Examination of witness (Questions 1 -
19)
MONDAY 22 JUNE 1998
MR DAVID
EDMONDS
Chairman
1. This afternoon we welcome David Edmonds
to the Committee to discuss the C&AG's Report on countering
anti-competitive behaviour in the telecommunications industry.
Our tradition is to go straight into questions. I will start and
then we will widen it out to the rest of the Committee. I am going
to start with paragraph 2 of the report which says that Oftel
see one of its main roles as being that of countering anti-competitive
behaviour in the telecommunications industry. As the new Director
General of Telecommunications, what will be your approach to this
work?
(Mr Edmonds) Thank you, Chairman. My approach
will be to build on the record that I think I have inherited from
two, if I may say so, very competent predecessors, Brian Carsberg
and Don Cruickshank, who in the period since 1984 have created
in Oftel an organisation which has an effective record in terms
of enhancing competition in the telecommunications industry and
in protecting the consumer. The fact that deregulation/denationalisation
in the United Kingdom has occurred as effectively as it has owes
a great deal to them and their work as well as of course to the
efforts of the private sector who have created the structure we
now have. In coming to the job, therefore, I have a firm lineage
on which to build. I mean to add to that an even greater slant
in terms of the consumer. I think the recent Green Paper of the
Secretary of State for Trade and Industry which puts the consumer
even more at the centre or will put the consumer even more at
the centre of the concern of the regulator gives me perhaps an
added dimension. I think it is an extension of the policies that
we have now, it is taking on board that direction, and of course
it is implementation of the new powers that the Competition Bill
will give me. I think all of that will constitute my role.
2. We will come back to the Competition
Bill in a minute. Paragraph 2 also says that the most effective
way of obtaining the best possible deal for the consumer is to
encourage competition within the industry. How much further do
you need to go to achieve effective competition in the telecommunications
market?
(Mr Edmonds) Can I preface my reply to that question
by firstly underlining the fact that I am a very new regulator.
I have been in office for about ten weeks and I think on this
occasion I would ask for some time to reflect on a question as
fundamental as that. It seems to me that every time Oftel looks
at the major plank of its competitiveness policy, which is the
price control which it imposes on a degree of BT's turnover it
looks at a variety of factors. It looks at relative market shares;
it looks at movements in prices; it looks at the quality of the
service that is being provided; it looks at whether new competitors
are in the field; it looks at the pace, for example, at which
cable is being provided across the United Kingdom; it looks at
things like the advance of mobile telephony. At the beginning
part of next year Oftel will be undergoing a major review of the
overall state of the competitiveness in the telecoms industry
before deciding whether or not to move towards not renewing price
controls. I think I will be much better able to answer your question
a year to 15 months' time but those are the kinds of factors I
want to take into account on reaching a decision on the state
of competitiveness in the sector as a whole.
3. Perhaps something a little less general
and more specific because this is very fundamental. Take something
like the provision of the ISDN service by British Telecom, which
has been widely criticised, and I must say I think it is a very
bad commercial practice. It is a very expensive service and it
has the serious effect of undermining the position of our software
industry, which is one of our best and fastest growing industries.
I presume, I do not know, that comes about through lack of competition.
Is that the sort of thing you are going to take on board?
(Mr Edmonds) I think that is a factor. In 15 to
18 months' time there will be alternatives to that kind of technology.
There will be alternatives to a whole range of services, that
BT now offers. Yes, they will be taken into account.
4. I will move on. Others may want to come
back to those matters. Figure 3 on page 5 shows that only 17 out
of 217 investigations between 1995 and 1997 led to Oftel taking
enforcement action. Would not taking enforcement action in more
investigations send out a clear message to the industry that you
are not prepared to tolerate anti-competitiveness?
(Mr Edmonds) I think there are a number of answers
to that question. The need to take formal enforcement action or
the ability to take formal enforcement action clearly underpins
the authority of Oftel and the fact we did take action in that
number of cases shows where we cannot reach agreement or where
agreement cannot be reached between the parties Oftel will not
hesitate to take formal action. The fact is that in 37 per cent
of these cases, set out in the footnote to the table, there was
agreement between the parties which did lead to a remedying of
the complaint that was originally levelled that led to the investigation
being launched in the first place. I think from a personal perspective
I would have to say I have no problem whatsoever in taking formal
enforcement action should that be the case. The way these statistics
work out here I do not think illustrates a failure on the part
of Oftel, I think it illustrates a fairly successful route in
reaching agreement through investigation, through discussion,
through the parties realising perhaps on the one part they had
erred and on the other part that BT or whoever was offering a
satisfactory resolution of the original complaint.
5. I hope BT and the others take note of
your willingness to use enforcement action when it is necessary.
(Mr Edmonds) Absolutely.
