Examination of Witnesses (Questions 20-36)
1 MARCH 2005
Mr Stephen Carter, Lord Currie of Marylebone, and
Mr Ed Richards
Q20 Mr Evans: I want to look at Local
Loop Unbundling. Is this recognition that then ADSL now is `the
only game in town'?
Mr Carter: I am not sure the cable
industry would welcome that question. Clearly at a retail level
and infrastructural level there is an effective and increasingly
consolidating competitor. It does not have anywhere near 100%
geographical reach. If one is looking across the reach of the
country in fixed infrastructure, ADSL is the major player.
Q21 Mr Evans: Do you fear that with Local
Loop Unbundling it is going to divert scarce resources away from
our infrastructural investments?
Mr Carter: I think that is a very
important question and it goes back to the Chairman's question
about timing. The judgment we took when we inherited our responsibilities—and
history will be the judge of whether it was right or wrong—was
that if we could get the conditions for alternative investments
in LLU right speedily then that would facilitate other players
investing in the network at the deepest point of infrastructure,
which might then lead to subsequent follow-on investments in other
areas. We have never seen it as an absolute end in itself. It
is a means to an end, but that means you have got to get it right
reasonably fast otherwise the market or technology moves on.
Mr Richards: We looked very carefully
in the first part of the review at whether there was, as a result
of technological change, other opportunities for full end-to-end
infrastructure competition in the model of the cable industry
but perhaps through wireless mechanisms or indeed fibre to the
home. The conclusion we came to, which we tested in the consultation
process, was that indeed in many people's view there was no long-term
scope for that. As a result of that, as Stephen said, what we
wanted to focus on was driving competition as deep into the network
as possible and we combined the consultation we did with some
economic modelling and where we believe that that is possible
is through Local Loop Unbundling at least for a significant part
of the UK. Where that takes place within the UK should have a
broader beneficial effect across the UK more generally. That is
the way we have been thinking about it. We spent a lot of energy
and time looking at alternatives first because clearly if it had
been possible to take any measures which would have introduced
full multiple infrastructure competition from end to end that
would have been a preferable outcome, but there is no suggestion
anywhere that that is in the offing.
Q22 Mr Evans: Are we not storing up a
little bit of trouble for the future with so much concentration
going on ADSL as well? There is a capacity problem, is there not,
with ADSL in any event? Is it 18 megabits a second?
Mr Richards: It is 18 to 24. It
varies around the world. There are all sorts of experiments and
research and development going on in this area. We pretty much
know now that you can do 18 to 24 per second over copper. That
does have a consequence because it is very hungry and therefore
it may affect the reach of the ADSL network in any particular
area if you are giving very high bandwidths to people closer to
the exchange. There may be a consequence that needs to be looked
at carefully there. Nevertheless, it does raise the issue of the
next generation beyond that. There will be an upper limit. It
is remarkable how far people have been able to extend what you
can put over copper. This is another issue that we have looked
at carefully and had a lot of dialogue on in the UK and internationally.
At the moment I think it is safe to say that in the UK there is
very little ambition to roll-out anything beyond stretching the
copper as far as you can to that 18 to 24 megabits per second.
That is not the case in other countries. In the US now there is
more fibre going either to the home or to the kerb. Both SBC and
Verizon have announced major investments in that area. As I know
you are aware, in some of the Asian countries, Singapore, Korea
and so on there is already investment of that kind.
Q23 Mr Evans: Is our industry going to
be disadvantaged compared to other countries round the world if
we do not encourage or somehow incentivise proper investment into
these new technologies?
Mr Richards: I think the most
important thing that we have thought about in this area is that
we have got a clear regulatory framework which will facilitate
that next generation investment should there be the demand from
industry or indeed people at home for that kind of capacity. It
is important to make the distinction between the UK and some other
countries. The biggest difference with a country like Korea is
that they have very high densities which make the economics of
providing fibre to a building, for example, much more attractive.
The UK tends to have less dense populations. We want to make sure
that we have got a clear regulatory framework in place so that
when people are ready to roll-out and when they believe the demand
is there from businesses or homes, that investment can be made.
