APPENDIX 44
Memorandum submitted by Orange
SUMMARY
Orange welcomes the Select Committee's inquiry
into Communications and, in particular, its early consideration
of the structure of the Office of Communications (OFCOM). We believe
the views of telecommunications providers need greater parity
with the broadcasting industry to ensure the most suitable regulatory
framework.
The Government's proposal to replace the existing
five communications regulators with OFCOM will have a significant
impact upon Orange. It will set the new regulatory—and therefore
business—environment in which the company operates. It is
therefore vital that the Government puts in place the most appropriate
regulatory environment to meet the rapidly changing nature of
communications technology. The new framework needs to allow the
mobile phone industry to compete, invest and innovate to ensure
UK consumers receive the best and most advanced mobile services
in the world. Increased regulation within the mobile sector will
have a detrimental impact upon delivering Broadband Britain and
therefore the United Kingdom's position as a global leader in
telecommunications.
The Communications Bill—giving OFCOM objectives,
duties and regulatory powers— needs to provide OFCOM with
an overriding objective to serve the interests of consumers through
the promotion of competition. OFCOM should also have a duty to
withdraw from sector specific economic regulation once it concludes
that a competitive market has developed.
OFCOM should incorporate the recommendations
of the Government's regulatory advisory body, the Better Regulation
Task Force. In particular, OFCOM's executive and non-executive
members should be appointed for their expertise rather than to
represent stakeholder groups.
There needs to be a structure that delivers
faster roll back of regulation than has been experienced hitherto.
The Office of Fair Trading (OFT) should have a right to be involved
in withdrawing supervisory authority over economic regulation
from OFCOM. OFCOM should not have powers concurrent with the OFT
to invoke the Competition Act.
Orange believes the process for appeal in respect
of OFCOM decisions should mirror the procedures set out in the
Competition Act which are applied to OFT regulatory decisions.
Such an approach is critical if the Government is to achieve the
important objective of promoting the minimum necessary regulation,
thereby minimising the risk of market distortion being introduced
due to inappropriate regulatory interventions.
Orange expects the amalgamation of five regulators
into one should lead to a decrease in the cost of regulation.
It should be a duty of OFCOM, as part of its preliminary work,
to examine ways to deliver long-term operational cost saving synergies.
OFCOM should have a duty to concentrate on its
tasks of economic regulation and content regulation and it should
not be usurping the role of government by introducing sector specific
rules where adequate general legislation exists.
OFCOM needs to deliver a light touch of regulation.
However, initial indications from the Towers Perrin report commissioned
by the existing five regulators suggest that OFCOM will be larger
than a simple aggregation of the bodies it will be replacing.
This is not what the Government intended and is not in the interests
of consumers.
INTRODUCTION
1. Orange welcomes the House of Commons
Culture, Media and Sport Select Committee's inquiry into communications,
and in particular its intention to look at the prospects for a
draft Bill on Communications. This submission focuses on the new
regulatory environment: the proposed formation of OFCOM, its structure,
duties and responsibilities and also comments on other aspects
of the inquiry such as progress towards effective broadband and
the timetable for analogue switch off.
2. Orange Personal Communication Services
Limited (Orange) is licensed under the Telecommunications Act
1984 to run a mobile radio telecommunications system and to provide
national mobile radio telecommunications services. Orange provides
these services to over 12 million customers within the United
Kingdom, now making it the largest network operator in terms of
active customers. Orange is one of five third generation (3G)
licence holders and will soon begin providing UK customers with
faster and more advanced mobile services. In 2000, Orange was
acquired by France Telecom and now forms part of a global group
spanning 20 countries and serving over 37 million customers at
end of September 2001.
3. Although the weight of the agenda appears
to concentrate on broadcast issues, Orange believes issues central
to the telecommunications sector should not be overlooked. The
share of consumer leisure time captured by television is falling
and it will be companies such as Orange that, through the implementation
of 3G wireless technology, will furnish the consumer with a broadband
access to a wider variety of entertainment and other services.
