Connected Research

Union policy research in the 21st century

Ofcom confirms Openreach pricing framework

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Ofcom has today published its response to its Second Consultation on A New Pricing Framework for Openreach, confirming the prices that Openreach can charge in 2009/2010 for unbundled local loops, together with the indexation (RPI-X) that will apply to these prices in 2011/2012. Ofcom believes that the new regime will ensure that – were the same levels of indexation to apply in 2012/2013 – then, by the end of this period, the price of each of the regulated products covered would equal Ofcom’s assessment of its projected efficient fully allocated cost.

Which is a rather long-winded way of saying that Openreach prices should end up as being no more than its cost – and that with a certain degree of (externally-imposed) efficiency built in.

The indexation that will apply for 2010/2011 will be the October 2009 RPI but it is clear that the world has changed dramatically since the consultation first began in May last year and that RPI is, as the Ofcom statement says, ‘unlikely to provide a reliable indicator of the inflationary pressure facing Openreach for the relevant period’. Consequently, the ‘X’ figures in the RPI-X formula have been boosted to take account of this by around 4%.

The charge period will apply for less than two years, until March 2011 and, with required notification periods of 28 days in the case of some products and 90 in the case of others, actually for quite considerably less than this.

Connect and the CWU submitted a joint response to the consultation which focused on three issues:

1. Setting realistic targets for cost efficiencies, which take sufficient account of the implications for workforce headcount, skills and training and therefore quality of service in their calculation.

2. Reflecting Openreach’s full operating costs in the charge controls, including its pensions deficit.

3. Creating stability in the charge control to provide Openreach with the regulatory certainty it needs to justify the investment necessary to improve current networks and build Next Generation Access networks.

At first sight, the outcomes of the statement are a mixed bag when set against these points:

1. Ofcom believes that cost efficiencies of 4% are possible in 2009/2010 – at the very top of the 2-4% range it outlined in its Second Consultation (although this declines to 3% in 2010/2011 and 2% in each of 2011/2012 and 21012/2012).

2. In line with Ofcom’s existing practice, Openreach will not be allowed to incorporate its BTPS deficiency contributions into its cost structure – although Ofcom has agreed to set up a separate consultation on its long-term approach to the funding of pension deficits.

3. The charge period is for less than two years which scarcely provides the required predictability which lets Openreach move forward confidently on its investment plans – although the statement does clearly have a future perspective on the situation applying in the two years subsequently.

Nevertheless, we will be considering the report in detail and responding further as appropriate.

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Written by Calvin

22/05/2009 at 2:02 pm

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