MPF New Provide Dispute Determination (Openreach)...Determination of a dispute between TalkTalk and...

64732024

Dispute between TalkTalk Telecom Group PLC and Openreach relating to whether Openreach

offered MPF New Provide to TalkTalk on fair and reasonable terms and conditions

This version is non-confidential Confidential redactions are indicated by []

Determination

Issue date: 15 August 2013

Contents

Section Page

1 Summary 5

2 Introduction and background 8

3 Analysis and Second Provisional Conclusions 16

4 Analysis and Determination 51

Determination of a dispute between TalkTalk and Openreach relating to whether Openreach offered MPF New Provide to TalkTalk on fair and reasonable terms and conditions

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Glossary of terms

2003 Act: The Communications Act 2003.

ANFA: Access Network Facilities agreement (also referred to as RANF - revised Access Network Facilities agreement). Openreach’s reference offer for its LLU services, the latest version of which is available at: http://www.openreach.co.uk/orpg/home/products/llu/contracts/contracts.do.

April 2012 ANFA: The ANFA revisions offered by Openreach from 2 April 2012: Part IV Schedule 06 - Metallic Path facilities – version 3.6; Part VI Service Levels and Fixed Compensation – version 3.6; and Part V definitions – version 3.6.

BT: means British Telecommunications plc, whose registered company number is 1800000, and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, all as defined by section 1159 of the Companies Act 2006.

CAA: Copper Appointment Availability. Openreach’s term for the SLA concerning engineering appointments.

CP: Communications provider.

CWW: Cable & Wireless Worldwide.

December 2012 ANFA: The latest ANFA revisions offered by Openreach, offered from 29 December 2012 and backdated to 1 November 2012: VI Service Levels and Fixed Compensation – version 3.7; and Part V definitions – version 3.7.

Determination: This determination of the Dispute between TalkTalk Telecom Group PLC and Openreach relating to whether Openreach offered MPF New Provide to TalkTalk on fair and reasonable terms and conditions, issued on 15 August 2013 and published on 16 August 2013, setting out our resolution to the Dispute

EPM: Enquiry Phase Meeting –meeting between Ofcom and the parties to the dispute, held during the Enquiry Phase (for further details, see Ofcom’s Dispute Resolution Guidelines of June 2011: http://stakeholders.ofcom.org.uk/binaries/consultations/dispute-resolution-guidelines/statement/guidelines.pdf).

FAMR consultation: Fixed access market reviews: wholesale local access, wholesale fixed analogue exchange lines, ISDN2 and ISDN30, 3 July 2013: http://stakeholders.ofcom.org.uk/binaries/consultations/fixed-access-market-reviews/summary/fixed-access-markets.pdf

First Provisional Conclusions: Ofcom’s provisional conclusions in respect of the Dispute, issued on 26 March 2013.

Forecasting Manual: Openreach’s Copper Appointment Availability Provision SLA / SLG Forecasting Manual, 27 March 2012.

Lead time: The time taken from an order being placed to the date of the first appointment offered, where Openreach offers to a CP ordering MPF New Provide an appointment date for an engineer site visit.

LLU: Local Loop Unbundling. A regulated wholesale service sold by Openreach. It allows CPs to physically take-over or share the copper access network connection (from end-user

http://www.openreach.co.uk/orpg/home/products/llu/contracts/contracts.do

http://www.openreach.co.uk/orpg/home/products/llu/downloads/RANF%20Part%20IV_S06_v3.6.pdf

http://www.openreach.co.uk/orpg/home/products/llu/downloads/RANF%20Part%20IV_S06_v3.6.pdf

http://www.openreach.co.uk/orpg/home/products/llu/downloads/PART%20VI_v3.6.pdf



http://www.openreach.co.uk/orpg/home/products/llu/downloads/RANF%20Part%20V_v3.6.pdf

http://stakeholders.ofcom.org.uk/binaries/consultations/dispute-resolution-guidelines/statement/guidelines.pdf

http://stakeholders.ofcom.org.uk/binaries/consultations/dispute-resolution-guidelines/statement/guidelines.pdf

http://stakeholders.ofcom.org.uk/binaries/consultations/fixed-access-market-reviews/summary/fixed-access-markets.pdf



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to the BT exchange building), and to provide data services (e.g. broadband) and voice to retail customers

MPF New Provide: The Openreach product ‘MPF Connection charge - New Provide Standard’, which offers LLU new line provisioning. See: http://www.openreach.co.uk/orpg/home/products/pricing/loadProductPriceDetails.do?data=totid5BwFmkf9vLcBITRyZF9loRxWIbIKK6V7YWmlYAlMnGHsqdC0vzO163bJmh34D91D7M0q8u%2F%0AIlSgtIFAKw%3D%3D.

MPF: Metallic Path Facility. The copper access network connection from end-user to the BT exchange building.

Openreach: A BT Group business offering CPs products and services that are linked to BT’s nationwide local access network.

Openreach’s 1st s191 response: Openreach submission of 13 February 2013, issued in response to Ofcom’s first request for information under section 191 of the 2003 Act dated 6 February 2013.

Openreach’s 2nd s191 response: Openreach submission of 22 February 2013, issued in response to Ofcom’s second request for information under section 191 of the 2003 Act dated 18 February 2013.

Openreach’s 3rd s191 response: Openreach submission of 22 March 2013, issued in response to Ofcom’s second request for information under section 191 of the 2003 Act dated 20 March 2013.

Openreach’s 4th s191 response: Openreach submission of 24 April 2013, issued in response to Ofcom’s second request for information under section 191 of the 2003 Act dated 22 April 2013.

Openreach’s December response: Openreach’s submission of 28 December 2012, commenting on TTG’s Dispute submission.

Openreach’s EPM response: Openreach’s response of 8 January 2013 to Ofcom’s pre-EPM questionnaire.

Openreach’s February comments: Further submission from Openreach of 8 February 2013.

Openreach’s January comments: Further submission from Openreach of 29 January 2013.

Openreach’s response to the First Provisional Conclusions: Openreach submission of 11 April 2013 commenting on the First Provisional Conclusions.

Openreach’s response to the Second Provisional Conclusions: Openreach submission of 11 June 2013 commenting on the Second Provisional Conclusions.

OTA / OTA2: Office of the Telecommunications Adjudicator. In 2010 the OTA2 was established as a follow-on scheme to the OTA, as an independent organisation tasked by Ofcom to oversee co-operation between communications providers and enable a competitive environment in the telecommunications sector. OTA2’s primary task is to deal with major or strategic issues affecting the rollout and performance of products provided by Openreach. In this document, ‘OTA’ and ‘OTA2’ have the same meaning.

http://www.openreach.co.uk/orpg/home/products/pricing/loadProductPriceDetails.do?data=totid5BwFmkf9vLcBITRyZF9loRxWIbIKK6V7YWmlYAlMnGHsqdC0vzO163bJmh34D91D7M0q8u%2F%0AIlSgtIFAKw%3D%3D




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Relevant Period: 1 June 2012 to 31 August 2012.

Second Provisional Conclusions: Ofcom’s provisional conclusions in respect of the Dispute, issued on 28 May 2013.

Sky: British Sky Broadcasting Limited.

Sky’s response to the First Provisional Conclusions: Sky submission of 11 April 2013 commenting on the First Provisional Conclusions.

Sky’s response to the Second Provisional Conclusions: Sky submission of 11 June 2013 commenting on the Second Provisional Conclusions.

SLA: Service Level Agreement. An SLA defines a set of performance indicators relating to the provision and/or performance of the service; this may include numerical targets for the key elements and will be a constituent part of the service’s Terms and Conditions.

SLG Consultation: Service level guarantees: incentivising performance, 10 December 2007 http://stakeholders.ofcom.org.uk/binaries/consultations/slg/summary/slg.pdf.

SLG Statement: Service level guarantees: incentivising performance Statement and Directions, 20 March 2008 http://stakeholders.ofcom.org.uk/binaries/consultations/slg/statement/statement.pdf.

SLG: Service Level Guarantee. An SLG sets out specific levels of customer service against defined criteria; this will include numerical targets and compensation for non-performance.

SMP: Significant Market Power.

TTG or TalkTalk: TalkTalk Telecom Group PLC, whose registered company number is 07105891, and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, as defined by section 1159 of the Companies Act 2006.

TTG’s 1st s191 response: TTG submission of 13 February 2013, issued in response to Ofcom’s first request for information under section 191 of the 2003 Act dated 6 February 2013.

TTG’s 2nd s191 response: TTG submission of 25 February 2013, issued in response to Ofcom’s second request for information under section 191 of the 2003 Act dated 18 February 2013.

TTG’s 3rd s191 response: TTG submission of 23 April 2013, issued in response to Ofcom’s second request for information under section 191 of the 2003 Act dated 22 April 2013.

TTG’s Dispute submission: Confidential Dispute submission from TTG of 18 December 2012.

TTG’s EPM response: TTG’s response of 8 January 2013 to Ofcom’s pre-EPM questionnaire.

TTG’s January comments: Further submission from TTG of 25 January 2013.

TTG’s response to the First Provisional Conclusions: TTG submission of 11 April 2013 commenting on the First Provisional Conclusions.

http://stakeholders.ofcom.org.uk/binaries/consultations/slg/summary/slg.pdf

http://stakeholders.ofcom.org.uk/binaries/consultations/slg/statement/statement.pdf


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TTG’s response to the Second Provisional Conclusions: TTG submission of 12 June 2013 commenting on the Second Provisional Conclusions.

Vodafone UK: Vodafone Limited, whose registered company number is 1471587, and any of its subsidiaries or holding companies, or any subsidiary of such holding companies, as defined by section 1159 of the Companies Act 2006.

Vodafone’s response to the First Provisional Conclusions: Vodafone submission of 15 April 2013 commenting on the First Provisional Conclusions.

WLA statement: Review of the wholesale local access market: Identification and analysis of markets, determination of market power and setting of SMP conditions, 7 October 2010. http://stakeholders.ofcom.org.uk/binaries/consultations/wla/statement/WLA_statement.pdf.

http://stakeholders.ofcom.org.uk/binaries/consultations/wla/statement/WLA_statement.pdf


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Section 1

1 Summary 1.1 This determination (the “Determination”) sets out our resolution to the dispute (the

“Dispute”), brought by TTG against Openreach, (collectively the “Parties”), relating to the level of service provided by Openreach for MPF New Provide between 1 June 2012 and 31 August 2012 (the “Relevant Period”).

1.2 When a CP places an order with Openreach for it to supply MPF New Provide, Openreach offers the ordering CP an appointment date for an Openreach engineer site visit to install the product at that CP’s customer’s premises.

1.3 TTG contends that for orders during the Relevant Period “the number of working days that Openreach was on average late in delivering MPF New Provide (compared to an expected service performance of 12-14 working days […] for the period in dispute was around 25-26 working days […]”,1 and that this level of service was not acceptable. On this basis, TTG wrote to Openreach on 25 October 2012, with a claim for compensation of £[] .

1.4 Openreach rejected TTG’s claim, and considers that Openreach is not obliged to pay compensation under the SLA/SLG contractual provisions, as TTG did not sign up to an amendment to the LLU contract “formally entitling CPs to SLG payments for lack of appointment availability” (i.e. the April 2012 ANFA).2

1.5 On 18 December 2012 TTG referred a dispute to us. TTG argues that the terms and conditions pursuant to which the MPF New Provide service was supplied were not fair and reasonable on the basis that compensation should have been payable where the level of service provided fell below acceptable levels.3 TTG argues this is a breach by Openreach of SMP Condition FAA9 imposed on BT in the WLA statement, which includes a requirement for Openreach to provide LLU services (including MPF New Provide) on fair and reasonable terms and conditions.

1.6 Openreach considers that “there was no contractual obligation upon Openreach during the Relevant Period to pay any sums of money via a SLG to TTG for MPF New Provide appointment availability”.4 Openreach also states that it “[does] not believe the existence of a lead time SLA or SLG is a necessary condition for meeting FAA9”,5 and that, in any event, it had offered a contract that contained SLAs/SLGs which TTG chose not to accept. Further, it considers that any consideration of Openreach’s level of service in respect of condition FAA9 should take into account factors such as the impact adverse weather had on engineer availability, Openreach’s prioritisation of line repair over provisioning, and TTG’s unexpectedly high level of demand for MPF New Provide for the Relevant Period.6

1.7 On 10 January 2013, we accepted the Dispute for resolution. The scope of the Dispute is to determine:

1 Pages 1 to 2 of TTG’s January comments.

2 Page 3 of Openreach’s December response.

3 Page 6 of TTG’s Dispute submission.



6 Pages 5-8 of Openreach’s December response.


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1.7.1 “whether Openreach offered MPF New Provide to TalkTalk Telecom Group PLC over the period 1 June 2012 to 31 August 2012 on fair and reasonable terms and conditions as required under Condition FAA9.2; and

1.7.2 any appropriate exercise by Ofcom of its powers under section 190(2) of the Communications Act 2003 as part of Ofcom’s determination resolving this dispute.”

Our First Provisional Conclusions on the matters in dispute

1.8 On 26 March 2013 we issued our First Provisional Conclusions on the matters in dispute. In this, we considered whether Openreach is required to provide MPF New Provide on fair and reasonable terms and conditions and, if so, whether the terms and conditions offered by Openreach during the Relevant Period were fair and reasonable.

1.9 Our provisional view was that:

1.9.1 the existence of contractual provisions relating to service level commitments and corresponding compensation are a necessary component for the terms and conditions offered by Openreach in respect of the provision of MPF New Provide over the Relevant Period to be fair and reasonable; and

1.9.2 based on the available evidence, we did not consider the level of SLG payment offered by Openreach as part of the April 2012 ANFA to be fair and reasonable, although the forecasting requirements were fair and reasonable.

1.10 We therefore provisionally concluded that the terms and conditions offered by Openreach in respect of the provision of MPF New Provide over the Relevant Period were not fair and not reasonable and therefore in breach of Condition FAA9.2, but invited further evidence on each element of our provisional conclusions.

1.11 Given our concerns over the limited evidence available to us, we did not consider that it would be appropriate for us to determine what a fair and reasonable SLG payment level would be. Assuming that we maintained our provisional view, we considered that the most pragmatic approach available to us would be to determine this aspect of the Dispute by reference to an appropriate benchmark and we consider the December 2012 ANFA provides the best available benchmark.

1.12 The limitations of the evidence available to us also led us to express considerable reservations about the data put forward by the Parties. We explicitly invited the Parties to provide us with more robust evidence.

1.13 We also invited views as to whether we have the power to direct a repayment under section 190(2)(d) of the 2003 Act and, if so, whether we should exercise our discretion.

Our Second Provisional Conclusions

1.14 We received four responses to the First Provisional Conclusions. Having carefully considered these responses, on 28 May 2013 we issued our Second Provisional Conclusions. We provisionally concluded that the information which was then


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available to us did not support our views in relation to the fair and reasonable SLG level set out in the First Provisional Conclusions.

1.15 We remained of the view that the existence of an SLG is necessary for an offer to supply MPF New Provide to be considered fair and reasonable.

1.16 However, we re-assessed whether the SLG level offered by Openreach was fair and reasonable. On the basis of the information provided by the Parties and publicly available information, we considered that the £2 SLG level lies within a reasonable range of values for a pre-estimate of loss.

1.17 We remained of the view that the forecasting requirements were fair and reasonable.

1.18 We therefore provisionally concluded that the terms and conditions offered by Openreach in respect of the provision of MPF New Provide over the Relevant Period were fair and reasonable and accordingly that it would not be necessary to exercise any of our powers under section 190 of the 2003 Act.

Our Determination

1.19 We received three responses to our Second Provisional Conclusions. The responses were from Sky, Openreach and TTG.7 Following careful consideration of these responses, we have changed our views on Openreach’s methodology for calculating the Lost Revenues component of a fair and reasonable SLG, and have revised certain of the data inputs we use in our analysis to assess whether the SLG offered was fair and reasonable.

1.20 We have also further considered the incentive properties of our Determination for the Parties.

1.21 For the reasons set out in this document, the changes to our reasoning have not caused us to change our overall conclusions as set out in the Second Provisional Conclusions. We therefore determine that:

1.21.1 the April 2012 ANFA was fair and reasonable and that Openreach is accordingly not in breach of Condition FAA9.2; and

1.21.2 we do not consider it necessary to exercise any of our powers under section 190 of the 2003 Act.

Structure of the remainder of this document

The introduction and background to this Dispute are set out in section 2. Our analysis and Second Provisional Conclusions, including consideration of submissions from stakeholders in response to the First Provisional Conclusions, is set out in section 3. Sections 2 and 3 of this document are identical to the corresponding sections of the Second Provisional Conclusions, save for a few minor changes. Our further analysis and reasons for our Determination, including consideration of submissions from stakeholders in response to the Second Provisional Conclusions, are set out in section 4.

7 TTG responded by way of a submission dated 12 June 2013, and two letters dated 20 June 2013

and 4 July 2013


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Section 2

2 Introduction and background 2.1 This section of the document is identical to section 2 of the Second Provisional

Conclusions, save for this paragraph and paragraphs 2.38 to 2.41.

Issues in dispute

2.2 BT has a regulatory obligation to provide wholesale LLU services to CPs.8 Under LLU, a CP takes full (or shared) control of the copper line from a BT local exchange to a customer’s premises, and uses this to offer retail broadband products.

2.3 MPF New Provide is one of the wholesale LLU services offered by Openreach pursuant to its regulatory obligations. When a CP places an order with Openreach for it to supply MPF New Provide, Openreach offers the ordering CP an appointment date for an Openreach engineer site visit to install the product at that CP’s customer’s premises.

2.4 On 18 December 2012, TTG referred a dispute to Ofcom concerning the level of service provided by Openreach for MPF New Provide, for the Relevant Period. In its Dispute submission, TTG contends that “Openreach’s poor performance during this period amounted to a breach of its obligation to provide LLU services on fair and reasonable terms”.9

2.5 In particular, TTG states “it was reasonable to expect that Openreach would offer MPF New Provide appointments on average in 12 working days and in most cases within 14 working days”, and that for the relevant period “the average appointment lead time was 26 days (i.e.14 days more than target average and 12 days more than the SLA)”.10 In TTG’s view “Openreach has failed to offer fair and reasonable terms for its LLU service by failing to maintain an adequate level of service for MPF New Provides during June to August 2012”.11

TTG’s request for Ofcom to make a determination

2.6 TTG submits that Openreach is required by SMP condition FAA9 to provide LLU services on fair and reasonable terms and conditions, and that MPF New Provide is a relevant LLU service for the purposes of SMP Condition FAA9.

2.7 Condition FAA9.2 requires that:

The provision of Local Loop Unbundling Services, together with any Ancillary Services, in accordance with paragraph FAA9.1 shall occur as soon as reasonably practicable and shall be provided on fair and reasonable terms, conditions and charges and on such terms, conditions and charges as Ofcom may direct from time to time

8 For further details, see Ofcom’s Wholesale Local Access Market Review statement of 7 October 2010, which

sets out the regulatory obligations placed on BT and the reasons for them: http://stakeholders.ofcom.org.uk/binaries/consultations/wla/statement/WLA_statement.pdf 9 Page 6 of TTG’s Dispute submission.





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2.8 TTG further submits that Openreach is in breach of this provision and therefore requests that Ofcom determine that:

2.8.1 “Openreach has not provided LLU services on a fair and reasonable basis by failing to offer an inadequate [sic]12 service performance for MPF New Provides during the period June to August 2012”; and

2.8.2 “Openreach must compensate TalkTalk for the financial loss that TalkTalk has incurred as a result of such failure in the amount £[] (plus interest at a rate of TalkTalk’s WACC)”.13

Initial comments from Openreach on TTG’s submission

2.9 We provided a copy of TTG’s submission to Openreach on 19 December 2012. In its response of 28 December 2012, Openreach provided its view that:

2.9.1 “TTG has failed to evidence that they have made reasonable endeavours to enter into good faith negotiations in order to seek to resolve their differences before referring the matter to Ofcom”;

2.9.2 “Openreach has complied with all of its relevant regulatory obligations (including those relating to the provision of LLU services on fair and reasonable terms)”;

2.9.3 “no sums of money are legitimately owed by Openreach to TTG (either contractually or as retrospective payment via a regulatory dispute)”; and

2.9.4 “TTG’s alleged losses are remote and unsubstantiated and the factual analysis underpinning those alleged losses inaccurate”. 14

Enquiry Phase Meeting

2.10 Before holding an EPM, Ofcom issued a pre-EPM questionnaire to both Parties. Following responses from both Parties, on 8 January 2013 Ofcom sent an agenda in advance of the EPM, which also invited views on what the draft scope of the Dispute might look like, if we concluded that it was appropriate for Ofcom to handle the Dispute.

2.11 On 9 January 2013, Ofcom held an EPM with representatives of TTG and Openreach, in order to clarify the principal arguments and facts raised by the Parties and to discuss views on the potential scope of the Dispute. As part of this EPM, TTG confirmed that the Relevant Period for the Dispute is 1 June 2012 to 31 August 2012.15

Dispute resolution

Ofcom’s duty to handle disputes

2.12 Section 185(1A) of the 2003 Act provides (in conjunction with section 185(3)) that in the case of a dispute relating to the provision of network access between a CP and a person who is identified, or is a member of a class identified, in a condition imposed

12

We take this to be a typographical error and the correct meaning to be ‘adequate’. 13

Page 10 of TTG’s Dispute submission. 14

Page 2 of Openreach’s December response. 15

Confirmed at page 1 of TTG’s EPM response.


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on the CP under section 45 of the 2003 Act, which relates to entitlements to network access that the CP is required to provide to that person by or under that condition, any one or more of the parties to the dispute may refer it to Ofcom.

2.13 Sections 186(1) and (2) of the 2003 Act provide that where a dispute is referred to Ofcom in accordance with section 185, Ofcom must decide whether or not it is appropriate to handle the dispute. Section 186(3) provides that where that dispute falls within section 185(1A), unless there are alternative means available for resolving the dispute, Ofcom’s decision must be a decision that it is appropriate for it to handle the dispute. A resolution of the dispute by those alternative means must be consistent with the Community requirements set out in section 4 of the 2003 Act, and a prompt and satisfactory resolution of the dispute must be likely if those alternative means are used to resolve it.

Ofcom’s powers when determining a dispute

2.14 Ofcom’s powers where it makes a determination for resolving a dispute are limited to those set out in section 190 of the 2003 Act. Except in relation to disputes relating to the management of the radio spectrum, Ofcom‘s main power is to do one or more of the following:

2.14.1 make a declaration setting out the rights and obligations of the parties to the dispute (section 190(2)(a));

2.14.2 give a direction fixing the terms or conditions of transactions between the parties to the dispute (section 190(2)(b));

2.14.3 give a direction imposing an obligation, enforceable by the parties to the dispute, to enter into a transaction between themselves on the terms and conditions fixed by Ofcom (section 190(2)(c)); and

2.14.4 for the purpose of giving effect to a determination by Ofcom of the proper amount of a charge in respect of which amounts have been paid by one of the parties to the dispute to the other, give a direction, enforceable by the party to whom the sums are to be paid, requiring the payment of sums by way of adjustment of an underpayment or overpayment (section 190(2)(d)).

2.15 A determination made by Ofcom to resolve a dispute binds all the parties to that dispute (section 190(8)).

Ofcom’s duties when determining a dispute

2.16 When resolving a dispute under the provisions set out in sections 185 to 191 of the 2003 Act, Ofcom is exercising its functions. As a result, when Ofcom resolves disputes it must do so in a manner which is consistent with both Ofcom‘s general duties in section 3 of the 2003 Act, and (pursuant to section 4(1)(c) of the 2003 Act) the six Community requirements set out in section 4 of the 2003 Act, which give effect, amongst other things, to the requirements of Article 8 of the Framework Directive.16

16

Directive 2002/21/EC of 7 March 2002 as amended.


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Accepting the Dispute for resolution

2.17 Having considered TTG’s submission and subsequent comments made by both Parties, we were satisfied that the Dispute fell within section 185(1A) of the 2003 Act.

2.18 On 10 January 2013 we informed the Parties of our decision that it was appropriate for us to handle the Dispute for resolution in accordance with section 186(3) of the 2003 Act.

The scope of the Dispute

2.19 On 15 January 2013 we published details of the Dispute, including the scope, on the Competition and Consumer Enforcement Bulletin part of our website:

“The scope of the dispute is to determine:

whether Openreach offered MPF New Provide to TalkTalk Telecom Group PLC over the period 1 June 2012 to 31 August 2012 on fair and reasonable terms and conditions as required under Condition FAA9.2; and

any appropriate exercise by Ofcom of its powers under section 190(2) of the Communications Act 2003 as part of Ofcom’s determination resolving this dispute”.

2.20 We received no comments on the scope of the Dispute after we published it.

Interested parties

2.21 Two stakeholders, CWW and Sky, have expressed an interest in the outcome of this Dispute.

Factual background

2.22 In March 2008, Ofcom published its SLG Statement where we set out some general principles for assessing whether SLA/SLG arrangements are fair and reasonable. These General Principles included that when agreed service levels are not met, provision for compensation should be made based on a pre-estimate of an average CP’s loss.

2.23 Ofcom explained at paragraph 3.61 of the SLG Statement that it considered that a service level regime that met these General Principles is likely to be fair and reasonable.

2.24 In our SLG Consultation we had noted that it is possible to use various methodologies to calculate loss to CPs of different failures, including:

2.24.1 lost/delayed revenue as a result of the failure;

2.24.2 lost customers;

2.24.3 compensation paid by CPs to their end-users;

2.24.4 additional costs of customer service relating to the failure;


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2.24.5 operational costs to the CP of dealing with Openreach as a result of the failure; and

2.24.6 reputational damage.