4. By proposing to restructure the regulatory
environment in communications, the Government has presented regulators
and the communications sector with a timely opportunity to review
the overall function of regulation within the mobile communications
market. The review will therefore have a significant impact upon
Orange. It will put in place a new regulatory—and therefore
business—environment in which the company operates. It is
therefore vital that the Government devises the most appropriate
regulatory environment to meet the rapidly changing nature of
communications technology.
THE FUTURE
REGULATION OF
MOBILE COMMUNICATIONS
5. Orange believes the current method of
regulating the mobile telecommunications sector is outdated and
needs to change. We recommend that the new legislation will allow
for the withdrawal of sector specific regulation.
6. Evidence from the mobile market would
justify the withdrawal of sector specific regulation:
— There are four well-established participants
with reasonably balanced market shares. A fifth, well backed,
player is soon to launch service.
— There has never been a dominant incumbent.
— A mobile phone, albeit increasingly
ubiquitous, is not vital to the sustenance of life in the same
way that utilities are. It many ways it is no different to any
other electronic consumer good.
— Overall price competition is vigorous
(in 2001, prices fell by 13 per cent according to Oftel).
— Consumer satisfaction, as monitored
by Oftel, is consistently above 90 per cent.
— Subscriber numbers have grown from
seven million to 45 million in little more than five years.
7. Furthermore, revenue streams in the mobile
market are far more uncertain than in other regulated industries,
such as water. With the introduction of 3G wireless technology,
there is an enormous range of possibilities for new services,
only some of which will taken up by the market. In addition to
marketing flair, the successful execution will require the deployment
of large amounts of risk capital. The mobile industry should be
regulated like a utility as tends to happen today.
8. In any non-regulated sector, the competition
authorities would not be investigating an industry sector with
such a record. It is therefore frustrating that Oftel feel duty
bound to continue manipulating prices in this market sector.
9. In seeking to reduce OFCOM's involvement
in the mobile market, Orange is not seeking to shirk its responsibilities.
It simply seeks fair treatment for all stakeholders and to be
treated the same way as others in competitive markets. As a result,
the new OFCOM must have responsibilities that are more focused
than a simple amalgamation of existing regulators' duties. There
must also be much more rigorous application of deregulatory measures.
10. Orange believes regulation of the mobile
sector is on the increase and unless this trend is reversed, there
will be a negative impact upon the delivery of Broadband Britain
and the UK's position as a global leader in telecommunications.
It is therefore imperative that the Government creates a new regulatory
environment that allows the mobile phone industry to compete,
invest and innovate to ensure UK consumers receive the best and
most advanced mobile services in the world.
THE COMMUNICATIONS
BILL
11. Orange believes that it is vital to
withstand an ever increasing tide of regulation and to this end
the Communications Bill should enshrine certain principles that
will govern the behaviour of OFCOM.
Objectives of OFCOM:
12. In order to ensure that a more focused
and aggressively deregulatory mindset exists after the creation
of OFCOM, Orange believes that certain objectives should be included
in the Communications Bill. Moreover, Orange believes that it
would be best to have an overriding objective so that both the
regulator and the regulated are clear as to where priorities lie
in the unavoidable situations where there is tension between conflicting
objectives.
13. Orange agrees with the Government's
overall objectives outlined within the Communications White Paper:
— To make the UK home to the most dynamic
and competitive communications and media market in the world.
— To ensure the widest possible access
to a choice of diverse communications services of the highest
quality.
— To ensure that citizens and consumers
are safeguarded.
14. However, the overriding objective of
the regulator should be to ensure the widest possible access to
a choice of diverse communications services of the highest quality
and this should be through the promotion of effective competition.
In addition, OFCOM should have a duty to withdraw from sector
specific economic regulation once it concludes that a competitive
market has developed and pass responsibility for this to the OFT.
The OFT should have a right to decide whether powers of economic
regulation should be withdrawn from OFCOM.
