House of Commons - Trade and Industry

Select Committee on Trade and Industry Third Report

II. RECENT DEVELOPMENTS IN TELECOMMUNICATIONS INDUSTRY (Continued)

Price controls

32. The present price cap formula of RPI- 7.5% is due to expire by the end of July 1997. The new price cap, RPI-4.5%, effective from August, will focus on the lowest 80% of residential users by bill size. There will be no price caps on the business sector or on the largest 20% of residential users by bill size, reflecting the increased level of competition in these sectors. Only 25% of the BT's revenues will be price capped against 65% now. To counterbalance this lessening of price controls OFTEL has provided for greater powers to act against anti-competitive practices, such as predatory pricing, by BT.[85] OFTEL intends this to be the last retail price cap since it believes that the residential market will be sufficiently competitive by 2001 for these price caps to be abandoned, although there will be controls on wholesale network access prices (see para 34).

33. DTI told us that BT's prices have fallen by around 40% in real terms since 1984, and BT's productivity has increased by an average of 3.5% a year over the last 10 years. OFTEL and Mercury told us that the new arrangements will ensure that customers receive a "better deal" than the current 7.5% control[86] because previously "cuts were focused on competitive areas, with reductions skewed towards business customers",[87] implying that prices may fall further than they have done so already. We asked BT if the price controls would affect its willingness to invest in the domestic market. BT replied that the new controls would be "tough and challenging".[88] OFTEL told us that "the pressures of technology will continue to give BT cost-saving opportunities".[89] We received no evidence from BT which indicated that the new price controls are likely to have an adverse affect on BT's investment plans in the UK market.

34. The companies expressed far more concern in relation to the proposed new network charge cap, a control on the charge by one operator for carrying the traffic of another, due to come into effect from August 1997.[90] OFTEL has proposed radical changes to the basis on which interconnection charges are set, from historic to long run incremental costs, and to the process of setting the charges: in future BT not OFTEL will set interconnection charges. The subject is currently under consultation and some very complex issues which are likely to have a profound affect on the structure of the industry will need to be resolved. We believe that our successor Trade and Industry Committee should examine this issue again in the next Parliament.

Telephone numbering scheme

35. Since 1990, the telephone numbering scheme has been changed three times. The first change was to divide London numbers into 071 and 081, the second, to insert 1 after the 0 (phONEday, 1995), and the third, and most recent proposal (1997), to change numbers in five cities (London, Belfast, Cardiff, Portsmouth and Southampton) to 02 codes in year 2000.[91] Although the Director General implied that the numbers will not need to change again, we note that the recent European Commission Green Paper on Telecoms Numbering Policy may result in further changes in the UK before long,[92] possibly at the same time as the 2000 changes proposed by OFTEL.

36. Constant changes of approach to numbering are neither appropriate nor acceptable since they are disruptive, inconvenient and result in huge costs to customers, especially businesses.[93] The Director General did not accept criticisms that the numbering system had been ill thought-out and rejected the suggestion that the most recent proposal could have been introduced at the same time as the phONEday change in 1995, despite having known in 1995 that there was a need to introduce new geographic codes. He argued strongly that a staged approach was deliberate rather than a result of poor planning, pointing out that a simultaneous change would have "led to major customer confusion, misrouting of calls and could have risked network failure because of the level of misdialled calls".[94] We believe that the most recent proposal, involving 02 codes for London and for some provincial cities with the rest keeping 01 codes, is clumsy and likely to lead to more customer confusion. The Director General also told us that OFTEL's capacity to estimate future demand for numbers has improved.[95] We are not persuaded by the Director General's arguments about OFTEL's improved planning and forecasting methods, or that modern technologies are used to the customers best interests. It is also possible that prospective EC changes could cause further complications. We recommend that the Government commission an independent examination, by world class consultants, of the UK's methodology and approach to numbering schemes, and that this review should take account of EC and world numbering requirements.