2.25 In October 2012, Ofcom issued the WLA Statement in which we found Openreach to have SMP in the wholesale local access market. We therefore imposed various regulatory obligations, including Condition FAA9, which requires that:

“The provision of Local Loop Unbundling Services, together with any Ancillary Services, in accordance with paragraph FAA9.1 shall occur as soon as reasonably practicable and shall be provided on fair and reasonable terms, conditions and charges and on such terms, conditions and charges as Ofcom may direct from time to time.”17

2.26 Openreach purported to give effect to its obligation under Condition FAA9 by the April 2012 ANFA,18 which was offered to CPs including TTG. TTG did not accept the terms of that offer. Prior to the April 2012 ANFA, the terms of supply for MPF New Provide, including SLAs and SLGs had been the subject of negotiations between Openreach and CPs including TTG.19

2.27 Discussions go back to March 2011, when Ofcom requested that the OTA20 “reviewed the effectiveness of the SLG process that catered for lead times with Openreach and the CP community”.21

2.28 In its July 2011 update, the OTA reported that it had “worked with all parties to establish a set of principles that we can all endorse as the basis of a potential agreement”. These 10 principles include that SLAs should be set with appropriate lead times, 22 that SLGs should be paid to CPs where SLAs are not met by Openreach, and that CPs should have incentives to forecast orders accurately.23

2.29 In its September 2011 update, the OTA reported that agreement had been reached on all of the variable elements that make up the SLG, including that an SLA lead time of 14 working days would take effect from 1 January 2012, linked to forecast accuracy from April 2012 at a value to be agreed in January 2012.24

2.30 In its January 2012 update, the OTA confirmed that from 1 January 2012 Openreach had introduced the SLG of £2 per day for orders that could not be offered an appointment within 14 working days. The OTA also confirmed that this was unconditional for the first three months, but from April 2012 onwards the SLG would be conditional “upon a degree of forecasting accuracy for the largest CP’s in terms of orders placed and requiring appointments”. 25

17

Set out in Ofcom’s Wholesale Local Access Market Review statement of 7 October 2010: http://stakeholders.ofcom.org.uk/binaries/consultations/wla/statement/WLA_statement.pdf. 18

See, for example, page 13 of Openreach’s January comments. 19

TTG, Sky and BT Retail. 20

OTA – Office of the Telecommunications Adjudicator. An independent body set up by Ofcom to oversee cooperation between CPs, in particular in relation to rollout and performance of products provided by Openreach. 21

See OTA update for March 2011: http://www.offta.org.uk/updates/otaupdate20110405.htm. 22

‘Lead times’ are discussed in more detail as part of our analysis in section 3. 23

See OTA update for July 2011: http://www.offta.org.uk/updates/otaupdate20110802.htm 24

See OTA update for September 2011: http://www.offta.org.uk/updates/otaupdate20111004.htm. 25

See OTA update for January 2012: http://www.offta.org.uk/updates/otaupdate20120207.htm.


http://www.offta.org.uk/updates/otaupdate20110405.htm





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2.31 Following these discussions, in April 2012, Openreach made revisions to its existing offer in the form of the April 2012 ANFA.26 This incorporated the SLAs/SLGs offered during January to March 2012, but tied them to forecasting.27

2.32 Through the facilitation of the OTA and Ofcom, industry continued to negotiate the details of the SLA/SLG arrangements and in its December 2012 update, the OTA announced that a Memorandum of Understanding (“MoU”) had been agreed.28 On 18 December 2012, Openreach published an updated LLU contract29 reflecting the detail of the MoU, which includes an SLA target of 13 working days (reducing to 12 working days over a year), and an SLG of £2 per day if lead times are 14-16 days, and £4 per day if a lead time is 17 or more days. These SLGs are tied to an agreed forecasting requirement with a tolerance of 15% (reducing to 10% over a year). These latest LLU contract revisions were published by Openreach with an offer to take effect from 29 December 2012, backdated to apply from 1 November 2012.30

2.33 The OTA’s January 2013 update confirmed that CPs including TTG had signed up to the revisions.31

The First Provisional Conclusions

2.34 On 26 March 2013, we published the First Provisional Conclusions setting out the outcome of our initial assessment as to how we proposed to resolve the Dispute. Our provisional assessment was that:

2.34.1 the existence of contractual provisions relating to service level commitments and corresponding compensation were a necessary component for the terms and conditions offered by Openreach in respect of the provision of MPF New Provide over the Relevant Period to be fair and reasonable; and

2.34.2 based on the available evidence, we did not consider the level of SLG payment offered by Openreach as part of the April 2012 ANFA to be fair and reasonable, although the forecasting requirements contained therein were fair and reasonable.

2.35 We therefore provisionally concluded that that the terms and conditions offered by Openreach in respect of the provision of MPF New Provide over the Relevant Period were not fair and not reasonable and therefore in breach of Condition FAA9.2, but invited further evidence on each element of our provisional conclusions.

2.36 Given our concerns over the limited evidence available to us, we did not consider that it would be appropriate for us to determine what a fair and reasonable SLG payment level would be. Assuming that we maintained our provisional view, we considered that the most pragmatic approach available to us would be to determine

26

The Openreach’s reference offer for LLU is a contract referred to as the Access Network Facilities Agreement with various schedules including ‘Part VI - Service Level Agreements’ see:

http://www.openreach.co.uk/orpg/home/products/llu/contracts/contracts.do. 27

See OTA update for April 2012: http://www.offta.org.uk/updates/otaupdate20120501.htm. 28

See OTA update for December 2012: http://www.offta.org.uk/updates/otaupdate20130108.htm. 29

See: http://www.openreach.co.uk/orpg/home/products/llu/contracts/contracts/downloads/PART%20VI_v3%207_291212.pdf. 30

The arrangements for which mean that Openreach will make SLG payments covering a period from November 2012 onwards. 31

See OTA update for January 2013: http://www.offta.org.uk/updates/otaupdate20130205.htm.

http://www.openreach.co.uk/orpg/home/products/llu/contracts/contracts.do



http://www.openreach.co.uk/orpg/home/products/llu/contracts/contracts/downloads/PART%20VI_v3%207_291212.pdf

http://www.openreach.co.uk/orpg/home/products/llu/contracts/contracts/downloads/PART%20VI_v3%207_291212.pdf



14

this aspect of the Dispute by reference to an appropriate benchmark and we considered the December 2012 ANFA provides the best available benchmark.

2.37 We also invited views on the appropriate exercise of our powers under section 190(2) of the 2003 Act in the event that we maintained our provisional view as set out in the First Provisional Conclusions.

The Second Provisional Conclusions

2.38 On 28 May 2013 we published the Second Provisional Conclusions. Our second provisional assessment was different to our first. Our provisional conclusions were that:

2.38.1 the SLG offered as part of the April 2012 ANFA was a fair and reasonable pre-estimate of an average CP’s loss; and

2.38.2 the forecasting requirements were fair and reasonable.

2.39 Our second provisional view was that BT had not therefore breached Condition FAA9.2 by virtue of the April 2012 ANFA offer and accordingly it would not be necessary for us to exercise any of our powers under s190 of the 2003 Act.

2.40 The analysis and reasons for our Second Provisional Conclusions is set out in full in Section 3 below.

Information relied upon in resolving the Dispute

2.41 These Provisional Conclusions draw on the key information provided by the Parties. This includes TTG’s submission and related correspondence provided by both Parties, including:

2.41.1 TTG’s Dispute submission;

2.41.2 TTG’s EPM response;

2.41.3 TTG’s January comments;

2.41.4 TTG’s 1st, 2nd and 3rd s191 responses;

2.41.5 TTG’s response to the First Provisional Conclusions

2.41.6 TTG’s responses to the Second Provisional Conclusions32

2.41.7 Openreach’s December response;

2.41.8 Openreach’s EPM response;

2.41.9 Openreach’s January and February comments;

2.41.10 Openreach’s 1st, 2nd, 3rd and 4th s191 responses

2.41.11 Openreach’s response to the First Provisional Conclusions

2.41.12 Openreach’s response to the Second Provisional Conclusions.

32

Submission dated 12 June 2013 and letters dated 20 June 2013 and 4 July 2013


15

2.42 In addition to the information provided by the Parties, our analysis also refers, where relevant, to documentation relating to industry negotiations concerning the development of SLAs / SLGs for MPF New Provide and to submissions from Sky and Vodafone UK in response to the First Provisional Conclusions.


16

Section 333

3 Analysis and Second Provisional Conclusions

Introduction

3.1 The scope of this Dispute is set out at paragraph 2.19 above and requires us to determine whether Openreach has complied with Condition FAA9.2 by offering MPF New Provide to TTG on fair and reasonable terms and conditions during the Relevant Period. As set out in paragraph 2.26 above, the terms and conditions offered during the Relevant Period are those contained within the April 2012 ANFA.

3.2 In order to determine this dispute, it is necessary to first consider the following:

3.2.1 is there a regulatory requirement on BT to offer SLAs and SLGs for MPF New Provide; and

3.2.2 if so, were the SLAs and SLGs offered by Openreach during the Relevant Period fair and reasonable such that BT complied with its regulatory obligations.

3.3 It is only if we find that the offer in the April 2012 ANFA was not fair and reasonable that we need to consider whether it is necessary to exercise any of our powers under 190(2)(a)-(d) of the 2003 Act.

3.4 In the context of dispute resolution which requires a quick resolution and in light of the relative robustness of the information available to us, in deciding whether the April 2012 ANFA offer was fair and reasonable, we have not sought to determine what the terms and conditions of any SLAs and SLGs offered should have been. We have considered whether Openreach’s offer was fair and reasonable, recognising that there are likely to be a number of different approaches that may be fair and reasonable and therefore, consistent with the regulatory requirements imposed on BT.

3.5 We consider that this approach is consistent with our discretion under section 188(3) of the 2003 Act to adopt a procedure which is appropriate for consideration and determination of the Dispute.

3.6 We note that we are separately considering service levels more generally in the context of our current Fixed Access Market Review (“FAMR”),34 including considering whether it is appropriate for Ofcom to intervene in the markets covered by the FAMR on a forward-looking basis.

Responses to the First Provisional Conclusions

3.7 In the First Provisional Conclusions (set out in full in Annex 3), our analysis considered:

33

This section of the document is identical to section 3 of the Second Provisional Conclusions.

34 http://stakeholders.ofcom.org.uk/consultations/fixed-access-markets/.

http://stakeholders.ofcom.org.uk/consultations/fixed-access-markets/


17

3.7.1 The SMP conditions applicable in this Dispute;

3.7.2 the four cost components used in calculating the level of the SLG; and

3.7.3 forecasting requirements.

3.8 We noted our concerns about the accuracy of the data underlying the Parties’ calculations of the appropriate SLG level and the limited evidence available to us, but we concluded on the evidence that one assumption used in setting the SLG level (its assumption of a 12-month average customer retention) did not appear reasonable. We therefore invited the Parties to provide more robust evidence.

3.9 We have received four responses to the First Provisional Conclusions from Openreach, Sky, TTG and Vodafone UK. Sky, TTG and Vodafone UK have provided responses that in general accepted or supported our view in the First Provisional Conclusions that the April 2012 ANFA offer was not fair and reasonable. Openreach’s response disagrees with the First Provisional Conclusions.

3.10 We have received detailed comments on each of the areas considered in the First Provisional Conclusions and we deal with these below.

3.11 Our analysis considers the following main issues:

3.11.1 Is there a requirement on BT to provide MPF New Provide to TTG on fair and reasonable terms and conditions;

3.11.2 If so, were the terms and conditions offered by Openreach during the Relevant Period fair and reasonable in respect of:

a) the level of SLG offered; and

b) the forecasting requirements.

Requirement on BT to provide MPF New Provide to TTG on fair and reasonable terms and conditions

3.12 In order to resolve the Dispute, it is first necessary to consider whether BT was under a regulatory obligation to offer SLAs and SLGs for MPF New Provide on fair and reasonable terms and conditions.

3.13 At paragraphs 3.10 to 3.12 of the First Provisional Conclusions, we explained that SMP Condition FAA9 requires that LLU services be provided on fair and reasonable terms and conditions. In assessing what terms and conditions are fair and reasonable, we further explained that it is necessary to take into account the broader regulatory obligations imposed on BT to address its SMP in the wholesale local access market. We noted that in this context, SMP Condition FAA5 requires that Openreach publishes a Reference Offer in relation to the provision of Network Access. This Condition includes a specific requirement to publish a Reference Offer in relation to the provision of LLU Services (SMP Condition FAA5.3) which includes at least:

3.13.1 service level commitments, namely the quality standards that each party must meet when performing its contractual obligations; and


18

3.13.2 the amount of compensation payable by one party to another for failure to perform contractual commitments.

3.14 We therefore, set out our provisional view that the existence of contractual provisions relating to service level commitments and corresponding compensation are a necessary component for the terms offered during the Relevant Period to be fair and reasonable.

Stakeholders’ views

3.15 Openreach argues that “[t]he CAA SLA/SLG scheme relating to appointment availability offered in April 2012 was a voluntary offer which went beyond the regulatory requirement in place at the time.”35

3.16 Openreach argues that Ofcom is specifying new regulatory obligations retrospectively, saying: “Ofcom’s powers to set SMP conditions are limited by the terms of Article 8ff of the Access Directive as implemented in the Communications Act 2003 and must be construed accordingly in the context of dispute resolution”. It argues that “Ofcom has therefore formulated the issues in its PC incorrectly by asking itself whether FAA9 imposes an obligation on Openreach to offer SLAs and SLGs for MPF New Provide on fair and reasonable terms. The obligation is to provide the LLU services to which the condition applies on fair and reasonable terms by this does not necessarily include specific SLAs or SLGs” (Openreach’s emphasis).36

3.17 Openreach adds “Ofcom itself has never previously suggested that FAA9.2 can be read in this extended sense to incorporate specific SLAs and SLGs. […] there is no specific SMP regulatory obligation under which Openreach is required to offer a copper appointment availability SLA/SLG (CAA SLA/SLG) and a copper appointment availability SLG/SLG is not a necessary condition for meeting the requirements of SMP Condition FAA9.2.”37 (Openreach’s emphasis)

3.18 Openreach argues that we should acknowledge that “there were of course SLAs/SLGs in place prior to the introduction of the CAA SLA/SLG in April 2012 (including for Missed Appointments and Repair). These SLAs/SLGs were being provided on fair and reasonable terms in compliance with the existing regulatory regime”38 and the April 2012 ANFA offer was therefore not necessary for Openreach to meet its regulatory obligations.

3.19 TTG “welcomes Ofcom’s provisional conclusion that Openreach is required by Condition FAA9 to offer SLAs and SLGs on fair and reasonable terms.” It notes our reference to SMP Condition FAA5 and considers that “[t]he inclusion of these requirements makes much sense from a commercial perspective.” It considers that “the fact that Openreach entered into negotiations […] with a view to concluding a suitable SLA/SLG supports the conclusion that offering fair and reasonable SLA/SLG terms is clearly intended to be a regulatory obligation under Condition FAA9 [as] Openreach had no commercial incentive to offer suitable SLA/SLG terms”.39

35

Openreach’s response to the First Provisional Conclusions, page 2. 36


Openreach’s response to the First Provisional Conclusions, pages 5 and 6. 38

Page 6 of Openreach’s response to the First Provisional Conclusions. 39

TTG’s response to the First Provisional Conclusions, page 2.


19

3.20 TTG also refers to our SLG Statement, in particular paragraphs 2.5 and 3.60-61, which it considers supports a view that “SLA/SLG are a necessary component of a fair and reasonable product”.40

3.21 Sky argues that “Ofcom is correct to conclude in the Provisional Conclusions that, in accordance with the SMP Conditions applied to BT in the WLA market, the existence of service level commitments and corresponding compensation are a necessary component for the terms offered by Openreach to be considered fair and reasonable.”41

3.22 Sky interprets the First Provisional Conclusions as saying that “the existence of contractual provisions is a necessary component in order for SMP Conditions to apply” and “disagrees strongly” with this.

Ofcom’s assessment

3.23 Having considered the submissions made to us, we continue to consider that there is a requirement on BT to provide MPF New Provide to TTG on fair and reasonable terms and conditions.

3.24 It is important to remember that the Conditions imposed on BT comprise a package of remedies, the effect of which overall is to address BT’s SMP. Therefore, the requirement in Condition FAA9 to provide LLU services on fair and reasonable terms and conditions must be read in conjunction with the requirement in Condition FAA5 which requires the publication of a Reference Offer. Our view is that, reading these conditions together, an offer of network access that does not meet the requirements specified in Condition FAA5 will not be fair and reasonable. We therefore remain of the view that this means that service level commitments and compensation should form part of a network access offer to be considered fair and reasonable.

3.25 In relation to Openreach’s argument that SLAs/SLGs were not specifically required for MPF New Provide (in contrast to certain other LLU services), we do not consider that the fact that MPF New Provide was not specified in a direction means that it could not be subject to the requirements of SMP Conditions FAA9 and FAA5.

3.26 Openreach points to other SLAs/SLGs that were in place prior to the introduction of the CAA SLA/SLG in April 2012, for example for Missed Appointments and Repair and claims there was no specific requirement for it to offer an SLA/SLG for “copper appointment availability”. Our provisional view is that losses resulting from delays in lead times are distinct from those addressed by pre-existing SLA/SLGs prior to the April 2012 ANFA.

3.27 With regard to the two examples given by Openreach, losses might still be incurred as a result of long lead times irrespective of whether there are missed appointments (by an Openreach engineer) or where repairs are required. We note that the on-going industry negotiations between Openreach and CPs, culminating in LLU contract revisions that include SLAs/SLGs (see paragraphs 2.27 to 2.33 above) strongly suggests an industry-wide view that there was a need for such arrangements

3.28 In relation to Sky’s interpretation of the First Provisional Conclusions, we consider that Sky has misunderstood our position. We do not consider that contractual provisions must be in place for the Conditions to apply. Rather, we consider that

40

TTG’s response to the First Provisional Conclusions, page 3. 41

Sky’s response to the First Provisional Conclusions, paragraph 3.


20

service level commitments and corresponding compensation should form part of an offer.

Were the terms and conditions offered by Openreach during the Relevant Period fair and reasonable?

3.29 Having established our provisional view that there is a regulatory requirement on BT pursuant to FAA9 read together with Condition FAA5 to provide MPF New Provide to TTG on fair and reasonable terms and conditions, in order to determine this Dispute, it is necessary for us to consider whether the terms and conditions offered during the Relevant Period were fair and reasonable. We have assessed this in relation to two key aspects of the April 2012 ANFA: the level of the SLG and the forecasting requirements.

Assessment of the level of the SLG

3.30 As explained at paragraph 3.11 above, we are considering whether the £2 SLG offered by Openreach was fair and reasonable. We do so by considering:

3.30.1 whether Openreach’s general approach to setting an SLG was reasonable; and if so,

3.30.2 whether the methodology then adopted by Openreach was reasonable; and

3.30.3 whether the data used by Openreach as inputs to then calculate an SLG were reasonable in light of the methodology used.

3.31 We then go on to consider the use of benchmarks in assessing the level of the SLG.

3.32 In adopting this approach, we are mindful that the purpose of an SLG is to provide a pre-estimate of an average CP’s loss and is not designed to calculate the actual loss suffered by a Party. We note that a pre-estimate of loss may be reasonable overall, even if we consider that there are issues with some of the methodology or data used to calculate individual components.

3.33 Our analysis and revised provisional conclusions are set out in detail below.

General approach to setting an SLG

3.34 At paragraph 3.30 of the First Provisional Conclusions we noted that we considered that a service level regime that met the general principles for assessing SLA/SLG arrangements mentioned at paragraph 3.61 of the SLG Statement is likely to be fair and reasonable

3.35 At paragraph 3.42 of the First Provisional Conclusions, we noted that whilst Openreach and TTG framed the issue differently (i.e. TTG put it as a compensation claim while Openreach put it as a SLG pre-estimate) and referred to different categories for the cost / financial loss data they had provided, we considered that these are comparable under the following four headings: lost revenues; cancellations; potential sales; and customer care. We further stated that these headings are consistent with the various methodologies to calculate loss to CPs of different failures identified in our SLG Consultation and SLG Statement.


21


3.36 Openreach notes the general principles set out in the SLG Statement, which state that SLGs should:

3.36.1 when agreed service levels are not met, make provision for compensation to be made based on a pre-estimate of an average CP’s loss;

3.36.2 ensure that CPs are entitled to make a claim for additional loss;

3.36.3 pay compensation on a per event basis;

3.36.4 ensure that compensation payments are made proactively; and

3.36.5 efficient cost recovery should be permitted.

3.37 Openreach states that in assessing the potential level of the SLG, it was “mindful of Ofcom’s SLG direction of March 2008”42 and that “in developing the SLG we noted in particular the key principles as set out in Ofcom’s statement and directions”.43 In Openreach’s view, “The methodology employed by Openreach to establish what a reasonable pre-estimate of loss would be shows that the £2 SLG offered in the April 2012 was reasonable”.44

3.38 TTG notes that in the First Provisional Conclusions, Ofcom set out four SLG components which are consistent with the SLG Consultation and SLG Statement45 and agrees that its claim headings can be arranged under these categories.46 TTG states that “the fact that Ofcom, TalkTalk and Openreach all appear to agree about the relevant potential claim headings is significant in that it essentially means that there is agreement about the types of financial losses that may logically result from poor performance by Openreach”.47

3.39 In TTG’s view, “the question is therefore solely about how one may quantify such losses in each category in a robust and reliable manner”.48

Ofcom’s view

3.40 None of the submissions made to us cause us to change our view that the Parties accept the four components as a general approach to setting an SLG.

3.41 The four components underpinning Openreach’s SLG49 also meet three of the general principles set out in the SLG Statement in that:

3.41.1 Openreach has offered the April 2012 ANFA which included arrangements for CPs to claim compensation for additional loss;

3.41.2 the SLG is based on a per-event basis, in that it is a per-day payment for each instance where Openreach failed to meet an SLA of a 14-day lead time;50 and

42




TTG’s response to the First Provisional Conclusions, pages 4-5. 46




See 3.42.1 to 3.42.3 of the First Provisional Conclusions.


22

3.41.3 the compensation payments are pro-active in that Openreach makes credit payments to a CP along with an additional ‘Communication Provider Itemised Statement (CPIS) specifically designed for the Appointment Availability’ (as set out in the Forecasting Manual – see Annex 24 to Openreach’s submission of 29 January 2013).

3.42 We consider next the methodology for each SLG component and the values used by Openreach, and whether they were reasonable in that they led to an SLG that meets the remaining relevant general principle,51 namely whether it reflects a reasonable pre-estimate of an average CP’s loss.

Methodology and data used to estimate the £2 per day SLG

3.43 At paragraph 3.53 of the First Provisional Conclusions we noted our considerable reservations about the data put forward by the Parties in support of their respective positions concerning the level of the SLG offered by Openreach. Given the uncertainty as to the accuracy of the assumptions proposed by both Parties, we invited the Parties to provide further evidence to support their respective positions.

3.44 In response to the First Provisional Conclusions, Openreach provided further submissions on the methodology underpinning its £2 per day SLG offer. TTG also provided further submissions in support of its claim of financial loss.

3.45 We have considered evidence from the Parties52 to assess whether the £2 per day SLG offered as part of the April 2012 ANFA was a reasonable pre-estimate of an average CP’s loss and permitted efficient cost recovery. We do so in relation to each of the four SLG components we identified in the First Provisional Conclusions:

3.45.1 1. Lost Revenues;53

3.45.2 2. Cancellations;54

3.45.3 3. Potential Sales;55 and

3.45.4 4. Customer Care.56

3.46 For each of these four components, adopting the approach outlined above, we consider both the methodology adopted by Openreach and the data Openreach then

50

See Assumption 1 at page 14 of Openreach’s response to the First Provisional Conclusions. 51

We consider that the fifth principle, relating to recovery of efficient costs, is not relevant to our assessment of the level of SLG because that principle relates to Openreach’s efficient costs, whereas this assessment addresses CPs’ losses. 52

Evidence includes subsequent clarification from each of Openreach and TTG provided in response to information requests issued on 22 April 2013. 53

This refers to Openreach’s heading “delayed customers” in Table 1 of the First Provisional Conclusions, and TTG’s heading “increased lead times” in Table 2 of the First Provisional Conclusions. 54

This refers to Openreach’s heading “lost customers” in Table 1 of the First Provisional Conclusions, and TTG’s heading “increased leakages” in Table 2 of the First Provisional Conclusions. 55

This refers to Openreach’s heading “wasted acquisition” in Table 1 of the First Provisional Conclusions, and TTG’s heading “lost sales” in Table 2 of the First Provisional Conclusions. 56

This refers to Openreach’s heading “additional service costs” in Table 1 of the First Provisional Conclusions, and TTG’s heading “missed appointments” / “credits” / “CS call volumes” in Table 2 of the First Provisional Conclusions.


23

used in line with this methodology. Where appropriate, we take account of the data provided by TTG on each of these components.57

3.47 In pre-estimating the losses associated with each SLG component, Openreach assumes that these arise as a result of a delay of 25 days. We discuss the assumed period of delay further at paragraphs 3.113 to 3.116 below. Openreach then derives a daily value by dividing the total by 25 days. Dividing losses associated by the assumed period of delay to derive a per-day impact (and therefore a per-day SLG level) appears a reasonable approach, where losses are calculated on the basis of the impact of that same assumed period of delay. We note that this may not have been the case for Lost Revenues, and discuss this further at paragraphs 3.76 to 3.77 below.