6. Paragraph 15 has a range of suggestions
as to how you might improve your effectiveness in countering anti-competitive
behaviour. Do you accept these suggestions?
(Mr Edmonds) I accept all the recommendations
in the report. Again this arrived about ten days after I had taken
office. It was extraordinarily useful for me as a newcomer, firstly,
to act as a discussion point for the teams who advise me in all
of this and, secondly, to give me a series of recommendations
on which a formal management response, using auditing language,
can be prepared. What we have prepared inside Oftel is a plan
to take each of the recommendations here, to analyse them, and
in almost all cases I think to implement what has been suggested
to us.
7. If you have got a written plan perhaps
it would save time if you gave us a copy of it.
(Mr Edmonds) The written plan at the moment is
in fact a timetable for all of the items. There are some very
specific items within some of these examples. I can put together
from various pieces of paper a very full account of what we are
going to do against all those recommendations.
8. Can I ask one difficult question relating
to a number of these suggestions. Do you feel at the moment that
you have the right people in your organisation or enough of the
right people?
(Mr Edmonds) There are two questions there. Coming
back to public service after seven years in the City working for
a commercial organisation, I was hugely and immediately impressed
by the quality of the intellectual analysis and analytic skills
of the team I have inherited. Since I have been working there
I have been as impressed by the economic and legal prowess that
is there as well. I think we have some very strong skills within
Oftel but they need to be built upon. With the change that will
come through the Competition Bill, as you said perhaps more of
that later, we need to reskill and to retrain in a number of areas.
I think the way in which we organise the top of the organisation
needs to be looked at. What I propose to do over the next eight
weeks fairly fundamentally— and all my senior staff know
this—is to look at how the top of Oftel is organised. There
are ten divisions reporting to me and I think we could organise
ourselves better and more effectively and more economically. In
terms of the number of resources, again I plead for a little time.
At the moment it is very tight. In some areas we do not have enough
people to carry out some of the services we would like to carry
out. We do not answer the telephone quickly enough, really basic
things, and calls get lost, which is dreadful for the telephone
watchdog to own up to. We will address that. We are talking to
the Treasury at the moment about a three-year budget which is
apparently being offered to small departments like my own. I would
like a three-year budget but I would like it to be on a baseline
which I think is sufficient. I am not sure at the moment it is
sufficient. Equally, I am not sure that with redistribution of
resources within Oftel I cannot meet the demands placed upon it.
If that sounds a waffly answer, I apologise, but I do not know
and I shall not know until October probably how I want to organise
Oftel differently and what level of resources I need and how strongly
I may or may not need to make an approach to Treasury for extra
resources to do it. But I am impressed by the quality of people
I have working for me.
9. Thank you, that is helpful. I see from
paragraph 2.27 that from July 1997 Oftel set themselves a new
target of completing 75 per cent of investigations of anti-competitive
behaviour within three months and all of them, 100 per cent, within
six months. Can you tell us where you are at the moment?
(Mr Edmonds) If I can find my own note to remind
myself. We are doing very well in terms of our clear-up of cases
within the six-month period. We are actually clearing up 86 per
cent of cases now within the six-month period. We set ourselves
however a target which I think was too tight of clearing up 75
per cent within three months. Although in absolute terms we are
doing better than we were when this Report was published, in terms
of our new target, which was a 75 per cent clear up in three months,
we are only about half way towards the target. We are only doing
35 per cent of cases in three months but we are doing 86 per cent
in six months. I need to look at the new targets set for my teams.
I think it is probably too tight. I am pleased with the process
over the six-month period which shows a very significant improvement
in what we were doing before.
10. My slight worry about slackening the
target over three months is that this is a fast moving industry
or will become one and it may well be that the problem becomes
a different one over the six-month timetable to the three months.
(Mr Edmonds) It may indeed but if I could throw
another statistic back at you. We are actually reducing the average
time that we are taking on cases quite significantly from 32 weeks
to 23 weeks. I totally take the point about time. We are not going
to slacken the target for its own sake but I think having a target
that is totally unachievable and unrealistic is bad for the morale
of the team doing it. I will set with them targets that are very
stretching but they have to be realistic too.
11. Since I am running out of my own time
I will make this my last question and then open it up to others.
You mentioned already the Competition Bill and in paragraph 3.15
it talks about the Competition Bill which is currently going through
Parliament. How will its provisions help you to regulate markets
and counter anti-competitive behaviour?
