Select Committee on Culture, Media and Sport Appendices to the Minutes of Evidence


APPENDIX 30

Memorandum submitted by Colt Telecommunications

EXECUTIVE SUMMARY OF COLT'S VIEW

  1.  OFCOM's objectives should be:

    (a)  Making the UK home to the most dynamic and competitive communications and media market in the world;

    (b)  Ensuring universal access to a choice of diverse services of the highest quality; and

    (c)  Ensuring that citizens and consumers are safeguarded.

  2.  In exercising its sectoral powers, OFCOM should have an overriding objective to act in the best long-term interests of consumers through the promotion of effective competition. OFCOM should also be required to act in a transparent way.

  3.  Strong and effective "before the event" regulation is needed for those with significant market power and OFCOM should have enhanced powers to grant interim relief and permit third party damages claims for breach of OFCOM rules.

  4.  OFCOM should have an "Economic Regulation" panel which is responsible for "before the event" economic regulation. Like the proposed consumer panel, the economic panel should report directly to the OFCOM Board.

  5.  OFCOM should not have concurrent jurisdiction under the Competition Act; rather the OFT should deal with all Competition Act issues.

  6.  No extension to the USO for telecoms is currently required. Any future extension to the USO should be subject to a full cost-benefit analysis and fully consulted on and should have a "provide or pay" framework.

  7.  A general "mere conduit" or "common carrier" defence should be available to all network and service providers, subject to their compliance with the rules defined by OFCOM.

  8.  Co and self regulatory approaches should only be adopted where stakeholders' interests coincide.

  9.  There should be a presumption against sector-specific consumer protection regulation unless a clear market failure is identified and a cost/benefit analysis shows clear benefits to consumers.

INTRODUCTION

  This paper sets out COLT's vision for the future of communications regulation in the UK. It builds on the vision set out in the Communications White Paper ("CWP"). COLT fully supports the CWP's aims of:

  The rapid pace of change within the communications industries necessitates reform of the current regulatory framework in order to achieve this vision. The proposals set out in the CWP go some way towards setting the correct framework.

  The key practical challenges for the new framework will be:

    —  To provide a stable regime which will encourage investment;

    —  To regulate at the appropriate level. This means:

        —  effective intervention to deal with players and market power; and

        —  to use a light touch when regulating competitive players and new entrants.

VISION, OBJECTIVES AND POWERS

The Importance of Connectivity Infrastructure

Concerns

  The communications world is changing fast. Consumers and business users have come to expect access to a wide range of services delivered over a variety of media. Increasingly, the media are converging: Interactive TV and the internet move ever closer.

  It is important to recognise that the change is being driven by changes in the underlying communications infrastructure which in turn enables the explosion of media and content. The debacle of local loop unbundling and the UK's woeful record in broadband penetration (22nd out of the 20 according to OECD figures) demonstrates how quickly competitive advantage can be lost in this market. Without widespread penetration of the right network infrastructure the UK will quickly become a second-class nation when it comes to delivery of content. A world-class regime for content regulation will be little use if UK infrastructure is not capable of delivering that content on a competitive basis.

  Thus our major concern about the new regime is that it focuses only on the top layers—media and content—without recognising that the connectivity infrastructure is the foundation underpinning choice in the media and content layers.


Objectives

  The CWP sets out the objectives of:

  Making the UK home to the most dynamic and competitive communications and media market in the world;

  Ensuring universal access to a choice of diverse services of the highest quality; and

  Ensuring that citizens and consumers are safeguarded.

  We suggest that these are adopted as the objectives for OFCOM, rather than the current proposals, which seem to be merely a "cut and paste" of existing OFTEL and ITC objectives.

  In our view this "cut and paste" approach sets up conflicting objectives: in particular reconciling how to protect short term consumer interest with protecting long term consumer welfare (through promoting competition). Unless this fundamental tension at the heart of the current proposals is addressed, OFCOM's decisions will be uncertain, raising the regulatory risk premium and inhibiting investment.

  A consensual approach which may work well for issues of decency and taste will not work when dealing with complex issues such as forward looking incremental cost modelling and price setting in relation to communications' networks.

