House of Commons - Trade and Industry

Select Committee on Trade and Industry Thirteenth Report

3 Equality of Access

25. Ofcom set out three options to deal with the dominant position of BT in fixed telecoms, including broadband. The first is to withdraw from regulation altogether: whilst regulation might be entered into for sound reasons, it could be argued that this can result in a less desirable outcome than if regulation had not been entered into. Regulators inevitably rely on the company that is being regulated for the information on which to base their decisions, and there are time lags in the decision-making process. Furthermore, by regulating to keep prices low in the absence of competition, there is a danger of providing a disincentive to the investment required to allow competition to develop.[35]

26. Ofcom reject this option, concluding that BT retain a position of Significant Market Power in too much of the fixed telecoms industry for regulatory withdrawal. Though there is competition at the level of core networks, we agree with Ofcom that BT's control of the access network and wholesale dominance means that attempting full deregulation is extremely premature. Without regulation, there would be no restraint on BT's potential to exploit its market dominance in the future. Unsurprisingly, we found no support for such deregulation in the evidence we received.

27. Ofcom's second option is to make a reference to the Competition Commission on the grounds that BT's market dominance restricts competition to such an extent that structural, rather than regulatory, remedies are required. The Competition Commission would have the power to impose such structural remedies, for instance, forcing BT to fully separate their wholesale activities from their retail activities.

28. Their third option is to regulate to achieve equality of access, or 'equivalence'. This means ensuring that those who are reliant on BT are able to access the same products on the same terms as BT itself. If equivalence can be successfully achieved it should allow regulation to be rolled back in other areas. This is Ofcom's preferred option.

29. Ofcom argued against structural separation via a Competition Commission referral, except as a last resort if equivalence proves unachievable. It would entail a drawn-out, expensive and uncertain process. This would mean that investment by BT would be diverted from more constructive uses, and the uncertainty created throughout the industry would presumably act as a deterrent to investment by BT's competitors as well.[36]

30. Energis, on the other hand, argued that structural separation was the most efficient way of dealing with the 'problem' of BT. They stressed that the BT executives' entirely proper duty to maximise shareholder value obliged them to work against Ofcom's plans to promote access to their network, and that BT's vertical integration gave it the ability to do so effectively.[37]

31. The majority of our witnesses considered that a referral to the Competition Commission, and the structural separation that it is assumed would be the outcome, should be resorted to only if equivalence proved inadequate. However, we heard reservations about Ofcom's proposals on equivalence as they currently stand.[38] Ofcom identify two versions of equivalence in the Phase 2 consultation document, input and outcome.[39] Input equivalence would see BT's wholesale customers using the same products, on the same terms and at the same prices as BT Retail. This would have the advantage of encouraging BT to make general improvements to its products—those that would be of benefit to BT Retail would also be available to other customers. It would also, potentially at least, increase transparency. UKCTA claimed that input equivalence would be less likely to result in lengthy disputes.[40] Output equivalence requires BT to make available comparable products to those it provides to BT Retail. This has the scope for provoking large disputes about what constitutes 'comparable' and the lack of transparency associated with this. However, BT argue that the age of their network precludes the possibility of input equivalence in some instances.[41]

32. BT claim that they are already practising equivalence in their operations. But to improve transparency and the perception of equivalence they propose some structural changes to the company. They propose to set up an Access Services Division (ASD) as a separate entity within the company which will control the access network and the staff relating to it. It will also have a separate management and CEO. BT also propose to establish an Equality of Access Board (EAB) to oversee the application of the principle of equivalence. Chaired by the BT CEO, this board would include two independent members into whose appointments Ofcom would have an input, and one of whom could be an Ofcom board member.[42]

33. BT claim that these proposals go far beyond those that they are required to make and will give transparency to the relationship between BT and those relying on its products,[43] though they also question Ofcom's legal right to enforce equivalence.[44] Ofcom say that input equivalence is their favoured option, and that is supported by the industry representatives with whom we spoke.[45] Even Energis, who do not believe that equivalence is sufficient, conceded that "true input equivalence across all relevant products and services…would do a job" and would prove "a decent alternative" to structural separation.[46]

34. There are however, some reservations about the application of equivalence and the proposals for the ASD and EAB that BT put forward. UKCTA, though acknowledging that the BT proposals constituted a "significant shift in terms of concessions that BT put on the table", argued that they fell short of "the very clear, transparent, stand-alone entity within BT that is free to serve all customers including BT Retail on an independent arm's length basis".[47] The 'Chinese Walls' between the ASD and the main company were, in UKCTA's view, inadequate. This view was echoed by ISPA who noted that "it is going to be a separate division but with the same management and the same shareholders. Operationally and functionally, on a day-to-day basis, it reports to the same group of people".[48]