(Mr Edmonds) Again, as a new regulator I am slightly
diffident about being too forceful in this answer. It seems to
me that a good deal of the force of the Competition Bill comes
with the change of behaviour that it will induce in the regulated
companies. I think the bringing into law of the fair trading conditions
or rather bringing into primary legislation the fair trading conditions
will mean companies know they have to abide by it and they know
they will be committing an offence if they breach fair trading
conditions. I think that will have a major influence on company
behaviour in the first place. The second thing it will give to
me as the regulator is the power to ask for more material earlier,
more specifically, more precisely. It gives me the ability to
make determinations and to ask people to behave in a different
way at the outset. It gives third parties who feel that the company
is making gains and is not behaving the ability to take third
party action much earlier. I think all of that significantly enhances
the regulatory authority, if you like, that I have at my elbow.
I think that the Competition Bill—and I say this in entirely
non-partisan terms—with the current powers that I have with
my fellow regulators does significantly enhance my authority.
That is certainly the advice from my team working inside Oftel
who have welcomed what they see as a major—breakthrough
is perhaps too strong—reinforcement of the authority that
we currently have within the organisation.
Chairman: Thank you
very much indeed. We will now widen it out. I will start with
Mr Richard Page.
Mr Page
12. Thank you, Chairman. Mr Edmonds, I appreciate
that you are new as Director-General and this is something we
have found on the Committee of Public Accounts that whenever a
NAO report comes out there is a new Chief Executive in place to
answer questions, and this does not appear to be any exception.
Does this Report leave the impression that Oftel is a reactive
organisation rather than proactive?
(Mr Edmonds) The Report clearly indicates that
because it is looking at a fairly specific set of work that Oftel
deals with, and within that, work which is to do with investigations
into anti-competitive behaviour, Oftel is more reactive than proactive,
but I do not think that means the whole of Oftel in its work.
I say that on the basis of my understanding of Oftel as an organisation
so far. I see from my work with the team that they are a very
proactive and forward-looking organisation in many respects.
13. You say that but in the Report, in fact
on page 1, paragraph 2, do not bother to look for it, it says
that one of your main roles is countering anti-competitive behaviour.
Frankly, is that effective when you are being reactive? I say
that you are being reactive because if we look at the number of
cases that have taken place over the last three years Oftel does
not seem to have initiated more than 22 out of the 217 cases put
in front of it. That is as near as damn it ten per cent.
(Mr Edmonds) In the area in which the Report investigates,
which are individual cases, clearly the statistics that you quote
are absolutely accurate. There is a rising trend in the number
of cases initiated within Oftel. The raw data that you just gave
me suggests around about ten per cent. The data I now have suggests
that currently around 20 per cent of our cases are being initiated
from within inside Oftel. That is the first point. The second
point is that there are many areas where we are proactive that
do not become an investigation. The work we do with BT in particular
in terms of talking to it about new products, new tariffs, changes
and modifications, all of that we do with them proactively on
a regular basis before it gets to a stage where a complaint may
be made. We are also very proactive in terms of the regulation
that comes through licensing where we spend a lot of time and
effort.
14. That, with respect, is part of the normal
role of Oftel or in fact any regulator I speak to you as somebody
who served on both privatisation Bills. I had concerns right at
the start that Oftel was not large enough and was not going to
be funded enough to be able to do its job properly, and hence
a number of my questions will be predicated on that basis. Of
the ten per cent that are initiated by Oftel what is your success
rate? If we have an overall figure of 37 per cent where we there
is some form of change—"acceptable change of behaviour
without the need for enforcement action", "parties reached
agreement prompted by Oftel"—of the 22 out of the 217
what is your success rate?
(Mr Edmonds) I do not know the answer to that
question. I will have to find out.[1]
15. You do not know whether Oftel's proactive
activities, small as they are, are being successful or not?
(Mr Edmonds) I do not know if they are being more
successful than the overall rate of success that is indicated.
16. And you have not been given that information?
(Mr Edmonds) It is not a question I asked for
this session.
17. You do not really know how good your
investigations are by Oftel?
(Mr Edmonds) I know that the investigations produced
answers in 37 per cent of the cases that we looked all over the
three years. This Report covered solutions which were arrived
at, agreements which were reached.
18. But you do not know whether the quality
of the little proactive work that is being done by Oftel is better
than the unsolicited enquiries that come into you?
(Mr Edmonds) No I do not.
19. You do not, fine, I see. When I read
through this the existence of barriers to entry or attempts to
drive out new entrants, the only specific problem referred to
is length of time. Are there any other major areas that are considered
to be barriers to entry being raised through Oftel?
(Mr Edmonds) Yes, the barriers to entry include
the length of time it may take one of the existing players to
respond. It is also to do with technology. Will the technology
that for example BT has interface with the technology that somebody
else who wants to come into the market may have? It may be to
do with the pricing. Is the pricing, again using BT as the proxy,
at a level related to its costs so that the new competitor can
come into the market-place? So yes, I think barriers to entry
are more significant than time.
1 Note: See Evidence, Appendix 1, page 11 (PAC
357). Back
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