Examination of Witnesses (Questions 40-59)
OFCOM
2 MAY 2006
Q40 Peter Luff As a point of fact,
how constrained are you in this process by international agreements?
Mr Carter: Reasonably, and the
start point is an international agreement. In fact it is going
on and it will start next month. There is some national flexibility
but `reasonably' is the answer to that.
Chairman: There are no further questions
on the broadcasting side. In that case, I am now going to hand
over to my colleague, Peter Luff, who is going to take us through
telecoms.
Peter Luff was called to the Chair
Q41 Chairman: Gentlemen, thank you very
much. The only reason we took broadcasting first is that we did
it alphabetically; telecommunications is much more important!
I would like to begin by asking that general question which I
press you nicely about now. How important, in terms of GDP, do
you think the relative contributions of broadcasting and telecom-munications
are?
Lord Currie of Marylebone: First,
the tele- communications sector is bigger, quite clearly, as a
business, simply measuring it in terms of the businesses in the
sector. If you then go on and ask what is the contribution more
broadly, it is undoubtedly the case that telecommunications infrastructure
networks are a major dynamic source of economic growth. Equally,
one should say that public service broadcasting is a major contributor
to the social, cultural and political wellbeing of the country.
I would hate to have to balance one against the other.
Q42 Chairman: When we talk about
infrastructure these days we think about road and railways primarily,
perhaps sewage if we have that kind of mind, but telecommunications
is probably the most important aspect of the nation's infrastructure
now.
Lord Currie of Marylebone: I would
agree with that. I think what we are increasingly going to see
as telecommunications infrastructure becomes general, as very
high speeds of electronic delivery is available to everybody,
are our social working patterns shifting in much the way that
electricity, when it came, changed quite considerably the way
society worked and the way in which industry located and operated.
I think we are just at the start of that transformation.
Q43 Chairman: With the fact of the
convergence of the two sectors, it makes sense for you to exist
as a single regulator but you must have a view of the relative
importance of the two sectors to decide, in the context of your
Annual Plan, how much resource you are going to devote from your
organisation to the different parts. I repeat my question: how
important are the two different parts of your work?
Mr Carter: It sounds as though
we are dancing on pinheads here. They are equally important but
the absolute answer to your resource question is that we spend
more time on matters telecoms than we do on matters broadcasting
by some order.
Q44 Chairman: I can guess the reasons
for that but it would help if you stated those.
Mr Carter: They are largely scale,
complexity, partly a function of the historical regulatory regimes
which preceded us because the licensing regime and the technical
issues associated with that are more complex in telecoms than
they are in broadcasting, and partly because the single largest
player in broadcasting is not entirely our responsibility—the
BBC—whereas all players in telecoms are our responsibility.
There is a variety of reasons but there is no doubt that by volume
of activity we spend more time on matters telecoms than we do
on broadcasting, but they are equally important.
Q45 Chairman: It is a very difficult
to answer in a joint committee. If we had separate hearings, I
wonder what your answers might have been, but that is for another
occasion. Can I ask another point of fact? There is speculation,
or more than speculation, that the European Commission is looking
to take a responsibility for telecommunications regulations to
create a proper single market. Could you bring us up to date on
that?
Mr Carter: Again, telecommunications
is far more influenced by European rules than is the case for
broadcasting where the principles of subsidiarity are more pre-eminent.
We could have an interesting debate about why that is the case.
Currently, there is a review of the existing European framework
going on. We are engaged in that. We are fortunate in the sense
that one of our executive board colleagues is currently Chairman
of the European Regulators Group, so we are in a reasonably significant
position to influence that. I think it would be inaccurate to
describe it as a desire to create a single regulator. I do not
think, beyond some of the more wild remarks on the fringe, that
is the case, but there is no doubt that there is significant pressure
to harmonise not just regulatory analysis but regulatory remedies
across Europe. That is the case.
Q46 Chairman: So you are not concerned
by that at this stage?