1. Lost Revenues

3.48 This component refers to the daily profit losses associated with customers that experience delays after they have placed an order, but that did not cancel their order because of the delay.58

3.49 Openreach’s approach was to estimate a value of the profit loss associated with Lost Revenues.

3.50 Openreach applied an EBITDA59 margin to a monthly ARPU60 in order to pre-estimate the lost profit.

Methodology used to pre-estimate Lost Revenues

Views of the Parties

3.51 Openreach considers its approach reasonable on the basis that the profit loss suffered by CPs owing to delayed appointments for customers would not amount to the revenue lost during the delay but the lost profit (i.e. revenue less the relevant costs it would have incurred absent the delay).61

3.52 Openreach considers it reasonable to have assessed the monthly ARPU for broadband, lines and calls customers since these are the only services whose introduction could have been delayed as a consequence of extended Openreach lead times for the products within the scope of the SLG.62

3.53 Openreach views EBITDA margin as “the best measure of financial benefits at an operational level”.63

3.54 TTG’s claim for Lost Revenue also estimates lost profit margin. However, in TTG’s view, it “does not believe the EBITDA margin is relevant to the financial loss

57

Although as noted at paragraph 3.23 of the First Provisional Conclusion, TTG’s submission concern a compensation claim and TTG has not attempted to calculate its view of a fair and reasonable SLG. 58

Some customers may have cancelled their order due to reasons other than an extended lead time. These losses should not be included in any pre-estimate of loss for the purposes of calculating the SLG. 59

Earnings Before Interest, Tax, Depreciation and Amortization. 60

Average Revenue Per User. 61


Openreach’s response to the First Provisional Conclusions, pages 14-15. 63

Openreach page 14.


24

calculation set out in its Dispute Submission”.64 TTG has argued for a larger profit contribution via calculations using average margin per user (“AMPU”).65

3.55 In previous submissions to Ofcom, TTG stated that its assessment of Lost Revenues, “represents the lost EBITDA from not having a customer connected within the normal time frames (i.e. 14 days), i.e. the number of days the order is delayed times the daily AMPU (average margin per user).66 TTG has since stated that “we note that TalkTalk referred to the ‘lost EBITDA” in its response to Ofcom’s information request […] this is a typo which should rather have read ‘lost contribution’ to reflect AMPU minus CTS”.67

3.56 TTG advises that “AMPU has been calculated as the average revenue per user (ARPU) minus the monthly MPF line rental from Openreach and wholesale call costs (together the average cost per user (ACPU)). In addition, in the calculations in TalkTalk’s Dispute Submission, we have deducted from the AMPU an amount for cost to serve (CTS) which includes TalkTalk’s customer service costs”. TTG states that the reason for using this approach (rather than any other approach) is that “TalkTalk believes this most accurately reflects the lost gross margin for when a customer did not go live on TalkTalk’s network (or did so later than expected)”.68

Ofcom’s views

3.57 Both Parties assess Lost Revenues on the basis of lost profits. We provisionally consider that it is reasonable to use lost profits for this purpose, because a measure of an average CP’s loss should account not only for reasonably expected revenues from a service provided to customers, but also how these are offset by costs that a CP would reasonably incur.

3.58 Both Parties also refer to the use of ARPU as a reasonable measure of revenues when calculating lost profit. As a recognised measure of revenues and one that is reported in published financial returns this provides a transparent measure where values can be relatively easily checked by stakeholders.

3.59 However, the Parties’ views regarding how to calculate the profit loss differ. Openreach uses EBITDA margin, which is often reported by CPs (such as TTG) in their published financial results and hence is publicly available.69 It also provides a transparent way to estimate the profit loss that can be relatively easily checked by stakeholders. TTG uses AMPU in its claim for compensation70 which leads to a larger profit contribution than EBITDA. TTG argues that AMPU is more accurate than EBITDA. However, we note that TTG has applied an adjustment to the AMPU figure to deduct an internal TTG cost (see paragraph 3.56), which means it is harder for Openreach to use this as a basis for estimating an average CP’s loss.71

3.60 Openreach’s use of EBITDA for estimating profit margins was raised by Openreach during negotiations that preceded Openreach’s offer set out in the April 2012 ANFA, and, as far as we understand, was not contested or countered by an alternative

64

Page 2 of TTG’s 3rd

s191 response. 65

EBITDA and AMPU are different methods of calculating margins by deducting costs from revenues. The difference between them relates to the costs deducted. 66

Page 3 of TTG’s 2nd

s191 response. 67


s191 response. 68

Pages 1-2 of TTG’s 3rd

s191 response. 69

See, for example, the financial reports of TTG: http://www.talktalkgroup.com/investors/results-centre.aspx. 70

See Annex 5 of TTG’s Dispute Submission. 71

We consider that we do not need to come to a view as to whether TTG’s way of estimating AMPU (i.e. which costs need to be deducted) was appropriate.

http://www.talktalkgroup.com/investors/results-centre.aspx


25

proposal. Nor are we aware that an alternative (such as the use of AMPU) was proposed by TTG (or others) at the time. We note that TTG first referred to AMPU as a methodology for calculating margins in its compensation claim. As far as we understand, this was not raised with Openreach as an appropriate methodology for calculating SLG levels.

3.61 An additional consideration is that there could also be a probability associated with Lost Revenues, which is directly related to the probability of Cancellations: once an order has been placed, a customer could either decide to cancel that order or wait until the service is provided. If there is a probability associated with Cancellations of X (see discussion of Cancellations below), it would be appropriate to apply a probability to Lost Revenues of 1 minus X.72

3.62 Overall, we provisionally consider that Openreach’s methodology was reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer. However, this does not mean that it would not also be reasonable to use alternative measures of margin, such as AMPU.

Data used in pre-estimating Lost Revenues costs / losses

3.63 In order to pre-estimate a value for Lost Revenues, Openreach used two data inputs:73

3.63.1 an EBITDA margin of 20%; applied to

3.63.2 an average revenue per user (“ARPU”) value of £300 per annum (equivalent to £25 per month).

3.64 This produced a value for Lost Revenues of £5 for a 25 day delay (i.e. £0.20 per day).74 We consider both data points below.


Levels of EBITDA

3.65 In its response to the First Provisional Conclusions, Openreach revised its original assumption for EBITDA of 20% in light of the financial data published by CPs. Openreach assumed a range of 18.7% to 26.5% and suggested that, if using this data as a basis for setting an EBITDA margin, an estimate towards the top end of this range, of 25%, might be appropriate.

3.66 TTG did not submit a level of EBITDA which it considered appropriate to use in pre-estimating an average CP’s Lost Revenues.

72

This assumes that in the case of all orders, when a CP’s customer is offered an engineer appointment, the earliest appointment date is either (a) acceptable to that customer and they proceed with the order or (b) unacceptable to that customer and they cancel their order. Where lead times exceed the SLA target, the SLG includes a pre-estimate of losses associated with each event (Lost Revenues for (a) and Cancellations for (b). As events (a) and (b) are mutually exclusive, where the likelihood of (b) is X, the likelihood of (a) is 1-X. 73

As set out in slide 8 of SLA/SLG proposal, 5 September 2011. 74

As set out in Slide 8 of SLA/SLG proposal, 5 September 2011, provided at Annex 10 to Openreach’s January comments. See also Table 1 of the First Provisional Conclusions. To derive a daily pre-estimate Openreach divided the monthly value by 25 days.


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Level of ARPU assumed by Openreach

3.67 In its response to the First Provisional Conclusions, Openreach assessed its ARPU assumption by referring to publicly available information concerning ARPU for broadband, lines and calls per end user, and took an arithmetic mean of the ARPUs of CPs, as provided in the CPs’ respective published financial results:

3.67.1 For BT Retail, Openreach uses an ARPU of £29.92;75

3.67.2 For TTG, Openreach uses an ARPU of £27.70;76 and

3.67.3 For Sky, Openreach has not used an ARPU “because it is not possible to easily strip out the ARPU contribution of the Sky TV services, which would not be impacted by Openreach lead times”.77 According to Sky’s published results, ARPU for Q1 2012/2013 was £45.83.78

3.68 Openreach submits that these ARPU values (excluding Sky’s data) provide a mid-point of £28.81.

3.69 In calculating its compensation claim, TTG assumes an ARPU range of between £[] (for TalkTalk Essentials customers) and £[] (for TalkTalk Plus customers).79

Ofcom’s views

3.70 In estimating an average CP’s value for both EBITDA margins and ARPU, we note that in both cases, Openreach could have relied on publicly available information to derive a value for an average CP’s losses. This offers a transparent measure as values can be relatively easily checked by all stakeholders.

3.71 We have found that the published EBITDA margins for the CPs are as follows:

3.71.1 BT Retail’s published results produce an EBITDA margin for the nine months to 31 December 2012 of 26.6%;80

3.71.2 TTG’s published results report an underlying EBITDA margin, excluding investment in TV, of 20%-21%;81

3.71.3 Sky’s published results report an ‘operating margin’ of 18.5%.82

3.72 Although we do not have a complete set of industry EBITDA values, BT Retail and TTG have published values (it is unclear whether Sky’s ‘operating margin’ is expressed as EBITDA) which suggest a range of 20%-26.6% is appropriate. This suggests that Openreach’s 20% was reasonable, in that it is reflective of CP margins for the relevant services, using publicly available data.

75

Openreach advises that this figure is calculated by taking its most recent value of consumer ARPU for Q3 2013 of £359 and dividing this by twelve. 76

http://www.talktalkgroup.com/investors/results-centre.aspx. 77


http://corporate.sky.com/investors/latest_results/q2_1213. 79


s191 response. 80

See: http://www.btplc.com/Sharesandperformance/Quarterlyresults/PDFdownloads/q313_KPIs.pdf Estimate derived from 2013 Q3 figures on page 2. Note that the actual figure is 26.4%, as opposed to the 26.6% figure reported by Openreach. 81

See: http://www.talktalkgroup.com/~/media/Files/T/TalkTalk/pdfs/results/q3-results-2013.pdf EBITDA margin for FY13. 82

see:http://corporate.sky.com/documents/pdf/latest_results/q3_1213_presentation2.pdf. Sky reports ‘operating margin’ but does not confirm whether this is EDITDA margin.


http://corporate.sky.com/investors/latest_results/q2_1213

http://www.btplc.com/Sharesandperformance/Quarterlyresults/PDFdownloads/q313_KPIs.pdf

http://www.talktalkgroup.com/~/media/Files/T/TalkTalk/pdfs/results/q3-results-2013.pdf


27

3.73 We have found that the most recently published ARPUs for the CPs are as follows:83

3.73.1 BT Retail’s published results report an ARPU of £29.92;84

3.73.2 TTG’s published results report an ARPU of £25.47;85

3.73.3 Sky’s published results report an ARPU of £28.00.86

3.74 Using TTG’s published ARPU of £25.47 would imply that a reasonable range would be £25.47 to £29.92. We note that the value of £25 used by Openreach falls below the lower limit of this range, but only by 47 pence.

3.75 The 2012 Ofcom Communications Market Report provides industry levels of ARPU for fixed voice in 2011 of £22.26 per month and ARPU for fixed broadband of £13.70 per month, leading to a total of £35.96 per month for both services combined. We note that the Communications Market Report argues that this may be inflated by take-up of superfast services, e.g. fibre, which tend to be priced at a premium to slower services such as copper.87

3.76 Finally, using one month’s ARPU to pre-estimate Lost Revenues may have the effect of overstating Lost Revenues, where a 25 day delay impact is assumed. We consider that it is more appropriate to adjust the pre-estimate of loss to reflect 25 days’ ARPU, rather than using one month’s ARPU (which is nearer 30 days’ of ARPU).

3.77 Whilst Openreach’s approach is therefore likely to have overstated the value for Lost Revenues, the effect is not likely to have been significant in this case.88 Nonetheless, we include this adjustment in our analysis and provisional conclusions on the overall level of SLG offered by Openreach.

3.78 Overall, we consider that the £25 ARPU assumed by Openreach may appear low compared with the estimates provided by the Parties, as well as TTG’s published ARPU. Openreach’s assumption could therefore result in a lower SLG, although the effect of this assumption on the pre-estimate of lost revenues is reduced by the proportion of the ARPU used (since lost profits are estimated by multiplying ARPU with EBITDA).

Overall conclusion on Lost Revenues

3.79 For the reasons set out in paragraphs 3.57 to 3.62 above, we provisionally conclude that overall, Openreach’s methodology was reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer (although we believe that the approach could lead to a slight overstatement in the absence of accounting for a probability of Lost Revenues).

83

We note that ARPUs may include a number of services in addition to those relevant for the purposes of this Dispute. If that is the case, ARPUs may be slightly inflated. 84

http://www.btplc.com/sharesandperformance/quarterlyresults/quarterlyresults.htm. 85

TTG’s published results in fact state an on-net ARPU of £25.47 (with Q3 FY12: £25.05): http://www.talktalkgroup.com/investors/results-centre.aspx. 86

Slide 34 of Sky’s First Half Results 2013 shows ‘Revenue’ for its Broadband Unlimited product as £28, based on published tariff of customers taking the product, and line rental plus chargeable calls. 87

Ofcom Communications Market Report 2012, page 306 and figure 5.24. http://stakeholders.ofcom.org.uk/market-data-research/market-data/communications-market-reports/cmr12/. 88

Using Openreach’s assumption that 30 days’ ARPU is £25, 25 days’ ARPU could be estimated as (£25/30) x 25 = £20.80. £20.80 x EBITDA of 20% = £4.16 for a 25 days’ delay, or £0.17 per day. This compares with Openreach’s pre-estimate of £0.20 per day.

http://www.btplc.com/sharesandperformance/quarterlyresults/quarterlyresults.htm


http://stakeholders.ofcom.org.uk/market-data-research/market-data/communications-market-reports/cmr12/


28

3.80 For the reasons set out in paragraphs 3.70 to 3.78, we provisionally conclude that Openreach’s pre-estimate of Lost Revenues as part of the April 2012 ANFA offer was based on data that may have been too low. This is based on a comparison with publicly available values for EBITDA and ARPU, which we consider to be a reasonable basis for assessing EBITDA and ARPU values. However, the effect is likely to have been negated by Openreach incorrectly using one month’s ARPU to pre-estimate the impact of a 25-day delay.89

3.81 Based on our provisional conclusions on the methodology, a pre-estimate for a daily

rate of losses associated with Lost Revenues can be calculated as:

[(Monthly ARPU x EBITDA) x (1-X)] / 3090

3.82 A range of values can be derived by using the publicly available data for ARPU and

EBITDA set out in paragraphs 3.71 and 3.73, to offer a range of values for Lost Revenues of £0.17 per day to £0.24 per day (based on the impact of 25 days’ delay) factoring in a probability based on the probabilities of Cancellation (“X”) discussed at paragraphs 3.123 below). Based on the evidence available we consider this a reasonable range for the purposes of resolving this Dispute.

2. Cancellations

3.83 This component refers to profit losses associated with customers that experience delays after they have placed an order and cancel their order because of the delay.

3.84 Openreach’s original estimate for a daily value of profit losses associated with cancellations was made on the basis of an estimate of the profits generated by the lost customer over their lifetime and then applying a 30% probability that the order is cancelled after a 25 day delay. Openreach calculated the overall profits generated by a customer as the 12 months’ ARPU to which it applied an EBITDA margin, and then subtracting from this total a fixed amount based on 30% of a £50 connection charge (i.e. £15).

Methodology used to pre-estimate Cancellations


3.85 TTG explains that it based its total claim for Cancellations on an estimate of lost profit (calculated on the basis of [] months’ AMPU), and applying this to an estimate of the volume of cancellations (based on a probability of cancellations drawn from market research). TTG then deducted from the total an estimated monthly cost to serve over the [] months.91

3.86 Openreach’s response to the First Provisional Conclusions does not provide further comments on the methodology it used to produce a pre-estimate for Cancellations that formed the £2 per day SLG offered as part of the April 2012 ANFA.

89

Assuming monthly ARPU is at least £25.47 and not £25 used by Openreach, 25 days’ ARPU could be estimated as (£25.47/30) x 25 = £21.23. £21.23 x EBITDA of 20% = £4.25 for a 25 days’ delay, or £0.17 per day. This compares with Openreach’s pre-estimate of £0.20 per day 90

As Openreach uses monthly ARPU data to reflect the impact of a 25-day delay, we have divided by 30 days and not 25 days in order to derive a daily rate of loss. 91

Pages 7 and 8 of TTG’s response to the First Provisional Conclusions.


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Ofcom’s views

3.87 Both Parties estimate losses from Cancellations as lost profits. We consider that it is reasonable to use the lost profit (as opposed to lost revenues) for the reasons set out at paragraph 3.57.

3.88 We note that the Parties suggest different approaches for estimating lost profits. The specific views of the Parties on this, and our conclusion that Openreach’s use of EBITDA margin as an indicator of profit margin was reasonable, are set out in the discussion of Lost Revenues above.

3.89 Both Parties assume a period over which profits are lost. As the period that a customer takes a service in part determines the overall level of profits earned from that customer, we provisionally consider that it is appropriate to apply an estimate of average customer lifetime (i.e. customer retention) in order to provide a reasonable pre-estimate for Cancellations.

3.90 Both Parties propose the use of a probability of cancellation. As only a percentage of orders would result in cancellations because of delays, we provisionally conclude that it is reasonable to apply a probability factor to its occurrence.

Data used in pre-estimating losses associated with Cancellations


3.91 In order to pre-estimate a value for Cancellations, Openreach used three key data inputs:

3.91.1 A pre-estimate of lost profits, based on ARPU times the EBITDA margin (£5 per month, as calculated for Lost Revenues);

3.91.2 A probability of cancellation of 30%; and

3.91.3 A customer retention (i.e. the assumed lifetime of an average CP’s customers) of 12 months.

3.92 This produced a value for Cancellations of £3 for a 25 day delay (i.e. £0.12 per day).92

3.93 To provide a pre-estimate for Cancellations, the three data inputs are multiplied together. Therefore, in order to provide a reasonable output, all three inputs need to be reasonable.

3.94 We have found that the data used by Openreach in relation to pre-estimating lost profits for Lost Revenues may have been too low, as set out in the discussion of Lost Revenues above. We consider each of the probability of cancellation and the length of customer retention below.

3.95 Openreach then made an adjustment to the pre-estimate for Cancellations, by subtracting an amount representing the connection charge ‘saved’ by a CP. The proportion was calculated by Openreach applying the assumed probability of cancellation (i.e. 30%) to the MPF New Provide connection charge of £50. It appears

92

As set out in Slide 8 of SLA/SLG proposal, 5 September 2011, provided at Annex 10 to Openreach’s January comments. See also Table 1 of the First Provisional Conclusions. To derive a daily pre-estimate Openreach divided the monthly value by 25 days.


30

reasonable for Openreach to make this adjustment on the basis that a CP experiencing a Cancellation will not incur the connection charge normally paid when the MPF New Provide order is completed.

3.96 We received no information from the Parties as to whether Openreach’s assumption of a £50 connection fee was appropriate. However, we note that Openreach’s price lists

show the charge for ‘MPF Connection charge - New Provide Standard’ as £51.16. 93

Probability of cancellation

3.97 In its calculations, Openreach assumed a 30% likelihood of cancellations,94 although it provided no evidence justifying the assumption used. Openreach assumed this on the basis of a 25-day delay. We understand this to mean that after a 25 day delay in lead times, Openreach assumed a 30% probability that a retail customer would cancel their order with their CP.

3.98 In its response to the First Provisional Conclusions, Openreach assesses this assumption and concludes that 30% was an over-estimate. Openreach questions whether losses associated with Cancellations are incurred, stating “this is not a definitive case of actual customer losses (as no losses proven), but is more a case of customers potentially delaying moving CP due to extended lead-times with all CPs, and no additional losses to cable proven”,95 Openreach submits that the probability should range between 0% and [] %.96 However, it concluded that “for pre-estimate purpose, and recognising that there may be other data points that Ofcom could consider”97 Openreach suggests a percentage for cancellations as a range of 0-10% with a mid-point of 5%.

3.99 In support of its view , Openreach provides the following:

3.99.1 Losses from copper to cable at a market [] ;98

3.99.2 For TTG, cancellations as a proportion of overall orders for the Relevant Period were lower than the monthly average for the period December 2010 to December 2012. Openreach argues that this suggests no correlation between lead times and prevailing cancellation levels;99

3.99.3 For the market at a total level, analysis of cancellation shows “no apparent relationship between lead times and cancellation levels”;100

3.99.4 [], which in Openreach’s views suggests “no apparent impact of extended lead times”101 (i.e. no negative impact caused by lead times);

93

See: http://www.openreach.co.uk/orpg/home/products/pricing/loadProductPriceDetails.do?data=totid5BwFmkf9vLcBITRyZF9loRxWIbIKK6V7YWmlYAlMnGHsqdC0vzO163bJmh34D91D7M0q8u%2F%0AIlSgtIFAKw%3D%3D. 94

As set out in Slide 8 of SLA/SLG proposal, 5 September 2011, provided at Annex 10 to Openreach’s January

comments. 95


Pages 16 and 17 of Openreach’s response to the First Provisional Conclusions, as corrected by Openreach’s 4th s191 response. 97


Pages 15-16 of Openreach’s response to the First Provisional Conclusions. 99



Page 16 of Openreach’s response to the First Provisional Conclusions.




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3.99.5 Using TTG’s data, Openreach also submits that it is possible to “mathematically derive” that [] % of placed orders (the more relevant measure in this context) were cancelled during the relevant period as a consequence of extended lead times and that [] % of completed orders were cancelled during the relevant period as a consequence of extended lead times.102 However, Openreach’s derivation of [] % and [] % is based on TTG data and Openreach expresses reservations about using that data.103

3.100 In its response to the First Provisional Conclusions, TTG provides further analysis which it considers supports its view that there is a direct link between extended lead times and cancellation rates. In particular, TTG refers to its analysis of cancellation rates as a percentage of MPF New Provide sales, which TTG submits shows an increase in cancellation rates during the Relevant Period.104

3.101 TTG also submits that, as Openreach’s performance improved after the Relevant Period, TTG’s cancellation rates decreased.105 TTG submits that actual cancellation rates increased during the Relevant Period and that “there are no significant drivers or reasons other than Openreach’s poor performance that might have caused the increase in cancellations”.106

3.102 TTG estimates that the cancellation rate of its customers is around[] % of all orders placed, based on market research of October 2012.107 TTG also submits that its estimated volume of cancellations in its compensation claim, which was based on the [] %, has since been verified by its subsequent estimates for volumes of cancellations for the Relevant Period (in that the two volumes are very similar).108

Customer retention

3.103 Openreach had previously calculated a value for Cancellations based on a 12-month ARPU, whilst TTG assumed a customer retention of [] months, and neither Party provided reasoning or evidence to support their respective positions. We noted that in January 2013, we published a report showing that switching levels (including any switching of services within bundles) remain at around one in ten in each of the fixed-line (10%), mobile (9%) and fixed broadband (9%) markets.109 We provisionally concluded that this indicates that Openreach’s calculations assuming a 12-month average revenues/margins are too low (see paragraph 3.53 of the First Provisional Conclusions).

3.104 In its response to the First Provisional Conclusions, Openreach submits that “Ofcom’s justification for rejecting the 12 month assumption is inadequate, where the only evidence put forward is by reference to switching rates for fixed lines, mobile

102


Page 4 of Openreach’s 4th s191 response.

104 Page 6 of TTG’s response to the First Provisional Conclusions.



107 Page 7 of TTG’s response to the First Provisional Conclusions. The market research referred to by TTG was

provided at Annex 2 to TTG’s 2nd

s191 response. 108

Page 7 of TTG’s response to the First Provisional Conclusions. 109

See Ofcom’s report The Consumer Experience 2012, January 2013: http://stakeholders.ofcom.org.uk/market-data-research/market-data/consumer-experience-reports/consumer-experience/. See Figures 111 and 112 in particular.

http://stakeholders.ofcom.org.uk/market-data-research/market-data/consumer-experience-reports/consumer-experience/

http://stakeholders.ofcom.org.uk/market-data-research/market-data/consumer-experience-reports/consumer-experience/


32

and broadband”,110 but does not confirm its basis for using a 12-month retention, or offer a view on likely levels of customer retention.111

3.105 TTG argues that customer lifetime is closely related to churn, and that “customer lifetime can be calculated as the inverse of that customer’s predicted churn rate”.112 TTG states that its reported churn across all LLU MPF services, on a monthly basis, is 1.5% which TTG estimates gives a [] -month customer lifetime. TTG’s latest published returns report on-net churn at 1.5% (Q2 FY13: 1.6%).

Ofcom’s views

Probability of cancellations

3.106 At paragraphs 3.99.1 to 3.99.5, we note five areas that Openreach refers to in order to support a view “that the assumption of 30% loss of customers was a significant over estimate”.113

3.107 It is difficult to draw firm conclusions on the probability of cancellation from Openreach’s assertions. For example, the relationship suggested between losses from copper to cable, and the correlation between proportion of cancellations and lead times, may not be a good indicator. There may be a number of reasons for cancellation and switching that are not accounted for by Openreach, and identifying the relationship between cancellations and lead times is likely to be complex.

3.108 For the same reasons, we would exercise caution in relation to TTG’s assertion that [].114

3.109 We note that TTG draws on market research provided at Annex 3 to its 2nd s191 response in order to estimate a cancellation rate of []%. However, we have some reservations concerning the market research referred to by TTG and therefore the conclusions TTG draws from it, as noted at paragraph 3.43.2 of the First Provisional Conclusions. TTG has not addressed these concerns.

3.110 We note that there is some difficulty in reconciling Openreach’s approach with TTG’s submitted evidence, as neither of the Parties considers how the probability of cancellation is likely to vary with the duration of the delay. This complicates the Parties’ respective estimates, in that Openreach’s original pre-estimate assumed a 25-day delay, whereas TTG’s market research is unclear as to the length of delays that were assumed in order to derive a probability of cancellation.

