1. Regulatory issues raised by access upgrade investment: where we are in the UK debate Richard Budd Senior Regulatory, Economist, BT 16 September 2008 richard.budd@bt.com

2. Where we are – July 2008 announcement Widespread ADSL2+ will ~ double current speeds (up to 24Mb/s) 10 million km fibre already, 120,000 business premises have fibre access Announced intention for £1.5bn investment in FTTC and FTTP Accessible by up to 10 million homes by 2012 ~ 40Mb/s to 100Mb/s by FY 2012 All fibre based services from BT will be wholesaled to other ISPs - would be world’s most open super-fast network

3. Planned peak broadband speeds and coverage by country Source : OECD Telecommunications Database Peak service rateCoverage Open access 100 Mbps (FT) 50 Mbps 20 Mbps (ATT) 40 Mbps ( Verizon) 100 Mbps (NTT) 100 Mbps (BT) 17% by 2012 (FT) 26% by 2012 27% by 2010 (ATT) 16% by 2010 (Verizon) 40% by 2009 (NTT) 40% by 2012 (BT) × × × 100 Mbps (KT) 96% by 2009 (KT) × Major Govt. funding High Density Population × × × × × × × × × Note: All countries have a range of speeds

4. Commercial drivers Virgin Media upgrade Success of 3G mobile “dongles” Increasing demand for bandwidth from IPTV 21CN core upgrade …but consumer “willingness to pay” / take-up uncertain …extent and form of regulation uncertain - minimise regulatory risk to investment - no RAB in telecoms; not expecting any price controls

5. FTTC (Cabinet) and FTTP (Premises) FTTC uses copper for the final drop, active equipment in cabinet 30-100Mbit/s FTTP can be GPON or PTP GPON shares bandwidth from street cabinet

6. BSG Chairman’s Foreword Deployment costs of FTTC nationwide three to four times higher than current gen bband FTTP/GPON five times higher again FTTP/PTP ~ six times higher than FTTC

7. Analysys Mason Report for the Broadband Stakeholder Group

8. Importance of achieving utilisation levels Impact of overall take-up rate on the costs per premises connected nationally and in London for FTTH/GPON ([Source: Analysys Mason]

9. Regulatory consultations Ofcom - Future broadband: policy approach to NGA, September 2007 Ofcom – NG New Build: Promoting higher speed broadband in new build developments, April 2008 ‘Future Broadband’ Statement expected mid- September 2008 Also, European Commission draft Recommendation, mid-September 2008

10. Future broadband: policy approach to NGA, September 2007, Five Principles 1) Contestability NGA Investment open to all 2) Maximising potential for innovation Focus on competing infrastructure investments 3) Equivalence BT Upstream [Access business] has same products, processes and price for CPs as for BT Downstream 4) Reflecting risk in returns Anchor product regulation or risk-adjusted returns 5) Regulatory certainty Stability and clarity

11. 2007 Ofcom Consultation - competition can be promoted at many levels and locations through contestability and innovation Customer Street Cabinet Local Exchange Metro Node Core Network Passive Access Copper or FibreFibre Duct Fibre Wavelength Duct Sub-loop unbundling Fibre Wholesale Access Product Active Line Access

12. Street cabinet Local exchangeMetro NodeCore Network Copper sub-loop Fibre Fibre to the cabinet Splitter Metro Node Core Network Fibre Local exchange Fibre to the home Sub-loop unbundling - passive copper line access; appropriate supporting backhaul products Active line access - high quality, flexible, Ethernet based product; appropriate supporting backhaul products Two main remedies for market power: sub-loop access and ALA

13. New build networks - FTTH, no copper access, maybe not BT Competition can be promoted by: –Contestability at the point of deployment –Application of appropriate regulations where market power develops Consumer protection by ensuring access to existing services at existing prices Voice regulation continues, possibly by new products Spectre of fragmentation – patchwork of new build technologies.

14. Summary table FTTCFTTH / New build Mandatory Active wholesale services Wholesale equivalents Wholesale equivalents (? Other CPs) Mandatory Passive Duct sharing? Sub-loop unbundling ? “Dark fibre” ? Duct sharing? “Dark fibre” ? Other regulation Regulated copper services continue to be offered Regulation to require “copper equivalent” offer over fibre

15. Copper Access Regulation Telecommunications Strategic Review (TSR) saw limited prospect for competition to “legacy monopoly access infrastructure” Various implications: –WACC de-averaged and lower for access network –Some costs removed from copper access services in 2005 as already met by customers Wholesale copper access price materially below forward- looking costs (and at utility return) Fibre to be priced at a premium to copper Copper regulation will influence fibre returns

16. Regulatory certainty … 2005 TSR unwound 1990s policy towards competition between current generation access Concern over aggressive push on “remedies” upstream of the ALA product after any BT investment? Business case has long payback City reaction mixed at best