Examination of Witnesses (Questions 190
- 199)
TUESDAY 6 MAY 2003
OFFICE OF
TELECOMMUNICATIONS
Q190 Chairman: Good afternoon, Mr
Edmonds.
Mr Edmonds: Good afternoon.
Q191 Chairman: We are running to
a fairly tight timetable today, so if we could make a start. If
you would like to introduce your colleagues, we will jump straight
into it.
Mr Edmonds: I am David Edmonds.
I am the Director General of Oftel. I have just been appointed
by the Secretary of State to be a board member of Ofcom. Ofcom
is the regulatory agency that will take over from Oftel when the
Communications Bill hopefully becomes an act later on this year.
On my left is Peter Walker, who is the Director of Technology
in Oftel. On my immediate right is Chris Kenny, who is the Director
of Compliance, and on his right is Alistair Bridge, who is the
Broadband Co-ordinator in Oftel.
Q192 Chairman: As you gather, the
Committee's inquiry is on the issue of broadband in rural areas.
I would be interested in your views on the importance of access
to broadband in rural areas and the issue of whether there are
areas of the rural community that will never get broadband because
it is considered not viable economically to provide access at
economic cost both for the provider and also for the consumer
in those areas?
Mr Edmonds: For much of my five
years as Director General my life has been about creating a regulatory
environment to stimulate broadband in the UK. I think it goes
without saying from my perspective that the roll-out of broadband,
access to broadband, is I believe one of the more important roles
that the regulator has had to play. On to your question as to
why, it is to do with economics, which you have heard from the
previous witnesses. It is also to do with education. I think it
is to do with social services, it is to do with health, to do
with government, to do with accountability, a whole range of services
that can either be delivered or accessed in a different kind of
way. I think although Mr Curry in the previous session talked
about bits of technology having passed him by, I think this is
a bit of technology that is not going to pass any of us by and
is going to have a profound impact on our lives. I think that
rural communities will be as affected by it, and ought to be as
affected by the development and installation of that technology,
as any other part of the UK.
Q193 Chairman: In terms of delivery
of broadband to rural areas, do you feel that there is a delivery
gap at this stage or do you think that we are on schedule to deliver
adequate services to rural areas?
Mr Edmonds: There is a delivery
gap at the moment. Again, previous sessions of this Committee
have heard evidence from BT and others which suggests that ADSL,
the technology which will normally bring broadband to rural sub-urban
areas, is expanding very quickly and I think that one would take
some credit for the rate at which broadband is driving out in
much of the UK. Thirty to 35,000 units a week are being taken
up by UK consumers of small businesses, a fantastic delivery rate
at the moment. The technology and economics mean it is unlikely
that will get beyond 80% coverage of the UK probably by 2004-05.
I think BT have a reasonable hope that with advances in science,
advances in the way in which they make better use of the kit at
their disposal, mini DSLAMS or whatever, ADSL will probably get
to 85, 86% of the UK and that will leave a gap. Again, in the
previous session you were talking about some of the ways that
gap will be filled in. The simple, straight forward answer to
your question is yes, there will be a gap if we leave it to ADSL
and cable. That gap may be filled by satellite, may be filled
by mesh technology, may be filled by radio. The key marginal fundamental
question is how is that gap filled and that is why, if I may say
so, I think it is a very important and interesting inquiry that
you are running at the moment.
Q194 Chairman: Looking back at the
last few years, is there anything that with the benefit of hindsight
you think could have been done better or should have been done
that has not been done that would have meant that we were rather
further down the track than we are now?
