Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 1-19)

1 MARCH 2005

Mr Stephen Carter, Lord Currie of Marylebone, and Mr Ed Richards

  Q1 Chairman: Good morning, Lord Currie. Could you introduce your colleagues for us?

  Lord Currie of Marylebone: On my right is Stephen Carter, Ofcom's Chief Executive, and on my left is Ed Richards, Senior Partner and Board member. May I just start by saying that we very much welcome your interest in this area. You have many things on your agenda, but we are here to listen to your concerns and answer any questions as fully as we can. As you know, we have had very major consultation with responses from very wide parts of the industry, consumer groups, the public sector and elsewhere and we are studying those and we will be covering the issues in our final report in due course.

  Q2 Chairman: Thank you. We have had a couple of informal chats but we have not really taken any evidence on the record. We took the approach that it was better to let you get on with the job and then be called to account. I think we met you within a couple of weeks of you starting up. You have been in place barely 13 months. We are grateful to you for coming along. We have got some meat to chew this morning. Maybe we could start with the premise upon which your approach is base. It has been suggested that the promotion of competition, which you have taken as your starting point, places insufficient attention on the needs of the consumer. It has been put to us that perhaps the consumer should have been put first since there are a number of issues which are consumer orientated as much as provider orientated.

  Lord Currie of Marylebone: This is a strategic review. Right at the heart of our concerns are the interests of consumers. We are concerned absolutely to promote the interests of consumers and citizens as our primary duties under the Communications Act require. I think our analysis is that this is a market which has suffered from a lack of competition at the wholesale end part of the industry. We are seeking to address that question and if we do, we will have a much more dynamic, innovative sector that will very much serve the interests of consumers. What customers want is real value for money, innovation, diversity of provision. That is not something that we can mandate directly. What we need is a dynamic innovative market that delivers that. That is right at the heart of our strategic review. I believe the citizen and consumer are absolutely central to what we are doing. There are other considerations which we do cover in the review such as the need for better consumer information, so we have informed consumers. On the supply side we are seeking to get a better wholesale market which will then feed into retail innovation, but we are very conscious of the need that consumers on the demand side need to be better informed and we are consulting on ways in which we may enhance that.

  Q3 Chairman: While your review is pretty wide ranging, there seem to be other issues which have been thrown up and which have been dealt with by other reviews. There is the value of BT's copper, for example, which is the subject of a separate study. Are these studies being co-ordinated? One would think that one would impact on another. For example, the value of copper relates to prices charged by BT's wholesale sector. Is there joined-up regulation here?

  Mr Carter: We hope so. We planned our work plan for this calendar year and indeed for this financial year in the full knowledge of when the Strategic Review Phase 2 would conclude and then there would be a period between that conclusion in February and when we would publish our final outcomes, which is likely to be at the end of June. That would allow us to run in parallel with four or five other what you might call day-to-day—although they are certainly not day-to-day in their potential consequences—market reviews and other activities. One of those, for example, is looking at the valuation question of the underlying copper network, but there are others. We are consulting on what is an appropriate cost of capital for BT's business and whether or not that should be disaggregated and applied in different ways in different parts of the network. There are a number of other similarly significant pieces of work going on. The intention is that they are concluded at a series of points between now and the end of the summer so we get to a regulatory settlement which provides certainty to the incumbent and hopefully a framework of high levels of competition from other players.

  Q4 Richard Burden: Broadband will soon be available to 95% of the population. Its roll-out seems to be happening at the moment. When do you think it might reach 100%? Will that extra 5% be difficult to crack?

  Mr Carter: Going back to the Chairman's opening question, it seems to us that broadband is a good example at the retail level of where competition has delivered some significant benefits. I remember appearing before this Committee five years ago and we were a long way from that level of coverage and certainly a long way from the retail take-up and the pace of take-up that we are at now and that has been driven in part by some effective competition between the incumbent PDSN operator and the cable companies and also by some measure of wholesale competition, not so much as we would like. To that end we are at just north of 95% likely coverage and there are some significant local projects under way to try and infill in those geographical areas which are remote. We are also trying to release in another place as much wireless spectrum as it is possible to do to encourage alternative forms of less wire bound broadband technologies to be a possible infill alternative, and we are continuing to push for aggressive competition at the wholesale level as another driver. Whether we will get to 100% at this stage would be difficult to predict. It is worth recognising that 70% of those people who could get broadband today choose not to take it.

  Q5 Richard Burden: I understand that obviously everyone's wish would be to get to 100% and there are a number of things being done on that. If somebody does not want broadband then that is fine, but if they are in an area where they cannot get broadband and we are up to 98% or 99%, will that person who happens to live in that area not be able to get it because he is so close to 100%, so that extra bit of effort will not happen, or it will not come from the various initiatives that you are talking about? Would it be worthwhile at any stage considering, as we are so high now in terms of proportions, some kind of Universal Service Obligation?

