BT suffered a setback as the telecoms regulator Ofcom proposed cuts in the price of its wholesale products.
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Ofcom wants BT to reduce the price of its wholesale broadband products in order to improve internet access in rural areas.
The regulator also outlined a lower-than-expected estimate of BT’s cost of capital – the assumption of what it costs BT to fund its business. UBS analysts said that could cut BT’s earnings by up to 8 per cent. Shares in the telecoms company fell 2.7p to close at 176.6p.
Ofcom is aiming to ensure that broadband prices fall for consumers in rural areas and, potentially, to increase download speeds available to them.
To achieve this, it is proposing that BT should cut the price of wholesale broadband products in parts of Scotland, Wales and Northern Ireland, together with certain English rural areas.
Those are all areas where BT is the sole provider of wholesale broadband services: mainly places not covered by infrastructure owned by Virgin Media, TalkTalk or British Sky Broadcasting. In those areas, Ofcom is proposing annual cuts in the price of BT’s wholesale broadband products of between 11 per cent and 15 per cent over the next three years, after inflation.
Ofcom’s calculations of its price controls for BT are partly based on its estimate of the company’s cost of capital.
It proposed a lower cost of capital for BT Openreach, the subsidiary that provides the company’s rivals with access to its fixed-line connections running to homes and offices.
The regulator reduced BT Openreach’s weighted cost of capital from 10.1 per cent in May 2009 to 8.6 per cent in January 2011, partly to reflect lower interest rates. Analysts said this would in turn cut the price of the subsidiary’s wholesale products across the country.
UBS analysts said the lower cost of capital could reduce BT’s wholesale revenue by £50m in 2013-14 and cut group earnings by 3 per cent. TalkTalk, and other companies that use BT Openreach’s products, could pass on any reduction in its wholesale charges to their customers. In these circumstances, BT Retail might feel obliged to make a similar move. If it did, group revenue could be cut by £150m in 2013-14. Earnings could decline by 8 per cent.
BT said Ofcom’s proposed cost of capital for BT Openreach could reduce annual wholesale revenue by “low tens of millions” of pounds. It added that the regulator’s price controls for its wholesale broadband products should “strike the right balance between control and incentives to invest in rural areas”.
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