Examination of Witnesses (Question Numbers
40-59)
MR ANDREW
HEANEY, MR
AIDAN PAUL,
DR TIMOTHY
WHITLEY AND
MR DAVID
WILLIAMS
2 NOVEMBER 2009
Q40 Mr Wright: I was just going to
comment that it is certainly a mixed bag and obviously the jury
is out on this particular one, and I wait with interest.
Mr Paul: I can give you some benchmarks
on what we did for the design in Cornwall, and that is that without
a subsidy you could make a case for something like 25% coverage
of households or people. It needed a subsidy, and in that case
quite a significant subsidy, to get it up to 85 or 90%. As we
stand today, looking at current demand, you could make a business
case that would have supported something like 25% penetration.
Chairman: It does feel to me as though
the Government's guesstimate is under, and we are all a bit in
the dark at present.
Q41 Mark Oaten: Mr Paul, I think
earlier on you were about to say you wanted a change in the regulatory
system to be able to speed up next generation. Do you want to
tell us a little bit about that?
Mr Paul: This is the information
we got out of doing the trials in Cornwall. On my submission we
analysed the cost of getting back from Hatt. If we are to put
infrastructure in there independently—I do not know if anybody
has a submission—
Q42 Mark Oaten: Can I stop you a
minute? I have to be absolutely honest—can you define Hatt
for me because I am getting a bit confused?
Mr Paul: It is a small settlement
three kilometres north of Saltash. It consists of 210 buildings
and we estimate around 400 people.
Q43 Mark Oaten: You keep using it
as a generic term for lots of things.
Mr Paul: It is very representative
of the Final Third.
Q44 Mark Oaten: Is it a term that
other people in the industry understand?
Mr Paul: It is an actual village.
Q45 Mark Oaten: I know, but it is
being used all the time.
Mr Paul: I am using it all the
time because we have discovered that it is very, very representative
of a very significant part of the Final Third.
Q46 Chairman: It is Ambridge!
Mr Paul: It is whatever—it
is actually—yes. If you look at the map we have provided
you will see that, quite to our surprise, these settlements are
very evenly distributed across the UK, that they represent what
we think are the lower end—half the size of Hatt, we think,
represents the lower end of what it will ever be economical to
do fibre-to-the-cabinet with, and so it is a very, very important
benchmark against which you can then compare whether or not a
universal service obligation can be met and how it can be met.
Q47 Mark Oaten: So on to the regulation.
Mr Paul: It is three kilometres
away. If we want to connect this cabinet back, we put a cabinet
next to BT's cabinet at the end of Hatt. We can then connect into
much shorter copper loops. So the distance from the exchange in
Saltash to Hatt is just short of five kilometres. It is pretty
much technically impossible, as it currently stands, over a single
copper loop for anybody in Hatt to receive a decent quality 2Mbs
service. When we get to the connections in to the cabinet in Hatt,
we shorten those loops from five kilometres plus the cabinet length
to about 600 metres, and because we have shortened that copper
loop we can get much more signal down it and therefore provide
much higher bandwidth.
Q48 Mark Oaten: I am sorry, this
is getting too technical for me. What is stopping you doing what
you want to do?
Mr Paul: The cost of getting back
from the cabinet in Hatt back to Saltash.
Q49 Mark Oaten: The regulator is
stopping you doing this.
Mr Paul: The regulator is not
facilitating it.
Q50 Mark Oaten: You want the regulator
to do what to make this happen?
Mr Paul: Allow us access to BT's
duct network or fibre at the same prices and under the same terms
and conditions that BT is using itself for its trials elsewhere
in its roll-out of fibre-to-the-cabinet.
Q51 Mark Oaten: What is BT's view
of this?
Dr Whitley: I think BT's view
of this is that that is a bit of a simplification of the economic
challenge associated with next generation access. It is the subject
of ongoing discussion with the regulator. The economics are driven
not just by that element, that one bit of the network, but very
much by the cost of establishing the cost of the cabinets, by
the number of customers you can get on each of those cabinets.
You do not need to take BT's word for it: study after study has
noted that the economics of deploying such infrastructure in very
small locations is extremely challenging. It is something that
is starting to happen. It obviously depends on the level of demand,
take-up, and, Andrew's point, the level of premium that people
are willing to pay for those services. That track is one that
is fraught with difficulty in terms of the ability of customers
who ultimately get choice. If we ended up with a whole load of
regional networks built to different standards and built in different
ways, then the question that would arise is: can service providers
exploit those infrastructures?
Mr Paul: There speaks the monopolist!