Mr Carter: We are deeply involved
in it. I am not sure we would say we are concerned by it. I think
we are advantaged by the fact—and I do not want this in
any way, shape or form to sound boastful because it is not meant
to be, genuinely—that across Europe, both in the newer accession
countries and indeed in the larger, more established European
countries, our regulatory approaches are generally regarded as
quite significantly developed, and therefore we tend to be at
the forefront of these discussions rather than at the back.
Q47 Chairman: Keep it that way because
the importance of the services sector in the UK economy means
that the competitiveness of the telecommunications sector is absolutely
key. Briefly, tell us about your plans for a separate consumer
voice within your organisation. You are consulting on that, are
you not?
Lord Currie of Marylebone: No.
We have a separate consumer voice already within Ofcom, which
was set up in the Communications Act.
Q48 Chairman: But are you planning
for an expansion of that role?
Lord Currie of Marylebone: No,
I think it is fair to say that the Government is proposing to
create a consumer voice. Currently, there are discussions going
on about how such a body, which may have a wider remit, would
interact with our consumer panel. On some versions of those, it
might incorporate the consumer panel, but there is a number of
different proposals on the table that are being discussed.
Q49 Chairman: When do you expect
decisions to be taken?
Mr Carter: I think the current
timetable is towards the end of the year.
Q50 Chairman: Let us move on to the
strategic review, which is obviously one of the most important
things you are doing in this sector. Can you give us an update
on the progress that BT is making in implementing its undertakings?
Mr Carter: We can. Substantial
activity has gone on since the undertakings were signed and agreed.
We have seen the creation of the separate access division, Openreach,
and all of the staff transfer and structural transfers that went
along with that. We are now experiencing what I described to my
board last week as the `bump and grind' of operational delivery.
That is creating some challenges for everyone involved. This is
no small task. Openreach is a division that employs over 35,000
people. Going back to your earlier question about the relative
size and scale, that makes it bigger even than the BBC by headcount.
In terms of consumer outcomes rather than regulatory detail, I
think we are seeing strides. I have to confess to taking some
small moment of pleasure in driving past a billboard with `broadband
price wars' when we saw broadband services being offered at ever
faster speeds and ever lower prices. That is in no small part
down to reductions in wholesale prices and ease of access and
competitors entering that market.
Lord Currie of Marylebone: I think
Stephen is absolutely right to say that we are in the process
of getting operational delivery. BT, in their undertakings, have
committed themselves to very considerable change. I am absolutely
sure that they are determined to deliver that, but of course it
is not an easy task. It is our job to keep them up to the mark.
If you go back two or three years and thought where was local
loop unbundling then and where is it now, I think the transformation
has been very considerable, to the benefit of consumers.
Q51 Chairman: So you are broadly
satisfied with the progress being made?
Mr Carter: We will give you an
answer to that in October. There are five critical delivery dates
between now and then and significant delivery dates on systems
equivalence, systems access, planning and back-haul. These are
all very important constituent elements of a programme that needs
to deliver. It would be inappropriate for us to say right now
that we are doing anything other than monitoring those responsibilities.
Q52 Chairman: It is not the case
that the jury has not yet reached a verdict; it is not in a position
to reach a verdict yet?
Mr Carter: No, it is not.
Q53 Chairman: I know one of the competitors
to BT who desperately wants this process to succeed obviously,
and it must, is a little bit concerned about any other changes
to regulation affecting the sector before the review is complete.
Can you comment on that?
Mr Carter: It is always very dangerous
for people to see one regulatory decision as contingent upon another
regulatory decision, not least because, going back to your question
about the European structure, the European structure requires
us to look at the market in vertical analysis, which I think is
one of the limitations of the European framework. We have to make
stand-alone decisions about different areas of regulation. It
is absolutely accurate to say that we have identified four or
five individual markets where we think deregulation can be pursued.
Q54 Chairman: What are those?
Mr Carter: That is in: business
lines, leased lines; in retail price controls, most visibly and
significantly in the application of price controls to the line
rental charge; what is called combined pooling of prices where
people wish to bid for commercial contracts and at the moment
they are not allowed to pool pricing on a market where they are
regulated with a product from a market where they are not, for
reasons that are obvious. There are others. And we are consulting
on some or all of those at the moment. If you work back from a
good place, if we were to meet again in September or October,
assuming that we were to find ourselves with the necessary level
of delivery on the access part of the infrastructure, it would
be disappointing, I think, in our view, were we not to see the
march of deregulation continue.
