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;
— 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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