Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Memorandum submitted by J M Harper

The basics underlying the problem were included in the examination by the Committee in its 1994 and 1997 enquiries, which I was asked to advise. My personal views on these at that time were set out in a Memorandum which I was asked to submit as evidence to the 1994 enquiry (HC285-II, p 77). Since then I have done work for various government Departments and public authorities on advanced communications for education, civil law and health, which has given me first hand experience of what these matters and especially unbundling look like on the ground. I have also had a book published by Cassells in 1997 which developed the ideas in detail. In the hope that it might be helpful to the Committee I thought you might like a note on where I have got to today.

  I believe that, as with the railways, the root of the problem lies in the structure adopted for the industry at the time of privatisation and the introduction of competition. In essence BT was left as a very big vertical company discharging all the functions of network construction and operation and of service provision and retailing historically discharged by the Post Office. Competition was arranged by licensing other companies which had similar ranges of function. Most of them specialised in the sense that they concentrated on particular segments of the market, as for example the cable companies on local communications; but within their segments they still exercised the full range of network and service functions.

  We now have 16 years experience of this approach. In the local communications area it has proved to have two major defects:

    (a)  as the Committee has noted in the past it leads the competitors to construct their own infrastructures which duplicate BT's at great expense in investment. As the cable companies have found to their cost the income available is not enough for this investment to earn a proper return, even when new digital services and cable TV are added in and even with the most vigorous operating economies. The extra cost of the idle capital involved must inescapably have forced up prices to the public; and the economic hazards have undoubtedly affected the disposition of BT to invest in new distribution technology—a matter of concern to the Committee in the past. The situation has become more and more difficult for the wired competitors and indeed for BT's wired operations as competition has expanded from mobile and satellite radio; and their respective share prices reflect this; and

    (b)  because BT still owns the main mass of the network at the same time as it competes in service provision and because its competitors are obliged to turn to it for important network facilities there have been repeated disputes and conflicts between them, of which unbundling is only the latest. Some of these have become acrimonious. They have seriously impeded competition and undoubtedly affected the interest of consumers in important ways. There is every indication that they will go on even when unbundling is resolved.

  These disadvantages have so far been allowed to run without any action being taken on the structure, but the situation has become serious. Despite the growth of radio, wired service will undoubtedly continue to play an important part for the foreseeable future. The proper development of network technology, the free development of wired services through unbundling and the unhindered working of retail service competition are absolutely vital to the development of the New Economy and e-commerce as well as to traditional telecoms. In my view the time has come for the basics of the structure to be re-examined.

  After continuing thought and debate with others in the industry I have concluded that the only solution which could ever be satisfactory would be to cause the present operators to divest themselves of their local exchanges and distribution networks and to have a single free-standing company independent of all others running all local exchanges and distribution plant. This company would be regulated and required to provide facilities countrywide without fear or favour to all retailers and service providers who asked for them.

  I restated this proposal recently to the DG of OFTEL. I have had detailed experience of telecoms engineering economics for several decades. I told Mr Edmonds that, quite apart from its role in facilitating unbundling, I believe objective study would confirm that the economics in the distribution area are such that the saving in unit costs arising from having a single distribution network under a dedicated management will always outweigh any operating savings which could be available in practice from competition.

  My original idea was that the unified local network would be run by a controlled profit co-operative, not quoted on the Stock Exchange but owned jointly by the bigger service providers and any other service providers who wished to participate. Such a co-operative would obviously be a monopoly in the technical sense; and many people have raised objections to the idea on those grounds. I believe that the pressures for efficiency of operation from the service-provider owners, whose livelihoods would depend critically on the effectiveness of the network operation, would more than eliminate any danger of the inefficiencies associated with monopolies of the conventional kind.

  These ideas on the constitution of the network entity were conceived some time ago and things have moved on since then. The important thing is to re-unify the network. There may well be better ways to constitute the entity. The public interest in efficiency could for example be secured by a mix of public and private equity in its ownership of the kind being canvassed now for the railways.

  I believe that the commercial interest of the wired service operators and the competition from radio will inevitably force them to come together on some basis like this in the end. It is highly desirable in the national interest that government and OFTEL should seek to catalyse it happening in the near future. Experience has shown that, correctly used over time, the existing powers of OFTEL and the Secretary of State can be used to exert considerable leverage on the companies. The company structure of the industry has become so much more fluid lately that there is an ideal opportunity to steer events in the direction I suggest.

30 October 2000

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