3.111 One further observation on the approach taken by TTG is that the probability of cancellation is applied to the total volume of orders. It is not clear whether this provides a robust measure of cancellations in order to estimate loss because total orders include items in addition to MPF New Provide. The data submitted by TTG suggests that the [] % submitted by TTG would increase to around [] % if based on MPF New Provide orders only, although we base this only on TTG’s unsubstantiated statement that of all orders, TTG “estimate that normally [] would

110


In its response to the First Provisional Conclusions, Openreach models a range of potential options using 12 months to 3 years, in order to assess potential impacts, but does not advocate any particular alternative to 12 months. 112



Page 7 of TTG’s response to the First Provisional Conclusions.


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have been new lines so would need an MPF New Provide order”,115 with no obvious basis for easily verifying the proportion of total orders that are orders for MPF New Provide.

3.112 A final observation is that there may be an inter-relationship between the probability of Cancellation and the delay assumed by Openreach in its pre-estimate of loss:

3.113 Openreach has assumed a delay in lead times of 25 days. This is significant, as to calculate a daily SLG level, the total losses for all four cost components are divisible by this number. For example, if losses were based on a lower delay, the same total losses would produce a higher daily SLG level. Equally, assuming a higher delay in lead times with the same total losses would lower the daily SLG level.

3.114 However, it is plausible that the probability of Cancellation varies with the assumed length of delay. For example, the probability of Cancellation might be expected to increase with an increase or the assumed length of delay.116

3.115 Neither Party has presented evidence or arguments concerning how, or if, the probability of cancellation might depend on the length of delay (nor is it clear what delays were assumed by TTG in conducting its market research). Further, the 25 days’ delay used by Openreach was shared with CPs as part of the negotiations leading to the April 2012 ANFA offer,117 and we have not seen evidence or arguments presented for assuming an alternative to this.

3.116 Accordingly, absent any arguments or evidence put forward that Openreach should have used an alternative to a 25-day delay in pre-estimating loss, we have used this figure in our analysis.

3.117 Overall, the submissions of the Parties propose a wide range of probabilities for cancellations. Whilst Openreach suggests that the 30% probability of cancellation it used in its pre-estimate of losses associated with Cancellations was too high, there is considerable uncertainty as to what is an appropriate pre-estimate of the probability of cancellation. We note that the Parties now indicate that this probability is 10% or less (and potentially significantly lower than 10%).118 We have seen no further evidence to suggest that a 30% probability of cancellation is appropriate.

Customer retention

3.118 In the First Provisional Conclusions we proposed that Openreach’s use of a 12-month assumption was not reasonable. We have received no further evidence to confirm levels of customer retention, and we note that there are significant doubts concerning the evidence provided to estimate probabilities of Cancellation.

3.119 Using TTG’s published monthly churn rate of 1.5%, it is unclear to us how TTG has arrived at a [] -month estimate of average customer lifetime – it would appear to us that the inverse of a monthly churn rate of 1.5% implies a higher customer retention. We have considered whether using the inverse of the retention rate (as suggested by TTG) would provide an appropriate figure. However, we do not consider that a precise estimate of the customer lifetime can be mechanically derived as the inverse

115

Page 2 of TTG’s 2nd

s191 response. 116

This may also be relevant to the estimation of Potential Sales and for the costs associated with Customer Care. 117

As set out in Openreach’s SLA/SLG proposal, 5 September 2011, provided at Annex 10 to Openreach’s January comments. 118

See paragraphs 3.98 (Openreach) and 3.102 (TTG).


34

of the average churn rate in order to provide a precise pre-estimate for the purpose of this Dispute. We consider that doing so could overstate the customer lifetime because it may include customers who are unlikely to switch (and therefore have a longer customer lifetime) as well as those who are likely to switch. Nonetheless, TTG’s methodology suggests a view that customer retention should exceed 12 months.

Overall conclusion on Cancellations

3.120 For the reasons set out in paragraphs 3.87 to 3.90 above, we provisionally conclude that Openreach’s methodology was reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer.

3.121 For the reasons set out in paragraphs 3.106 to 3.119, we provisionally conclude that Openreach’s data used for the purposes of pre-estimating profit margins as part of the April 2012 ANFA offer may have understated losses. As set out in paragraph 3.80, we base this on a comparison with publicly available values for EBITDA and ARPU.

3.122 Based on our provisional conclusions on the methodology, a pre-estimate for a daily rate of losses associated with Cancellations can be calculated as:

[(Monthly ARPU x EBITDA x Customer Retention x X) – (Connection Charge x X)] / 25

3.123 For the reasons set out in paragraphs 3.106 to 3.117, we provisionally conclude that Openreach’s use of 30% is likely to overstate the probability of Cancellations (“X”). We are not aware of any publicly available data to confirm a value, although we note that the Parties both suggest low (i.e. 10% or less) probabilities. Given this, and in the absence of robust evidence on this issue, for the purposes of resolving this Dispute we propose that the use of a range of 0-10% is a reasonable measure (although we note this is very uncertain).

3.124 For the reasons set out in paragraphs 3.118 to 3.119, we remain of the view that the assumption of 12 months’ lost revenues seems low, as set out in the First Provisional Conclusions. However, we have not been able to calculate the precise industry value. However, for the purposes of resolving this Dispute we propose, based on submissions from the parties, a range of 12 months to 48 months119 is a reasonable measure.

3.125 Using the range of publicly available data for ARPU and EBITDA set out in paragraphs 3.71 and 3.73, and applying the above ranges for each of the probability of Cancellation and the customer retention, the pre-estimate of losses due to Cancellations is between £0.00 per day and £1.36 per day (based on a 25-day delay). Based on the evidence available we consider this a reasonable range for the purposes of resolving this Dispute.

3. Potential Sales

3.126 Potential Sales refer to profit losses associated with customers that would have placed an order with a CP but were deterred from doing so because of their expectation that there would be delays in provision (which in turn was caused by extended lead times).

119

[]


35

3.127 Openreach’s original estimate for a value of losses associated with Potential Sales was made on the basis of sales costs. This was calculated as a commission paid to sales staff amounting to 10% of an estimated 12-month ARPU. In other words, Openreach assumed a wasted acquisition cost associated with Potential Sales.

Methodology used to pre-estimate Potential Sales


3.128 In response to the First Provisional Conclusions, Openreach maintains its view that a pre-estimate of loss associated with Potential Sales should be based on wasted acquisition costs. However, Openreach submits that “our original assessment erred by assuming that there would be wasted acquisition costs for all customers where delay was experienced, whereas in fact the only wasted acquisition costs will be those where the customers are subsequently lost.”120

3.129 TTG submits that the calculation of financial loss contained in its compensation claim was a loss that materialised “in some form or to some extent” and the type of loss is consistent with the SLG Consultation and SLG statement.121 TTG’s claim for Potential Sales was based on:

3.129.1 A value for lost profits derived from AMPU;

3.129.2 An assumed customer retention of [] months; and

3.129.3 A deduction from (lost profits x assumed customer retention), based on costs saved from serving a customer over a [] month lifetime.

Ofcom’s views

3.130 We recognise that current delays could potentially lead to a loss of profits if potential customers who might have placed an order did not do so.122 A CP’s potential customers that would have connected, but did not because of the expected delays, would have offered that CP a profit over the customers’ average lifetime. We therefore consider that Openreach’s approach of applying a wasted cost value is inconsistent with its approach to Cancellations and we do not consider that it was an appropriate methodology for pre-estimating losses associated with Potential Sales. An appropriate approach should instead provide a pre-estimate of lost profits, as provided by the approaches adopted for Lost Revenues and Cancellations.

3.131 We provisionally consider that, in line with our views in relation to Cancellations, an appropriate approach would be to pre-estimate profit losses using:

3.131.1 The EBITDA levels. These are already discussed at paragraphs 3.60 to 3.62 above;

3.131.2 The ARPU levels. These are already discussed at paragraph 3.58 above;

3.131.3 An estimate of average customer lifetime. These are already discussed at paragraph 3.119 above; and

120



The distinction between Potential Sales and Cancellations is that Cancellations relate to customers who actually placed an order but then cancelled it.


36

3.132 As with Cancellations, a pre-estimate also needs to take into account the number of potential orders which may be lost as a result of delays.

3.133 We note that TTG bases its compensation claim on profit loss calculations using AMPU and TTG’s view of ARPU. We have already provided views on reasonable estimates for these data points at paragraphs 3.70 to 3.78 above.

3.134 As set out in the September 2011 slides and summarised in Table 1 of the First Provisional Conclusions, Potential Sales was by far the largest component of the SLG, with an estimate value equivalent to £1.20 of the £2123 per day SLG offered by Openreach as part of the April 2012 ANFA. We observe that applying what we consider to be an appropriate approach (as set out in 3.131 above), factoring in the probability of potential orders which may be lost as a result of delays, would significantly reduce this estimate.

Data used in pre-estimating losses associated with Potential Sales


3.135 In response to the First Provisional Conclusions, Openreach’s assessment suggests that it had over-estimated the number of customers included in the Potential Sales component, as Openreach had assumed that such costs would be incurred for all customers who placed an order and experienced a delay. Openreach submits that the number of lost potential sales due to a delay should be only a proportion of customers who placed an order.

3.136 As a proxy for estimating the number of customers attributable to the Potential Sales component, Openreach suggests that a better way to calculate the number of customers would be to use the probability used for Cancellations multiplied by the number of orders. As set out in paragraph 3.98 above, Openreach’s response to the First Provisional Conclusions suggests a range of 0-10%.

3.137 TTG submits that in respect of estimating the Lost Revenues, “the challenge with this task is that the customers concerned were never recorded on TalkTalk’s systems because they never placed any order with TalkTalk, therefore it is difficult to arrive at a precise estimate of this loss”.124

3.138 TTG submits that it has presented “robust evidence… that identified a proportion of customers cancelled their order with TalkTalk due to long provisioning delays. It is entirely reasonable that customers reached the same view even before placing an order with TalkTalk”. As noted at paragraph 3.109, TTG submits market research in respect of Cancellations that it believes suggested a probability of [] % of all sales were cancelled due to delays (we note above that this [] % of all sales could equate to []% of MPF New Provide orders).

3.139 In its 2nd s191 response, TTG also offered alternative market research for Potential Sales stating that “approximately [] % of all potential sales were affected by Openreach’s long lead times”. TTG’s response to the First Provisional Conclusions includes estimations for volumes of lost customers in line with the approach in its 2nd s191 response. TTG’s submissions therefore suggest a value of [] % to [] %.

123

Whilst Openreach offered a £2 per day SLG, its September 2011 slides (as summarised in Table 1 of the First Provisional Conclusions) showed an implied per-day SLG of £1.80 (although we note that £46 / 25 days = £1.84 per day), of which the value for Potential Sales (referred to by Openreach as ‘Wasted Acquisition Costs’) was £1.20. 124



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Ofcom’s view

3.140 We agree with both Parties that losses associated with Potential Sales should be based on an estimate of customers that would not have placed an order as a result of delays, rather than basing on volumes of all customers impacted by extended lead times.

3.141 We note that it is very difficult to accurately pre-estimate the number of potential future sales that would be lost as a result of delays today. This is because this number concerns volumes of customers that might have placed an order but did not do so, for which a CP may have no information. We observe that this is information that would not be publicly available and this value would be extremely difficult to accurately estimate for an average CP, without the results of robust consumer research, representative of all the CPs, being made available to Openreach. We therefore recognise that any assumption in this regard is likely to be highly uncertain.

3.142 Both Parties suggest that the number of lost Potential Sales could be estimated by multiplying the number of orders by the probability of Cancellation. We note that this would imply that the number of lost Potential Sales is the same as the number of cancelled orders. For the reasons set out at paragraphs 3.106 to 3.117 above, we have significant reservations about attributing a value to the probability of Cancellations, and regardless of this, it is unclear whether or not this is a reliable basis for estimating Potential Sales.

3.143 However, we note that TTG refers to market research suggesting a probability of []%. We make a number of observations on the market research submitted by TTG:

3.143.1 The research is based on a sample size of 95 sales calls. This is unlikely to provide a sufficient basis for drawing reliable inferences;

3.143.2 The research does not provide information regarding whether the sample is representative (there is no information on the basis for the calls, or how the consumers were selected);

3.143.3 The number of ‘lost opportunities’ from which TTG extrapolates data concerning reasons for lost sales totals [], of which [] were considered to be “potential sales [that] were affected by Openreach’s long lead times” (i.e. Potential Sales).125 This is again a sample that is unlikely to provide a sufficient basis for drawing reliable inferences; and

3.143.4 Of the [] respondents that TTG considers were Potential Sales, these were consumers that have expressed the reason for not placing an order as “took too long to go live / no engineer availability”.126 It is unclear whether this is on the basis of extended lead times, and if so whether this was in relation to lead times that exceeded the SLA target of 14 days.

3.144 Accordingly, we consider that it is not clear that the evidence supplied by TTG can be reliably extrapolated in the way that TTG has attempted.

3.145 Overall, the submissions of the Parties propose a range of values for the number of customers who might have placed an order but did not do so as a result of current

125

Page 2 of TTGs 2nd

s191 response. 126

Slide 4 of Annex 3 to TTG’s 2nd

s191 response.


38

delays. Openreach suggests that the number of cancelled orders can be considered as a proxy, but for the reasons above we have significant reservations with its use. TTG offers market research as an alternative, but for the reasons above, this does not appear to offer a robust basis for estimating an appropriate number. Accordingly, we consider that there is considerable uncertainty as to what is an appropriate pre-estimate of the probability that a customer who might have placed an order decided not to do so as a result of delays. As noted in paragraph 3.134 above, this is a very significant component of the £2 SLG offered as part of the April 2012 ANFA.

Overall conclusion on Potential Sales

3.146 For the reasons set out in paragraphs 3.130 to 3.134 above, we provisionally conclude that Openreach’s methodology was not reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer. We consider that a reasonable methodology would provide a pre-estimate of lost profits, as provided by the approaches adopted for Lost Revenues and Cancellations.

3.147 On this basis, and as set out at paragraph 3.134 in particular, we therefore provisionally conclude that Openreach’s pre-estimate of Potential Sales as part of the April 2012 ANFA offer may have been too high.

3.148 Based on our provisional conclusions on the methodology, a pre-estimate for a daily rate of losses associated with Potential Sales can be calculated as:

(Monthly ARPU x EBITDA x Customer Retention x Y) / 25

3.149 For the reasons set out in paragraphs 3.106 to 3.117, we provisionally conclude that it is very difficult to accurately pre-estimate the number of Potential Sales that would be lost as a result of delays. As with Cancellations, we are not aware of any publicly available data to confirm a value for the probability of Potential Sales (“Y”), although we note that the Parties both suggest that lost Potential Sales could amount to 10% or less of orders placed which experienced a delay. Given this, and in the absence of robust alternatives, for the purposes of resolving this Dispute we propose that a range of 0-10% of orders is a reasonable measure (although we note this is very uncertain).

3.150 As set out in the in paragraphs 3.118 to 3.119, we remain of the view that the assumption of 12 months’ lost revenues seems low, as set out in the First Provisional Conclusions. However, we have not been able to calculate the precise industry value. Accordingly, and as set out in paragraph 3.123, for the purposes of resolving this Dispute we propose a range of 12 months to 48 months is a reasonable measure.

3.151 Using the range of publicly available data for ARPU and EBITDA set out in paragraphs 3.71 and 3.73, and applying the above ranges for each of the probability of potential sales being lost by delays and the customer retention, these offer a range of values for Potential Sales of £0.00 per day to £1.36 per day (based on a 25-day delay). Based on the evidence available we consider this a reasonable range for the purposes of resolving this Dispute.


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4. Customer Care

3.152 Customer care refers to additional costs that a CP is likely to incur when handling its customers that have suffered a delay as a result of extended lead times.127

3.153 Openreach’s estimate for a value of costs associated with Customer Care was made on the basis of additional service costs (i.e. customer care calls) resulting from extended lead times. Openreach’s estimate was based on the assumption that on average a delayed customer will generate two extra calls of 10 minutes each, at a cost of £25 per hour, which led to it applying a value of £8 per customer for a 25 day delay (i.e. £0.32 per customer, per day).

Methodology used to pre-estimate Customer Care


3.154 In its response to the First Provisional Conclusions, Openreach has not changed its position that Customer Care should be based on costs of additional service (i.e. customer call handling) that arise from extended lead times.128

3.155 In its compensation claim, TTG considers that in addition to additional call handling costs, it should be compensated for two areas of costs it believes it has incurred:129

3.155.1 Costs incurred as a result of customers missing engineer appointments (costs being the charges made by Openreach to TTG where a TTG customer fails to meet a pre-arranged appointment with a BT engineer); and

3.155.2 Goodwill credits (an additional cost to the CP) that it paid out to customers as a result of extended lead times.

Ofcom’s view

3.156 Both Parties consider that a CP is likely to incur some additional call handling costs, due to increased customer handling resulting from delays. This appears to be a reasonable cost to include in calculations for Customer Care over and above the loss of profits from the other SLG components.

3.157 In respect of TTG’s claim for costs concerning its customers missing appointments, we note that customers may miss appointments for a variety of reasons and it is not clear from TTG’s submissions that there is a robust basis for concluding that customers miss appointments as a result of extended lead times. Further, as these are costs Openreach would be claiming back as costs it has incurred for sending out an engineer unnecessarily, to allow TTG to then claim this back as part of an SLG would appear to both penalise Openreach and offer no incentive for TTG or other CPs to ensure that their customers kept their appointments. Where TTG has a claim against a standalone charge levied by Openreach for engineer appointments, we consider that this could be pursued as a separate claim.

127

The reason why it may reasonable to include these in setting the SLG is that in calculating the profit loss for Lost Revenues, Cancellations and Potential Sales, we considered it reasonable to use industry average figures for ARPU and EBITDA, and these do not include the additional costs concerned with the additional customer care cost raised by delayed orders. 128

Pages 18 to 19 of Openreach’s response to the First Provisional Conclusions. 129

Pages 9 to 10 of TTG’s response to the First Provisional Conclusions.


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3.158 TTG’s customer credit claim “is not an estimated amount but is based on detailed analysis of the credits granted to customers during the relevant period and the reasons for those credits as recorded on our customer management systems”.130 However, TTG does not explain how the credits were calculated or whether they applied to all customers who complained to TTG, or just those taking MPF New Provide and were credited as a result of lead times extending beyond the 14 day SLA. Accordingly, it is not clear how a reasonable cost can be quantified for the purposes of considering as an input to the SLG pre-estimate.

3.159 Separately, we note that during the negotiations between the Parties that led to the SLG offer by Openreach as part of the April 2012 ANFA, the evidence shows that Openreach’s pre-estimate of Customer Care costs on the basis of call costs only was raised by Openreach131 and not contested by TTG (or others). Nor is there any evidence that alternatives or additional costs (such as goodwill payments or costs of customer missed appointments) were proposed by TTG (or others).

3.160 On balance, we provisionally consider that Openreach’s use of additional call costs as an indicator of Customer Care costs was reasonable.

Data used in pre-estimating Customer Care costs


3.161 Openreach’s response to the First Provisional Conclusions offers alternative assumptions concerning the costs of the additional customer care calls, producing a range of values depending on whether customer calls were handled in the UK or overseas. Openreach suggests that if an assumption is made that calls could be handled by offshore centres, it could be at a cost of £[] per hour, rather than £25 per hour, as it had originally assumed in its pre-estimate of costs.

3.162 TTG states that its estimated average cost of a customer service call is £[].132

3.163 Openreach submits that the key impacts on Openreach Service Centres during period of extended lead times for new provision work was that a CP’s propensity to call Openreach increased by [] % and escalations doubled.133 Using this as a proxy, Openreach considers that its assumption of two additional ten minute phone calls between customers and CP service agents regarding appointment re-assurance seems appropriate. By considering that use of offshore call centres could lower costs, Openreach proposes that there is a range of £[] to £8.33 for Customer Care.134

3.164 TTG offers no explanation on the increase likelihood of customer calls in the event of extended lead times, other than that an increase would be experienced. However, TTG notes that if every customer affected by extended lead times called TTG once during the provisioning period this would produce a total cost higher than that claimed in its original Dispute Submission.135

130


Slide 8 of SLA/SLG proposal, 5 September 2011. Provided at Annex 10 to Openreach’s January comments. 132




Pages 9-10 of TTG’s response to the First Provisional Conclusions.


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Ofcom’s views

3.165 The further evidence submitted by Openreach suggests that its pre-estimate of the cost of handling the calls falls within a range of £[] to £25 per hour. Given that there is no certainty as to the use of UK or overseas call centres, we provisionally conclude that Openreach’s value of £8.33 (or £0.33 per day based on a 25-day delay) appears to be a reasonable pre-estimate for this component.

Overall conclusion on Customer Care

3.166 For the reasons set out in paragraphs 3.156 to 3.160 above, we provisionally conclude that Openreach’s methodology was reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer.

3.167 For the reasons set out at paragraph 3.165 above, we provisionally conclude that Openreach’s data used for the purposes of pre-estimating loss as part of the April 2012 ANFA was reasonable. Based on this, a pre-estimate for a daily rate of losses associated with Customer Care can be calculated as:

(Number of additional calls x duration of calls (hours) x hourly rate) / 25

3.168 Based on the evidence available we consider that for the purposes of resolving this Dispute, a reasonable value for Customer Care is £0.28 per day.

Benchmarks

3.169 At paragraph 3.52 of the First Provisional Conclusions, we noted that individual SLG levels offered elsewhere do not offer an immediate comparison with the SLG level in this Dispute.

3.170 At paragraph 3.74 of the First Provisional Conclusions, we took the provisional view that on the basis that we maintain our provisional view and that the available evidence continues to be insufficient to be able to calculate a fair and reasonable SLG offer, we would consider that the December 2012 ANFA provides the best available benchmark to determine a fair and reasonable level of SLG and we proposed to indicate that a fair and reasonable SLG offer would be one that reflects the terms of the December 2012 ANFA as a whole.


3.171 TTG accepts that the SLGs for Openreach Connectivity Services and Ethernet services do not provide a perfect benchmark, but considers they are still relevant to the overall consideration of what is a fair and reasonable SLG.136

3.172 TTG submits137 that as there is competition in the delivery of these services, the SLGs are likely to be closer to the level that is likely to be offered in a competitive market. In relation to different underlying costs to those for the disputed SLG, TTG suggests that an SLG as a percentage of the connection charge provides a valid comparison as it provides a normalisation for different costs. On this basis, TTG notes that this approach identifies an SLG per day of delay of 5% to 20% (increasing as the delay increases) for the benchmarked SLGs, which compares 8% if considering the SLG offered as part of the December 2012 ANFA. This, TTG

136




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submits, indicates that the SLG for MPF New Providers is “rather conservative and low compared to Connectivity Services”. For Ethernet services the benchmark is 9% which TTG submits “indicates that Ofcom’s approach is reasonable”.

Ofcom’s views

3.173 Whilst benchmarks might be informative in considering the level of the SLG, we maintain our provisional view that SLGs elsewhere do not offer an immediate comparison with the SLG level in this Dispute. In respect of considering the level of SLG as a ratio of the charge of the service to which it relates, we consider that this does not offer a robust basis for assessing a fair and reasonable level for the SLG in dispute. This is because the range of ratios offered by the services referred to by TTG vary considerably, and to assess the disputed SLG on this basis in order to (a) determine that it was not fair and reasonable and (b) determine what a fair and reasonable level might be, requires an understanding of the reasons for variance in the ratios of the benchmarked services. This is not easily established within the confines of resolving this Dispute, as it would require a detailed assessment of each of the benchmarked SLGs.

Overall provisional conclusions on the SLG level offered by Openreach

3.174 For the purposes of this Dispute, we have assessed whether pursuant to Condition FAA9 read together with Condition FAA5, the SLG level offered by Openreach as part of the April 2012 ANFA was fair and reasonable, recognising that there are likely to be a number of different approaches that are likely to be fair and reasonable and therefore, consistent with the regulatory requirements imposed on BT. We have done so by looking at both the methodology used by Openreach and also the input values used to determine the SLG level.

3.175 We note that:

3.175.1 Openreach’s general approach to setting an SLG is consistent with the general principles set out in the SLG Statement; and

3.175.2 the Parties broadly agree that the SLG could be broken down into the four components used in Openreach’s approach, though they disagree on how exactly to pre-estimate each component.

3.176 In respect of the methodology used by Openreach to calculate the SLG level, we provisionally conclude that:

3.176.1 For Lost Revenues, Openreach’s methodology overall was reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer (although we believe that the approach could lead to a slight overstatement in the absence of accounting for a probability of Lost Revenues);

3.176.2 For Cancellations, Openreach’s methodology was reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer.

3.176.3 For Potential Sales, Openreach’s methodology was not reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer. We consider that a reasonable methodology would provide a pre-estimate of lost profits, as provided by the approaches adopted for Lost Revenues and Cancellations; and


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3.176.4 For Customer Care, Openreach’s methodology was reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer.

3.177 In respect of the data used by Openreach to calculate the SLG level, we provisionally conclude that:

3.177.1 For Lost Revenues, Openreach’s data used for the purposes of pre-estimating loss as part of the April 2012 ANFA offer was reasonable, based on the final figure used by Openreach;138

3.177.2 For Cancellations, Openreach’s data used for the purposes of pre-estimating profit margins and customer retention may have understated losses, whereas Openreach may have overstated the probability of Cancellations;

3.177.3 For Potential Sales, Openreach’s methodology was not reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer and Openreach’s pre-estimate of Potential Sales may have been too high; and

3.177.4 For Customer Care, Openreach’s data used for the purposes of pre-estimating loss as part of the April 2012 ANFA was reasonable.