Mr Edmonds: I think with the benefit
of hindsight I would have been tougher, harder and acted in some
ways a little bit more quickly in terms of BT and the famous local
loop unbundling exercise. Local loop unbundling, which actually
is a way of enabling competitors to get their connections to the
local exchange, was a painful experience for regulation in the
UK. I think with hindsight quite often it is said that local loop
unbundling has failed, we have got 3,600 units unbundled, but
I do not believe that at all. I think that local loop unbundling
was a fantastic success in terms of putting pressure on BT to
do its own ADSL roll-out. I do not believe for a moment that nearly
70% of the UK would now have an ADSL enabled exchange were it
not for the explicit threat I introduced three and a half, four
years ago to BT that if they did not roll it out then their loops
would be unbundled by somebody else. I think from that perspective
local loop unbundling has succeeded dramatically well. However,
looking back, I could probably have saved six to nine months in
the process if I had understood at the time that some of the delaying
tactics and some of the less than the totally productive responses
to policies would be adopted by BT, but that is the only regret
I have got. I think the broadband story in the UK, as again previous
witnesses have just said, is developing very quickly and, I think,
very successfully in giving the UK consumers in most of this country
a great deal of choice.
Q195 Mr Curry: Do you have some sympathy
for the position BT finds itself in? BT is, after all, a private
company quoted on the Stock Exchange, even if it has not been
doing terribly well. It was a nationalised industry and one gets
the impression that many people still regard it as if it were
still a nationalised industry, charged with carrying out some
sort of national mission and yet BT have got to make money in
order to be able to compete in the modern world and it does seem
to be caught slightly in this slightly equivocal position of a
private company in a sense being asked to do a job as if the Government
still ran it. Is my perception entirely false or do you share
some sympathy with the sort of position they are in?
Mr Edmonds: I have very little,
if any, sympathy for BT, but then I would not because I have dealt
with them over five years. I have some understanding for the point
that you have just made because I think that BT as an ex-nationalised
industry does come under different kinds of pressures. It comes
under pressures from this House, it comes under pressures from
consumer groups, it comes under pressure from the media, I think,
in a different kind of way from a "pure private sector company",
so I can understand that. I do not actually believe, however,
that in any sense BT are unjustly penalised because of that position
they are in. The whole concept of competition law, the whole concept
of the licence, the whole concept of regulation is that we seek
to mimic a position in which there is competition. BT are not
in a competitive environment. BT have still got 80% of connections
into the home. When you have got that kind of dominance in the
marketplace, I think regulation must follow, so I think there
is an interesting tension that they face that some other companies
do not face, but I think it is a perfectly fair tension given
the dominance they have in much of the marketplace.
Q196 Mr Curry: Do you have sympathy
for some of the smaller companies who said that they thought that
BT had engaged in sort of deliberate spoiling tactics?
Mr Edmonds: I saw that evidence.
Companies complain to me all the time about deliberate spoiling
tactics or anti-competitive behaviour. Every complaint of that
nature I take seriously. The company that gave evidence to you
has made no such formal complaint and if they did, I would investigate
it. I think in the area actually in which they were talking, which
was they were the satellite area and they were saying that BT
had brought forward ADSL enablement or reduced trigger levels,
there is actually a bit of a discontinuity in the argument, is
there not, because, on the whole, satellite, which is rather more
expensive, is not competing with ADSL, so if the company were
to make a complaint, I would investigate it. No one has ever complained
to me, so I think I had better stop at that point.
Q197 Mr Curry: The remarks you were
making just before I intervened flow on naturally to what I want
to talk to you about. You said that BT had said that they would
expect to have enabled, and you quoted up to sort of 85, 86% of
the population, in fact they quoted 90% to us within two or three
years. You will have heard, I suspect, the previous evidence which
we got rather anxious about, that inevitably the bit that was
not enabled would turn out to be the sticks. Do you think that
the extension of ADSL into rural areas is happening more slowly
than you anticipated? Perhaps coupled with that, are the trigger
levels set by BT for rural areas realistic and fair ones?
Mr Edmonds: I think on the first
part of your question, roll-out is happening actually rather more
quickly than I expected given the original economics of ADSL.
