Examination of witness (Questions 60 -
79)
MONDAY 22 JUNE 1998
MR DAVID
EDMONDS
60. Do you think that is reasonable?
(Mr Edmonds) For me to express a view on the reasonableness
of BT's profits——
61. Do you think it is sustainable in a
purely competitive marketplace?
(Mr Edmonds) All the evidence I see, if I read
analysts' views, for example, on the future of BT suggest yes,
it is sustainable with the growing marketplace.
62. It is higher than the market leader
in the United States tele-communications market, is it not, the
rate of return that you have just quoted?
(Mr Edmonds) I think it is, but I am struggling
in the recesses of my mind for the AT&T equivalent.
63. The point I am trying to make is to
ask whether you are comfortable that market share itself is the
best indicator of market dominance and abuse because surely if
BT can see growth in sales and in profitability, but a reduction
in market share within a context where they know that the regulators
are supposed to be enforcing competition, then it is in their
interests to share out the market at a limited rate with Cable
& Wireless and other entrants while keeping average prices
at an uncompetitive level? Is that not the case?
(Mr Edmonds) The thesis is clearly a plausible
thesis. I do not actually think it is happening in reality. What
I see is BT in a number of areas launching new products. It is
competing very hard in the Internet marketplace. It is of course
regulated and controlled, not just in terms of its consumer prices,
where we control 23 per cent of turnover here, but also in terms
of its interconnect prices so if a competitor is coming in, BT
has not got a lot of choice about what the competitor pays to
interconnect into its network because the prices are controlled.
I think that is a control against that kind of situation emerging
that you see. BT cannot charge more than its costs. It cannot
charge its competitor that wants to interconnect into its central
network more than it charges it is own retail branch, so there
are regulatory controls within the system which, I think, produce
the kind of balance and what you may be worried about from your
question does not actually arise.
64. You said earlier that in the foreseeable
future you could see the removal of price regulation on BT because
of competition based on market share. What market share would
you think was reasonable to stop putting price constraints on
BT?
(Mr Edmonds) Can I very quickly conditionalise
the first part of my answer. I meant to say, and I thought I said,
that the previous Director General said that the loss of the most
recent price control was likely to be the last because in four
years' time there would be a competitive situation. I do not just
see it in terms of market share, but I also see it in terms of
prices, the downward movement in prices, the number of people
who are producing new products. As to BT's actual market share,
until we have done the research that the economic team is going
to do next year, until we have consulted, and this is not something
that we simply impose, it is something we talk about to competitors——
65. Yes, but in terms of fair pricing being
in some sense cost plus in simplistic terms, would you not agree
that the rate of change in the telecommunications market, in particular
the tendency for costs to spiral downwards for various products,
that actually to set prices at, from a regulatory point of view,
a fair price may not be in six months, and you mentioned in passing
that you would think about the share and price, et cetera, and
assessing when to actually draw from regulation a price, again
let me ask you, what market share and how would you establish
prices because it seems to me to be a moving target?
(Mr Edmonds) Prices are obviously moving very
quickly and the whole point of the RPI minus equation over four
years is to get away from annual adjustment. To say to the company,
"We expect you to reduce your prices by RPI—4½
per cent over the next four years" or RPI—8 per cent
over the next four years in terms of interconnect prices, is to
give them the incentive so that they can capitalise, so that if
they can do better than that, they keep the profit. Now, that,
I think, is a stimulant to the companies to invest and to do better
than we think they can do. I think you are absolutely right, I
do not think you can control the prices on a year-by-year basis.
As for BT's market share will be in three years' time, statistically
you can extrapolate, it could be down from 70 odd per cent to
60 per cent, but I do not think I should say today that if it
is 60 per cent or 50 per cent, that will be a sufficient measure
because until we have done the research and looked at all the
other factors that I have touched on, I really would not want
to commit myself to a particular view.
66. Do you not think that a company in this
sort of market with a 50 or 60 per cent share has very much the
whip hand and the consumer is really open to prospective abuse
and for you to be sitting here in your new job saying that you
actually would at least consider withdrawing price control at
that level of market share is outrageous?