3.178 In light of these provisional conclusions, we have set out what we consider would be a reasonable range of SLG levels, based on what we provisionally conclude to be reasonable methodology, and using the data ranges we consider reasonable to use based on the evidence available to us in resolving this Dispute (see Table 1 below).

3.179 Note that, having regard to the robustness of the evidence available to us and the limitations on the analysis we can undertake in the context of dispute resolution, we have not concluded that all the values used in Table 1 have a strong evidential basis that they are reasonable, nor are we able to attach particular significance to one value over any other within these ranges. However, we consider that they are the best available in light of the evidence considered in resolving this Dispute.

138

Whilst the values used may have been too low when compared with publicly available data, the effect is likely to have been negated by Openreach incorrectly using one month’s ARPU to pre-estimate the impact of a 25-day delay.


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Table 1: Range of daily SLG levels based on the provisional conclusions outlined in these Second Provisional Conclusions

SLG Components Lower End of

range Upper end of

range

1 - Lost revenues(1) 139 £0.17 £0.24

2 – Cancellations(2) 140 £0.00 £1.36

3 - Potential sales(3) 141 £0.00 £1.36

4 - Customer care(4) 142 £0.33 £0.33

Overall daily SLG level £0.50 £3.29

3.180 Table 1 shows that this result in a range of SLG levels between £0.50 and £3.29 and we note that Openreach’s offer of £2 lies within this range. This analysis shows that making the adjustments to Openreach’s methodology discussed above and using input values (in the light of what the Parties told us and publicly available information) which we consider reasonable or at least the evidence does not show that they are unreasonable, the £2 per day level pre-estimate of an average CP’s loss offered by Openreach, in respect of the Relevant Period, can be justified.

3.181 On the basis of this analysis, we provisionally conclude the evidence available to us does not support a finding that the £2 per day level of SLG offered by Openreach in respect of the Relevant Period was not a fair and reasonable pre-estimate of an average CP’s loss.

3.182 On this basis, we do not consider we need to decide what benchmarks should be considered to determine a fair and reasonable level of SLG.

Assessment of the forecasting requirements

Requirement to provide forecasts

3.183 At paragraph 3.63 of the First Provisional Conclusions, we set out our provisional view that forecasting provides Openreach with a basis for better planning of its resources in order to meet CP demands for MPF New Provide. We considered that the terms and conditions offered by Openreach could include some form of forecasting requirement and still be considered fair and reasonable.

3.184 At paragraph 3.64 of the First Provisional Conclusions, we noted that a further consideration in assessing whether the forecasting arrangements offered by Openreach as part of the April 2012 ANFA are fair and reasonable, is to consider whether or not CPs have been able to meet the requirements of Openreach’s offer

139

The basis for calculating this is set out at paragraph 3.81 above. For values used, see paragraph 3.80 above. 140



The basis for calculating this is set out at paragraph 3.167 above. For values used, see paragraph 3.167 above.


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since then. We provisionally concluded at paragraph 3.71 that in our view, the evidence was not sufficient to show that the 10% forecasting requirement was not fair and reasonable. However, we noted that our final determination is subject to any further evidence submitted by the Parties and/or other stakeholders in relation to some of the assumptions highlighted in the analysis set out in the First Provisional Conclusions.


3.185 Both Parties agree that in principle, it is reasonable for an SLA regime to include a forecasting arrangement.143 TTG accepts that “better industry forecasting benefits the entire industry and as such we agree that forecasting accuracy is relevant”.144 Openreach states that forecasting “allows Openreach to better understand future market demand for Openreach engineering resource, and thereby better understand how many engineers are required where, and when, to best meet the needs of the market and in consequence deliver better service to CPs and end users.”145

3.186 Openreach considers that the forecasting requirements were fair and reasonable. It states that the terms of the forecasting arrangements are required “to reflect the minimum period needed to recruit and deploy additional engineering resource”.146

3.187 Openreach argues that the forecasting requirements were guided by two assumptions:147

3.187.1 “CPs themselves have the best capability to understand their own future demand”; and

3.187.2 “the largest CPs have the ability to impact the market most (for good or bad) since they utilise the largest share of Openreach engineering resource. In consequence it was deemed that the largest purchasers of the in scope products for the CAA SLA/SLG should be required to place accurate demand forecasts in return for the further SLG offered.”

3.188 Openreach submits that “there is no clear correlation whatsoever between periods of extended lead time and degrees of forecasting (in)accuracy”.148 In support of this, Openreach provides the following summary of lead time performance against forecasting accuracy of CPs including TTG:149

[]

3.189 Openreach submits that performance in terms of lead times is unrelated to forecasting accuracy. It submits that forecasting accuracy is assessed against orders received, and not completed, and that “in consequence Openreach service issues are not an impediment to CPs achieving good levels of forecasting accuracy”.150

143

See page 10 of TTG’s response to the First Provisional Conclusions, and page 21 of Openreach’s response to the First Provisional Conclusions. 144






Diagram 3, at page 23 of Openreach’s response to the First Provisional Conclusions. 150

Page 22 of Openreach’s response to the First Provisional Conclusions.


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3.190 TTG states that it has “serious misgivings”151 about the forecasting requirement, as TTG considers that there is a lack of evidence that forecasts are used by Openreach in planning and managing its resources. TTG submits that “therefore at a minimum Ofcom must not use 10% unless it is satisfied that Openreach actually used the forecasts to plan its resources and that its poor performance was caused in a material way by TalkTalk’s poor forecasts”.152

3.191 TTG argues that Openreach’s performance during the Relevant Period has failed to improve, despite TTG over-forecasting which “should have meant that Openreach had more engineers available than necessary (which in turn should have meant that they would have been better able to meet their SLA timescales)”. 153 TTG adds that as it was unable to adjust the forecasts made 3-6 months in advance “it would be unfair to penalise TalkTalk for inaccurate forecasting where this information did not have any actual impact on Openreach’s service performance”. 154

3.192 TTG further submits that the First Provisional Conclusions had not addressed TTG’s view “that Openreach’s poor service performance hampered TalkTalk’s ability to forecast accurately”.155 In its Dispute Submission, TTG states that “TalkTalk assumed that the SLG regime would be based on a fair and reasonable forecasting regime that allowed LLU operators to provide sensible order forecasts in return for robust service delivery by Openreach…TalkTalk’s agreement was based on the quite reasonable assumption that Openreach’s performance would be relatively normal in the sense that only a small percentage of orders would ever trigger the SLG payment”.156

Ofcom’s views

3.193 We provisionally remain of the view that a forecasting requirement is a reasonable requirement in order to support delivery of MPF New Provide and this does not appear to be a point of contention between the Parties. Our view is reinforced by Openreach’s Forecasting Manual, which states that “the purpose of forecasting is to enable Openreach to resource adequately to meet forthcoming order volumes and to onward provide suppliers with forecasts and advance orders”157 and that “it provides Openreach with information so that it can aim to deliver service in accordance with the SLA”.158

3.194 The Parties’ arguments in relation to forecasting appear to relate to two main issues:

3.194.1 whether Openreach in fact relied on the forecasts provided by CPs; and

3.194.2 whether TTG’s ability to forecast accurately was impaired by Openreach’s poor performance.

3.195 We have no evidence to confirming whether or not Openreach relied on the forecasts provided. However, Openreach has an incentive to use forecasts effectively since it improves Openreach’s ability to predict resource requirements accurately. In a situation where Openreach is subject to an SLA regime, failure to use the forecast information would be more likely to result in SLGs being paid.

151

See page 11 of TTG’s response to the First Provisional Conclusions. 152





Page 10 of TTG’s Dispute Submission. 157

Page 3 of the Forecasting Manual. 158

Page 3 of the Forecasting Manual.


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3.196 In any event, we accept that increased accuracy of resource planning does not guarantee performance. We consider that accurate forecasting should be used to aid resource planning in advance of orders being placed, but note that it may not be the sole determining factor in terms of subsequent delivery against anticipated lead times. Other factors at the time of delivery could, for example, include how other operational and commercial considerations, such as whether Openreach prioritises resources for repairing MPF over MPF provision, impact delivery while external factors such as adverse weather will also have an impact.

3.197 It is not clear from TTG’s submissions how its ability to forecast accurately was impeded by Openreach’s performance. We note our provisional view set out at paragraph 3.68 of the First Provisional Conclusions that [] extended lead times were unlikely to be sufficient to prevent forecasting close to or within the target range. We have seen no evidence which causes us to depart from this view.

3.198 We therefore propose to maintain our view set out in the First Provisional Conclusions.

Conclusions on whether the relevant terms and conditions are fair and reasonable, as required by Condition FAA9.2

3.199 For the reasons set out above, we provisionally conclude that:


3.199.2 the forecasting requirements were fair and reasonable,

3.200 We therefore provisionally conclude that we have not found that BT has breached Condition FAA9.2 by virtue of the April 2012 ANFA offer.

3.201 Below we consider other issues raised outside our assessment of whether the relevant terms and conditions are fair and reasonable, and then set out our provisional assessment of consistency of Ofcom’s provisional conclusion with our statutory duties and Community obligations.

Ofcom’s powers when resolving the Dispute

3.202 At paragraph 3.77 of the First Provisional Conclusions, we stated that we were considering whether we should exercise our powers to give a direction under section 190(2)(d) of the 2003 Act requiring the payment of sums by way of adjustment of an underpayment or overpayment for the purpose of giving effect to a determination by us of the proper amount of a charge in respect of which amounts have been paid by one of the parties to the dispute to the other. In particular, we were considering what constitutes a “charge” for these purposes, and invited the Parties to make legal submissions on the extent of Ofcom’s powers to direct a repayment under section 190(2)(d) for the purpose of giving effect to our determination of the Dispute.

Stakeholders’ and Ofcom’s views

3.203 Stakeholders made a number of detailed submissions on the extent of Ofcom’s power to direct a repayment under section 190(2)(d). In summary, Openreach submits that this power does not extend to making a repayment in these circumstances while TTG and Sky argue the opposite. Openreach also argues that,


48

even if we were to conclude that we have the power to award a payment under section 190(2)(d), we should not exercise that discretion

3.204 We have considered the submissions of the Parties and Sky in relation to the extent and exercise of our powers under the 2003 Act. However, given our provisional conclusion that the April 2012 ANFA offered by Openreach was fair and reasonable, it is no longer be necessary for us to reach a final view on this point.

Incentives

3.205 In the First Provisional Conclusions, we considered the most appropriate exercise of our powers under section 190 of the 2003 Act, given our provisional view that Openreach was in breach of Condition FAA9.2 during the Relevant Period. We also stated, however, that if we were to conclude that the April 2012 ANFA was fair and reasonable, we would not consider that any remedy would be necessary. We noted that this should reduce the risk of negative incentives for CPs to engage in genuine commercial negotiations with Openreach and/or act as a disincentive for CPs to bring disputes to Ofcom promptly.


3.206 Openreach argues that, if Ofcom were to direct a payment, it would “undermine the incentives of individual undertakings to participate in such industry negotiations, as the CP participants will be aware that others can opportunistically use the dispute resolution process to re-open settled commercial terms in an attempt to gain a greater benefit. It will also undermine the incentives of the SMP undertaking to improve its service offers beyond what is required by Ofcom if it perceives that this will lead to opportunistic behaviour of this kind by its customers.”159

3.207 TTG argues that “a breach finding would improve incentive properties by ensuring that Openreach in future cases makes a greater effort to ensure compliance with its regulatory obligations.” It argues that “Openreach has no real incentive or willingness to engage in proper commercial negotiations that one would expect in a competitive environment. The reason for this is that the worst that can happen is that Openreach is ‘restituted’ back to the position it would have been in if it met its regulatory obligations initially”.160

3.208 TTG disagrees with our provisional view that no remedy would be necessary if the April 2012 ANFA had been fair and reasonable, thereby reducing the risk of giving rise to incentives for CPs not to engage in genuine commercial negotiations with Openreach or delay submitting a dispute to Ofcom.

Ofcom’s view

3.209 Given that we now provisionally conclude that the April 2012 ANFA was fair and reasonable and that Openreach is accordingly not in breach of Condition FAA9.2, we do not consider it necessary to exercise any of our powers under section 190 of the 2003 Act. We consider that our proposed approach to resolving this Dispute strikes an appropriate balance in relation to incentive properties, providing BT with the incentive to ensure that it offers fair and reasonable terms in a timely manner, while ensuring that CPs have the incentive to engage in genuine commercial negotiations.

159


TTG’s response to the First Provisional Conclusions, page 13.


49

3.210 We disagree that our proposed approach will mean that CPs have to sign up to sub-optimal terms. If Openreach offers terms which are not fair and reasonable, CPs do not have to agree to them and can bring a dispute on the basis that Openreach was required to offer fair and reasonable terms. Alternatively, if CPs do not feel they have sufficient information to assess whether the terms are fair and reasonable, they can agree to them but bring a dispute on the basis that Openreach is providing a service on terms which are not fair and reasonable.

3.211 If, on the other hand, Openreach offers terms which are fair and reasonable but CPs do not agree to them, we do not consider that we should nevertheless provide CPs with the benefit of the terms which they rejected. We consider this would provide CPs with poor incentives to agree to fair and reasonable terms; rather, they would have incentives to prolong negotiations.

3.212 We do not consider that our proposed approach would mean that Openreach has an incentive to prolong negotiations. Where it is required to provide a service on fair and reasonable terms, but no such terms have been put in place or offered, CPs would be able to bring a dispute in respect of any period where fair and reasonable terms were not offered.

Assessment of consistency of Ofcom’s Second Provisional Conclusion with our statutory duties and Community obligations

3.213 As part of our analysis, we have considered our general duties in section 3 of the 2003 Act and also the six “Community requirements” set out in section 4 of the 2003 Act, which give effect, among other things, to the requirements of Article 8 of the Framework Directive.161 In particular, we have had regard to:

3.213.1 our principal duty to further the interests of citizens in relation to communications matters and to further the interests of consumers in relevant markets, where appropriate by promoting competition (section 3(1));

3.213.2 the duty to secure the availability throughout the United Kingdom of a wide range of electronic communications services (section 3(2)(b));

3.213.3 the need to have regard when performing our duties to:

a) the desirability of promoting competition in relevant markets (section 3((4)(b));

b) the desirability of encouraging investment in relevant markets (section 3((4)(d));

c) the duty to have regard to the principles under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed; as well as any other principles appearing to Ofcom to represent the best regulatory practice (section 3(3)); and

3.213.4 Community requirements:

a) to promote competition (section 4(3)); and

b) to encourage, to such extent as Ofcom considers appropriate, the provision of network access and service interoperability for the purposes of securing efficiency and sustainable competition, efficient investment and innovation and

161

Directive 2002/21/EC.


50

the maximum benefit for the customers of communications network and services providers (sections 4(7) and 4(8)).

3.214 In the WLA statement we found BT to have SMP in the wholesale local access market within the UK, but not including the Hull Area. We imposed a requirement on BT pursuant to Condition FAA9 to provide LLU on fair and reasonable terms to address this SMP. We considered that this supports investment in CGA networks, and provides CPs with network access at a level that enables them to compete effectively with BT and provide their own products and services at the retail level. By ensuring access is provided on fair and reasonable terms and conditions, this prevents BT using access terms to impede CP’s deploying competing services. In our view, creating a regulatory framework in which such competing services can develop is consistent with our duties, including our principal duty and our duties under sections 3(2)(b), 4(3), 4(7) and 4(8) of the 2003 Act.

3.215 The level of service provided at the wholesale level has a direct impact on competition at the retail level. The purpose of an effective SLA/SLG regime is to provide BT with appropriate incentives to provision services to third party CPs at the wholesale level and is therefore important for securing competition at the retail level. Compensation payments associated with any failure to meet performance requirements are likely to influence directly the downstream contractual terms offered to retail customers.162 Our provisional conclusion that any SLG offered must be fair and reasonable is aimed at ensuring that there is effective competition at the retail level. However, it is also important to provide appropriate incentives to the Parties to engage in meaningful commercial negotiations. We consider that our proposed resolution of this Dispute strikes an appropriate balance between these incentives and is consistent with our statutory duties and Community obligations.

3.216 In setting out our provisional view, we have kept in mind our duty under subsection 3(3)(a) of the 2003 Act to ensure that our regulatory activities are, among other things, transparent, accountable, proportionate and targeted only at cases where action is needed. In particular, in the First Provisional Conclusions we set out the Parties’ initial arguments and the reasoning that underpinned our provisional assessment, providing the Parties with an opportunity to comment on it in advance of these Second Provisional Conclusions. We considered the further submissions of the Parties and sought further information from them. We have set out these further submissions and information in this document, together with our analysis of them and are seeking further views in light of the significant further information we have received and the changes to our views based on our analysis of this further information. We consider that our proposed resolution of this Dispute avoids undue regulatory intervention where, on the specific facts of this Dispute, action is not warranted. We have also considered the other work being carried out by Ofcom on issues related to the subject matter of this Dispute.

162

See paragraph 2.5 of the SLG statement: http://stakeholders.ofcom.org.uk/binaries/consultations/slg/statement/statement.pdf.

http://stakeholders.ofcom.org.uk/binaries/consultations/slg/statement/statement.pdf


51

Section 4

4 Analysis and Determination

Introduction

4.1 Ofcom received three responses to the Second Provisional Conclusions, from Openreach, TTG and Sky. In addition, TTG wrote to Ofcom on 20 June 2013 and 4 July 2013 in relation to our approach in resolving the Dispute.

4.2 In this section, we summarise the key issues raised in the responses to the Second Provisional Conclusions and, having carefully considered those responses, we set out our analysis, final conclusions and determination.

4.3 Our consideration of the responses has led us to change our approach to certain issues, as set out below. However, for the reasons set out below, these changes have not led us to alter our overall position as set out in our Second Provisional Conclusions.

4.4 In setting out the key issues raised in the responses we received and our analysis we use broadly the same headings and ordering that we used in our Second Provisional Conclusions (see Section 3 of this document).

Requirement on BT to provide MPF New Provide to TTG on fair and reasonable terms and conditions

4.5 As explained at paragraphs 3.12 to 3.28 above, we provisionally concluded that the existence of contractual provisions relating to service level commitments and corresponding compensation are a necessary component for the terms offered during the Relevant Period to be fair and reasonable.


4.6 Openreach submits that “the copper appointment availability SLA/SLG offered on voluntary, commercial terms in April 2012 was not specifically required by SMP Condition FAA9”. It remains “unhappy that this SLG has been scrutinised under the auspices of a regulatory dispute”163.

Ofcom’s views

4.7 We do not consider that Openreach has provided any explanation as to why SMP Condition FAA9 does not apply, beyond the points raised in response to the First Provisional Conclusions and which we considered in reaching our provisional view.

4.8 We therefore remain of the view set out in our Second Provisional Conclusions that service level commitments and corresponding compensation are a necessary component of a network access offer for the terms offered during the Relevant Period to be considered fair and reasonable.

163

Page 12 of Openreach’s response to the Second Provisional Conclusions.


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Were the terms and conditions offered by Openreach during the Relevant Period fair and reasonable?

Assessment of the level of the SLG

4.9 Our Second Provisional Conclusions assessed the question of whether, based on the available evidence, the £2 SLG offered by Openreach was fair and reasonable.

4.10 We explained that in undertaking this assessment, we did not seek to determine what the precise terms and conditions of any SLAs and SLGs offered should have been but rather whether Openreach’s offer was fair and reasonable, recognising that there are likely to be a number of different approaches that may be fair and reasonable and, therefore, consistent with the regulatory requirements imposed on BT.

4.11 We provisionally determined that the £2 SLG was fair and reasonable because it sat within a range of values which was identified on the basis of information provided for the purposes of resolving this Dispute.


4.12 In its response to the Second Provisional Conclusions, TTG submits that Ofcom’s approach in considering whether the £2 SLG offered by Openreach was fair and reasonable was wrong, and that this approach has resulted in an “unlawful conclusion”.

4.13 TTG submits that:

“The correct approach to resolving this dispute is for Ofcom to decide on what it considers the (most) fair and reasonable SLG value. Ofcom’s task is not, as it thinks, to consider ‘whether the £2 SLG offered by Openreach was fair and reasonable’…but rather what a fair and reasonable SLG is. There is a material difference between the two and Ofcom’s error has (in combination with other errors highlighted below) led to an unlawful conclusion”;164 and

“contrary to Ofcom’s apparent view in the present circumstances, the mere finding that BT has not breached Condition FAA9 is far from determinative of the dispute between the parties”.165

4.14 In later correspondence, TTG submits that Ofcom should resolve the dispute in the following way:

“first to decide on a single SLG that Ofcom considers its best estimate of the (most) appropriate or fair and reasonable SLG

second, award this SLG amount retrospectively to the CP”.166

4.15 TTG submits that “Ofcom cannot conclude that BT’s offer was fair and reasonable simply because the value fell within a wide range of values”.167

4.16 TTG suggests that Ofcom’s range of SLG values in the Second Provisional Conclusions (£0.50 to £3.36) is “based on unrealistic assumptions”, and based on its

164

Page 3 of TTG’s response to the Second Provisional Conclusions. 165


Page 4 of TTG’s letter to Ofcom dated 20 June 2013. 167

Page 3 of TTG’s response to the Second Provisional Conclusions.


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own analysis it concludes that “a £2 SLG cannot be deemed to be fair and reasonable (since it is materially below the central estimate of the SLG)”.168

4.17 TTG suggests169 that the setting of charge controls is analogous to our assessment of the level of the SLG, and that to use this approach for setting charge controls would be unacceptable.

Ofcom’s views

4.18 We do not agree with TTG’s argument at paragraph 4.13 above that our role was to determine what a fair and reasonable SLG is as between the parties. Rather, the scope of the Dispute which we accepted for resolution is:

“whether Openreach offered MPF New Provide to TalkTalk Telecom Group PLC over the period 1 June 2012 to 31 August 2012 on fair and reasonable terms and conditions as required under Condition FAA9.2; and

any appropriate exercise by Ofcom of its powers under section 190(2) of the Communications Act 2003 as part of Ofcom’s determination resolving this dispute.”

4.19 As can be seen from this, in order to determine the Dispute we are required explicitly to determine whether Openreach complied with the requirement under Condition FAA9.2 to provide MPF New Provide on fair and reasonable terms and conditions.

4.20 With regard to TTG’s submissions on how we should approach the assessment of what is fair and reasonable, we used a broad range of values in our assessment because of the degree of uncertainty around the precise value to assign to a number of parameters used to estimate almost all SLG components (the exception being Customer Care). As explained in paragraph 3.179 we considered that, given the lack of robust evidence, it was not possible to determine the relative likelihood of values within the range identified.

4.21 We raised concerns in our Second Provisional Conclusions that there was uncertainty as to the accuracy of the assumptions and evidence submitted by both Parties in their earlier submissions. We accordingly invited the Parties to provide further evidence to support their respective positions. As explained in detail below, we have considered the additional submission of the Parties, and taken these into account in revising the range of SLG levels that we consider would be fair and reasonable in light of the available evidence.

4.22 We remain of the view that we cannot reliably assess the relative likelihood that particular values within the range identified are more likely to be fair and reasonable than others, given the considerable uncertainty in relation to a number of the parameters that are used to estimate the SLG level. For this reason, we consider that it would not be appropriate for us to conclude that the central value is more likely to be fair and reasonable than values at the upper or lower bounds of the range.

4.23 Further, we note that the regulatory requirement is for the terms and conditions to be fair and reasonable, not to be the “most” fair and reasonable terms possible.

168


Page 3 of TTG’s response to the Second Provisional Conclusions and page 4 of TTG’s letter to Ofcom dated 20 June 2013.


54

4.24 Finally, we do not consider that TTG’s suggested analogy with setting charge controls is appropriate. When we decide to set a charge control, we do so because we have decided that we should set the precise level of a charge. In the context of this Dispute, however, we are considering a different regulatory requirement (the fair and reasonable requirement imposed under Condition FAA9.2), which means in the context of this Dispute we are required to assess whether Openreach offered MPF New Provide to TTG over the Relevant Period on fair and reasonable terms and conditions.

General approach to setting an SLG

4.25 As explained at paragraphs 3.34 to 3.42 above, our view in the Second Provisional Conclusions was that a service level regime which met the general principles for assessing the SLA/SLG arrangements mentioned at paragraph 3.60 of the SLG Statement is likely to be fair and reasonable.


4.26 Sky submits that Ofcom should include a performance incentive element in the calculation of a fair and reasonable level of SLG. In support of this submission, it cites the SLG Consultation in which Ofcom stated, regarding the value of compensation offered in the SLG:

“Ofcom’s starting principle is that when Openreach fails to meet agreed service levels, it should pay CPs compensation which is based on a pre-estimate of an average CP’s loss resulting from that service failure. In the event of a future review, Ofcom may increase compensation above this level to incentivise performance. If compensation payments are set at such a level, they should provide an effective and efficient financial incentive on Openreach to provide appropriate service performance.” 170

Ofcom’s views

4.27 The passage quoted by Sky appeared in the SLG Consultation, but was not repeated in the SLG Statement. It is clear from the SLG Statement that Ofcom did not consider that it was appropriate at that time to amend its approach to SLG payments to require Openreach, to include a further compensatory element to act as a performance incentive in addition to the pre-estimate of an average CP’s loss.

4.28 We considered this issue again recently in the FAMR consultation, in which we stated that our provisional view is that:

“we do not consider that it would be appropriate to depart from the basis that SLGs are set so as to form a pre-estimate of CPs loss arising from the breach of the SLA. On this basis we do not consider that it would be appropriate to seek to increase the level of SLGs so as to, in effect, penalise BT.” 171

4.29 While this is not a final view and remains subject to consultation responses, it does represent our current policy view on this issue.