15. Orange believes that, if the market
was judged by the more realistic, non-utility mindset of the OFT,
the mobile market would already be judged competitive and there
could have been significant regulatory roll-back. However, to
date, Oftel has decided what outcome it desires (eg the imposition
of service providers in the distribution channel) and developed
its own competition law type doctrine such as "Market Influence"
to trigger the outcome it desires.
16. Three years on and Oftel is in the process
of withdrawing the Market Influence trigger because it is inhibiting
market development. It attempted to second-guess the market and
focused on one business model, when others could have been more
appropriate. It is very undesirable that the sector regulator
branches away from generic competition law in this way.
Better Regulation Task Force (BRTF) Recommendations:
17. Within the body of the Communications
Bill it is essential that the recommendations identified by the
BRTF are adopted. In particular, Orange agrees that:
— Members of OFCOM should include both
executive and non-executive members and be appointed for their
expertise rather than to represent stakeholder groups.
— There should be mandatory use of
cost benefit analysis in order to guarantee the proportionality
of regulatory intervention.
— In addition to the duty to withdraw
from sector specific economic regulation, OFCOM should have a
duty to publish in its annual plan, specific programmes for introducing
deregulatory measures, wherever possible.
— While not necessarily appropriate
for the body of the Bill, OFCOM should include in its annual business
plan a clear explanation of how it will prioritise its different
objectives and set out a clear linkage to decisions they make.
OFCOM and Concurrency:
18. Since the publication of the Communications
White Paper, the Government has announced a strengthening of the
role and powers of the OFT. The Communications Bill must clarify
that competition issues in the communications sector should be
treated on an equivalent basis to other non-utility markets. Once
a market has been deemed competitive, responsibility for economic
regulation in communications should pass to the OFT once and for
all.
19. Furthermore, Orange does not believe
that it is necessary for OFCOM to have concurrent powers with
the OFT. So that the OFT does not have to replicate the expertise
within OFCOM, Orange suggests that the OFT is obliged to consult
OFCOM as part of any competition investigation in the communications
sector. Based on its experience to date, Orange believes that
this is the only way that regulation will be rolled back in the
mobile market and that the operators will receive comparable treatment
to participants in non regulated industries.
The Appeals Process:
20. Orange welcomes the Government's recognition
that the regulatory structure must embody a transparent and effective
appeals process. However we do not believe that the proposals
set out in the Chapter 8 of the Communications White Paper are
sufficient to afford stakeholders impacted by regulatory decisions
a transparent and effective appeals process.
21. The Committee will be aware from previous
consultation exercises that there is a unanimous view amongst
operators of communications networks that Judicial Review is not
an acceptable appeals mechanism in respect of regulatory decisions.
The previous consultations referred to above include the introduction
of the extended Judicial Review mechanism into the Telecommunications
Act, proposals to amend the Telecommunications Act licence modification
process proposed within the Electronic Communications Bill, and
proposals to introduce fines for licence breaches in the Utilities
Bill.
22. The existing appeals procedure in respect
of all regulatory decisions, other than licence modification,
taken by Oftel is by way of extended Judicial Review through the
Courts. Whilst the extended Judicial Review affords the Courts
with the additional scope to review material errors of the facts
it is not considered to be an effective mechanism for the following
reasons:
— the scope of appeal is still too
narrow, it is extremely unlikely that a Court would extend its
jurisdiction beyond simple factual errors,
— the Court, as the appeal body, is
not equipped to consider detailed substantive issues such as errors
in market analysis or whether the regulatory decision is in the
public interest,
— in light of the first two points
we consider that Judicial Review does not satisfy Article 9(6)
of the EC Licensing Directive or Article 6 of the European Convention
of Human Rights
— Judicial Review is not consistent
with appeal rights in the Competition Act
23. Orange strongly believes that the process
for appeal in respect of OFCOM decisions should mirror the procedures
set out in the Competition Act which are applied to OFT regulatory
decisions. It should be noted that it is not our intention to
introduce a lengthy process that could be used by any operator
to delay action by the regulator. Rather it is our intention to
introduce an effective check that will, if ever required, ensure
that regulatory decisions are balanced, fair, and reflective of
the economic reality and competitive state of the market place.
