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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