RESPONSE TO ISSUES RAISED BY OTHERS IN
ORAL EVIDENCE
LOCAL LOOP
UNBUNDLING
14. Other witnesses claimed that the "problem"
in the UK was what they said was the natural monopoly that exists
in the local loop. They also claimed that the local loop is not
unbundled in the UK in practice and that potential competitors
to BT withdrew from the unbundling process because of a combination
of what they said were enormous practical barriers that BT put
in the way, and the introduction of cheaper wholesale prices by
BT.
15. Those same witnesses were then gracious
enough to admit that there were no examples of other countries
that were any better placed in this regard.
16. We are disappointed with the tenor of
these comments. The fact is that the UK has a clean bill of health
as far as its local loop unbundling process is concerned. Only
last week, on 20 March, the European Commission announced that
it had decided to open formal infringement proceedings against
Germany, France, Ireland, the Netherlands and Portugal with regard
to the way local loop unbundling is offered in those countries.
This is the second-wave of infringement action from the Commission
for failure to implement its local loop unbundling requirements.
On both occasions the UK has been recognised as fully compliant.
The media and our competitors may make much of Germany as the
exemplar of a country where LLU has been offered—but the
fact is that it is Germany which is in the EU dock, and not the
UK.
17. BT invested over £50 million in
preparing for unbundling, on the basis of what turned out to be
hugely inflated forecasts of demand from potential operators.
The downturn in the economic outlook for the telecommunications
sector and the subsequent lack of availability of capital undoubtedly
played a part in reducing demand, but it seems clear that the
economics of the market and possible commercial models had not
been fully understood by operators when they made their initial
estimates. However, BT has been ready to take orders for unbundled
loops at every one of its UK exchanges since January 2001.
18. The suggestion that potential users
of unbundled loops were dissuaded from proceeding because of cuts
in BT's Wholesale prices demonstrates again the complexity and
conflicting pressures that are inherent in the multi-layered competitive
market we have in the UK. Service Provider competition is predicated
upon other companies offering their services over lines provided,
but still owned, by BT. Local loop unbundling, on the other hand,
is designed to allow competitors to take ownership of BT's lines
and then sell services over them. These are two different models
that the regulatory rules require be run side by side and, clearly,
price changes in one will impact upon the other. There has, of
course, been significant pressure on BT to reduce the cost of
its wholesale broadband products in order to stimulate service
provider activity. This has now happened. The major changes in
the projected cost base which have given the scope for these announcements
are not in the components which comprise the unbundled local loop.
BT has made a significant investment in the unbundling process
and the prices for local loops are actually determined by Oftel
and not set by BT.
VAT FOR INTERNET
SERVICE PROVIDERS
19. There has been comment in the press
recently about the fact that AOL, uniquely amongst major ISPs
in the UK, benefits from a UK Customs & Excise interpretation
of VAT rules which means that they do not have to pay VAT. The
benefit to them in the narrowband world has been calculated as
being £30 million per year. This effectively means that a
US-based competitor is being subsidised by UK taxpayers to export
value-add services out of the UK. It should be noted that no other
EU member state interprets AOL's activities within their boundaries
as falling within the scope of this exemption—the benefit
to AOL is a UK-specific one. AOL thus receives a substantial financial
advantage which it then uses for marketing purposes in this country.
If the VAT exemption persists, the potential benefit to AOL in
the broadband market will be even greater since the individual
VAT saving will be higher. Whilst BTopenworld is not a party to
current legal action on this issue it does have concerns about
the potentially damaging effect this anomalous position will have
on competition in the UK broadband market at a time when such
a tax subsidy could make the difference between profitable and
loss-making activity.
26 March 2002
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