  Mr Carter: I think our view on that is that at this stage that would be inappropriate or preemptive, but we would not rule it out. It is undoubtedly the case that provision and access to some of these new services is unfortunately disadvantaged depending upon your geographical locality. The reason for my gentle history lesson of what has happened over the last five years is there has been significant progress over a relatively short period of time and therefore our view is that it is worth looking at this stage to see what happens over the next 12 to 18 months before rushing to a judgment as to whether or not a Universal Service Obligation would either be legitimate or required. Again, just for clarity, the USO would not be ours to determine. The application of a USO on broadband would be for the Secretary of State, it would not be for the regulator.

  Mr Richards: Our current technical estimates suggest that we may reach something like 99.5 or 99.6%, so the residual number may be very, very small. It is worth remembering that when we embarked upon the broadband journey the consensus for quite a long period was that we would not reach beyond 70% and actually we managed to get very, very close to 100%. The second observation is that there are many areas that have identified local schemes sometimes with local authorities or with development agencies for that infill problem. One of the issues that have tended to be thrown up in that circumstance has been state aid questions. As you reach full maturity in the market and reach the final level which the market is likely to drive it to—and 99.5 is obviously very, very high—those state aid issues are likely to become less relevant and that is likely to give you more scope for the kind of local authority or development agency initiatives which have been considered. It would be government who would need to look at a Universal Service Obligation.

  Q6 Richard Burden: Do you reckon the right kind of timescale for looking at that might be about a year's time?

  Mr Richards: I would put it a different way. You need to have a strong sense that the evolution of the market forces has led you to a point where you understand how far the market will take you. I think the fact that it would probably have been only 60 or 70% two or three years ago makes that point. Let it go as far as the market will take it, look at potential infill activity, sometimes just groups of individuals getting together, at other times in collaboration with local authorities and development agencies, and then consider the USO beyond that. It is moving at an incredible pace. This is not a static market. There are 100,000 people taking up broadband every single week at the time, so the rate of growth is intense. It does not feel like we have reached the point of equilibrium yet.

  Q7 Richard Burden: Let us move on to the regulatory regime. The way you are approaching this at the moment is that there are regional variations. You are looking for areas of market failure about where areas require more regulation and where things seem to be going okay. Is there not a danger that varying the regulatory regime in a regional way would act as a disincentive to future investment in those areas that are currently being developed on the ADSL network of BT?

  Mr Carter: I think I would put it slightly differently. The history of regulation by geography in telecommunications is quite long. Indeed, the period of licensing fixed infrastructure competition to BT was done by geographical franchise, by cable franchise and was limited to the largely urban and denser areas. We are not pursuing a policy of geographical differentiation by regulation. There is no freedom to geographically deaverage voice charges, that is a fixed average charge. There is an emerging debate about where you are likely to see wholesale competition really emerge in the local loop and the economics would tell you that that is likely to be in the denser areas. So we have signalled that whilst in our view Datastream—which is one of the existing wholesale alternative products—is an important part of the current regulatory framework, we need to look at what the future relationship is between Datastream and LLU, if LLU takes off, in those areas where you are unlikely to see investors come in to invest in unbundled exchanges. That is where we are as of today.

  Q8 Mr Clapham: Your preferred strategy is obviously equivalence. Are you satisfied with what BT has done so far?

  Lord Currie of Marylebone: It seems to me that BT has engaged constructively with the questions that we have put forward. They have come forward with proposals that I think have moved the debate on. We have to be satisfied that it will deliver genuine equivalence of access. There is a lot of detail to be considered there including the questions of enforcement and we are engaged with BT and with the rest of the industry in debating those issues and we intend those to be resolved over the next few months. It is too early at this point to answer your question. We are examining the question of whether we are satisfied and we will have an answer by the time we produce our final report.

  Q9 Mr Clapham: Is it possible to say why there is a kind of skepticism in the industry about equivalence? Do you feel that it can become a reality?

  Mr Carter: I think there is a skepticism based on two reasons. The first one is historical experience on the ground and, secondly, because factually the incumbent holds all the network asset cards, if you are seeking to compete with BT that is a challenging activity. Our analysis laid out some alternative options and, as David has said, at this stage we are inclined to take the view that the best option is an option called real equality of access and that requires two fundamental changes from BT, one in terms of the products they provide to competitors who wish to compete with them and those products have to be provided on an equivalent basis to allow a level playing field, but there is a second dimension, which is that there needs to be organisational, structural and behavioural changes within BT to come in behind those products so that there is not obfuscation, delay, all the things that conspire to make it even harder for competitors to compete equally. Right now we are engaged almost on a daily basis in working through the detail of whether both those products and those behavioural and structural changes are (a) deliverable and (b) legally enforceable. At the moment we are of a view that we would like to get to a position where they are. If they are not, that leads the sector to the inexorable conclusion that the only way in which you can make it work is to look at a fundamentally more radical solution.

  Lord Currie of Marylebone: It is also worth recording the responses to our previous consultation to this. The balance of opinion in the industry was against the alternative of going down the Enterprise Act route and we were encouraged, I think rightly, to see whether we can really make equivalence of access work. As Stephen said, if we do not then we will have to consider the alternatives, but it is worth putting in this large amount of effort both on the part of BT, Ofcom—and indeed, we hope, the rest of the industry—to see whether we can make this one work.