Q55 Chairman: So are you going to
add any areas, any areas earmarked out of that process at present?
Mr Carter: Not in the near term.
Chairman: We will turn to price control
and Peter Bone.
Q56 Mr Bone: Thank you, Chairman.
I think most people would agree that in 1984 when BT was privatised
things went very well; we saw lower prices and obviously more
competition and better quality. But in that bundle of privatisation
there were price protections and I understand now that there is
talk of giving up the price controls. Will that benefit consumers
or will that be to their detriment?
Mr Carter: We would not do it
if we did not believe after consultation—so just to be clear
we are consulting on that at the moment—that ultimately
it would be to their benefit. The proposals that we are consulting
on contain two important safety nets, one of which is that for
those vulnerable consumers who are on any form of income support
there is a widely available, easy to use, price guaranteed alternative.
So for consumers who are looking for low line rental with very,
very, very low call usage there is a light user scheme that is
part of that proposal. Therefore that is an important ongoing
safety net. So the removal of retail price controls from the complete
package of lines and calls will not remove that—in fact,
if anything, we have bolstered that provision. Secondly, you would
have to look at the alternative provision and, as you rightly
say, at the moment there are many alternative providers and the
number and economic sustainability of those is increasing on both
counts. Ultimately that acts as a more effective control on price
than the Regulator determining once every five years whether it
is RPI minus zero or RPI minus one.
Q57 Mr Bone: I certainly agree with
you in principle on that and what you have just said has touched
on something I was concerned about, that the vulnerable groups
who, actually, you are not talking about removing total price
control?
Mr Carter: No, we are not.
Q58 Mr Bone: Can I just go back to
the fact that BT is still dominant in the sector and it has more
than 50% of the market share? Is there a danger that if you completely
do away with price controls—and maybe this would have happened
anyway in the current situation—that BT, if it wanted to,
because of its strength could sell at ridiculously low prices
to knock other competitors out of the market and when they have
gone they can put the prices way up?
Mr Carter: We would have powers
to deal with the exact situation that you describe; we could do
an own initiative investigation on predatory pricing, and we are
a competition authority in the sector so we would be able to deal
with that. Indeed, we have examples of that in other areas, so
I would not be unduly concerned about that specific concern. What
we are trying to balance here is really the point that the Chairman
made in his opening remarks about the importance of the sector.
Since we have inherited our responsibilities from the Telecoms
Regulator we have never taken it as our job to beat up the incumbent
telecoms provider; that does not seem to me to be the definition
of good regulation. The definition of good regulation is to have
effective controls where they are necessary and where they are
not necessary to get out of the way and allow market services
to compete, because you are right to say that BT is the majority
provider of fixed calls, but when you then look at lines and calls
together and then lines and calls and mobile calls together, and
then you look at voice services and other forms of communication
over a four to five year period, this market is changing at a
substantially rapid pace, and it would not be to our overall industrial
competitiveness to be too restrained by traditional market definitions.
You need to be aware of them and you need to have effective controls,
but if you are overly restrained by them what you end up doing
is regulating for yesterday very effectively and then tomorrow's
products and services somehow or other do not come as thick and
as fast as you would want them to, and we are always trying to
get that balance about right. There are judgments and there are
analyses to be done but that is why we have said we think now,
after the undertakings, with effective implementation, with real
competition, with increasing alternative forms of call-like services,
now is the time to remove retail price controls, apart from for
that vulnerable group of society who are on some form of income
support.
Q59 Mr Bone: So, in summary, it will
be cheaper for most consumers and you are still going to look
after the vulnerable?
Mr Carter: If you wanted to regard
telecoms as a utility, which we believe increasingly is not a
helpful classification, if you go back to your 1984 start point
and you look at your utility prices in gas and electricity and
you compare what is happening in telecoms then prices are going
down in telecoms.
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