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    Vodafone Limited, Vodafone House, The Connection, Newbury, Berkshire, RG14 2FN, England. Registered in England No. 1471587 Page 1 of 19


    June 2016

    Response to Ofcoms Consultation:

    Wholesale Local Access Market Review: Approaches to fibre cost modelling

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    Vodafone Limited, Vodafone House, The Connection, Newbury, Berkshire, RG14 2FN, England. Registered in England No. 1471587 Page 2 of 19


    1.1 This consultation and the wider Wholesale Local Access market review project are key to determining if

    Ofcoms Digital Communications Review aspirations can be met. If Ofcom is to make communications

    work for everyone, then the appropriate pricing of and access to Next Generation Access (NGA) services

    are a vital component. Without access to affordable, ubiquitous higher speed services UK consumers will

    be disadvantaged. The disadvantage will arise as a result of the emerging gap within the UK between

    those who can achieve the highest speeds and those who cant, but also in international comparisons,

    where a global market place dictates an ever greater need for reliable high speed digital connectivity, if a

    nation and all its parts are to succeed economically. In countries like France, Portugal, Ireland, and Spain

    we are seeing a real Fibre To The Premises (FTTP) transformation occurring. In Spain the entire

    telephone network will be converted to FTTP by 2020 and further afield, in the UAE universal FTTP is

    already a reality. The UK needs at the least to keep in step, not simply in metropolitan areas but also


    1.2 In the UK we have come a long way in the last decade, with legacy copper infrastructure being pushed

    ever harder to try and satisfy our growing appetite for bandwidth. While this path of innovation will

    continue through initiatives like G.fast, developments in this area will always be throttled by the physical

    characteristics of the copper access wire being used for a task it was never designed for and where

    longer copper lengths defeat any technological interventions to increase speed.

    1.3 The progress made on broadband speeds has to a large extent been to the detriment of competition. In

    the move away from using Local Loop Unbundling (LLU), BT has secured a better deal on both charges

    (focusing on a product which to date hasnt been charge controlled) and being left free to design its

    implementation in a way that does not require equivalent consumption built on a co-location presence.

    1.4 The pricing and availability of NGA is therefore linked to other strategic policy considerations that Ofcom

    is currently contemplating, including how the UK is to meet the future USO challenge of providing a

    minimum of 10Mbit/s access to every UK home and the considerations around the future ownership,

    direction and control of Openreach. At some point the dots need to join up, however whilst this project is

    focused on delivering the correct NGA pricing outcomes in the next market review period to 2020, it

    cannot be done in isolation from the substantial policy questions. This means getting the foundations

    right to support the Gigabit society of the future, ensuring the UK has the right infrastructure to deliver

    all its digital aspirations in the decades ahead.

    1.5 In summary, Ofcom is walking a tightrope, whilst recognising that:

    Legacy copper isnt going to deliver the same benefits to UK consumers as alternative forms of NGA

    connectivity such as FTTP.

    Restricting charge control regulation to a legacy technology risks a totally inappropriate regulation

    being set.

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    Vodafone Limited, Vodafone House, The Connection, Newbury, Berkshire, RG14 2FN, England. Registered in England No. 1471587 Page 3 of 19

    BT has significant incumbency advantages that discourage others from entering the NGA

    market with their own investments in infrastructure. Addressing these incumbency

    advantages is not the same as encouraging BT to invest.

    Any investment risk premium return incorporated into NGA regulated pricing must only be

    contemplated when the time is right (and there is a realistic prospect of investment) and

    done in a transparent way. If costs are exaggerated in the short run then only BT and its

    shareholders will benefit rather than UK consumers as a whole, and it will leave other

    infrastructure investment an even more distant prospect. An outcome that delivers greater

    returns for BT in the short run (over a three year control), is unlikely to provide a sufficient

    enough incentive for others contemplating the costs of deploying new infrastructure.

    Pricing in the next control period should reflect efficient cost, preventing BT over-recovery

    and excessive profitability and the resulting damage to competition.

    All stakeholders require an understanding of the true cost of provision of NGA using FTTC /

    G.fast. This will ensure this regulatory model is robust, future business cases are sound and

    consumers benefit from prices set at appropriate levels.

    While the European Framework directive advocates national regulators taking a technological

    neutral approach, Ofcoms Digital Communication Review clearly set the aspiration for fibre.

    Without a change in the UKs underlying regulatory environment the proper transition to fibre

    is unlikely to occur.

    1.15 We dont believe that the regulatory and commercial environment in the UK supports the fibre

    ambition at this point in time, although we recognise the environment is beginning to evolve with

    hopes pinned on a number of initiatives such as duct access. We recognise this consultation and

    the forthcoming market review are simply the start of the process to ensure the UK regulatory

    environment is one that encourages the competition and infrastructure investment.

    1.16 This response is divided into two sections, the first discusses the wider policy considerations that

    are in play, setting out a wider frame of reference for the fibre cost model, providing market

    context both now and in expectations for the future. The next section then turns to the specifics

    of the proposed model, addressing Ofcoms specific questions and discusses the models

    proposed design and its approach to calculating the cost of NGA access in the UK to 2020.

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    Vodafone Limited, Vodafone House, The Connection, Newbury, Berkshire, RG14 2FN, England. Registered in England No. 1471587 Page 4 of 19

    2. Policy Considerations on fibre cost modelling

    2.1 If Ofcom is to succeed in making communications work for everyone then it needs to achieve the right

    outcomes from this charge control and market review. There is a significant trade-off between delivering

    copper based NGA today to consumers at a price that fairly reflects its underlying costs and creating an

    environment that ensures that the UK has fit for purpose infrastructure that supports a more complete

    NGA in the years ahead.

    Copper is no match for Fibre

    2.2 The expediency of relying on BTs legacy copper network is not a strategy without significant risk. While

    it undoubtedly results in most of the UK having access to some form of NGA from either BTs

    commercial roll out or through state aid support (via BDUK), it does result in a solution that performs

    poorly against fully fibre based alternatives and leaves around 5% of the UK population unserved, with

    this latter issue being considered in the concurrent Broadband USO review.

    2.3 In 2027 no one wants to be looking back at a lost decade, where the continued presence of copper

    access because of policy choices made 10 years before are visibly constraining the UK economically,

    with the gap between those who have access to the faster speeds and those that dont wider than ever.

    Todays utilisation of copper based Fibre To The Cabinet (FTTC) must be viewed as a staging post to

    ultrafast NGA connectivity, a stepping stone towards FTTP, not a barrier that thwarts it becoming a reality

    in the UK.

    2.4 Whilst article eight of the Framework Directive requires Ofcom to take the utmost account of the

    desirability of making regulations technologically neutral1, Ofcom has taken a very different policy

    stance in its initial conclusions in the Digital Communications Review, as it states that it will promote a

    strategic shift to large-scale investment in more fibre2. A technology neutral stance in this aspect of

    regulation is one that is almost certainly destined to promote and prolong the use of the copper

    network. Remaining silent over the drawbacks of copper and its limitations results in a rational

    incumbent sweating its assets for as long as possible and acting as a commercial barrier to entrants

    investing in fibre. If Ofcom really wants to incentivise fibre build then costing and pricing decisions

    need to take account of this. Unless this is undertaken, sticking to technology neutrality will result in the

    UK becoming ever more reliant on and constrained by the copper network, through its significant

    physical limitations coupled with BTs rational desire to maximise financial rewards for its shareholders

    from its existing network assets.

    2.5 FTTC and G.fast are options to extend the life of the copper network and arent Modern Equivalent Assets

    (MEAs) for anyone oth

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