24. Orange does not consider Judicial Review
to be an appropriate appeal mechanism in respect of economic regulatory
decisions. We believe that the appropriate appeals body should
be the Competition Commission and that the scope of the appeal
should be consistent with the review remit already established
in statute in respect of licence modifications. Such an approach
is critical if the Government is to achieve the important objective
of promoting competition through the minimum necessary regulation,
thereby minimising the risk of market distortions being introduced
due to inappropriate regulatory interventions. Further and more
detailed consultation needs to be taken forward between stakeholders
and Government in order to agree an effective and timely appeals
mechanism to replace Judicial Review.
The Cost of OFCOM:
25. Orange firmly believes that OFCOM should
be properly resourced and should pay salaries that are capable
of attracting well-qualified people. However, that is not to say
the communications industry will support an ever-increasing bill
for regulation. It is a clear expectation that the running cost
of the combined regulator will be less than the current combined
cost of the existing five bodies and that the Government will
pay half the establishment costs of OFCOM. It is not clear from
the OFCOM Bill that the Government will not seek to recover their
share of costs through licence fees, by resorting to the use of
advances as opposed to grants.
26. Furthermore, there is one anomaly in
the existing regime. On the occasions when Oftel exercises its
powers under the Competition Act, the cost is borne by the telecommunications
industry via licence fees. In non-regulated industries, costs
of the Competition Authorities are picked up by the public purse.
Withdrawal of concurrent powers from OFCOM would remove this anomaly.
The Structure of OFCOM:
27. Orange supports the idea that OFCOM
should be governed by a board and not by one supreme regulator.
Not only will this bring a wider range of skills to bear on complex
problems but also it is likely that the potentially adversarial
nature of the relationship between the regulator and the regulated
will be ameliorated by a less personal approach.
28. Below the board, the structure should
be divided into the distinct domains of: content, economic regulation
and spectrum management, each of where different expertise and
analytical tools are relevant. This structure implies a much more
radical reshaping and streamlining of the existing five regulators
than would happen by simply adopting all the processes, organisational
shape and activities carried out today.
29. The Regulators Steering Group (RSG),
staffed by internal secondees from the existing regulators, has
been set up to work on a new structure to OFCOM and that it is
more or less working to the recommendations emanating from the
Towers Perrin report. There is a severe risk that such an approach
will lead to a larger organisation than the sum of the existing
parts. Orange is very concerned that the RSG is advancing its
work without any parliamentary scrutiny or input from stakeholders.
The RSG should be obliged to engage in dialogue with those that
are going to pay for its existence.
Use of Co-regulation:
30. In the interests of good practice and
in order to promote the reduction of OFCOM staff numbers, Orange
supports the increased use of co-regulation. Examples of where
the mobile phone industry is developing co-regulation are as follows:
— the ten commitments regarding mast
planning and construction
— mobile services for elderly and disabled
customers
— consumption of premium and adult
content through mobile phones
— mobile number portability
— regulating unsolicited SMS scams
The use of co-regulation is a way to leverage
the goodwill and expertise of industry and to prevent the ballooning
of staff numbers within the regulator.
Excluded Activities and Behaviours:
31. Orange believes that it would also be
helpful to specifically exclude certain activities from OFCOM's
powers, so as to prevent it from diverting into areas which are
strictly the domain of government or are covered by other generic
legislation (eg many aspects of consumer protection). It should
also be prevented from introducing enhancements of Directives
emanating from the EU.
32. On the first point, "the Government
must remember that it is not the function of regulators to design
social change". It is well understood that the regulator
must put in place measures to guarantee universal access to basic
telephony. It was questionable that Oftel was asked to use its
influence in enabling the Internet for schools policy, for example.
33. Secondly, there are a number of examples
where the regulator has put in place or is proposing to put in
place measures that overlap horizontal legislation and, in any
event, are far more onerous than would be required in unregulated
industries. For example, Oftel's current proposals for ensuring
that operators have accurate metering and billing systems threaten
to be disproportionately expensive and inflexible. The proposals
could also act as yet another barrier to entry for new market
entrants.