(Mr Edmonds) I do not think it is outrageous and
I think that the view that was expressed by my predecessor was
posited on five years of very solid experience. I think that the
range of other powers that we have, all the fair trading conditions
that get written into the Competition Bill, the work we shall
do with the other people in the industry to ask them what they
think, the control that we will continue to have over interconnection
charges even after retail price control goes, if it goes, and
I have to say I have been very careful not to commit Oftel to
the withdrawal of that, I think all of those are factors which
have to be taken into account. It is nearly four years off and
I do think we need the time within Oftel to do the analysis that
I think you want us to do, and we shall do that.
67. Can you remind the Committee again of
the rate of return for British Telecom and what you think would
be a competitive rate of return?
(Mr Edmonds) I think the current rate of return
on capital employed is about 17.9[8]
per cent and I think that we believe in Oftel that a figure of
12.5 per cent would be reasonable for a company of this nature.
Mr Love
68. Good afternoon, Mr Edmonds. Can I go
back to a question that the Chairman asked at the beginning? He
asked you about the quality of the staff that you employ and you
gave a very comprehensive answer, other than to mention the commercial
skills of the staff which are commented upon in the Report. Could
you tell us, as someone who has come back in from the commercial
sector, your view about the commercial standards of your staff?
(Mr Edmonds) Many of the staff have spent some
time in the commercial sector. When I saw this reference, I asked
somebody to add up and apparently four out of ten of the staff
of Oftel have spent some time in a private sector organisation.
Now, that may be in a legal firm or in an accountancy firm, but
my experience over the last seven years suggests that they are
as commercial as any. There are many others who have worked very
closely with BT and other commercial organisations during the
course of their career there and certainly the 15 economists I
have talked to so far seem to me to have a very strong understanding
of balance sheets, profit and loss accounts and all that goes
with it. I think, that being said, I would have to say that we
probably are short of people who have spent time at the top of
a large private sector market and who know what are the real motivations
that dominate the lives of companies struggling either to gain
market share or to make more profit or not to make a loss. I think
to some extent I have brought and will bring that skill. We are
short in that area, yes.
69. Can I ask you two questions arising
from that? You mentioned earlier on or in one of the conversations
it was mentioned that telecommunications is a very fast-moving
market. Has that put a premium on those commercial skills?
(Mr Edmonds) I think it puts a premium on analysis.
I think we are very good at analysis and I think Civil Service
skills allied to the quite strong numerate economic and accountancy
skills that we have means that we can analyse changing situations
quite quickly. Whether we always understand what the impact of
a new product in a new market is, I am probably less convinced.
70. The associated question is to ask you
whether your organisation is in a position to be able to go to
the marketplace and offer a competitive and attractive package
to people who want to come in from outside?
(Mr Edmonds) No. Again, coming from the private
sector, I have a real anxiety about the absolute level of remuneration
of my senior staff in comparison with that which they could get
outside.
71. So you would not disagree with the view
that if you wanted to bring in someone at a particular level from
the private sector, it would not be possible, unless they were
prepared to undergo a significant reduction in their remuneration?
(Mr Edmonds) I think the single-word answer to
that question is yes. I think at the kind of level that you would
be thinking of, Director or Deputy Director level, the wage rates
are totally out of kilter with those you get in the private sector,
so I could not afford to do it, no.
72. I was struck by the fact that the fair
trading clause that you have introduced, which is a sort of precursor
to the sort of provisions that will be included in the Competition
Bill, has only led to one order. Can you explain to us why that
is the case and whether you are building up enough experience
to make adequate use of that Competition Bill when it comes in?
(Mr Edmonds) Well, I think the reason that we
only used it once was partly to do with (a) its relative newness,
(b) it is a fairly complex process to use and (c) most of the
investigations or all of the other investigations that you see
set out in this Report were done under different powers. But we
have learnt from that. We have looked at the particular case that
we dealt with under the fair trading powers, we have set out a
series of training modules within Oftel for the Competition Bill,
we are working very closely with the OFT on joint training and,
perhaps above all, we are producing with the OFT a very strong
manual on how we will implement the powers of the Competition
Bill once enacted. So from now through until November massive
training will be going on inside Oftel of the people dealing with
competition cases.