Universal Service Obligation

37. Currently only BT and Kingston Communications are required to provide a universal service in areas such as voice telephony, directory inquiries, emergency services and payphone provisions.[96] We are pleased that OFTEL has undertaken an extensive review of the provision of a universal service in a multi-operator and rapidly changing market and consumer needs. Their consultation document was published at the end of February 1997. OFTEL told us the document makes proposals on the definition, cost, funding and secure delivery of basic universal service in a manner which does not distort competition.[97] One important aspect is the question of setting up a universal service fund. OFTEL's conclusion, although BT not surprisingly disagrees with it, is that the cost to BT of providing universal service in the UK is not significant; consequently a separate universal service fund may not be warranted.[98] If such a fund were to be set up, the CCA told us that cable companies would contribute, pointing out that the cost will ultimately fall to consumers already subscribing and therefore the fund should be kept as small as possible.[99]

38. The Rural Development Commission was concerned about the low penetration of country areas by cable companies.[100] The DTI has recently issued licences to BT and RadioTel to run radio fixed access systems in rural areas.[101] This should make provision more economically viable[102] and, in addition, the Independent Television Commission (ITC) is increasingly awarding more licences which cover rural areas.[103] However, the CCA does not support the expansion of the universal service obligation as a way of providing more services.[104]

The merger between BT and MCI Communications Corporation

39. In November 1996, BT announced its proposals to merge with MCI, an American company, to form a new company called Concert plc.[105] The proposed merger is currently being considered by US and EC authorities.[106] Concert plc would be one of the largest telecommunication enterprises in the world with annual revenues of over £25 billion and 43 million business and residential customers in 70 countries.[107] A number of potentially significant regulatory consequences are likely to arise from the merger if it goes ahead, for example: BT's already dominant market position may be further strengthened, presenting a threat to the development of competition in the UK; whether BT will continue to meet its `reasonable demand' obligations in the UK; and the need to ensure that BT's international activities are not financed using monopoly profits.[108]

40. Mr Taylor did not regard the merger as a threat to domestic competition, pointing out that "the UK market is now sufficiently mature" for this not to concern him.[109] The Director General has a number of concerns which he intends to address. One of these is whether BT's proposed structure and licence holding arrangements allow sufficient regulatory assurance, for example, to monitor whether adequate levels of service are being provided to UK customers and there is transparency and accounting separation in respect of Concert's UK activities. He may choose to rely on the existing licence conditions, strengthen the obligations on the directors of Concert, or take a more intrusive approach to the regulation of Concert.[110] The Director General is still considering the actions he needs to take and has not yet reached any conclusions.[111]

41. Mr Taylor disagreed with the view that the merger marked a shift in BT's priorities away from the UK market.[112] He also told us that he did not intend to interfere in the affairs of BT and such decisions were a matter for its shareholders.[113] BT said that the bulk of its investment over the next five years will be in the UK market and, regardless of the merger, the UK will remain a major part of its forward plan.[114] Nevertheless, with the telecommunications markets changing rapidly and the merger giving BT exposure to the US market, especially now that the US Telecommunications Act 1996 has opened-up the US market to full competition,[115] there is no guarantee that BT's plans will not change. We remain concerned about the consequences of this merger for UK consumers and the level of future investment in the domestic market. Both the Government and OFTEL have an important role to play in safeguarding the interests of UK consumers and ensuring a proper level of investment by BT in the UK. We recommend that the Government should make a commitment to safeguarding the interests of UK consumers and should give appropriate policy direction to OFTEL to have regard to the level of future investment in the domestic market.