To go back to your first question, BT is a commercial company
and it has got to make a capital return, it has got, for each
project it puts in place, to justify to its finance committee
the investment it puts in, and I was privy to some of the earlier
calculations that BT did, demonstrating how long it would take
to get a return on some of their investments, so the answer is
no, I am not totally concerned. Trigger levels, I think, were
an interesting device to stimulate demand, bring forward demand,
and I think have been really quite successful. I think the way
in which they have changed, they have been brought down, and the
way that RDAs and others have operated to make sure they are actually
triggered has been an interesting example of using a variety of
pressures in the marketplace to produce an economic sum, an economic
solution that enables investment. Chris, would you like to add
to that?
Mr Kenny: I think the thing I
would add, Mr Curry, is that it is really quite difficult to answer
your question in a market which is moving very quickly in terms
of technology, but is also moving very quickly in terms of the
economics and commercial underpinnings. Were we in a world of
central planning, I guess we may have actually set rather more
ambitious trigger levels than BT did initially, but the thing
to recognise, I think, is that the whole concept of trigger levels
is really only nine or ten months old. BT were the first incumbent
operator in western Europe to come up with this kind of mechanism
and they have twice in the course of that ten months tightened
the ratchet. I suspect the kind of targets they have got now are
actually more ambitious than a central planning mechanism might
have given you. What has been impressive, I think, is the way
that a variety of pressures have borne in on BT, first, to make
sure that they did not somehow create a chimera and invent regulatory
obstacles when in fact there were not any. The second is the way
local communities have really mobilised both to ensure trigger
levels have been met, but also the very interesting thing in the
evidence BT gave is the way that, when communities have done that,
the level of penetration and interest has been far higher than
BT would have envisaged through their own marketing efforts. I
am not sure it is easy to say that the absolute, right trigger
level for the Forest of Dean or Skipton is X. What is more important
is that there is a process which leads to those levels being set
and also being constantly re-examined in the light of the way
technology and commerce moves on and that seems to us to be happening.
Q198 Mr Curry: What is the regulatory
position when it comes to the use of income from profitable enabled
exchanges towards funding the "enablement", if that
is the right noun, of exchanges which might be less profitable
to extend coverage? BT suggested that there was a regulatory inhibition
here. Could you explain what it is to us and the logic behind
it?
Mr Edmonds: I can and my short
answer is that there is, in my view, no substantive or substantial,
both words, regulatory inhibition. Peter Walker will give you
a bit more detail on that.
Mr Walker: Yes, the important
thing about BT obviously is that it should operate in a fair,
competitive market, so looking at the overall national broadband
market, we would want to see that BT is not acting in a predatory
way against its competitors, which are the cable companies, by
selling below cost. However, as long as on a national level they
are selling above cost, then we have no problem with them taking,
as it were, the higher income from urban exchanges and maybe running
some rural exchanges at a loss. That in fact would not be a problem
and it is one of the things that we will be discussing further
with BT, that they somehow imagine there is a barrier there and
there is not. However, I would say this: that the fact that it
is a competitive market and BT, as you know, has a lot of competition
from the cable sector in those urban areas which is driving prices
down means that there is not a huge amount of income even in the
urban areas then to throw at the rural areas and I think clearly
BT has got to decide what is right for its shareholders and we
cannot require them to provide services below cost in individual
exchanges, but of course if they chose to do, as I say, as long
as they are profitable at the national level, we would not be
concerned.
Q199 Mr Curry: But it takes us straight
back, does it not, to this sort of, if you like, slightly equivocal
position of BT as being seen with the national hopes riding upon
it and yet at the same time it has got to live in a commercial
environment and some of the expectations upon it may not accord
with what makes sense from a purely corporate point of view, given
the sort of relatively short-term way in which we look at things
in the UK?
Mr Walker: There are some times
when it is very convenient for BT to say that there is a regulatory
barrier when the reality is that they cannot sell the idea to
their shareholders of funding loss-making services.
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