  We strongly disagree with the proposal set out in paragraph 8.5.3 of the CWP that it should be for the regulator to "strike the right balance". Decisions need to be reasoned and transparent and judged against objective criteria. This is a matter for Parliament.

Economic Regulation Must Be Within Rigorous Analytical Framework

INTRODUCTION

  It is vital that the Communications Bill sets out a clear, rigorous framework for economic regulation. Whilst we recognise that the regulation of content requires that differing interests need to be balanced, extending this approach to economic regulation of networks would not help to achieve the Government's policy objectives of having a world-leading competitive communications market. Rather, economic regulation should be geared towards simple, clear objectives.

  In the absence of a highly focused approach to economic regulation, there is a real danger that UK telecoms—including widespread internet connectivity—will suffer. There will be a natural tendency for OFCOM to focus on higher profile content issues. These issues are important but must not detract from the importance of rigorous economic regulation.

  Predictable Regulatory Environment Required for Investment

  Telecoms is a very highly capital intensive business and in order to invest companies need to access the global capital markets. The ability to raise and the cost of capital is a constraint on companies' ability to invest.

  Both the availability and cost of capital are determined by the level of risk in the industry in which a company does business. By international standards, the UK regulatory environment has historically been seen as a relatively low risk place for telecoms companies. When operating effectively, the regulatory environment has been seen as:

    —  Impartial, independent and fair;

    —  Transparent; and

    —  Predictable, in that the rules are clear and the process for reaching decisions is transparent.

  This low regulatory risk has been a key underpinning of the ability of the telecoms industry to raise funds for investment in the UK. A stable regulatory framework and the resulting positive environment for telecoms investment has produced real benefits for the UK. The regulatory regime throughout the 1990s produced unprecedented levels of inward investment in UK telecoms and the resulting competition has benefited consumers and business users alike.

  Given the current attitude of the global capital markets towards TMT stocks it is vitally important that this is reinforced in the future regulatory framework. However, recent trends—such as the local loop unbundling debacle and the UK's poor standing in broadband penetration—show how easy it is for a world-leading position to be lost. The new regime must allow us to regain world-leadership in this area by having clear and transparent regulation.

  A particular concern is the legal regime for imposing licence-type obligations on telecoms operators. The existing regime under the 1984 Telecoms Act allows licensees a high degree of protection for sudden or unwelcome changes. Sometimes this makes life difficult for regulators. But it has been highly effective in delivering stability. The new regime must not allow capricious or sudden changes to licensing obligations.

Problems with Current Proposals

  There are some key problems with the proposals for OFCOM that have been made so far:

    —  OFCOM may have conflicting objectives: in particular reconciling how to protect short term consumer interest with protecting long term consumer welfare (through promoting competition). Unless this fundamental tension at the heart of the current proposals is addressed, OFCOM's decisions will be uncertain, raising the regulatory risk premium and inhibiting investment.

    —  It is unclear how a board will be able to address on the one hand issues of decency and taste, but on the other deal with complex issues such as forward looking incremental cost modelling and price setting in relation to communications' networks.

    —  We support the move towards self and co-regulatory initiatives. However, they will be effective only where stakeholders' interests are aligned (eg ICSTIS—the body which regulates the content of premium rate telephone calls). They are not appropriate to deal with complex issues where the stakeholders have differing commercial objectives and in particular where the purpose of the measure is to tackle an entrenched monopoly position (eg local loop unbundling).

    —  The regime for the modification of licensing and other obligations must be clear and must not allow for sudden or capricious changes. In the absence of this, regulatory stability will be impossible to achieve.

Powers

  This section deals with two issues—first, Competition Act jurisdiction. Secondly, enforcement of sector-specific jurisdiction.

