BT to be forced to maintain 'minimum margin' between wholesale and retail superfast broadband prices

BT gives other communication providers access to its superfast broadband network through a product called Virtual Unbundled Local Access (VULA) as well as selling superfast broadband services itself to businesses and consumers.

Ofcom said its plans to regulate BT's pricing (282-page / 2.02MB PDF), which are specific to the consumer market and not the business market, are necessary to ensure there is no distortion of competition in the market for superfast broadband in the UK. The proposals apply up to 2017 and cover the period when the wholesale local access (WLA) market is subject to review by Ofcom. The regulator said it expects the market for superfast broadband to grow in the UK during this time.

"We are concerned that BT could distort the development of competition in superfast broadband by setting an insufficient margin between its wholesale VULA and retail superfast broadband prices," Ofcom said. "Our approach is designed to ensure that other communication providers have sufficient margin to be able to compete with BT in the provision of superfast broadband packages to consumers. It also continues to provide BT with pricing flexibility for VULA that preserves its investment incentives in relation to superfast broadband."

Ofcom said that BT enjoys "significant market power" (SMP) in the wholesale local access market and that there is a risk of competition being distorted unless it takes steps to regulate BT's pricing of superfast broadband.

Under the plans, BT will have "broad flexibility over the level of VULA prices" but has set out how BT's own "costs and revenues" and other factors should be considered in the calculation of the minimum margin the company will have to maintain between its wholesale and retail prices.

"We consider that there is a relevant risk of adverse effects arising from a price distortion," Ofcom said. "We therefore consider that it is necessary to intervene to ensure that BT cannot use its SMP in the WLA market to set the VULA margin over the period of the market review such that it causes retail competition in superfast broadband to be distorted."

"We consider that this aim is most appropriately achieved in this review period by ensuring that BT does not set the VULA margin such that it prevents an operator with slightly higher costs than BT (or some other slight commercial drawback relative to BT) from being able to profitably match BT’s retail superfast broadband offers," it said.

Ofcom has notified the European Commission of its plans and said it expects to announced its finalised measures next month.