  Q10 Mr Clapham: Let us look at BT and the enforcement issue. Given the lengths that they seem to be going to in terms of a separate division with separate management and separate accounts, would a full structural separation not be simpler?

  Lord Currie of Marylebone: It has always been open to BT's management to decide whether or not they wished to structure voluntarily their business in a different way. Obviously there would be regulatory outcomes that would be different that are a matter for the board of BT plc. My own view is that they have responded to our consultation in a constructive way at this stage. The question is how you make it work.

  Q11 Mr Clapham: Would a full structural change not eliminate the need for regulation?

  Lord Currie of Marylebone: No, it would not. This is one of the reasons why many in the industry have understandably shied away from the more radical structural solution, because it is not as if with one bound you are free of regulatory option, not least because in the wholesale market whatever entity was left behind would still be required to be regulated because by definition it would be a monopoly provider of wholesale, and it is not entirely clear that even a fully separated retail entity would be wholly free of regulation either. That is for now, until the market matures and develops, not a likely option.

  Q12 Chairman: Do you not think you should look at the British Gas model where you have the pipes and the need for having a natural monopoly? They had them separated into three linked companies and they came to the conclusion that the game was not worth the candle and basically they went their separate ways.

  Lord Currie of Marylebone: I think there is a very interesting parallel there. It is worth making the point that that was a decision by British Gas management to separate themselves, not a regulatory regime.

  Q13 Chairman: I remember the discussions we had with them over things like separate canteens and different golf clubs perhaps even. The Chinese walls became so much of a problem that it was better, in their view at that time, to have three separate managements altogether.

  Lord Currie of Marylebone: I think there is a parallel, but one has also to bear in mind that telecoms networks are technologically much more complex and dynamic than pipes and wires and indeed technology is moving things around all the time and therefore the question about exactly where you make the separation is a much harder one to address on the telecoms area.

  Q14 Mr Evans: Is BT playing ball with you?

  Mr Carter: It is a fair question, but it is not a game. BT is engaged in detail in answering the very specific questions we have asked them. The difference, if that is what is behind your question, is that we have been more focused on where it is we are demanding equivalence. We have been open to the question that there may be some areas of the telecommunications market where a lighter touch or a lighter form of regulation may now be appropriate because there are some markets where there is a significant measure of effective competition and therefore the need for the regulator to try and impose it or control it or structure it is not as high. The level of the detail of their engagement is high.

  Q15 Mr Evans: That is basically what I am getting at. Clearly what you are asking them to do is to invite competition into something where they are unused to having competition. You are basically saying to them you want them to give away part of their business. You talked about behavioural and cultural change. It is a bit like the European Union, is it not, where some countries sign up to Directives without any desire whatsoever to carry out the regulations, whereas other countries clearly do? I am just wondering whether you perceive that BT is being genuine when they say "Yes, we will do all your requirements" and they are smiling at you when they are saying it. Do you think they are?

  Lord Currie of Marylebone: The conversations I have had with the senior management at BT suggest yes, but they face a challenge. BT is a large organisation. It is the top board that signs up to this. They then have to transmit that message right down through the organisation to the behaviour of the engineers and people working out on the field and that is a difficult change for BT to effect. There may perfectly well be goodwill, but there is still a challenge for BT to deliver it through the day-to-day operation of their activities and that is something they recognise and that is the debate about the behavioural separation issues, how to really make this work on the ground so that it really does deliver real equality of access for the industry as a whole.

  Q16 Mr Evans: If other companies then start complaining to you that they are not getting the equivalence that you require, you basically have the last say, do you not, because you have got the threat against BT that if they do not play ball fully and co-operate with you then you have other measures up your sleeve?

  Mr Carter: We do, and we have significant enforcement powers. My own view is that part of the change of tone of engagement is a function of the fact that this regulator has more significant enforcement powers. You will hear later today from people who are competing with BT in the market and I suspect they will say, and they will probably be right, that the process of registered complaint and then seeing real change on the ground is too slow, because anything that does not happen immediately in the real world of competition is too slow. What does that tell you? It tells you that you need to have a workable solution that works on the ground. However robust the regulatory regime is, it will always be after the event.

  Q17 Mr Evans: Is it a workable solution with timetabling as well? If something is not happening, will you make it happen?

  Mr Carter: An essential part of the framework we will need to conclude or not between now and the summer will not only be undertakings that are legally enforceable but that have deadlines and timelines and measurements attached to them.

  Q18 Chairman: There is a feeling that BT's mission statement is a bit like St Augustine's prayer, "Make me good, God, but not yet"! That is our worry, that things might take rather longer than expected. You have said you are going to put down a timetable. Do we take it that it will be a fairly short and rigidly policed operation?

  Mr Carter: Within the bounds of what we are allowed to do legally. We are required to consult over time periods. We have already had questions from the Committee about Universal Service Obligations and 100% coverage and these things require some degree of balance.

  Q19 Mr Evans: Is equivalence being rolled out to the wholesale market as well?

  Mr Carter: Indeed.


 
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