42. If Concert retains the MCI share in News Corporation, the parent company of BSkyB, this could give BT an indirect stake in BSkyB, leading to an indirect link to media communications. It is important that OFTEL assesses how this relationship between BT and BSkyB is likely to affect the current prohibition on BT carrying entertainment services on its telecommunications network.[116] In addition, the CCA and Mercury drew our attention to the potential collaboration between two dominant market players[117] at a "crucial time in the development of our [cable] industry", in particular, to preferential rights of supply of either BT's network assets or BSkyB's set-top boxes.[118] The CCA would, therefore, prefer the shareholding to be divested.[119] BT told us that it would regard its interest in BSkyB as passive but that it would be interested in potential collaborations, such as the distribution of information, particularly in the interactive market.[120] We note that the merger would require regulation by both OFTEL and ITC,[121] a matter considered below. We recommend that the Director General examine the potential consequences, on the development of competition, of a closer relationship between BT and BSkyB and take appropriate action including, if necessary, requiring Concert to dispose of its interest in News Corporation or amending BT's licence conditions.

Regulatory structure

43. In our Optical Fibre Networks Report in 1994 we recommended that the Government should review the structure of telecommunications and broadcasting regulation in the light of increasing convergence between the two industries.[122] The Government rejected this recommendation, saying that this would be premature "in the absence of much more concrete information about how convergence will occur".[123] The DTI agrees in principle that some convergence of regulatory structures will be required, but apart from stating that this should be after the advent of digital television, its position on when this should be is unclear. It cited the "medium term" and 1998 as possibilities.[124] We note that in 1995 the Government gave OFTEL the responsibility for regulating conditional access systems for digital broadcasting, reinforcing the view that the industries are converging.[125]

44. The evidence indicated that an earlier rather than later review would be appropriate: BT suggested the next year or two and certainly within the next five years;[126] OFTEL believed that legislation needed to be changed before the end of the century.[127] Among the arguments put forward for reform were that the boundaries of responsibility were no longer clear and "becoming increasingly blurred";[128] that because of globalisation markets could no longer be defined by boundaries;[129] that the market is moving rapidly towards digital information which may be transmitted over phone lines or satellites and if the regulations are not reviewed anomalies will begin to arise;[130] and that the current division of duties between OFTEL, ITC and the Radio Authority has the potential to act as a barrier to effective economic regulation (the example of the overlap in the regulation of electronic programme guides was cited by the Consumers' Association).[131]

45. With regard to nature of the reforms, only the Consumers' Association argued for a single regulatory body for the communications industry.[132] BT and CCA made suggestions about redefining the boundaries and allocation of responsibilities between OFTEL and ITC, suggesting that the regulation of the distribution networks should be separated from the regulation of the content of services.[133] The Hansard Society recommended enhancing the role of OFTEL by creating an "Office of Communications" which would regulate infrastructure in telecommunications and broadcasting, leaving the ITC to regulate issues relating to content.[134] OFTEL agreed with them.[135]

46. The case for examining whether the current regulatory structures of telecommunications and broadcasting is appropriate is now even stronger than it was in 1994, given the significant technological and market developments. We are not convinced by the arguments for having a single regulatory body for both industries, but we see great merit in redefining the roles and responsibilities of OFTEL and ITC along the lines suggested by CCA, BT and the Hansard Society. It is important that responsibilities are allocated to where the expertise resides. Furthermore, there appears to be a lack of urgency on the part of DTI as to when the regulatory structures should be reviewed and reforms implemented. We believe that the DTI should attach greater urgency to these. Given that digital technology will be introduced from 1998 onwards, we recommend that the Government undertake a review of the regulatory structures of telecommunications and broadcasting within the next two years, with a view to redefining roles and setting clear responsibilities in all matters relevant to the regulation of the communications industries, and that this review should have due regard to the suggestions made by BT, CCA and the Hansard Society.

85 Ev. p.86. Back

86 Ev. pp.2, 19, 94. Back

87 Ev. p.94. Back

88 Ev. p.82. Back

89 Q.43. Back

90 Ev. pp.73, 83, 94-5. Back

91 Ev. pp.13, 58. Back

92 ECC Green Paper, ref: 12194/96, "Telecoms Numbering Policy". Back

93 Q.146. Back

94 Ev. p.53; See also QQ.47-61. Back

95 Q.51. Back

96 Ev. p.58. Back