170

Paragraph 3.4 SLG Consultation 171

Paragraph 10.55 of the Fixed access market reviews: wholesale local access, wholesale fixed analogue exchange lines, ISDN2 and ISDN30, 3 July 2013. See: http://stakeholders.ofcom.org.uk/binaries/consultations/fixed-access-market-reviews/summary/fixed-access-markets.pdf




55

4.30 In light of the above, we do not consider that it would be appropriate to include a performance incentive element in the calculation of a fair and reasonable level of SLG as suggested by Sky.

Methodology and data used to estimate the £2 per day SLG

4.31 As noted in our Second Provisional Conclusions, we have considered evidence from the Parties to assess whether the £2 per day SLG offered as part of the April 2012 ANFA was a reasonable pre-estimate of an average CP’s loss and permitted efficient cost recovery. We did so in relation to each of four SLG components: Lost Revenues, Cancellations, Potential Sales and Customer Care.

4.32 We retain this basic structure in this Determination, and the discussion that follows comprises our analysis of each component.

1. Lost Revenues

Methodology used to pre-estimate Lost Revenues

4.33 This component of the SLG relates to profit losses associated with customers that experience delays after they have placed an order, but that did not cancel their order because of the delay.

4.34 In our Second Provisional Conclusions, our provisional view was that Openreach’s methodology, pre-estimating the profit margin by applying the EBITDA margin to ARPU, was reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer.172 We noted in particular that (i) Openreach had raised its use of EBITDA during negotiations, (ii) Openreach’s use of EBITDA was not contested at the time and (iii) no CP put forward an alternative to EBITDA. We also noted that EBITDA was a transparent and publicly available figure, whereas TTG’s proposed approach using AMPU involved deduction of an internal TTG cost, which meant it was harder for Openreach to use this as a basis for estimating an average CP’s loss. We noted, however, that this did not mean that it would not also be reasonable to use alternative measures of margin, such as AMPU.

4.35 As explained at paragraphs 3.79 to 3.82 above, our provisional view in the Second Provisional Conclusions was that a pre-estimate for a daily rate of losses associated with Lost Revenues could be calculated as:

[(Monthly ARPU x EBITDA) x (1-X)] / 30173


4.36 TTG argues that applying the EBITDA margin to ARPU is “fundamentally wrong” and produces too low a figure, as it “is calculated after fixed costs are deducted even though fixed costs will not decrease if the number of customers reduces.”174 It submits that the pre-estimate of the lost profit margins should reflect the marginal lost profit, and hence should be estimated as “the lost revenue (which is all marginal) less reduced marginal costs ”, e.g. “direct costs such as MPF rental and interconnection

172

Although we believed that the approach could lead to a slight overstatement in the absence of accounting for

a probability of Lost Revenues 173

As Openreach uses monthly ARPU data to reflect the impact of a 25-day delay, we had divided by 30 days and not 25 days in order to derive a daily rate of loss. 174

Page 5, TTG’s response to the Second Provisional Conclusions


56

payments” (it refers to this margin as AMPU) and argues that it also should subtract “an amount for costs to serve (customer service and billing costs)”. It maintains that its profit margin estimate, as it only deducts marginal costs, is “fundamentally a better indicator of the incremental/marginal profit impact on the CP (over the lifetime of customer)…” than EBITDA times ARPU. TTG also states, however, that “it is likely that the true marginal profit impact on the CP may be slightly less than AMPU less cost to serve since some costs which are variable with volume (such as some network costs) will not be deducted.”175

4.37 In relation to our provisional view that some elements (i.e. “costs to serve”) required to estimate AMPU were not publicly available, TTG argues that Openreach could have asked CPs to provide this data to them.176

4.38 Openreach continues to consider that the using EBITDA and ARPU in the calculation of this component is appropriate.

4.39 In their responses to the Second Provisional Conclusions, both Openreach and TTG appear to accept the formula used to calculate lost revenues in the Second Provisional Conclusions (albeit TTG uses AMPU instead of EBITDA times ARPU).

Ofcom’s views

4.40 We have carefully considered the submissions of the Parties as to whether, as a matter of principle, EBITDA times ARPU was a reasonable approach to use in pre-estimating lost revenues.

4.41 We agree with TTG that, in principle, a pre-estimate of the lost profit margin from delays should be based on a pre-estimate of the foregone revenues less the estimated avoidable costs. As noted above, TTG considers that it is not appropriate to estimate the lost profit margin as EBITDA times ARPU, since the EBITDA margin will include costs that are fixed and hence would not be avoided in the event of a delay. We consider that there is merit in TTG’s argument, and note in this regard that EBITDA is an accounting measure of profits that is likely to include some costs that would not be avoidable in the case of delays. An example of these costs are certain overheads, which may include rent and managers’ salaries. If correct, this would suggest that EBITDA times ARPU could result in an underestimate of the lost profit margin, and this, in our view, undermines the suitability of this method as a basis for pre-estimating the profit loss.

4.42 TTG has instead proposed an alternative approach that is based only on avoidable costs. We agree that a pre-estimate of lost profit based only on avoidable costs is preferable to one that uses EBITDA to calculate the profit margin.

4.43 TTG proposes an approach based on an estimate of the Average Margin per user, or AMPU (defined as ARPU less MPF rental and interconnection costs) less the marginal ‘cost to serve’ incurred by the CP that would be avoided in the event of a delay (relating to customer service and billing costs). We accept that this type of approach, if implemented correctly (i.e. including all correctly estimated avoidable cost components), would in principle provide a better basis for estimating the profit loss due to delays, since it seeks to identify only those costs that are avoidable.

175

Page 5 of TTG’s response to the Second Provisional Conclusions 176

Page 5 of TTG’s response to the Second Provisional Conclusions


57

4.44 In using such a measure, however, it is important that all of the relevant avoidable costs are included in order to avoid over-estimating the lost profit due to delays. In this regard, we note that TTG has stated that “it is likely that the true marginal profit impact on the CP may be slightly less than AMPU less cost to serve since some costs which are variable with volume (such as some network costs) will not be deducted.”177 We also note that TTG has not provided detailed evidence to support its estimate of the avoided customer service and billing costs that it includes in the category ‘costs to serve’, and we have not verified the accuracy of this estimate.

4.45 In our Second Provisional Conclusions we expressed the concern that it would be difficult for Openreach to pre-estimate the customer service and billing costs that would be avoided by CPs in the event of a delay, in part because no CP raised this point at the time or proposed an alternative. As noted above, TTG has responded that Openreach could have sought this information. On reflection, we consider that it would have been reasonable for Openreach either to have sought this information, or alternatively, to have considered making an appropriate adjustment to its preferred EBITDA times ARPU method to reflect the proportion of costs that are fixed (although we consider the latter may be difficult to implement in practice). Although the issue was not raised by CPs, Openreach ought to have been aware that EBITDA includes an element of fixed costs and should therefore have considered whether it was appropriate for it to use EBITDA to pre-estimate the lost profits margin.

4.46 In conclusion, therefore, we consider that Openreach’s method of EBITDA times ARPU is likely to have understated the lost profits caused by delayed customers, and we therefore consider that it was not an appropriate way to calculate this component of the SLG.

4.47 As discussed above, we consider that an approach that is based only on avoidable costs is preferable to one that uses EBITDA to calculate the profit margin since it seeks to explicitly take into account costs that are avoidable. We further consider that TTG’s proposed approach is, in principle, such an approach although we continue to have reservations about the extent to which TTG’s approach captures all of the avoidable costs, and consider that there is therefore a risk that that it may over-estimate the lost profits. We comment on this further below.

Data used in pre-estimating Lost Revenues losses

4.48 We were of the provisional view in our Second Provisional Conclusions that Openreach’s pre-estimate of Lost Revenues as part of the April 2012 ANFA offer was based on data that may have been too low. This was based on a comparison with publicly available values for EBITDA and ARPU;178

4.49 On the basis set out in the Second Provisional Conclusions, we concluded that a reasonable range of values for Lost Revenues for the purposes of resolving this Dispute was £0.17 per day to £0.24 per day (based on the impact of 25 days’ delay) factoring in a probability based on the probabilities of Cancellation (“X”) as discussed at paragraph 3.1232.

177


We noted, however, that the effect was likely to have been negated by Openreach incorrectly using one

month’s ARPU to pre-estimate the impact of a 25-day delay


58


4.50 In its response to Ofcom’s 3rd Notice under Section 191 (following our First Provisional Conclusions) TTG explained to us how it estimated its profit margin for the purpose of this Dispute (using its approach discussed at paragraphs 4.36 to 4.37). TTG estimated profit margins separately (using AMPU) for its TalkTalk Plus and TalkTalk Essential customers as £[] and £[] respectively.

4.51 TTG argued in its response to the First Provisional Conclusions that [].179

4.52 In its response to our Second Provisional Conclusions TTG notes that “it is likely that the true marginal profit impact on the CP may be slightly less than AMPU less cost to serve since some costs which are variable with volume (such as some network costs) will not be deducted”. It provides a revised estimated profit margin range of £[ ] to £[] (with a mid-value of £[] ).180 It states that the “blended AMPU” for the two set of customers “across the period is £[] and the cost to serve is £[] ”.181

4.53 TTG does not explain what it had revised in its estimates of revenues or avoidable costs in calculating these new values. Nor does it confirm that the revised lower £[] and upper £[] values in its range relate to AMPU estimates for its Plus and Essential customers respectively, as they did in TTG’s response to Ofcom’s 3rd Notice under Section 191.

4.54 In estimating the Lost Revenues component TTG uses the range of £[] to £[] referred to in paragraph 4.52 (with a mid-value estimate of £[] ) and assumes that the probability that a customer does not cancel the order ranges between 0% and 10% (with a mid-value of 10%)182 to produce a central daily estimate for this SLG component of £0.45 from a range of £0.40 to £0.54.183

4.55 Openreach submits that Ofcom should have used the updated figures of 25% EBITDA and average ARPU of £28.81 that it provided in response to our First Provisional Conclusions.184

4.56 Openreach also suggests that using 25 days per month to calculate lost EBITDA is appropriate “as it represents the approximate number of ‘Working MPF’ days in a month that are appropriate to SLGs. Sundays are not defined as working days for MPF so are not appropriate for inclusion, hence Openreach’s 25 day figure (as opposed to the full monthly figure of 30 days).”185 It also submits that SLG payments would not be paid for Sundays within a delay, as engineer appointments are not available on Sundays.186 Openreach re-estimates the value for Lost Revenues as ranging between £0.28 and £0.30.

179



Footnote 6 of TTG’s response to the Second Provisional Conclusions. 182

We note that this is derived from the probability of cancellations (i.e. 100% - probability of cancellations). Therefore, TTG’s assumptions for Lost Revenues in this respect are inconsistent with the values it assumes for

the probability of cancellation (i.e. []-[]% with mid-value of []%). See further at paragraphs 4.91-4.92

below. 183


Page 5 of Openreach’s response to the Second Provisional Conclusions. 185


Email from Openreach to Ofcom dated 9 August 2013.


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Ofcom’s views

4.57 We explain above our view that a pre-estimate of the lost profit margin from delays should be based on a pre-estimate of the foregone revenues less the avoidable costs for an average CP. Given our view that EBITDA times ARPU is not an appropriate measure for us to use in resolving this Dispute, we do not use the values put forward by Openreach in our assessment.

4.58 We note above that TTG’s proposed approach is, in principle, based on a pre-estimate of the forgone revenues less the avoidable costs for an average CP. In the absence of alternatives suggested by the Parties, we have considered whether the AMPU data proposed by TTG is a suitable basis for pre-estimating the lost profit margin from delays for the purposes of the Dispute.

4.59 As noted above, in its response to our Second Provisional Conclusions, TTG states that it considers that the lost profit margin should be in the range of £[]to £[], with a mid-value of £[]. As noted above, we have some reservations about the accuracy of these figures, and we note that TTG has not provided detailed evidence to support them. In particular, we note that TTG has indicated that there may be some additional avoidable costs that are not included which may reduce the estimated profit margin, and it does not state whether these revised estimates include those costs.

4.60 It is unclear how TTG has assessed the level of avoidable customer service and billing costs from the evidence provided.

4.61 We understand, on the basis of TTG’s submissions that:

4.61.1 the £[]to £[] revised range includes a cost to serve deduction;

4.61.2 each of the £[] and £[] respectively represent an AMPU less cost to serve estimate for a separate set of customers (Plus and Essential); and

4.61.3 TTG’s “central estimate” of £[] is a weighted or simple average of estimated AMPU for the two separate customer groups.

4.62 Notwithstanding our concerns set out at paragraph 4.44 regarding TTG’s methodology, we believe that it is preferable to use profit margin data in the Lost Revenues calculation that is based on an avoidable costs approach. For this reason, in the absence of any other appropriate profit margin data and despite our concerns related to these estimates, we consider that the best available data to pre-estimate a reasonable range for Lost Revenues is the revised data provided by TTG in response to the Second Provisional Conclusions.

4.63 We consider that the lower and upper bounds of our estimate range should reflect a profit margin for all relevant TTG customers187 for which it has provided an estimate of AMPU less cost to serve.

4.64 As noted above, we understand that the £[] “central estimate” provided by TTG reflects profit margins for both customer groups. For this reason, we use this value for both our lower and upper bound profit margin in calculating our estimate range.

187

As delays can be expected to affect both groups of customers.


60

4.65 In using TTG’s proposed £[] figure we note the following concerns about its use in this context: it is not clear on what basis it has been calculated; it is not clear that all avoidable costs have been deducted; and the value relates only to TTG and does not represent an industry-wide value.

4.66 We do not consider that it would be appropriate to use a value higher than TTG’s central estimate given the concerns we have about the data provided by TTG.

4.67 We have also considered whether it is appropriate to use 25 days or 30 days a month in our calculations. We note the purpose of the calculations, which is to assess a pre- estimate of the profits that CPs would lose as a result of longer lead times. We also note though, that SLG payments would only be made on approximately 25 days of each month. We therefore consider that it is appropriate to use a value of 25 days.

Implementation of conclusions on Lost Revenues

4.68 As a result of these changes to our provisional conclusions, we have amended our formula to replace ARPU x EBITDA to estimate the profit margin with an approach based on avoidable costs:

[(Monthly Profit Margin) x (1-X)] / 25

4.69 Using this revised approach and values, the range of values for Lost Revenues we use in our assessment is £[] to [] 188 (instead of £0.17 to 0.24 in our Second Provisional Conclusions).

2. Cancellations

Methodology used to pre-estimate Cancellations

4.70 As explained at paragraph 3.57 above, our provisional view in the Second Provisional Conclusions was that it is reasonable to use lost profits (as opposed to lost revenues) to calculate Cancellations.

4.71 We provisionally considered that it is appropriate to apply an estimate of an average customer lifetime (i.e. customer retention) to provide a reasonable pre-estimate for Cancellations.

4.72 We provisionally concluded that, as only a percentage of orders would result in cancellations because of delays, it is reasonable to apply a probability factor to its occurrence.

4.73 We provisionally concluded that a pre-estimate for a daily rate of losses associated with Cancellations can be calculated as:

[(Monthly ARPU x EBITDA x Customer Retention x X) – (Connection Charge x X)] / 25

188

The lower bound is higher than the upper bound due to the effect of the probability of Cancellations (X). Applying the probability of Cancellations in the formula has the effect of reducing the profit margin, to account for customers who cancel, and for whom there is therefore no Lost Revenues. A lower probability of Cancellations in the lower bound means a greater proportion of profit in the pre-estimate. Likewise, a higher probability of Cancellations in the upper bound results in a smaller proportion of profit in the pre-estimate. With a lower bound of 1% probability of Cancellations, the Lost Revenue is 99% of the profit margin, divided by 25 to get a daily rate. For the upper bound, there is a 10% probability of Cancellations, so the Lost Revenue is 90% of the profit margin, divided by 25 to get a daily rate.


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4.74 Openreach concurs with our Second Provisional Conclusions that Cancellations consisted of the “EBITDA loss from customers who have raised orders with a CP and subsequently cancel their order”.189

4.75 In explaining why it believes that there should not be a Potential Sales component in the calculation of the SLG, Openreach comments on the potential relevance of customer acquisition costs (“CACs”) to the calculation of the Cancellations component. Openreach believes that “there are wasted customer acquisition costs (“CACs”) when customers cancel their orders, and that it may be reasonable for these costs to be a component of the pre-estimate of loss”.190

4.76 TTG submits that its range of lost profits based on an AMPU margin referred to in response to the Lost Revenues component should be used to calculate Cancellations.191

4.77 TTG has not in its response to the Second Provisional Conclusions commented on CACs.

Ofcom’s views

4.78 The Cancellations pre-estimate is derived from a pre-estimate of lost profit. For the same reasons as set out at paragraph 4.41 above regarding Lost Revenues, we do not consider that it is appropriate to use EBITDA times ARPU to calculate this pre-estimate of lost profit for Cancellations component of the SLG. For the reasons set out at paragraphs 4.44 to 4.47 above, we consider that a profit margin that reflects avoidable costs is preferable.

4.79 We remain of the view that for Cancellations it was reasonable for Openreach to deduct from the profit margin the one-off connection charge that a CP pays to Openreach.

4.80 With the exception of the basis for the lost profit element, we remain of the view that it is appropriate to calculate the Cancellations pre-estimate using the formula in our Second Provisional Conclusions at paragraph 3.122. We include in our conclusion with respect to Cancellations below at paragraph 4.120 the amended formula.

4.81 We have considered Openreach’s comment about wasted CACs that are incurred when a customer cancels their order.

4.82 We consider that, having concluded that the profit margin loss should be expressed in terms of lost marginal revenues and costs, the CP would be sufficiently compensated and that there is no case for also compensating them for “wasted” CACs.

4.83 A separate and different question is whether some proportion of CACs should be subtracted as avoidable costs element in the case of cancelled orders. In principle, the pre-estimate of a CP’s profit margin lost as a result of cancelled orders should include an estimate of all the avoidable costs, which we discuss at paragraphs 4.44 to 4.47 above regarding the Lost Revenues component. On this basis, it would be appropriate to include CACs in the profit margin calculations as long as these were

189

Page 4 of Openreach’s response to the Second Provisional Conclusions 190




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avoidable costs, by subtracting them from the profit margin. On the basis of the available information, however, we are unable to establish if, and if so in what proportion, CACs can be described as avoidable costs, and we have therefore not separately deducted CACs from the profit margin.

4.84 We note that, in any event, were we to separately account for wasted CACs in the calculation of this component, it would not have a material effect on our range of values.

Data used in pre-estimating losses associated with Cancellations

4.85 In our Second Provisional Conclusions, we set out that:

4.85.1 according to the parties’ submissions and in the absence of robust evidence on this issue, for the purposes of resolving this Dispute we proposed that the use of a range of 0-10% for probabilities of Cancellation was a reasonable measure (although we noted its uncertainty);

4.85.2 the customer retention assumption of 12 months’ lost revenues seemed low, but we had not been able to calculate the precise industry value. For the purposes of resolving this Dispute we proposed that a range of 12 months to 48 months was a reasonable measure, based on submissions from the parties;192 and

4.85.3 the pre-estimate of losses due to Cancellations, using an EBITDA margin for lost profits, was between £0.00 per day and £1.36 per day (based on a 25-day delay). Based on the evidence available we considered this a reasonable range for the purposes of resolving this Dispute.


4.86 TTG broadly193 uses the same approach as that set out in the formula in our Second Provisional Conclusions at paragraph 3.122. In place of an EBITDA margin, it applies its estimated values for AMPU less cost to serve, customer retention and probability of cancellations to obtain a range of £0.64 to £4.54 (with a central value of £1.49) for a daily SLG for Cancellations.194

4.87 Openreach uses the formula for Cancellations set out at paragraph 3.122 in our Second Provisional Conclusions and its estimates for the relevant variables to obtain a range of £0.00 to £0.83 for a daily SLG due to Cancellations.195

Customer retention

4.88 TTG states that Ofcom’s use of 12 months as the lower end of the range for customer retention is “fundamentally incorrect”.196 It submits that there is no evidence to support this figure being used in the assumed range. TTG disagrees with our view in the Second Provisional Conclusions that we do not consider that a precise estimate of the customer retention can be mechanically derived as the inverse of the average churn rate in order to provide a precise pre-estimate for the

192

[] 193

TTG also multiplies for a variable it terms “Total Cancellation %” but does not subtract the Connection Charge (times the probability of cancellation). 194





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purpose of this Dispute. TTG argues that we used this formula in our “Competition Act 1998 broadband pricing investigation decision”.197 TTG claims that its own churn rate implies an average customer retention of 66 months (as a central value in a range of 48 to 70 months). It also notes that other CPs have ever lower churn (Sky’s yearly churn of 10.8%).198

4.89 Openreach “maintains that there is no basis for Ofcom determining that the value of Cancelled Customers should be derived from lost revenues for a period of 48 months”.199 Openreach also argues that some customers that have cancelled their order as a result of a delay may sign up again soon, and this is a reason why a value of 36 month would be “over generous”.200


4.90 TTG submits that Ofcom’s use of 25 calendar days to derive the daily SLG payable is not appropriate. It states in this regard that “this figure is not appropriate to use if using the TalkTalk actual cancellation data since the level of cancellation reflected the actual delay TalkTalk experienced of about [18 calendar days].”201

4.91 TTG submits that the cancellation probability range of 0% to 10% is not appropriate. In particular, it argues that a lower bound of 0% is implausible and that “the evidence presented by both parties suggest a central cancellation probability estimate of [] %”, within a range of []% to [] %.202

4.92 TTG refers to Ofcom’s 2013 fixed access market review consultation203 (“the FAMR consultation”) to argue that Ofcom’s own research:

“clearly shows that customers are highly sensitive to provisioning delays and consequently that Ofcom’s modelling assumption that no customer may cancel is unrealistic and in conflict with Ofcom’s market research. As a matter of fact, Ofcom’s market research supports using a much higher cancellation percentage in the SLG calculations and we would suggest that TalkTalk’s mid-range value of [] % is actually very realistic (if not an underestimate)”.

4.93 Openreach comments that there are challenges in deriving the Cancellations “probability factor” in that it is difficult to identify whether a cancelled customer has gone forever or delayed their connection, and to identify with certainty that a Cancelled customer has cancelled due to the lead time delay and not another reason.204

4.94 Openreach states that its management information relating to cancellation orders for TTG suggests no significant increase in TTG MPF cancellations during the dispute

197







It refers in particular to paragraph 10.50: “We noted that the SLA including the proposed reduction from 13 to 12 working days has been very recently agreed within industry. However, our market research found that only around 10-15% of consumers and SMEs consider an appointment time of 10 days as acceptable for provisioning a new line and a majority would start considering switching to an alternative provider if they are offered appointment times over seven working days”. See http://stakeholders.ofcom.org.uk/consultations/fixed-access-market-reviews/. 204

Page 6 of Openreach’s response to the Second Provisional Conclusions

http://stakeholders.ofcom.org.uk/consultations/fixed-access-market-reviews/

http://stakeholders.ofcom.org.uk/consultations/fixed-access-market-reviews/


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period, but that it could support Ofcom’s provisional view that a range of 0-10% for customer cancellations is a reasonable estimate, noting that this may be “generous”.205

Ofcom’s views Profit margin 4.95 For the reasons set out at paragraphs 4.57 to 4.66 above, we have used the profit

margin figure of £[] as both an upper and lower bound in calculating our estimated SLG range.

Customer retention 4.96 We explained in the Second Provisional Conclusions that we had reservations about

estimating the average customer retention mechanically from the inverse of CPs’ average churn rate (see para 3.119). In this regard, we note that the pre-estimate of loss should reflect the average customer retention of those customers who are likely to switch broadband provider, since these are the customers who are likely to be affected by delays. As explained in paragraph 3.119, we were concerned that using the inverse of the average retention rate could overestimate the likely retention period for these customers if there are a significant proportion of customers who are unlikely to switch broadband provider, since this would be reflected in a lower average churn rate.

4.97 We have considered the responses of the Parties to our Second Provisional Conclusions, but remain of the view that that the customer retention values put forward by the Parties are estimates which we cannot verify, and may not be based on relevant data. In the case of TTG, its customer retention estimate refers to all of its customers and in addition to our concern expressed in paragraph 4.96 above, we note that it is not an industry average. With regard to Openreach’s estimate, Openreach has not stated to which customer or CP it relates despite our reservations stated in our Second Provisional Conclusions. The period to which both Parties’ estimates refer to is also uncertain.

4.98 Since the Second Provisional Conclusions, we have examined some additional publicly available data to help us understand the industry expected customer retention which is relevant for this Dispute. As part of its consumer switching survey in 2012206, Ofcom produced a switching tracker. The Ofcom switching tracker 2012 survey (“Ofcom switching tracker”)207 was undertaken during July 2012 and asked

205


Ofcom has run a survey of consumer decision-making since 2006, covering consumers in each of the fixed-line, mobile, fixed broadband and multichannel television markets, including bundle purchasers. Its main objective is to track the extent to which consumers participate in the communications markets. This survey is now Ofcom’s key data source for monitoring switching and satisfaction in communications markets. 207

Ofcom Switching Tracker (2012), 17th July to 20th August 2012, available at http://stakeholders.ofcom.org.uk/market-data-research/statistics/.

https://webmail.ofcom.org.uk/owa/redir.aspx?C=dd8c038775df4539a1ba4cdb829b8228&URL=http%3a%2f%2fstakeholders.ofcom.org.uk%2fmarket-data-research%2fstatistics%2f


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different groups of customers (“landline”, “fixed broadband” and “bundle”)208 how long they have been with their current provider.209

4.99 We consider that the most relevant group for the purposes of this Dispute is “bundle” customers. These are customers that purchase a bundle of services from the same provider. In the case of telephony, broadband and (in some cases) TV customers, these customers would subscribe to CPs that provide services making use of a (full) MPF in most cases.210 The other categories of customers in the Ofcom switching tracker would not make use of a full MPF and, therefore, would not be as relevant for the purpose of this Dispute. Table 2 below shows the responses of customers to the question “How long has [your BUNDLE PROVIDER] been providing your home bundle service?”:

Table 2: “How long has [your BUNDLE PROVIDER] been providing your home bundle service?