We have looked at a variety of different options which we are
consulting on at the moment. One is full regulatory forbearance
where essentially we say if you want to make the next generation
access investment—and this is not BT's core network, this
next generation broadband access—we would forebear from
regulating for a certain time period, thereby making it the most
attractive situation. They would be able to earn full returns
on it. Another option is to make the ducts and civil infrastructure
of BT available to other players who then may make an earlier
investment. The third option that we have looked at is what we
have called open access through which we would have a regulated
return on a single fibre investment, but a whole variety of different
providers might have one of those fibres or share that fibre access.
At home you could choose between different service providers but
there would essentially be monopoly regulated access.
Q24 Chairman: I am not very clear here.
The emphasis in the last few moments has been about technology,
but we are talking about a market which requires massive resource
in order to gain even a niche position. The difficulty seems to
be that we have been concentrating on the technology but not the
cost. My understanding is that outside of BT there are a number
of people who are very precariously placed at the present moment
in the sense that it costs them more to sign people up than the
charges that they make. If BT just sits there and plays poker
long enough the other ones will leave the table because they do
not have the resource regardless of the technology. What would
you say to that view?
Mr Carter: It is not the most
optimistic view I have heard.
Q25 Chairman: We are here to get some
idea of what is happening.
Mr Carter: You will hear later
today from companies who are trying to compete with BT. Whether
they would describe themselves as precariously placed or not,
I do not know. What Ed is describing in terms of alternative technologies
demands an investment appetite, demands significant capital investments
and Op-Ex investments in order to be able to make it. At this
stage, partly because of the structure of the market, partly because
of market valuations and a variety of other things, there is no
real evidence of that. In another place in the telecommunications
market, in mobile, there are significant capital investments being
made not least in the rolling out of third generation network
capabilities, five of them to be precise. It is not that there
is no investment in new telecommunications infrastructure. We
are having a conversation about fixed, but there are investments
in alternative technologies taking place.
Q26 Mr Evans: Do you see that as a case
for the defence as well sometimes and not moving as fast on fixed
when they say you have always got mobile telephony?
Mr Carter: You mean the case for
BT?
Q27 Mr Evans: Yes.
Mr Carter: I am not sure, not
least because of their position in mobile. One of the conclusions
we came to in our review is that fixed to mobile convergence is
not yet, certainly in competition terms, a meaningful reality;
in other words, you still need to treat them as separate markets
for the purposes of regulation. My point really was in response
to the Chairman's point that there is a scale of investment being
made but it is in other areas.
Q28 Chairman: Do you think the investment
could go further if BT's charges were reduced? You might argue
that Michael Howard could use BT as a model for immigration policy
as far as letting people into the exchanges is concerned in the
sense that in the past it was almost as difficult getting through
the eye of the proverbial needle as getting into this place. That
has changed but there are still charges involved. Fabulous sums
have been paid every week to BT for what seemed to be relatively
minor problems; it is £300 a throw at the moment. Have you
thought about trying to get that reduced? There obviously are
economies of scale coming into play and some of the people wanting
to get into the LLU business are not being able to move at the
speed they would like to move because of the scale of the charges.
Do you have regulatory powers to look at these prices?
Mr Carter: We do, we have been
and we will continue to do so. We have seen significant reductions
in the wholesale charges from BT in the local loop both for rental
and connection, largely for shared lines rather than for fully
unbundled lines. We are currently consulting on the cost of the
local loop. Wherever we conclude on the cost of the copper—because
that is a significant proportion of the wholesale charges—will
read right across to what are, going forward, acceptable charges
and I think it would be safe to say that those charges are only
going to go in one direction and that is downwards. There is no
doubt that your analysis is correct, that the wholesale charges
in part have been an obstacle to the enthusiasm of those people
who wish to compete. I do believe there is now a common acceptance
across the industry including BT that we need to get a level of
significant competition in the local loop. Is there absolute universal
agreement as to what the charges should be? I am not so sure,
but there is common agreement on the principle.
Mr Richards: Connection charges
have come down from £117 to £34 in the last four months
and the rental from £53 to £15.60, so there has been
a big change in the last 12 months, whereas last year the price
was genuinely regarded as prohibitive.
Q29 Chairman: There was an access charge
of £300 which has never been altered as I recall, is that
correct?
Mr Richards: Those are the shared
line prices. We are consulting on the fully unbundled.
