Select Committee on Culture, Media and Sport Minutes of Evidence

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.


  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.


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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