35. Ofcom also emphasised that the organisational changes need to be supported by behavioural changes in BT in order to ensure proper compliance with the spirit of input equivalence. To illustrate this, they highlighted a number of areas of complaint from BT Wholesale customers, specifically: preferential knowledge of product innovation, influencing wholesale product and process investment priorities, better quality processes, more retail competitor intelligence, and cost allocation.[49] Complaints about BT's behaviour were reiterated to us. One witness complained the management was "scheming"[50]. Others, rather less emotively, merely suggested that an able management was using the measures at their disposal to provide the best returns to their shareholders.[51] But it was emphasised that behaviour is difficult to change: " There is something that describes behaviour and that is DNA, and that is difficult to change". Consequently, equivalence and the associated proposals from BT required rigorous oversight and monitoring.[52]

36. BT rejected any accusations of 'poor' behaviour and highlighted their good record on regulatory compliance.[53] This would suggest that, if the regulatory regime is sufficiently robust and is correctly designed, BT will continue to work within it. If the 'Chinese walls' between the ASD and BT Retail are sufficiently high and wide, and the governance correct, then there are greater incentives to BT to put equivalence into practice—BT noted that, whilst still being part of the BT group, the ASD with its separate CEO and management, will have performance-related rewards based on the successful implementation of equivalence. It is clearly necessary for the regulatory regime to provide such incentives as it seems that trying to force BT to, for instance, provide a better Datastream product, without them will be only partially successful.

37. We are not in a position to judge criticisms of BT's past behaviour. We acknowledge their record on compliance, but it is hard to see the decision to de-average wholesale broadband prices in the LLU target areas as anything other than an attempt to inject uncertainty into the process. The justification that they are obliged to offer a low price to their ISP clients does not really convince—are the ISPs operating in the less populous exchanges not entitled to a low price, too?[54]

38. Energis raised the possibility that, if the principle of equivalence is sufficiently robust and properly implemented, it will undermine the benefits to BT of vertical integration. This is a valid question, and obvious comparisons can be drawn with the gas market, for instance, where the incumbent voluntarily embarked on structural separation. BT denied this was going to happen and maintained the benefits to the industry as a whole of vertical integration. The example of the USA was raised, where, after structurally separating, telecoms companies are now reintegrating.[55] They stressed that significant future investment was reliant on an 'anchor tenant'—BT Retail—to provide at least a degree of guaranteed return.[56]

39. In our last Report on this subject, we concluded that the case for forcing BT to structurally separate had not been made, and noted that the benefits of separation were only those that a successful properly designed and implemented regulatory regime should be ensuring. This remains our position. We agree with Ofcom that input equivalence should be pursued where practicable, with properly monitored outcome equivalence as a substitute where necessary. Only if equivalence proves unworkable should moves towards forcible structural separation be initiated, and the judgement that it is unworkable must be against objectively defined measures of success and not merely on the basis of suspicions of management 'scheming'.

40. Putting equality of access into practice may, of course, lead BT to conclude that vertical integration is no longer beneficial and to voluntarily separate. This is, of course, a matter for BT's management and shareholders but it does not seem an imminent possibility. Furthermore, there is a clear difference between this and forced structural separation, with the divisions being made on the basis of efficiency and practicality rather than regulatory diktat. Furthermore, given the massive investment that BT is planning to make in its '21st Century Network', it would seem to us unlikely.

41. The implications of the emergence of 'Next Generation Networks' (NGNs), which integrate services such as data, telephony, and video, such as BT's 21st Century Network, for telecoms regulation remain to be seen.[57] However, the prospect of an entirely new, end-to-end network clearly has the potential to introduce a more effective version of equivalence from the start. We are pleased to hear that BT have been consulting on this from an early stage.

42. Ultimately, we agree with Ofcom's broad strategy and we welcome BT's initial response to it. Whilst BT's competitors may complain that these proposals do not go far enough, they represent a constructive engagement with the consultation. We recognise that much depends on the detail, and understand BT's competitors may wish to reserve judgement on Ofcom's plans until this is known. However, issues such as timing, enforcement, and monitoring are matters for consideration once the principle has been established, and Ofcom has rightly decided to deal with these in the next phase of its Review. We have no doubt that our successors will wish to examine the regulator's further proposals in due course.

35 Ofcom Review Phase 2, paras 5.15-5.20 Back

36 Ibid., paras 5.21-5.27 Back

37 App 7 Back

38 For example, Q 9. Back

39 Ofcom Review Phase 2, paras 6.10-6.13 Back

40 Q 41 Back

41 BT Ofcom's Strategic Review of Telecommunications Phase 2 Consultation Document - BT's Response (February 2004), p. 12 Back

42 Ibid., p. 11 Back

43 Qq 126 and 131-133 Back

44 BT Ofcom's Strategic Review of Telecommunications Phase 2 Consultation Document - BT's Response (February 2004), p. 34 Back

45 Q 41 Back

46 Qq 91 and 93 Back