Up to 1 year

1-2 years 2-4 years 4-6 years 6-10 years 10+ years

Bundle consumers

23% 17% 20% 15% 13% 9%

Source: Ofcom Switching Tracker (2012), QL3//I3/B3.

4.100 We used the data from the Ofcom switching tracker in Table 2 to construct a lower bound estimate of the average customer retention.

4.101 The lower bound was estimated by assuming that respondents that had been with their current provider for more than 10 years would never order a service that requires new MPF. These were therefore excluded from the calculation. For the other durations in Table 2 we used the relevant mid-point. This provides an estimate of the lower bound of 38 months for the average customer retention.211 Although this information would not have been available to Openreach as of April 2012, in the absence of alternative, reliable and available evidence, we consider it appropriate to rely on this publicly available industry data.

4.102 We are unable to use the Ofcom switching tracker data to estimate an upper bound for customer retention. We could attempt to do so by starting with an assumption that all respondents that have stated they have been with their current provider for 10 or more years (the “10+ group”) would all order a service that requires new MPF. However we do not have the data to complete the customer retention estimate calculation. This is because the Ofcom switching tracker data does not tell us how long on average respondents in the 10+ group will remain with their provider before ordering a service requiring a new MPF.

208

The groups of customers were: landline, defined as “landline phone”, fixed broadband, defined as “fixed broadband through a phone line or cable service – perhaps using a WiFi router” and bundle

, defined as “any of

the following services as a bundle or package from the same supplier – fixed broadband internet access, landline phone, TV service with additional channels you pay to receive, mobile phone, mobile broadband internet access”. 209

Exact question: “Q.13 How long has [your CP] been providing your [landline/home fixed broadband service/bundle]?” Base: Those with landline (not in a bundle)/fixed broadband access (not in a bundle)/bundle, where the bill is paid within the household or bundle). 210

Some CPs may also use wholesale products other than a (full) MPF (e.g. shared MPF/WBA and WLR/Call origination) to provide bundles of services. 211

We have also checked the results looking at specific bundles rather than all bundles as described in footnote 208. These show that for “landline and broadband” and “landline, broadband and TV” the average customer

lifetime is 38 and 36 month respectively. On this basis we have used the 38 month value for all respondents.


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4.103 We note that in our FAMR consultation document we discussed the quarterly data on churn for Virgin, TTG and Sky between Q4 2011 and Q4 2012 compiled by Enders Analysis.212 This suggests that TTG’s average customer life lies between 4.5 and 5.0 years (the mean is 4.8). We also stated that comparing the TTG data and BT’s data on CGA broadband suggests that TTG’s expected customer retention is shorter than BT’s, although the difference is small.213 While these figures suggest a longer customer retention, they are calculated using the formula in Freeserve214 which as considered at paragraph 4.96 may result in an overestimate of the customer retention for the purposes of this Dispute.

4.104 We note that Virgin’s customer retention is not relevant to this Dispute, as the large majority of Virgin customers do not use MPF. We commented215 in the FAMR consultation that the Sky data appeared to relate to its entire subscriber base (i.e. including consumers that only subscribe to pay TV). We consider that the value for Sky is affected by the presence of pay TV only customers, therefore we do not consider it relevant to this Dispute. We do not therefore use Virgin and Sky customer retention values quoted in the FAMR consultation for the purposes of this Dispute.

4.105 In the absence of any other more appropriate data, we have used for the purpose of calculating the pre-estimate range the upper bound 60 months (5 years) mentioned in the FAMR consultation for TTG. We note that there are still limitations with this value as this refers to only one CP (and hence it is not an industry value), the period it refers to is uncertain, and it suffers from the limitation discussed at paragraph 4.96.

4.106 We have therefore used a value range of 38 to 60 months in our assessment.


4.107 We agree with Openreach’s comment that there is considerable uncertainty as to what an appropriate value for the probability of cancellation should be.

4.108 As discussed in our Second Provisional Conclusions (at paragraphs 3.11 to 3.115) we consider that the probability of cancellation is likely to depend on the duration of delay and on the basis of the evidence we received we saw no reason to consider the pre-estimate period of 25 days used by Openreach as unreasonable.

4.109 As to the appropriate range of values to use in our assessment we consider that in the light of the lack of reliable evidence, which is particularly acute for this parameter (this equally applies to the impact of Potential Sales), we could not avoid exercising our judgment on this matter.

4.110 We note that neither party disputes the use of a 10% upper bound. We also note, however, that this upper bound has no evidentiary basis.

4.111 There is only disagreement between the Parties as to the level that should be used for the lower bound of the range. We have considered TTG’s argument that it is implausible that a 25 day delay would lead to no cancelled orders. We agree that it is unlikely that no order would be cancelled if the delay was 25 days. We therefore also agree that the lower bound used should be a positive probability of cancellation, and

212

Virgin and Sky are not relevant for the purpose of this Dispute because Virgin only demand MPF where it does not have its network and Sky’s figures also include pay TV delivered via a satellite dish. 213

Paragraphs 11.436-11.437, FAMR consultation. 214 Case CW/00613/04/03, Investigation into BT’s residential broadband pricing:

http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_613 215

Footnote 590, FAMR consultation

http://stakeholders.ofcom.org.uk/enforcement/competition-bulletins/closed-cases/all-closed-cases/cw_613


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not 0% as used in our Second Provisional Conclusions. However, TTG has not addressed the reservations we expressed in our First and Second Provisional Conclusions over the reliability of the []-[] % figures after 18 days of delay it put forward (based on its own market research).

4.112 In our FAMR consultation, after having examined the evidence including Ofcom’s survey run in the context of that review referred to by TTG, we considered that there is a positive correlation between delays and probability of cancellations. We concluded:

“We do not consider that it is straightforward to accurately pre-estimate the percentage of customers that will cancel their orders purely because of issues related to Openreach’s service. However, the evidence we have described above is suggestive of a positive correlation between a decline in QoS and the loss of orders. We therefore consider for the purposes of this assessment that cancellations could represent a cost to CPs.”216

4.113 We consider, though, that it is not appropriate to read the market research conducted in the course of the FAMR consultation217 as providing a useful indication of the appropriate range of probability of Cancellation in this Dispute, as TalkTalk suggests.

4.114 This is for a number of reasons:

4.114.1 respondents were asked what action, if any, they would be likely to take in the event that they found a particular installation scenario unreasonable218. Although the survey results indicated that 36% of businesses and consumers would “look into switching to an alternative provider of the same service” (emphasis added), it did not ask whether they would actually switch. This is therefore not a reliable proxy for the proportion of cancellations because it is not clear what proportion of those that would look into switching would actually switch. Furthermore, the fact that the responses to the consumer survey give a stated, rather than a revealed preference, suggests that even the proportion that would look into switching may be overstated;

4.114.2 the research did not specifically examine businesses and consumers’ responses to delays in provisioning a new MPF installation. Respondents were asked more generally about their reactions to unreasonable installation arrangements for new fixed line or broadband services; and

4.114.3 respondents could, and often did, select multiple answers. Indeed, the most selected reaction to the question in sub-paragraph 4.114.1 above was ‘complain to provider’ (58% for businesses and 67% for consumers) rather than ‘look into switching to an alternative provider’.

4.115 For the reasons set out above, we do not consider that we are able to rely on either the FAMR consultation or TTG’s submission as a basis upon which to calculate an appropriate lower bound. We therefore do not use in the range of values for our assessment the []-[] % proposed by TTG.

216

Paragraph A9.65, Annex 9, FAMRO consultation see: http://stakeholders.ofcom.org.uk/binaries/consultations/fixed-access-market-reviews/annexes/FAMR_Consultation_annexes.pdf 217

http://stakeholders.ofcom.org.uk/binaries/research/telecoms-research/telecoms-market-data/fault-repair-research.pdf (‘2013 QoS Research’) 218

2013 QoS Research, Q7C, Figure 41 and Figure 42.

http://stakeholders.ofcom.org.uk/binaries/consultations/fixed-access-market-reviews/annexes/FAMR_Consultation_annexes.pdf

http://stakeholders.ofcom.org.uk/binaries/consultations/fixed-access-market-reviews/annexes/FAMR_Consultation_annexes.pdf

http://stakeholders.ofcom.org.uk/binaries/research/telecoms-research/telecoms-market-data/fault-repair-research.pdf

http://stakeholders.ofcom.org.uk/binaries/research/telecoms-research/telecoms-market-data/fault-repair-research.pdf


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4.116 We agree with TTG, though, as discussed at paragraph 4.111 above that the lower bound used should be a positive probability of cancellation, and not 0% as used in our Second Provisional Conclusions. However, we note that there are factors that suggest that the probability of cancellations may not be very high:

4.116.1 as noted by Openreach219 some customers may cancel an order with a CP due to a delay by Openreach but may later return and make an order with the same CP;

4.116.2 most households today subscribe to a bundle of services containing at least a broadband connection in addition to telephony services. This means that most of the orders for MPF New Provide can be expected to come from customers switching provider (rather than customers who did not subscribe to the service before). This means that a longer waiting time does not imply that the customer would not have the service during the delay period. The switching customer’s loss from a delay and his/her incentives to cancel an order are therefore smaller than for new customers who would not have access to the service at all;

4.116.3 we also note that the implicit premise in the approach of the Parties to the issue of the level of SLG is that one CP suffers from delays while other CPs do not. We consider that if it were assumed that all CPs suffered from Openreach delays equally, each CP would lose some new orders but at the same time would retain customers who, but for the delay, would have switched to another CP. Under this alternative scenario the net cancelled orders would be lower than under the scenario considered in this Dispute.

4.117 We reiterate, however, that we have not identified any reliable evidence to use to estimate this parameter and it does not appear that reliable evidence was available to Openreach at the time it made its April 2012 ANFA Offer.

4.118 We have therefore, in the absence of another appropriate proxy, used a range of 1-10% for a probability of cancellation from a delay of 25 days for our assessment. We have used 1% as it is a positive value, and reflects the fact that we do not have available to us a more appropriate proxy for the lower bound.220

4.119 It is important to note that the values used in this range significantly affect the breadth of our estimated range of reasonable SLG levels. We discuss this further at paragraph 4.155 below.

Implementation of conclusions on Cancellations

4.120 As a result of these changes to our provisional conclusions, we have amended our formula to replace ARPU times EBITDA to estimate the profit margin with an approach based on avoidable cost:

[(Monthly Profit Margin x Customer Retention x X) – (Connection Charge x X)] / 25

4.121 Using this revised approach and values, the range for Cancellations we use in our assessment is £[] -[] (instead of £0.00-1.36 in our Second Provisional Conclusions).

219

Page 6 Openreach response to the Second Provisional Conclusions 220

We note that if we had used TTG’s proposed []% probability of cancellation, the range for a daily SLG would have been £[]-[], therefore it would not have altered our overall conclusions.


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3. Potential Sales

Methodology used to pre-estimate Potential Sales

4.122 In our Second Provisional Conclusions, our view was that:

4.122.1 Openreach’s methodology was not reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer. We considered that a reasonable methodology would provide a pre-estimate of lost profits, as provided by the approaches adopted for Lost Revenues and Cancellations.

4.122.2 Openreach’s pre-estimate of Potential Sales as part of the April 2012 ANFA offer may have been too high; and

4.122.3 based on our provisional conclusions on the methodology, a pre-estimate for a daily rate of losses associated with Potential Sales could be calculated as:

(Monthly ARPU x EBITDA x Customer Retention x Y) / 25


4.123 The Parties’ observations on the appropriate profit margin to use, discussed in relation to Lost Revenues, also apply to Potential Sales.

4.124 Openreach does not agree with the methodology adopted by Ofcom in its Second Provisional Conclusions. Openreach argues that it is appropriate to consider delayed customers or cancelled customers (i.e. customers that have placed an order), but not “customers who may/would have placed an order with TTG but declined to do so due to the lead-time offered by the (sic)TTG”.221

4.125 Openreach believes that Potential Sales should be interpreted as wasted CACs for orders that are placed but then cancelled due to delays. It argues that there are only two potential types of delays “Delayed Customers [Lost Revenues] and Cancelled Customers [Cancellations]”.

4.126 Openreach argues that this type of loss should not be included in the pre-estimate of loss calculation because:

“lead-times were the same for all the majority of the market leading CPs (with the exception of Virgin);

[]; and

it is impossible to measure or determine this type of loss given no actual customer feedback can be evidenced, it is not therefore reasonable to include this element in the calculation for Potential Sales”222

Ofcom’s views

4.127 We have considered Openreach’s argument that Potential Sales should not be included. This implies that no potential customers would be deterred from joining a

221




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CP as a result of delays in lead times. In our view, it is appropriate conceptually to take account of potential customers who may have been deterred from switching. However, we recognise that it is particularly challenging (and more difficult than in the case of Cancellations) to pre-estimate the lost profits associated with Potential Customers, therefore any estimate has to be treated with caution. This is because, while CPs have an understanding of the proportion of orders that are cancelled (though they may not know the reason for the consumer’s decision to cancel), they have very limited visibility of potential orders which did not materialise and that may have been deterred due to delays.

4.128 In terms of Openreach’s wasted CACs argument, in our Second Provisional Conclusions, we stated that a CP’s potential customers that would have connected, but did not because of the expected delays, would have offered that CP a profit over the customers’ average lifetime. We therefore considered that Openreach’s approach of applying a wasted cost value is inconsistent with its approach to Cancellations and we did not consider that it was an appropriate methodology for pre-estimating losses associated with Potential Sales. We remain of this view, and we conclude that an appropriate approach should instead provide a pre-estimate of lost profits, as provided by the approaches adopted for Lost Revenues and Cancellations.

4.129 In relation to Openreach’s evidence as to why Potential Sales should not be included, we consider that it is difficult to interpret the evidence in relation to Virgin and other CPs as definitively as Openreach suggests. There are many variables, other than delays in provisioning, that affect the indicators referred to by Openreach and it is therefore not possible to draw reliable inferences from this evidence.

4.130 For the reasons set out at paragraph 4.41 above, we consider that that it was not reasonable for Openreach to have used a profit margin input for this component based on EBITDA times ARPU, and that an approach based on avoidable costs would have been preferable. At paragraph 4.141 below, we have set out a revised formula that reflects this.

4.131 We note that in our Second Provisional Conclusions the formula for Potential Sales (at paragraph 3.148) did not include an adjustment for the Connection Charge, which Openreach consider should be deducted. The estimates in the Second Provisional Conclusions, however, were correctly calculated. Therefore, by way of correction, the formula for Potential Sales should deduct the following:223

(Connection Charge x X) / 25.

Data used in pre-estimating losses associated with Potential Sales

4.132 In our Second Provisional Conclusions, our view was that:

4.132.1 it is very difficult accurately to pre-estimate the number of Potential Sales that would be lost as a result of delays. As with Cancellations, we were not aware of any publicly available data to confirm a value for the probability of Potential Sales (“Y”), although we noted that the Parties both suggest that lost Potential Sales could amount to [] % or less of orders placed which experienced a delay. Given this, and in the absence of robust alternatives, for the purposes of resolving this Dispute we proposed that a range of 0-10% of orders was a reasonable measure (although we noted this is very uncertain);

223

The corrected formula is at paragraph 4.141 below


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4.132.2 we remained of the view that the assumption of 12 months’ lost revenues seemed low, however we had not been able to calculate the precise industry value, and proposed a range of 12 months to 48 months as a reasonable measure; and

4.132.3 using the range of publicly available data for ARPU and EBITDA and applying the above ranges for each of (i) the probability of potential sales being lost due to delays and (ii) the customer retention, we concluded that these offered a range of values for Potential Sales of £0.00 per day to £1.36 per day (based on a 25-day delay).


4.133 The Parties’ observations on the level of profit margin to use discussed in relation to Lost Revenues, also apply to Potential Sales. TTG’s customer retention comments and suggested ranges under Cancellations also apply to Potential Sales.224

4.134 TTG also considers “absurd” the suggestion that an average CP may not have incurred any reduced sales as a result of Openreach’s poor performance. TTG believes that the probability of cancellations used for the Cancellations component should also be used as an input in calculating the Potential Sales estimate.225

4.135 TalkTalk refers226 to the following statement in the FAMR consultation and claims that it is in conflict with our assumed 0% lower bound value in our estimate range for the impact delays on Potential Sales:

“It is very difficult to pre-estimate accurately the number of ‘potential sales’ that would be lost as a result of delays. However, we consider there to be a plausible link between poor quality of service and lost potential sales, which in turn represents a potential impact on CPs.” 227

Ofcom’s view

4.136 We have discussed the level of profit margin in relation to Lost Revenues and customer retention under Cancellations. Our conclusions in respect of the profit margin input for the calculation of those components also apply to Potential Sales. Similarly, our conclusions regarding the customer retention input for the Cancellations component, set out at paragraphs 4.96 to 4.106, apply to Potential Sales. Our focus for this component, therefore, is the impact of delays on Potential Sales.

4.137 Unlike for Cancellations, where we agree there is merit in TTG’s argument that the probability of cancellation after a 25 day delay should not be zero, we do not consider that the same applies to Potential Sales. We consider that there is substantial uncertainty (and greater than for Cancellations) about the effect that actual delays on placed MPF New Provide orders may have on customers making new orders. We note that we have even less information available to us in relation to Potential Sales than we have in relation to Cancellations. Therefore, we consider that the range of 0-

224

Pages 7-8 of TTG’s response to the Second Provisional Conclusions. 225

Pages 7-8 of TTG’s response to the Second Provisional Conclusions. 226

TTG’s letter to Ofcom dated 4 July 2013 227

Paragraph 10.50, FAMR consultation


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10% of orders used in our Second Provisional Conclusions remains an appropriate range of values.228

4.138 In order for a Potential Sale effect to arise it is necessary that information about actual delays incurred by some customers becomes public knowledge – i.e. that customers that are planning to place an order become aware of these delays. In many instances when a customer suffers a delay this information would not be known beyond Openreach, the relevant CP and the customer. Therefore, we consider it plausible that information about delays in MPF New Provide appointment availability may not generally be known, and therefore have no Potential Sales effect.

4.139 We do not consider the statement in the FAMR consultation quoted at paragraph 4.135 and relied upon by TTG to necessarily be in conflict with the range used in our Second Provisional Conclusions (0-10%). We recognise the possibility that a delay in connections may in theory result in lost Potential Sales, as reflected by the fact that we include this as one of the SLG components. However, we also note the great uncertainty in pre-estimating the possible impact of Potential Sales. We remain of the view that, while it is possible that there will be lost Potential Sales after a 25 day delay, it is also the case that such a delay may only have a small impact, if any on Potential Sales for the reasons discussed. We also note that Potential Sales relate to a type of reputational damage which, as discussed in the FAMR consultation, is a more uncertain effect than a cancellation (where the consumer has already taken the step of placing an order).229

4.140 Therefore, we consider that we have to exercise judgement in this case and we use a range of 0-10% in the estimate range we use in our assessment.

Implementation of conclusions on Potential Sales

4.141 As a result of these changes to our provisional conclusions, we have amended our formula to replace ARPU x EBITDA to estimate the profit margin with an approach based on avoidable cost and added the correction to include the connection charge:

(Monthly Profit Margin x Customer Retention x Y) / 25 - (Connection Charge x X) / 25

4.142 Using this revised approach and values the range we use in our assessment for Potential Sales is £[] - [] (instead of £0.00-1.36 in our Second Provisional Conclusions).

4. Customer Care

4.143 In the Second Provisional Conclusions, our view was that:

4.143.1 Openreach’s methodology was reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer.

4.143.2 Openreach’s data used for the purposes of pre-estimating loss as part of the April 2012 ANFA was reasonable. Based on this, a pre-estimate for a daily rate of losses associated with Customer Care can be calculated as:

(Number of additional calls x duration of calls (hours) x hourly rate) / 25

228

Using a higher value of 2-3% as suggested by TTG would also be immaterial for the purpose of this Dispute. 229

Paragraph A9.76, Annex 9, FAMR consultation


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4.143.3 Based on the evidence available and for the purposes of resolving this Dispute, a reasonable value for Customer Care is £0.33 per day.230


4.144 Openreach agrees with our provisional approach to customer care costs.231

4.145 TTG does not have any specific comments.232

Ofcom’s view

4.146 By way of correction, in the Second Provisional Conclusions (at para 3.168) we reported that the value we used for Customer Care was £0.28, when in fact the correct value was £0.33 as used in Table 1.

4.147 On the basis that we have received no further comments on this issue, we consider that, subject to this correction, it is appropriate to maintain our position in our Second Provisional Conclusions.

Overall conclusions on the SLG level offered by Openreach


4.148 TTG sets out, based on its own analysis, what it considers to be the correct SLG component ranges:

Table 3: TTG range of daily SLG values

SLG Component Lower end of range Central estimate Upper end of range

Lost revenues £0.40 £0.45 £0.54

Cancellations £0.64 £1.49 £4.54

Potential sales £0.64 £1.49 £4.54

Customer Care £0.33 £0.33 £0.33

Total £2.01 £3.75 £9.94

4.149 As discussed at paragraph 4.13, TTG contends that we should have selected “the (most) fair and reasonable SLG value” and that this single “best estimate” figure may be “around the middle of any range that it has developed”. TTG considers that “that appropriate single SLG figure would be the central estimate (£3.75)”.233

4.150 Openreach maintains that the SLG range £0.35 to £1.59 that it proposed in response to Ofcom’s First Provisional Conclusions is appropriate and reasonable.

Ofcom’s views

230 This correction is explained at paragraph 4.146 below. 231





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4.151 For the purposes of this Dispute, we have assessed whether the SLG level offered by Openreach as part of the April 2012 ANFA was fair and reasonable, recognising that there are likely to be a number of different approaches that are likely to be fair and reasonable and therefore, consistent with the regulatory requirements imposed on BT. We have done so by looking at both the methodology used by Openreach and also the input values used to determine the SLG level. Having undertaken this assessment, we have concluded that:

4.151.1 Openreach’s general approach to setting an SLG is consistent with the general principles set out in the SLG Statement;

4.151.2 the Parties broadly agree that the SLG could be broken down into the four components used in Openreach’s approach, though they disagree on how exactly to pre-estimate each component;

4.151.3 for Lost Revenues, we have changed our provisional view and conclude that Openreach’s methodology was not reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer as it included both avoidable and un-avoidable costs, therefore understating the pre-estimate of lost profits resulting from delay. As a consequence, we also conclude that the data Openreach used for the purposes of pre-estimating loss as part of the April 2012 ANFA offer was not reasonable and believe instead that it is preferable to use profit margin data that is based on an avoidable costs approach. In this case the best available data is the revised AMPU data provided by TTG, which we use to derive a range of estimates for this component of £[] - [];

4.151.4 for Cancellations, we maintain our provisional view, and conclude that Openreach’s methodology overall was reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer. However, we have changed our provisional view regarding the methodology for the profit margin input for this component. We note that it was not reasonable for Openreach to have used a profit margin input for this component based on EBITDA times ARPU, and that an approach based on avoidable costs would have been preferable. We also remain of the view and conclude that Openreach’s data used for the purposes of pre-estimating profit margins and customer retention may have understated losses, whereas Openreach may have overstated the probability of Cancellations. We use the revised AMPU data provided by TTG, our own customer retention estimates of 38 to 60 months, and a range of 1-10% for the probability of cancellations to derive a range of estimates for this component of £[] - [];

4.151.5 for Potential Sales, we maintain our provisional view, and conclude that Openreach’s methodology was not reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer. We maintain our provisional view that a reasonable methodology would provide a pre-estimate of lost profits, as provided by the approaches adopted for Lost Revenues and Cancellations. However, we have changed our provisional view regarding the methodology for the profit margin input for this component. We note that it would not be reasonable to use a profit margin input for this component based on EBITDA times ARPU, and that an approach based on avoidable costs would be preferable. We use the revised AMPU data provided by TTG, our own customer retention estimates of 38 to 60 months, and a range of 0-10% for the probability of


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losses of Potential Sales to derive a range of estimates for this component of £[] - [].

4.151.6 for Customer Care, we maintain our provisional view, and conclude that the methodology and data used by Openreach were reasonable for the purposes of pre-estimating loss as part of the April 2012 ANFA offer.

4.152 In light of these conclusions, we have set out in Table 4 below what we consider a reasonable range of SLG levels based on the available evidence. Note that, having regard to the robustness of the evidence available to us and the limitations on the analysis we can undertake in the context of dispute resolution, we have not concluded that all the values used in Table 4 have a strong evidential basis that they are reasonable, nor are we able to attach particular significance to one value over any other within these ranges. However, we consider that they are the best available in light of the evidence considered in resolving this Dispute.

Table 4: Ofcom range of daily SLG values

SLG components Lower end of range Upper end of range

1 – Lost revenues £[] £[]

2 – Cancellations £[] £[]

3 – Potential sales £[] £[]

4 – Customer care £0.33 £0.33

Overall daily SLG level £[] £[]

Overall daily SLG level (2nd Provisional Conclusions) £0.50 £3.29

4.153 The values we have used in calculating our estimated range for the SLG are in Table 5.


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Table 5: Values used to estimate range in Table 4

Variable Lower end of range Upper end of range

Profit margin (monthly)* £[] £[]

Connection charge (£) £50

Customer retention (months) 38 60

X – Probability Cancellations 1% 10%

Y – Potential Sales Impact 0% 10%

Number of additional calls 2

Duration of calls (hours) 1/6

Hourly rate (£) £25

* This is expressed as EBITDA * ARPU in the formulae reported in our Second Provisional Conclusions.

