APPENDIX 1
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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