73. The reason I asked both of those questions
is to lead me on to the statement by your predecessor about the
creation of a competitive market. You mentioned two areas that
were particularly important, one being technology, new products
coming onto the marketplace and prices. I would like to look at
prices and about the information that you have available now and
will be able to have available in the future under the Competition
Bill that will give you confidence that you can track the prices
that BT in particular but obviously other companies as well are
actually charging in the marketplace. Do you have confidence in
those mechanisms?
(Mr Edmonds) I have absolute confidence in our
ability to get the figures out. Dealing with BT's accounts is,
my team tell me, something of a nightmare because they are very
complex, very long and very dense. We have some regulatory accounts
that the economists use for getting exactly that kind of material.
Again it is a subject I am learning about rather than I know about,
but the whole question of long-run incremental cost pricing which
we are working on with BT means that we do need very very accurate
data and we are absolutely confident of our ability to get that
out of BT, yes. Let me put that more positively, we want to work
with them constructively in preparing that material.
74. Apart from a major setback some months
ago BT has been expanding very rapidly internationally and obviously
that makes their accounts so much more dense and difficult. Take
my example of something that perhaps I should not quote in this
room because it does not show politicians up terribly well, but
after the privatisation of BT which revolved around the need for
a high-technology company to raise private sector finance a huge
row ensued. When they were actually privatised BT raised the finance
it needed entirely from its own internal resources, which if it
showed something up it showed that perhaps the people that were
discussing the subject were rather out of touch. I wonder to what
extent you would admit to being a little out of touch with what
is actually happen internally in BT? How confident are you that
we are on top of the situation in relation to BT?
(Mr Edmonds) The personal answer from me to you
is that my knowledge of the various facets of BT's accounting,
balance sheet, profit and loss account is very superficial indeed.
I think I would go on from that to say that I clearly will develop
that and I have a team that I think has a pretty fundamental understanding
of what happens in BT. We have an in-house analyst who spends
a good deal of his time not only looking at the accounts and the
published material for BT but looks at the other flow of information
that comes across desks as well. Of course, we are inundated with
material on the financial situation of telecoms companies. So
I think it is a qualified assurance that though I may not have
that knowledge, and I do not, there are people inside the organisation
who do and I have not yet been told by anyone that lack of that
kind of data, lack of understanding of that kind of data is an
impediment to us doing our job.
75. Obviously most of those sources are
public sources. Do you feel that the Competition Bill and the
fair trading qualities that you have at the present time give
you access to information from BT themselves and would allow you
to make those judgments about what is happening within it and
whether it is acting in an anti-competitive manner in the market?
(Mr Edmonds) I believe at the moment we sometimes
have struggled to get that material. I believe, on all the advice
I have, that the Competition Bill powers remedy any defects that
we currently see in our information gathering capacity, yes.
76. So you believe that when you come to
take a judgment about whether a competitive market is being created
you will have at your fingertips the information necessary for
you to make that judgment?
(Mr Edmonds) I believe that once we see the judgments,
we will be able to get hold of the material, yes.
77. The report contains a number of surveys
of different people within the marketplace and I know that this
is not directly related to this report, but I presume your consumer
section carries out surveys and I wondered whether in your consumer
surveys of the market the confidence that you have in the surveys
carried out amongst manufacturers and others was reflected in
consumer surveys. Do they feel that the market is more competitive
and that they are benefiting from the activities that you have
been undertaking?
(Mr Edmonds) By consumers do you mean the general
public?
78. Yes.
(Mr Edmonds) I do not have knowledge of that kind
of survey data so I do not know.
79. You do not carry out surveys as a matter
of course?
(Mr Edmonds) I do not think we do, no.
8 Note by Witness: 19.6% is the current rate
of return on capital employed, not 17.9%. Back
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