Memorandum submitted by Cable & Wireless
plc
The Culture, Media and Sport Committee of the
House of Commons has invited written evidence on a number of issues
as part of its inquiry into communications in the United Kingdom.
It is to be expected that most submissions to
the inquiry will focus on how content should be regulated in the
future.
Cable & Wireless would like to stress the
central importance of economic regulation of "access"
products and services in delivering the government's objectives.
OFCOM must be able to effectively implement, police and enforce
the new framework for economic regulation alongside its obligations
to regulate content.
ECONOMIC
REGULATION IS
VITAL TO
DELIVERING GOVERNMENT'S
OBJECTIVES
The Communications White Paper recognised the
central importance of "access" issues to meeting the
stated objectives. Demand for content drives demand for the access
technologies, but if those technologies are not available to UK
consumers at competitive levels of price and quality then the
demand for content will be frustrated.
The framework for economic regulation has been
set by a series of Directives agreed at European level. These
will need to be transposed into UK legislation in the first half
of 2003 and will set out OFCOM's powers with regards to economic
regulation.
In debating the overall framework for OFCOM
and communications legislation in the UK, there is currently a
disproportionate, but understandable, focus on content regulation
issues. However, there exists a danger that decisions are taken
regarding OFCOM's structure and resources that are too heavily
influenced by the current focus of discussion and do not have
due regard to OFCOM's duty to act as the economic regulator.
The agreed framework for economic regulation
requires a well-resourced and highly skilled regulator if it is
to be adequately implemented and enforced. Without this, many
of the envisaged content issues will not arise because consumers
will not have access to, for instance, high-speed internet services
at acceptable prices.
WHAT
WILL ECONOMIC
REGULATION INVOLVE?
Implementation: analysis of markets, barriers
to entry
Put simply, the Directives setting out the economic
framework for regulation recognise the structural barriers that—in
the absence of regulation—would limit the availability of
truly efficient, competitively priced, high quality access technologies.
Effective competition in the supply of the "last
mile" access connections to consumers is unlikely to develop
because of economic barriers, for example the high capital cost
of building infrastructure to every consumer, and technical barriers,
for example the scarcity of radio spectrum. Unregulated provision
of access products and services will, therefore, lead to sub-optimal
consumer welfare outcomes. As such, the new framework for economic
regulation obliges national regulators to assess these structural
barriers and, where justified, apply regulatory rules to certain
suppliers.
In implementing the new framework, OFCOM will
need to commit resources to analysing markets and assessing barriers
to entry. Judgements will need to be made on whether the application
of regulatory rules to certain players is in the long-term interests
of consumers. Given the number of markets OFCOM will need to consider,
it will require considerable economic, legal and technical expertise
to make these judgements.
Enforcement: investigation, action
Once the rules have been set, OFCOM will need
to enforce them. The experience of local loop unbundling in the
UK showed that making a regulatory decision to force BT to act
in a certain way was - of itself - insufficient to deliver the
desired outcome. In this case, BT had clear incentives to delay
the implementation of the necessary unbundling processes and enforcement
powers were insufficient to force BT to act reasonably.
This has resulted in a situation where BT is
providing high-speed "DSL" connections to customers
unconstrained by significant competitive pressures. Less competition
will result in lower efficiency, higher prices, lower quality
and less choice.
Lessons must be learnt from this and other regulatory
failures. OFCOM must be able to effectively enforce the rules
it sets. This requires powers of investigation and powers to punish
any identified breaches of the rules immediately. A strong, capable
regulator, willing to take swift and effective action against
breaches would provide incentives to regulated operators to comply.
Enforcement will, however, also require considerable expert resource.
Regulation should be more precisely targeted,
but not `light-touch'
There is often talk of the need for defter,
"light-touch" regulation. This is a very general aim
and can be somewhat misleading. OFCOM should look to de-regulate
effectively competitive markets if there are no structural concerns.
However, the new economic framework will lead to OFCOM becoming
more focused in its regulation by targeting identified "problem"
areas.
In these areas, the lessons of the past suggest
that OFCOM will actually need to adopt a much more "hands-on"
approach in implementing and enforcing regulatory rules.
Rather than espousing a very general principle
that regulation should be "light-touch", a more effective
principle to adopt would be that regulatory rules should always
be the minimum necessary to deal with identified problems. In
certain cases the "minimum necessary" regulation may
well be "light-touch", whereas in others it may actually
need to be quite detailed.
The difficulties of regulating BT . . .
Eighteen years after privatisation and ten years
since full market liberalisation, BT remains the dominant supplier
of fixed access products and services in the UK. This position
is unlikely to be eroded over time given the economics of building
alternative access networks. BT is also a vertically integrated
player present in potentially competitive markets further "downstream".
The incentives on BT to use its dominance in
access to its competitive advantage in downstream markets are
therefore significant. Of course, the whole point of economic
regulation is to stop this behaviour, but it is often extremely
difficult for the regulator to act in a way that is sufficiently
quick and effective. The constant need for regulatory action to
make BT act to meet suppressed market demand for new access products
is also a clear example that BT's position frustrates the emergence
of truly dynamic, competitive markets. This in turn frustrates
the attainment of government objectives.
. . . and the case for restructuring
A more effective solution would be to remove
BT's incentive to leverage its dominance in access markets into
other markets. There is therefore a strong case for the reorganisation
of BT into separate businesses at different stages in the supply
chain.
Under separate ownership, these businesses would
have no incentive to prefer each other and so regulation could
focus solely on ensuring that the part of the business operating
the access network and enjoying the dominant position does not
exploit its market power through excessive pricing or low efficiency.
The Government has powers to refer the fixed
communications market to the Competition Commission and ask them
to assess the benefits of the break-up of BT. The Committee may
wish to recommend this course of action in its final report and
recommendations.
11 January 2002
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