  We do not feel that having Oftel exercise powers under the Competition Act is helpful: sector-specific duties (such as the primary duty under the Telecommunications Act to secure that such telecoms services are available as to satisfy all reasonable demand for them (section 3(1)(a)) will not always be compatible with competition law duties (under the proposals in the Competition White Paper, these are likely to be primarily the promotion of competition). It is not clear how these objectives are to be balanced where they conflict—certainly not to stakeholders, but apparently not the regulator either. In our view the current concurrency arrangements do not work. Oftel invariably applies sector-specific rules to the exclusion of competition law jurisdiction wherever it can. For example, Oftel has chosen not to address flat rate internet access and local loop unbundling under the Competition Act; the signs are that it will be similarly inactive on wholesale DSL, the key technology for the future development of broadband.

  This is not intended merely as a criticism of Oftel. Concurrency is a great idea in theory. But we doubt whether it can ever work in practice; we believe that for a regulator to operate to two different statutes with conflicting objectives generates a high degree of organisational confusion. If this is right, ignoring one set of objectives at an unspoken institutional level is, in fact, a highly logical response.

  It is crucial if OFCOM is to function efficiently that these same institutional mistakes are not repeated. We do not therefore believe that OFCOM should exercise concurrent jurisdiction under the Competition Act.

  We would support instead the creation of a communications group within the OFT which would be solely focussed on Competition Act investigations within the communications sector. This would lead to increased focus and clarity for OFCOM and in our view would provide a more robust framework for the competition investigations. We would suggest that ex-ante sector regulation should stay within the ambit of OFCOM, with the OFT able to recommend to OFCOM areas where ex-ante regulation may be appropriate as a result of its investigations.

Additional Sectoral Powers

  Communications networks have a number of characteristics which give rise to persistent market failures:

    —  They have high fixed costs with low marginal costs, and exhibit large returns to scale;

    —  They are subject to network externalities giving the owner of the largest network market power; and

    —  In the UK, BT's ubiquitous national network was built under monopoly conditions with taxpayers' money.

  These will continue to require ex-ante regulation for the foreseeable future and OFCOM should have powers to address this. In particular we support strong and effective ex-ante regulation of those with significant market power as outlined in the CWP.

  However, we suggest that OFCOM should only be able to exercise these powers "for the long-term benefit of consumers" to ensure that there is no legislative bias in favour of any dominant provider. Without this proviso, OFCOM may find it difficult (as Oftel has found it difficult) to take action where, for example a dominant provider has not provided an underlying wholesale product to its competitors, but wishes to launch a retail product, or where a dominant provider indulges in predatory pricing.

  We support stronger enforcement powers for OFCOM. In particular we suggest that OFCOM have enhanced powers to grant interim relief so that in a case where an urgent remedy were required to stop a breach of regulations, OFCOM was not hamstrung by the kind of procedural requirements which effectively operate to prevent "injunction" style relief in the current regime. We also welcome more ready availability of third party damages for breach of sector-specific regulation. There may be a role in awarding damages for an appeals body—similar to the role envisaged for the Competition Commission Appeal Tribunals under the new competition regime.

  Above all, decisions should be fast. Recent experience has shown that telecoms needs quick decisions—for example, in local loop unbundling, a string of good decisions emerged from Oftel late in 2001, when most players had exited the market some six months earlier. We suggest that OFCOM should be subject to strict statutory timescales within which it must reach decisions (in Germany the time is six weeks).

  There should be a new appeals process. The new European communications package of directives will mean that something more than "Judicial Review Plus" be put in place; a full appeal on the merits will be required. We suggest a dedicated appeals body.

Proposals

  We suggest:

    —  The new regulatory framework must focus on effective regulation of the connectivity infrastructure underpinning media and content.

    —  OFCOM should have an overriding objective to act in the best long-term interests of consumers through the promotion of effective competition.

    —  OFCOM should not have concurrent powers with the OFT under the Competition Act. The OFT should have a communications section responsible for Competition Act investigations. Their inter-relationship needs to be consulted on further.

    —  OFCOM should have an "Economic Regulation" panel which is clearly responsible for sector-specific economic regulation. This should have equal status and standing as other panels which report directly to the OFCOM board.

    —  OFCOM should make decisions within statutorily defined timescales. There should be a new, streamlined appeals body.

