Strategic review of Telecommunications Phase 2 proposals
Ofcom today published its proposals to support the growth
of greater competition, innovation and investment certainty in the UK
telecommunications sector.
The proposals are intended to prepare the ground for a new regulatory
framework as the market undergoes what amounts to a move from analogue
to digital; away from the switched-circuit fixed line networks of the
past and towards next-generation networks based on internet protocol.
THE CHALLENGE FOR THE SECTOR
Responses to Ofcom's Phase 1 consultation (published 28 April 2004) and
Ofcom's own research indicated the following:
1. The telecoms sector is changing rapidly as it moves from
historical business models based on the delivery of voice calls overswitched-circuit
networks to business models based on the delivery of data over internet
protocol networks.
2. These changes bring uncertainty as well as opportunity,
particularly for investors; yet companies have a limited opportunity in
time to make the significant, long-term commercial decisions required
if they are to remain competitive in the future.
3. The UK telecoms market offers choice and value to the end user
in a number of areas, yet despite twenty years of regulatory intervention,
competition in fixed line telecoms remains fragile. Additionally, many
of the advantages upon which competitors have based their businesses are
being eroded, not least by the transition to next generation networks.
4. Consumers' behaviour is changing as new technologies penetrate
the mass-market. However, with growth in choice and innovation has come
an increase in the potential for confusion, as consumers seek to navigate
increasingly complex competitive retail markets.
In seeking to address these challenges Ofcom has identified two key problems:
• Firstly, an unstable market structure in fixed telecoms,
dominated by BT and with alternative providers that are, in the main,
fragmented and of limited scale.
• Secondly, the continuance of a complex regulatory mesh, devised over
twenty years of regulation and in many areas dependent upon intrusive
micro-management to achieve its purposes, yet which, in aggregate, has
failed effectively to address the core issue of BT's control of the UK-wide
access network.
OPTIONS FOR CONSULTATION
In its Phase 2 Report, Ofcom presents three options to address these
issues:
• OPTION 1:
FULL DEREGULATION.
Removing the existing mesh of regulation entirely and relying instead
on ex post competition law to resolve complaints would significantly reduce
intervention in fixed-line markets. However, given BT's continued market
power, this would be unlikely to encourage the growth of greater competition
and as such
would not serve the best interests of the consumer.
• OPTION 2:
ENTERPRISE ACT INVESTIGATION.
Ofcom could investigate the market under the Enterprise Act 2002, with
the potential for a subsequent referral to the Competition Commission.
• OPTION 3:
BT TO DELIVER REAL EQUALITY OF ACCESS.
Ofcom could require BT to allow its competitors to gain genuinely equal
access to its networks. This option would also require BT to commit to
behavioural and organisational changes to ensure that its competitors
benefited from
access to products and processes which were truly equivalent to those
offered to BT's own retail businesses.
The large majority of respondents to Ofcom's Phase 1 consultation suggested
that Option 2 would be too disruptive and expensive, favouring instead
the swift introduction of real equality of access.
Ofcom shares that view. However, if real equality of access is not delivered,
Ofcom will consider an investigation under the Enterprise Act and potential
subsequent referral to the Competition Commission.
REAL EQUALITY OF ACCESS
Ofcom is proposing that the most effective way to deliver the changes
required will be for regulation to address head-on the barriers preventing
competitive wholesale access to BT's network.
For twenty years, regulation has failed fully to address the problem
of BT's control of the infrastructure connecting customers to the network.
Much of this infrastructure is very expensive to replicate; as such, collectively
it amounts to a series of economic bottlenecks upon which BT's competitors
are largely or wholly reliant. Without real equality of
access to those bottlenecks, sustainable competition cannot flourish.
To date, the manner in which BT has controlled access to the economic
bottlenecks in its network has had an impact on the roll-out of important
wholesale products with the potential to offer greater choices to the
consumer than would be provided by the incumbent alone. In broadband,
the products affected include Local Loop Unbundling and
DataStream; in voice they include Carrier Pre-Select and Wholesale Line
Rental.
