Memorandum submitted by the Computing
Services and Software Association
1. It is now evident that OFTEL has failed
markedly in its quest to have BT provide access to other carriers
at the local loop level. So far, despite promises from both OFTEL
and the Government that wide-spread access was likely before the
end of the English summer to enable competing suppliers to offer
high speed broadband services such as digital subscriber lines
(ADSL), just 361 BT exchanges have been listed. The European Commission
has reacted strongly, saying the UK has been "far slower"
in introducing competition at the local loop level than other
EC member states. Other critics point out that even the exchanges
listed are in lower traffic areas, leaving the plumpest sites
to BT's on-going monopoly.
2. What we are witnessing here is a sad
example of regulatory failure. This fundamentally calls into question
the continued relevance of current independent arrangements for
regulation of telecommunications in the UK. At best, OFTEL is
revealed as an organisation basically powerless to push BT into
opening up the local loop. At worst, OFTEL will be cited in history
as a stunning example of the captured regulatora variation
on the Stockholm syndrome, where hostages become converted to
the cause of their captors. Of greater concern, Government ministers
at the recent Labour Conference reverted to BT data to refute
OECD criticism, implying they may also be in the same position.
One hopes not!
3. On top of this, research firm Ovum recently
stated that because of its dominant ownership of the local loop,
only BT will be able to afford to roll out broadband services
such as ADSL to consumers and small businesses. Unfortunately,
BT will be constrained in the rate at which it makes these services
available by the limits of its own resources, not to mention the
absence of any significant incentive to cannibalise existing services
such as ISDN.
4. The result of all this? Britain will
be much slower in achieving roll out of broadband services than
the US, but more seriously, our European neighbours look set to
overtake us. Indeed, the Government's response has been to lobby
the European Commission to weaken the original EC proposal, which
called for EU member states to provide third parties access to
the local loop by 31 December 2000, at the latest. The UK proposed
this deadline be extended where member states face "technical
problems" in meeting the timetable, and this will be accepted.
But the reality in the UK is not a technical problem but regulatory
failure. This will naturally affect how the UK is viewed as a
location for investment in, and development of, broadband content
and related services. There is already evidence of this, with
reports that major suppliers such as Global Crossing are withdrawing
from supplying broadband services at the local level.
5. All this is in marked contrast with the
promise of OFTEL when it was set up in its ground-breaking, independent
regulation role back in the mid '80s, when Brian Carsberg (as
he then was) spoke valiantly of "patrolling the boundaries"
of BT's monopoly to ensure competition was not stifled.
6. Perhaps now is the time to consider if
there is another way to promote competition and re-establish the
UK's reputation as a priority location for communication services.
7. In economics, when discussing issues
of regulation and competition, it is critical to survey characteristics
such as market structures and identify the incentives that drive
the marketand which likewise might be harnessed to produce
8. In the case of the local loop, there
is now significant evidence of demand by consumers for a wider
choice of services that can be delivered using their existing
telephone connectionespecially broadband, "always
on" internet connection. Equally, many competing suppliers
are willing to offer such services; indeed, one of the alleged
reasons for the failure of BT and OFTEL to open up the loop on
schedule was because of the large number of suppliers wanting
to locate equipment in local exchanges, apparently causing concerns
about physical space, power supplies, cooling, static electricity
risks and the listcompiled by BTgoes on.
9. In these circumstances, one must favour
a market mechanism to deliver to consumers the services they demand.
But this immediately raises the question of ownership of the resources
and assets that can be exploited to deliver the services. These
are the local loop and the exchanges which switch them.
10. In the UK, the first approach to this
was to encourage the development and deployment of alternative
cable networks, based initially on meeting demand for subscription
TV services. Some of these also carry telecommunications but penetration
has not been as high as was hoped by policy-makers. In any case,
pay TV demand can be, and has been, equally well met by terrestrial
and satellite services. Likewise, communications services can
also be provided by alternative services such as wireless local
loop technologies, and these should be encouraged.
11. However, the fact remains that the vast
majority of consumers are served by BT's local loop and, under
current arrangements, BT is likely to be limited (or to limit)
in the speed with which broadband services are deployed.
12. One solution to this might be to separate,
structurally and commercially, ownership and control of local
loop assets into a separate company. Unlike the current position,
this new company would have a clear incentive to meet consumer
demand in a timely fashion, and respond to suppliers by investing
in capacity to meet their service needs. That is how it would
make money, rather than by offering competing services as is presently
13. There are plenty of precedents for this.
In the US, local telephone companies effectively play this role
(and the idea of separate local or regional local loop companies
ought not be ruled out in the UK). In modern electricity and gas
supply arrangements, there is a clear differentiation between
firms providing infrastructure and supply, enabling contestability
and competition. Finally, of course, there is Rail Trackmention
of which may be the kiss of deathbut the circumstances
between railways and telecommunications are markedly different.
14. It is time for debate to begin on these
types of reforms. UK is clearly falling behind and that will affect
the competitiveness of knowledge based industries.
15. As to the future of OFTEL, if the right
market structure can be established, one must question the ongoing
relevance of independent regulation of competition and suggest
that general competition rules, as administered by the Office
of Fair Trading, might work best.
3 November 2000