SOME SECTOR-SPECIFIC ISSUES

European Dimension

  The implementation into UK law of overriding telecoms regulation has been a source of frustration and confusion for the telecoms industry since 1998. The reason for this is that the UK adopts an over-formal legalistic approach to implementation without necessarily reconciling European requirements with existing UK regulation. This has added to the complexity of regulation on telecoms operators and significantly raised the regulatory burden on operators. We urge the government to adopt a "plain English" approach to implementation.

Environmental Issues

  In order to meet customer demand for our services, which are delivered over state of the art fibre optic networks, COLT digs up the streets. The ability to do this has been core to our ability to offer a wide range of innovative services to customers directly connected to our network.

  COLT cares about the environment. Since starting, we have won numerous Gold considerate contractor awards and are recognised across Europe as being a company which balances the need to invest in networks with protection of the environment. We seek to minimise disruption to communities when we carry out street works through:

    —  Planning routes through business areas which do not impact on citizen's residential homes;

    —  Joint digging with other telecoms operators and utilities; and

    —  Ensuring that works are carried out quickly.

  As a responsible operator we welcome and support co- and self-regulatory initiatives to ensure that all stakeholder interests are addressed, whilst ensuring that we can continue to offer high quality services to a wider range of customers across the UK.

  Future regulation on these issues must be proportionate; it must protect the environment but not damage the UK's international competitiveness.

  We do not believe that OFCOM should have any specific environmental responsibilities. Environmental regulation should be sector-neutral. So any changes to the existing law on streetworks and the environment should be the subject of a separate legislative process, rather than being dealt with in the context of the debate about communications regulation.

Universal Service Obligations

Voice Telephony

  We support the current universal service obligation for telecoms services, but have concerns over the proposals in the CWP. In particular:

    —  Any extension to the scope of the USO should be subject to a rigorous cost-benefit analysis, to ensure that it would be in the best interests of consumers.

    —  We have concerns if the scope of the current universal service obligation is extended and the costs are only recovered from telecoms operators that this would create a barrier to market entry and innovation. We fully recognise that the government has social policy objectives, but surely costs of achieving these are properly dealt with through general taxation, rather than an industry specific levy. A particular problem would be identifying which operators should contribute towards the cost of any universal service levy, given the move away from individual licences. We would not want to see a situation where some companies are forced to subsidise a competitor's network development.

    —  The CWP assumes that only BT and Kingston could undertake the universal service obligation. We suggest that if there are net costs then a more appropriate way of dealing with this is to have a "provide or pay" framework to incentivise economically efficient universal service provision.

    —  Any USO proposals must be consistent with EU law.

Internet

  COLT is an ISP for large businesses retail internet service provider, providing a complete solution: Professional services, call termination, hosting and internet transit services. We have been active in seeking an appropriate regulatory framework for dial-up internet and DSL internet access and support initiatives to encourage competition in these key areas.

  Availability of services becomes a social exclusion issue once a majority of the population has access to them. However, the majority of the population does not yet have access to broadband and there is a danger that too early regulatory intervention may stifle innovation or dictate inappropriate technology (eg the French adoption of Minitel, which inhibited initial internet adoption).

Higher Bandwidth

  COLT has installed a very high capacity dense wave division multiplexing (DWDM) backbone network around the UK, which is part of COLT's EuroLAN network throughout the EU. We have metropolitan area networks within London and Birmingham and are actively considering our market entry strategy to other cities in the UK. We have (through reselling BT's service) nation-wide DSL coverage. (We have abandoned plans to run our own DSL systems because of the failure of the local loop unbundling process, although we keep that stance continually under review.)

  Within our fibre metropolitan networks we provide high bandwidth services, starting from 2M Bits/s ranging to gigabit ethernet, STM-4 and STM-16 circuits and wavelengths of light across Europe.

  In our view the best way to increase the availability of services is to put in place the correct regulatory framework which enables undistorted build/buy decisions to be made and which constrains those with market power from exercising it to the detriment of competitors and consumers.

  Our comments on the extension of the USO to internet also apply to higher bandwidth services.