4.154 Table 4 shows a range of SLG levels between £[] and £[] and we note that Openreach’s offer of £2 lies within this range. This analysis shows that making the adjustments to Openreach’s methodology discussed above and using input values (in the light of what the Parties told us and publicly available information) which we consider reasonable (or at least that the evidence does not show are unreasonable), the £2 per day level pre-estimate of an average CP’s loss offered by Openreach, in respect of the Relevant Period, can be justified.

4.155 As noted in this Determination, there are a number of parameters for which, because of uncertainty, we have used a value range.234 The range of estimates for these parameters has had the effect of producing a broad estimated SLG range of £[] to £[]. This is a wide range but it is important to note that the parameters that drive the upper bound of our estimated range are the probabilities of Cancellation (1-10%) and Potential Sales impact (0-10%). As discussed at paragraphs 4.109 to 4.110, we consider that, although the Parties do not dispute the use of a 10% in the upper bound for these components, there is no robust evidence to support its use as such.

4.156 We note regarding the lack of robust data available to Ofcom in concluding on certain aspects of this Dispute, that the Parties and other CP consumers of Openreach services are the potential source of data to bridge this information gap. In saying this, we also note that the absence of data for the most uncertain elements discussed at paragraphs 4.155 above can be most readily addressed by CPs, not Openreach, given the nature of their respective businesses.

4.157 On the basis of this analysis, we conclude the evidence available to us does not support a finding that the £2 per day level of SLG offered by Openreach in respect of the Relevant Period was not a fair and reasonable pre-estimate of an average CP’s loss.

234

i.e. the profit margin, the customer retention, the probability of cancellations and the Potential Sales impact


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Assessment of the forecasting requirements

Requirement to provide forecasts

4.158 In the Second Provisional Conclusions, our view was that a forecasting requirement is a reasonable requirement in order to support delivery of MPF New Provide


4.159 Openreach welcomed our “conclusion that the forecasting terms offered by Openreach as part of the April 2012 ANFA were fair and reasonable” and confirmed that “the forecasts provided by CPs (including TTG) are relied upon and utilised by Openreach for the purposes of resource planning.”235

4.160 TTG made no further submissions regarding forecasting requirements in response to the Second Provisional Conclusions.

Ofcom’s views

4.161 In light of the responses received, we consider that it continues to be appropriate to maintain our findings in the Second Provisional Conclusions.

Conclusions on whether the relevant terms and conditions are fair and reasonable, as required by Condition FAA9.2

4.162 For the reasons set out above, we conclude that:

4.162.1 the existence of contractual provisions relating to service level commitments and corresponding compensation are a necessary component for the terms offered during the Relevant Period to be fair and reasonable;


4.162.3 the forecasting requirements were fair and reasonable,

4.163 We therefore conclude that BT has not been shown to have breached Condition FAA9.2 by virtue of the April 2012 ANFA offer.

4.164 Below we consider the responses of the Parties regarding the incentives created by our Determination. then set out our assessment of whether our analysis is consistent with our statutory duties and Community obligations.

Incentives

4.165 In our Second Provisional Conclusions, we explained that given that we proposed to find BT’s offer fair and reasonable, we did not consider it necessary to exercise any of our powers under section 190 of the 2003 Act. We further explained that we considered that this struck an appropriate balance in relation to incentive properties, providing BT with the incentive to ensure that it offers fair and reasonable terms in a timely manner, while ensuring that CPs have the incentive to engage in genuine commercial negotiations.

235



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4.166 In general, Sky commented in its response to our Second Provisional Conclusions that our provisional view fails “to have adequate regard to BT’s position of SMP, and therefore the difficulty of CPs reaching reasonable agreements with Openreach via commercial negotiation”.236

4.167 In its response to the Second Provisional Conclusions, TTG submits that Ofcom’s analysis set out at paragraphs 3.209 to 3.212 is “flawed and were Ofcom to take a final decision in the same or similar terms it would be unlawful”.237 It provides several grounds for its position, set out below.

4.168 First TTG argues that since neither Openreach nor TTG have been found not to have been acting fairly and reasonably and:

“...to impose no SLG at all (i.e. £0 and less than what Ofcom considers fair and reasonable) is unjustifiably asymmetric since it is not in dispute that BT’s poor performance merited some SLG and that a £0 SLG would not have been reasonable.” [original emphasis]238

4.169 It argues that this means that it is being penalised for bringing a dispute, and is “left significantly worse off than if it had accepted BT’s terms”. It argues that this is unfair and a breach “of Ofcom’s duties to act in a non-discriminatory manner and to have regard to the importance of regulatory consistency…”.239

4.170 Second, TTG submits that:

“Ofcom’s approach confuses the issue of breach of an SMP condition (which is not required for Ofcom to determine a dispute between two CPs – neither of which need have SMP) with what is fair and reasonable in all the circumstances when two CPs have been able to agree on terms. This is equivalent to the error that the Tribunal found Ofcom committed in T-Mobile v Ofcom [2008] CAT 12 at [89]-[90]”;240

4.171 Third, TTG argues that “Ofcom’s incentives based justification for its approach is plainly and unlawfully discriminatory”. It considers that “allowing CPs terms that they have previously rejected would simply put CPs and BT on an equal footing”.241 It further adds:

“To create such an asymmetric negotiating environment would not be justified even if TalkTalk and BT otherwise negotiated on equal terms. But given the disadvantage that CPs start with to adopt a policy approach designed to shape incentives so as to increase the existing asymmetry in bargaining power between the parties is manifestly perverse and does not justify Ofcom’s refusal to grant any relief”.242

236

Sky’s response to the Second Provisional Conclusions 237




Page 10-11 of TTG’s response to the Second Provisional Conclusions. 241




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4.172 Fourth, TTG state that “far from creating desirable incentives to promote fair dispute resolution without the need to engage Ofcom, Ofcom’s approach whereby it does not impose terms if BT’s offer is within a broad range puts CPs such as TalkTalk in a virtually impossible position” in that it must either accept the terms offered which will prejudice its position in any future dispute or not accept the terms and risk losing out if those terms are subsequently found fair and reasonable.243

4.173 Fifth, TTG argues that:

“if Ofcom refuses retrospectively to put in place terms to cover the disputed period then it presumably understands the period to have been one in which there was no SLG at all”.244

4.174 Lastly, TTG argues that:

“the harmful effects that would result from Ofcom continued [sic] with its provisionally proposed approach could be wide ranging as BT would delay offering terms in other matters (since there is no punishment for that) and would offer the most mediocre of terms knowing that CPs would have little choice but to accept them”.245

4.175 In conclusion,

“TalkTalk believes that Ofcom fails to understand the various incentives at play in negotiations between a CP and Openreach and consequently the impact of its proposed approach for the resolution of this dispute and also for future negotiations between a CP and Openreach”. It adds that “if a similar approach is used to resolve other disputes it would have harmful impacts on competition and ultimately consumers in markets where BT has SMP”.

4.176 TTG supplemented its response to the Second Provisional Conclusions with a letter of 20 June 2013 which further developed its arguments. This letter makes the following points.

4.177 Ofcom’s approach “means that provided BT’s offer is at the bottom of Ofcom’s likely range then CPs will lose any dispute they bring and so BT’s offer will stand. This approach effectively accords BT a wide range of discretion and BT can ‘get away with’ setting SLGs well below a central estimate” [original emphasis].246

4.178 Ofcom’s approach also “means that CPs will be incentivised to sign a contract that offers an amount below the bottom of Ofcom’s range since if they don’t sign the contract and dispute they risk ending up with nothing” [original emphasis].247

243



Page 13 of TTG’s response to the Second Provisional Conclusions. Sky also makes a similar point in its response to the Second Provisional Conclusions, arguing that Ofcom’s proposed approach would mean that BT has an incentive to prolong negotiations and it considers that “there is a risk that the outcome of this dispute will likely result in Openreach not prolonging negotiations, but rather that Openreach will simply make a “sub-optimal” offer to CPs and then refuse to enter into genuine negotiations with CPs in relation to the offer”. They argue that the protracted nature of the discussions around the MPF New Provide SLG entered into in December 2012 reinforces this point. 246

Page 1 of TTG’s letter to Ofcom dated 20 June 2013 247

Page 1 of TTG’s letter to Ofcom dated 20 June 2013


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4.179 Ofcom has also “seemed to have ignored the incentives at play and the reality of what actually happens on the ground”. TTG add that they “already suffer from an unequal bargaining position” and that “BT’s strength and unwillingness to offer reasonable terms in a timely fashion has played out a posteriori”. In contrast “TalkTalk has a priori every incentive to quickly conclude a reasonable agreement since absent agreement TalkTalk might receive no SLG”.248

4.180 TTG say that the suggestion in our Second Provisional Conclusions that “CPs could avoid the risk of not receiving any SLG by signing a contract and then disputing the term” to be “rather curious”. They consider that this approach:

4.180.1 “would reduce the incentive for BT and CPs to engage in genuine commercial negotiations”

4.180.2 encourages CPs to “act in bad faith and a contradictory manner by signing a contract with the intent of disputing”

4.180.3 is “inconsistent with Ofcom’s previous approach where in resolving a dispute Ofcom presumes that if a contract has been signed then the term is fair and reasonable (unless proven otherwise) and consequently if a CP has signed a contract then it prejudices its positions in the case of a dispute”. It uses the Ethernet Determination as an example of this.249

4.181 TTG further submits that if Ofcom’s policy is that CPs should sign contracts then bring disputes, then it should remove legal uncertainty by stating to CPs that signing a contract will not prejudice CPs position in subsequent disputes.

4.182 Sky makes a similar point, arguing that:

“Ofcom states that a CP has the fall back option of bringing a dispute to Ofcom if it considers that the terms being offered by Openreach are not fair and reasonable and that the CP can bring a claim either after rejecting the terms being offered or it can accept the terms and nonetheless bring a “protective” dispute. However, in its dispute resolution guidelines, Ofcom states that disputes should only be referred to it once the parties to a dispute have taken reasonable endeavours to enter into good faith negotiations in order to resolve their differences themselves. Therefore, on the one hand Ofcom is failing to incentivise Openreach to negotiate with CPs on the basis that CPs could bring a dispute against Openreach if they feel that what is being offered is not fair and reasonable. On the other, Ofcom is saying that disputes should only be brought following the exhaustion of the negotiation process. These positions are contradictory and increase the uncertainty faced by CPs when being pressured by Openreach to accept terms that are not acceptable to the CP. Furthermore, though Ofcom tries to reassure CPs that if they are offered terms that they do not consider are fair and reasonable CPs can bring disputes to Ofcom, it is clear that acceptance of a dispute is subject to an assessment by Ofcom of factors such as alternative means of resolution and Ofcom’s priorities and available resources, which means that it is far from certain that Ofcom will accept a CP’s dispute”.250

248

Pages 2-3 of TTG’s letter to Ofcom dated 20 June 2013 249

Page 4 of TTG’s letter to Ofcom dated 20 June 2013 250

Sky’s response to the Second Provisional Conclusions


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4.183 As stated above at paragraph 4.14, TTG believes that Ofcom should resolve the dispute by first deciding on a single SLG, then award that SLG amount retrospectively. It believes that this places CPs and BT on “an equal footing” and avoids uncertainty for CPs in the way in which Ofcom may resolve the dispute. TTG draws an analogy with Ofcom’s setting of single figures in charge controls, and concludes that by failing to do so in the Dispute, Ofcom is breaching its duties.251

4.184 TTG also wrote to us on 4 July 2013 noting our statement in the FAMR consultation252 that:

“BT is the SMP provider for services in the fixed access markets and, therefore, Openreach naturally holds a more powerful negotiating position. The recent negotiations over a new SLA/SLG for appointed provisioning demonstrate how protracted (over 12 months) such discussions can become. In this instance negotiations failed to reach agreement and in the end required mediation OTA2 and Ofcom. The lack of clarity and agreement relating to those discussions contributed in part to the dispute between TalkTalk and BT [concerning MPF New Provide], with the former asserting that BT had failed to provide access on fair and reasonable terms as a consequence”.

4.185 TTG believes that this statement supports its arguments in response to the Second Provisional Conclusions that Openreach has distorted negotiation incentives and that not to award TTG compensation would result in an increase in Openreach’s negotiation power.

4.186 Openreach agrees with our comments on incentives and maintains its view that to award TTG compensation would distort CPs’ incentives to negotiation in good faith and “resolve matters via commercial negotiation”

Ofcom’s views

4.187 We understand TTG’s position to be that, notwithstanding that we have found the April 2012 ANFA offer to be fair and reasonable, we should despite the decision by TTG not to accept that offer, nevertheless go on to exercise our powers under section 190 of the 2003 Act to retrospectively “compensate TalkTalk for late delivery of MPF New Provide services during the relevant period in accordance with the April 2012 ANFA”. As set out above, its reasoning for this position is that “TalkTalk believes that Ofcom fails to understand the various incentives at play in negotiations between a CP and Openreach and consequently the impact of its proposed approach for the resolution of this dispute and also for future negotiations between a CP and Openreach”. Sky makes similar points.

4.188 In deciding whether to exercise our powers under section 190, we must have regard to our general duties in section 3 of the 2003 Act and also the six “Community requirements” set out in section 4 of the 2003 Act, which give effect, among other things, to the requirements of Article 8 of the Framework Directive. As set out in our Second Provisional Conclusions, we consider that the following duties are particularly relevant to determining this dispute:

4.188.1 our principal duty to further the interests of citizens in relation to communications matters and to further the interests of consumers in

251

Page 4, TTG’s letter to Ofcom dated 20 June 2013 252

Paragraph 10.166, FAMR consultation


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relevant markets, where appropriate by promoting competition (section 3(1));

4.188.2 the duty to secure the availability throughout the United Kingdom of a wide range of electronic communications services (section 3(2)(b));

4.188.3 the need to have regard when performing our duties to:

a) the desirability of promoting competition in relevant markets (section 3((4)(b));

b) the desirability of encouraging investment in relevant markets (section 3((4)(d));

c) the duty to have regard to the principles under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed; as well as any other principles appearing to Ofcom to represent the best regulatory practice (section 3(3)); and

4.188.4 Community requirements:

a) to promote competition (section 4(3)); and

b) to encourage, to such extent as Ofcom considers appropriate, the provision of network access and service interoperability for the purposes of securing efficiency and sustainable competition, efficient investment and innovation and the maximum benefit for the customers of communications network and services providers (sections 4(7) and 4(8)).

4.189 In the WLA market review253, having regard to these provisions, we imposed, among others, a requirement on BT pursuant to Condition FAA9 to provide LLU on fair and reasonable terms and conditions to address BT’s SMP in the WLA market in the UK excluding the Hull Area. We considered that this supports investment in CGA networks, and provides CPs with network access at a level that enables them to compete effectively with BT and provide their own products and services at the retail level. In our view, creating a regulatory framework in which such competing services can develop is consistent with our duties, including our principal duty and our duties under sections 3(2)(b), 4(3), 4(7) and 4(8) of the 2003 Act. The purpose of an effective SLA/SLG regime is to provide BT with appropriate incentives to provision services to third party CPs at the wholesale level and is therefore important for securing competition at the retail level. Therefore, the regulatory framework should incentivise BT not to set access terms in a way which could impede CPs deploying competing services.

4.190 Any incentive for BT to breach its SMP conditions by offering an SLG that is not fair and reasonable should be addressed by the potential consequences of such action. Should it do so, and ensuing negotiations with CPs fail, CPs can avail themselves of the statutory dispute resolution process. In addition to the dispute resolution process, Ofcom can take enforcement action, with the potential for, amongst other things, a financial penalty of up to 10% of turnover of the Openreach’s relevant business for

253

Review of the wholesale local access market: Identification and analysis of markets, determination of market power and setting of SMP conditions, 7 October 2010.




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the relevant period of a past contravention and where the contravention is continuing, a daily penalty of up to £20,000 under sections 96A-96C of the 2003 Act.

4.191 We consider that in imposing an SMP condition on BT, we are thereby incentivising BT to act appropriately in accordance with the terms of that SMP condition. Compliance with the SMP condition (and sanctions for non-compliance) are part of this incentive. Accordingly, in light of the points on incentives made by TTG, we have considered whether in this case where we have found BT to have complied with the relevant SMP condition, whether not exercising any of our powers under section 190 of the 2003 Act would undermine the existing incentives on BT in a way that would not be consistent with our duties. In doing so, we have not only considered the incentives on Openreach, but also those of its contractual counterparties.

4.192 TTG suggests that not exercising any of our powers under section 190 on the facts of this case would generally incentivise Openreach in the future to offer an unfair or unreasonable SLG. We do not accept that this would be the case. As explained above, where Openreach fails to comply with its regulatory obligations, Ofcom has the option of taking enforcement action against it which could result in the imposition of significant financial penalties. Any such failure to comply by Openreach would also be relevant to the assessment in any market review as to whether existing regulation around SLGs was sufficient to address BT’s SMP and whether more intrusive regulation of SLG payments by BT was appropriate.

4.193 TTG also make the argument that Ofcom’s approach creates an asymmetric negotiating environment, and in particular that it does not provide any incentive for BT to offer fair and reasonable terms in a timely fashion while any terms offered would be unsatisfactory since BT would know that CPs had no choice but to accept them (points also made by Sky). Again, we disagree as the relevant incentive should exist by virtue of the regulatory obligations imposed on BT which it risks breaching if it does not engage properly.

4.194 We have considered TTG’s arguments about bad incentives (including the incentive not to negotiate in good faith) by a CP agreeing to a term which it does not consider fair and reasonable and subsequently bringing a dispute. We consider that it is relevant in this context to also consider the incentives created by the dispute resolution process. It is a pre-requisite for Ofcom’s acceptance of a dispute that parties have taken reasonable endeavours to enter into good faith negotiations. We consider that the risk that Ofcom will not accept a dispute (thereby leaving a CP with the options of either re-engaging in negotiations, or being left with the status quo) should act as a strong incentive for CPs not to simply agree to terms without engaging in good faith negotiations.

4.195 We also do not agree with Sky’s point that Ofcom’s position is contradictory given that “on the one hand Ofcom is failing to incentivise Openreach to negotiate with CPs on the basis that CPs could bring a dispute against Openreach if they feel that what is being offered is not fair and reasonable…” while “[o]n the other, Ofcom is saying that disputes should only be brought following the exhaustion of the negotiation process.” For the reasons set out above, we consider that the broader regulatory regime provides the correct incentives on Openreach.

4.196 We also do not agree with TTG’s point that signing a contract will automatically prejudice its position in the case of a dispute. This will depend on the circumstances of an individual case. Where a CP has endeavoured to enter into good faith


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negotiations254 and those negotiations are exhausted without reaching an outcome which the CP considers to be fair and reasonable, the CP should sign the contract and bring a dispute to Ofcom as soon as reasonably practicable after signing the contract. In such circumstances, we would expect to see evidence supporting the fact that the CP did not consider the terms and conditions to be fair and reasonable but that they felt negotiations had been exhausted and had therefore signed the contract to safeguard their position. In such circumstances, signing the contract is unlikely to prejudice the CPs position. This is consistent with our position in the Ethernet dispute. We would note that where there is a significant delay between terms being accepted and those terms being subsequently disputed, it is possible that Ofcom may depending on the circumstances consider that the CP will have prejudiced its position.

4.197 In terms of the incentives for CPs to negotiate in good faith and accept fair and reasonable terms offered by Openreach, we consider that awarding the SLG offered where the CP has chosen not to accept that offer would distort the incentives of CPs to negotiate in good faith. It would create the incentive for CPs, instead of using full and proper negotiations to obtain the best possible outcome, to instead use Ofcom’s dispute resolution process for this purpose.

4.198 Ofcom does not consider that it has confused the issue of breach of an SMP condition with what is fair and reasonable in all the circumstances as TTG suggests. The scope of the dispute accepted is to consider whether BT complied with its regulatory obligations (specifically SMP Condition FAA9.2). For the reasons set out at paragraphs 4.22,4.152 and 4.155 above, we consider the use of estimated ranges an appropriate approach in the circumstances to determining this dispute in the context of the available evidence. The point found to be in error in T-Mobile v Ofcom [2008] that TTG refers to was Ofcom’s reliance on its previous decision not to impose a charge control in a prior market review as demonstrating its compliance with its statutory duties in the subsequent dispute. This is clearly not comparable to this dispute where there is no such prior decision and where Ofcom has assessed whether BT’s offer was fair and reasonable by reference to the evidence available now.

4.199 We have also considered TTG’s argument that Openreach will be incentivised to set an SLG at the lowest value set out in our range. We consider this risk is limited by the following factors:

4.199.1 the range was produced solely for the purpose of determining whether the £2 SLG offer was fair and reasonable in the context of this Dispute;

4.199.2 whilst we consider that the range we have set is robust for the purposes of determining this dispute, we have stated our reservations about the data and assumptions both used by Openreach in the calculation of the SLG and produced by TTG in support of its dispute submission. Were the SLG to be re-set, either through an Ofcom market review, or through new negotiations between Openreach and CPs, we consider that this would present the opportunity for the relevant parties to identify more accurate data inputs; and

254

We would be unlikely to consider that the parties had entered into good faith negotiations if the CP simply accepted the first offer made by BT and then brought a dispute.


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4.199.3 in any event, we note that on the basis our revised assessment of the range in light of comments made by TTG as set out in this decision, the bottom of the range is £[] whereas BT’s offer was set at £2.

4.200 We also do not accept the other arguments put forward by TTG:

4.200.1 We do not agree with TTG that it is being penalised for having brought a dispute or that Ofcom is acting in a discriminatory manner. We have assessed the level of SLG offered by Openreach and found it to be fair and reasonable. For the reasons set out above, we do not consider that it is appropriate to direct BT to make a retrospective payment to TTG; and

4.200.2 We also disagree with TTG’s assertion that our position effectively means that there was no SLG in place over the Relevant Period. This is not correct as the April 2012 ANFA was available to CPs including TTG throughout the Relevant Period.

4.201 For the reasons set out above, we reject TTG’s contention that Ofcom has taken an unlawful position and we continue to consider that it is not appropriate in determining this dispute for us to exercise any of our powers under section 190 of the 2003 Act. We consider that our resolution of this Dispute strikes an appropriate balance between these incentives and is consistent with our statutory duties and Community obligations.

Assessment of consistency of Ofcom’s Determination with its statutory duties and Community obligations

4.202 We set out at paragraph 4.188 above those of our general duties under section 3 of the 2003 Act and the six “Community requirements” set out in section 4 of the 2003 Act, which are particularly relevant to determining this dispute. We also set out the background on how Condition FAA9 was imposed and the purpose of an effective SLG regime in achieving these duties. We have also explained why we consider the outcome of the dispute to be consistent with those duties.

4.203 We consider that the approach we have taken to assessing whether the terms and conditions offered were fair and reasonable supports the overall regulatory regime which aims to support investment in CGA networks, and provides CPs with network access at a level that enables them to compete effectively with BT and provide their own products and services at the retail level. By ensuring access is provided on fair and reasonable terms and conditions, this prevents BT using access terms to impede CP’s deploying competing services. In our view, creating a regulatory framework in which such competing services can develop is consistent with our duties, including our principal duty and our duties under sections 3(2)(b), 4(3), 4(7) and 4(8) of the 2003 Act.

4.204 For the reasons set out above, we consider that our resolution of this Dispute, including our decision not to exercise our powers under s190 of the 2003 Act, is consistent with our statutory duties and Community obligations in that it strikes an appropriate balance between BT’s incentives to provide services to third party CPs at the wholesale level and the incentives on CPs to engage in meaningful commercial negotiations.

4.205 Sky argues in its response to the Second Provisional Conclusions that “Ofcom fails to recognise that its proposed approach and the dispute outcome under the Second Provisional Conclusions increases the uncertainty around service performance and


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makes it increasingly difficult for CPs to negotiate with Openreach in relation to the terms and conditions offered to CPs. This has a direct impact on the ability of CPs to improve their services, in the interests of consumers, and increases the likelihood of disputes between CPs and Openreach, which would not be in the best interests of consumers”. We have considered this view but for the reasons set out above remain of the view that our resolution of this Dispute strikes an appropriate balance between the various incentives on each side and is consistent with our statutory duties and Community obligations

4.206 In reaching our Determination, we have kept in mind our duty under subsection 3(3)(a) of the 2003 Act to ensure that our regulatory activities are, among other things, transparent, accountable, proportionate and targeted only at cases where action is needed. In particular, in the First Provisional Conclusions we set out the Parties’ initial arguments and the reasoning that underpinned our provisional assessment, providing the Parties with an opportunity to comment on it in advance of these Second Provisional Conclusions. In the Second Provisional Conclusions, we set out the Parties comments in response to the First Provisional Conclusions and the reasoning that underpinned our revised provisional assessment, providing the Parties with an opportunity to comment. We consider that our resolution of this Dispute avoids undue regulatory intervention where, on the specific facts of this Dispute, action is not warranted. We have also considered the other work being carried out by Ofcom on issues related to the subject matter of this Dispute.

4.207 We therefore consider that, for the reasons set out in this Determination, our resolution of this Dispute is consistent with our general duties and Community obligations as required by the 2003 Act.

Determination

4.208 For the reasons set out above, we therefore, determine that:

4.208.1 the April 2012 ANFA was fair and reasonable and that Openreach is accordingly not in breach of Condition FAA9.2; and

4.208.2 we do not consider it appropriate to exercise any of our powers under section 190 of the 2003 Act.

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