34. Thirdly, Oftel has a strong tendency
to add extra measures when transposing EU legislation the cost
of which can be disproportionately expensive to the potential
benefits. The proposed introduction of an Ombudsman for communications
is a good example. An initial independent study has estimated
the first year set up and running costs will be £10 million.
Orange had approximately 50 complaints go to independent resolution
in the last 12 months 2001 (as provided for in its customer contracts).
Given that Orange has 12 million subscribers out of a total of
70 million mobile and fixed line subscribers, total disputes going
to independent resolution could be as low as 300 (more than £30,000
per dispute!)
35. OFCOM's functions must be focused on
content regulation, economic regulation and spectrum management
and must have an organisational structure that reflects these
distinct responsibilities.
RECENT POLICY
DEVELOPMENTS: TOWERS
PERRIN
36. The existing five communications regulators
have commissioned a report by Towers Perrin which seeks to propose
how an amalgamated regulator could be put together. Paragraph
1.5 of the executive summary states: "We have carried out
a broad assessment of how the five organisations are likely to
change following the implementation of the White Paper's proposals
and the completion of legislation. The analysis shows that, in
the short term, more work is likely to start than stop. However,
it is difficult at this stage to make an assessment of the level
of resources OFCOM will need, as there is still uncertainty about
the organisation's statutory functions".
37. This is precisely what is not required
and runs counter to everything that the Government is trying to
achieve in terms of light touch regulation. OFCOM's statutory
obligations must be couched in terms that do not increase the
regulatory workload. There must be structures in place that provide
incentives for reducing regulation where possible. It would be
disastrous if the combined regulator started life as a larger
organisation than would be the case by simply aggregating the
existing five communications regulators. If the new regulator
is get off on the right foot, it must be smaller.
38. OFCOM needs to deliver a light touch
of regulation. However, initial indications from the Towers Perrin
report commissioned by the existing five regulators suggest that
OFCOM will be larger than a simple aggregation of the bodies it
will be replacing. This is not what the Government intended and
is not in the interests of consumers.
IMPLICATIONS OF
THE DELAY
TO THE
EXPECTED LEGISLATION
ESTABLISHING OFCOM
39. The communications industry is in a
phase of rapid development and greater certainty on the future
of the regulatory environment is essential. However, reform needs
to run parallel to the 1999 European telecommunications package,
allowing it to be incorporated within the Communications Act.
40. However, a delay between the enactment
of the OFCOM Bill, currently before Parliament, and the introduction
of the Communications Bill giving the regulator powers lead to
an increase in OFCOM's establishment costs.
OTHER MATTERS
RELATING TO
THE SELECT
COMMITTEE INQUIRY
Analogue switch off
Orange supports the strategy to switch off analogue
terrestrial TV transmission in due course. While it believes that
it is highly unlikely that future auctions will raise sums similar
to those raised in the 3G spectrum auctions, it is vital for the
development of wireless services that spectrum is managed efficiently.
The extra economic activity that would result in further significant
releases of spectrum would be considerable.
Progress towards higher bandwidth networks
Orange is in the process of building its 3G
network. Amongst other things, this will provide individuals access
to the Internet at speeds in excess of that which has been traditionally
available through domestic telephone lines. The other four mobile
networks are doing the same. This initiative is market led not
mandated by government policy. Orange does not strongly believe
that government policy needs to stimulate supply in advance of
demand. In the United States, demand for broadband access to the
home has dropped enormously since the demise of Knapster.
The impact of technological developments on privacy
Orange is able to provide location-based services
to subscribers. The subscriber does not have to supply his or
her whereabouts, as the network can locate his/her whereabouts
Orange is most concerned that any additional legislation could
stifle the development of exciting new location based services.
These products are in their infancy and the market needs time
to develop and discover which innovations are useful and which
are not. Orange complies with Data Protection legislation with
these services and is very mindful of the need to preserve good
relations with their customers. The Government should rely on
these factors as the best deterrents against abuses.
14 January 2002
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