Q30 Chairman: The other thing we were
a bit concerned about was the issue of regulatory uncertainty
and whether this was a determined investment. Are you concerned
that the length of time that your reviews are taking is creating
a degree of uncertainty which is perhaps holding back LLU as well?
It is not just BT who is the villain here.
Lord Currie of Marylebone: If
we were to be proceeding without proper consultation, without
engaging with the industry about the issues, I think we would
be subject to the opposite charge, that we are not taking due
regard of the views of the industry.
Q31 Chairman: You are damned if you do
and damned if you do not.
Lord Currie of Marylebone: Consultation
does take time, but we are very clear that the objective at the
end of this is to create a regulatory framework that gives clarity
and certainty, that incentivises not just BT to invest but also
other players and so we have a much more healthier wholesale scene
which will then feed through as benefits to consumers at the retail
end. That is absolutely at the heart of what we are trying to
achieve.
Q32 Chairman: How do you see the role
of Datastream contributing to wholesale competition?
Mr Carter: Datastream was one
of the first decisions we had to face when we took over from Oftel
and we made the decision at the time that we should regulate the
margin available between IP Stream and Datastream on a retail
minus basis rather than a cost plus basis. Why did we do that?
We did it because it was quicker and we thought an immediate response
was what many people in the industry—some of whom are sitting
behind me—were demanding. We rationalized it because the
trouble with doing cost plus calculations when you are dealing
with emerging technologies is you lock in cost bases which may
change over time. It can be inappropriate or inefficient. What
has actually happened is that I think most industry observers
would say that Datastream has not developed its scale in the way
that one would originally have envisaged. In a sense the development
of LLU in the denser urban areas calls into question the role
of Datastream. Short term our view is that Datastream has a significant
role and we will continue to make the necessary regulatory interventions.
Then there is the technology question. Datastream is an ATM based
product and as telephone products move to IP technology we will
have to look at some medium-term changes there. That is really
where we are in the industry.
Q33 Chairman: As a consumer I get bewildered
by speeds and charges. Is there any move afoot to simplify that
for the lay person? I know that previous regulators have used
Which? magazine as a kind of conduit for the transmission
of information about rates and charges. Have you thought of doing
anything like that? People are now being somewhat bewildered by
adverts saying something is twice as fast as the one which was
slowest last week and you do not really know what it is all about,
and then there is quite extensive advertising about how you can
get something for next to nothing and you pay for it per year.
Is there not a duty on you to try and simplify this so that the
lay person can get a clearer handle of what they are paying for?
Lord Currie of Marylebone: We
did lay out in the strategic review of the last consultation a
whole set of options in this area. We are consulting on this question.
We are reluctant to be prescriptive about narrowing the range
of options out there in the marketplace because that does reduce
consumer choice. What we ideally want to achieve is a position
where the consumer is better informed and there are a range of
options that we laid out that may or may not achieve that. It
is a question we will be coming to. The regulator being prescriptive
about tariffs and products I suspect is not the way forward.
Q34 Chairman: It is not so much being
prescriptive about the tariffs but how they are presented and
a question of how long you consult.
Lord Currie of Marylebone: We
are consulted in a timely way. The danger with being prescriptive
about how the data is presented is that we may prescribe it to
be presented in a rather misleading way. There are a lot of options
out there. It may not be possible to make it so simple, but that
is the question we are asking. We will listen to views.
Q35 Chairman: Are you confident that
once the consultations are over, once you have got your mind clear
and the industry understands what you are going to do, you will
have the ability to enforce these decisions on the recalcitrants?
Lord Currie of Marylebone: We
have extensive powers, but one of the questions that we are specifically
addressing at this moment is the question of how we would enforce
real equivalence of access in a way that we ensure that BT does
indeed deliver on that. There are some enforcement questions and
we have different options in that respect. We have to be satisfied
at the end of it that we can make it stick and if we are not confident
in that then we will have to look at the alternative options that
we laid out.
Q36 Chairman: That has covered all the
areas that we wanted to raise with you. There may well be issues
which come up as a consequence of the evidence we get this morning
and so we may get back to you.
Lord Currie of Marylebone: If
you wish to ask us further supplementary questions in writing,
we would be very happy to respond.
Chairman: We may well have to do that.
Thank you very much.
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