Real equality of access would mean that BT must offer competitors the
same or similar;
• wholesale products and prices, as are made available by BT to
its own retail businesses, and;
• transactional processes, as are made available by BT for the use
of its own retail businesses.
Delivering this would not only require BT to make changes to its wholesale
products, product development process and transactional processes; it
would also require BT to commit to substantive behavioural and organisational
changes. It is clear that such changes are a necessary pre-condition if
there is to be any confidence that BT will not discriminate unfairly against
competitors and in favour of its own retail businesses.
In its Phase 2 Report, Ofcom calls on BT to provide prompt and clear
proposals which will achieve these behavioural changes and bring about
the level of confidence required.
A NEW REGULATORY CONTRACT
Ofcom believes that if BT delivers real equality of access, its competitors
will benefit from the certainty needed to make sustainable investments
in the market. This in turn will increase the scope for effective, long-term
competition; and as the market becomes more competitive, so the scope
for a withdrawal of regulation will increase.
Ofcom's Report proposes what would be in effect a new regulatory contract
for the sector, under which the delivery of genuine and lasting competition
at the wholesale level would allow the removal of regulation, particularly
at the retail level.
For example, Ofcom is proposing that if a fit-for-purpose Wholesale Line
Rental product is successfully introduced in 2005, a staged withdrawal
of retail voice regulation would follow. This would also be accelerated
as converged voice and data services develop and competition between fixed
and mobile services increases.
Ofcom also intends to re-examine the scope for deregulation of telecommunications
services directed at larger businesses, opening up the prospect of BT
having greater flexibility to package services for the largest corporate
customers. Achieving real equality of access in other highly regulated
markets, such as the leased lines market, could
also lead to significant deregulation.
In addition, Ofcom will seek to provide the necessary regulatory certainty
which operators will require before making investments which carry a higher
than average risk. In the case of BT's planned 21st Century Network, Ofcom
will recognise the risk involved when we recalculate the Network Charge
Controls which govern BT's rate of return
on its network investments.
CONSUMER INFORMATION
Ofcom believes that the combination of truly competitive markets together
with widespread consumer understanding of the choices available in those
markets amounts to the most effective form of consumer protection.
Informed consumers will seek out and reward providers offering quality
and value, whilst offering a strong incentive to poor performers by spurning
inferior choices. Equally, in order for a market to be truly competitive,
it must have the stimulus provided by informed consumers willing to change
provider as the market evolves.
Ofcom's proposed new regulatory contract will place even greater emphasis
on the importance of timely, neutral, transparent and accurate information
as retail competition - rather than regulation - becomes the primary source
of consumer protection.
Ofcom's consumer research - also published today - indicates that only
a minority of consumers either have or are likely to switch supplier;
less so than is the case in comparable competitive markets such as gas
or electricity. The research also shows that many consumers feel they
do
not generally have sufficient clarity to make the best informed choices.
Ofcom is therefore seeking views on a variety of options designed to:
• Improve the range, accuracy, accessibility and availability of
neutral information upon which consumers base their decisions.
• Simplify the process of switching supplier to make this as
straightforward and cost-effective as possible.
Universal service regulation also provides protection for consumers,
by ensuring the provision of public payphones for example. Ofcom's consultation
seeks views on how the scope and funding of universal service regulation
should evolve over time.
A NEW FRAMEWORK
Ofcom Chief Executive Stephen Carter said: "Twenty years after liberalisation,
the market has made good progress. However, its foundations are unstable
in parts, overly dependent on intrusive regulation and with limited sustainable
competition."
He added: "As the move to the next generation of telecoms brings
more choice and lower prices, we need a regulatory approach that is focused
and which encourages investment and innovation in the infrastructure and
services of the future."
The Strategic Review of Telecommunications Phase 2 public consultation
will close on 3 February 2005.
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