Common Carrier/Mere Conduit Defence

  We think that it is right and proper that controls are put in place, however. We urge the government to put in place a general "mere conduit" defence to copyright, defamation and other actions, for network providers who carry content. Under the current law, the liability on network operators such as COLT is unclear. We fully accept that this should not allow operators to "shut their eyes" to wrongdoing and would support its availability being subject to compliance with appropriate procedures set by OFCOM.

Proposals

  We suggest:

    —  OFCOM should not have concurrent powers with the OFT under the Competition Act. The OFT should have a communications section responsible for Competition Act investigations.

    —  Ex-ante regulation of communications networks will be needed for the foreseeable future and OFCOM should have sectoral powers to impose this.

    —  Strong and effective ex-ante regulation is needed for those with significant market power.

    —  In exercising its sectoral powers, OFCOM should have an overriding objective to act in the best long-term interests of consumers.

    —  Implementation should be done in "plain English".

    —  Environmental issues need to be addressed, but a balance needs to be struck so that operators can deploy the broadband infrastructure needed to achieve the government's goals.

    —  No extension to the USO is currently required.

    —  Any extension to the USO is subject to a full cost-benefit analysis and fully consulted on.

    —  Any USO scheme should not assume BT is the provider and should set a "provide or pay" framework.

    —  A general "mere conduit" defence should be available to network and service providers, subject to their compliance with rules defined by OFCOM.

CONSUMERS

Self and Co Regulation

  In areas where stakeholders have similar interests then we support self and co regulatory initiatives. Bodies such as ICSTIS (the regulatory body for premium rate telephone services) and the IWF have worked well.

  However, stemming from our recent experiences with local loop unbundling we would suggest that effective ex-ante regulation will be required where commercial interests diverge, especially where one of the stakeholders has market power.

  In order for self and co regulatory initiatives to work effectively there needs to be a procedure to give statutory backing to self and co regulatory codes.

Consumer Protection

  As set out elsewhere in this submission it is key that the duty is framed as protecting the long-term interests of consumers.

  However, we question the need for sector-specific consumer protection legislation—if this is needed, then surely it is needed across the economy as a whole and it is disproportionate to impose it just on the communications sector? We fail to see what justification there can be for imposing additional regulation (which in a competitive market raises prices to consumers) and would suggest that the legislation should contain a presumption against sector-specific consumer protection regulation unless:

    —  A clear market failure is identified; and

    —  A cost/benefit analysis shows clear benefits to consumers.

  Any consumer protection should be focused on those who require protection—domestic consumers. Businesses are able to protect their interests through the courts and we can see no justification for interfering in businesses' freedom to contract on terms they agree.

Access for People with Disabilities

  We fully support the proposals set out in the CWP.

Proposals

  We suggest:

    —  Co and self regulatory approaches should only be adopted where stakeholders' interests coincide.

    —  There should be a mechanism for giving co and self regulatory codes statutory backing.

    —  There should be a presumption against sector-specific consumer protection regulation unless a clear market failure is identified and a cost/benefit analysis shows clear benefits to consumers.

THE NEW ORGANISATIONAL FRAMEWORK

Unified Regulator

  COLT supports the creation of a unified regulator, OFCOM, to deal with the communication industries.

Internal Structure of OFCOM

  However, it is important that equal weight is given to economic regulation of networks, as opposed to content regulation.

  In order to comply with the licensing directive, it will also be important to identify which activities of OFCOM are concerned with regulating communications networks when determining applicable telecoms licence fees.

  We support the establishment of a panel, rather than an individual. However, it is important that those dealing with issues of economic regulation are competent to deal with the complex issues before them.

  It is important that OFCOM is able to pay "market" salaries for staff, in order to ensure that suitably competent staff are attracted and retained.

  This paper does not attempt a full-blown critique of the work done by Towers Perrin on the structure of OFCOM. However, we are not convinced their proposals will foster an environment in which economic regulation will work in practice. We are also concerned about the size and expense of the proposed organisation. Unless OFCOM provides better value for money than the existing arrangements, the entire exercise will have been a waste of time.

11 January 2002



 
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