The fact of the matter is that here are all the components of
the FTTC (Fibre to the Cabinet) service. I cannot buy a single
portion of them on the same terms and conditions that BT provides
to itself. This is a regulatory concession that Ofcom let them
off, without anybody realising, about two months ago. These are
all meant to be regulated components. There is nothing special
about a cabinet in Hatt; it is exactly the same as a cabinet in
Muswell Hill! The density of the people living in Hatt is the
same as Muswell Hill.
Q52 Mark Oaten: I tell you what;
we will bring in a slightly more independent jury here. Andrew
and David, what are your views?
Mr Heaney: I would not say I was—or
BT would not say I was wholly independent because I was at Ofcom
when we set up. If you go back to 2000 we used to have one standard
service at 2Mbs; it had a fixed contention rate; you needed a
BT engineer and a BT modem to get it working. The thing that really
drove broadband out to a lot more people and uptake in those days
was that the regulator forced BT to open up the exchanges and
unbundle its local loop and let people in.
Mr Paul: Absolutely.
Mr Heaney: That is what really
drove out investment in new services and more advanced services.
What Aidan is saying, better articulated and detailed, is, "Please
can we open up those bits of assets in BT's network so that other
people can have a crack at this opportunity?" That is the
way of making sure—
Q53 Mark Oaten: David, I presume
you do not care because you have got your satellites!
Mr Williams: I do not subscribe
to the notion that BT is an evil monster; BT is a big company
and by and large it does a pretty good job. Its network is pretty
good and it has behaved, by and large, pretty well. The best way
to deliver services to consumers is with a reasonable amount of
competition, and I think there is reasonable competition. I do
not think BT should allow its network to be bastardised and given
away to anyone at highly subsidised prices. I compete with BT
and sometimes BT are a bit vicious towards us and sometimes they
are not, and that is the way a market works. I am very happy to
compete with BT on open standards.
Q54 Mark Oaten: It is a 2-2 draw
at the moment! We might ask the audience in a minute! You have
been unbundled before and you have survived, have you not?
Dr Whitley: It is a very, very
important point. We absolutely have been unbundled. We have one
of the most competitive markets on the planet as a result of that
unbundling. Andrew's analysis is right. The whole policy though
over the last few years has essentially been to unbundle at the
deepest level of infrastructure that is economically viable. There
is no philosophical difference between us; the debate is the limit
of that economically viable piece. Our view, and it is a view
that has been shared by the Broadband Stakeholders' Group and
a variety of folk who have done independent analysis, is that
one that says that at the moment the economics of uplifting the
access network are sufficiently challenging that to have multiple
players—the idea of multiple street cabinets on street corners—is
utterly uneconomic. Therefore, the solution that has been struck
in the UK with the regulator and with industry is that Open Reach,
a division of BT, plays the role of providing an access solution
on an exactly equivalent basis to all communication providers
in the market. That is the model we are developing.
Q55 Mark Oaten: But if you are not
getting there, and particularly not getting into the Final Third—
Mr Paul: Yes.
Q56 Mark Oaten: — for goodness
sake, maybe let some smaller local regional outfits that can use
alternative ways to get into those areas have a bite at the cherry.
Dr Whitley: It is important to
say there is nowhere we are not getting which other people are
getting without some form of subsidy.
Mr Paul: You are not getting to
Hatt.
Q57 Mark Oaten: Well, hang on!
Dr Whitley: In Cornwall at the
moment a competitive tender process is going on, which BT is in,
so we do not know how that is going to pan out yet.
Mr Paul: Well, it is not competitive
because we have withdrawn from it because the playing-field is
not level.
Dr Whitley: Okay, in which case
BT cannot be charged with not going into those areas.
Q58 Mark Oaten: It is true, is it
not, that there are smaller models, for example in Bournemouth
and Dundee, where local groups have used other forms of utilities,
which you have not been able to do? They have been able to do
that and get to areas you have not got to?
Mr Paul: And Rutland.
Dr Whitley: Bournemouth is the
example of folk using the sewers as a means of getting fibre past
people's homes. As yet, I do not think any service has been provided
on that. One of the challenges that infrastructure will provide—and
it is a commercially funded enterprise and is competing with BT,
and we will compete with it as we are not afraid of competition
by any means, is encouraging the major service providers, who
by and large customers want to buy their broadband services from,
to deliver service. I do not think TalkTalk are delivering services
over that infrastructure; certainly BT Retail is not. They are
not doing it for good reason, because the ideal situation for
a service provider is that they can, with a common set of standards,
a common process, a common way of dealing with troubles and faults,
deliver a service anywhere.
Q59 Mark Oaten: We are running out
of time. There is clearly a debate to be had about this, but do
you think the current regulatory structure is robust enough to
handle this debate, or do we need to look at finding a better
way to arbitrate on this kind of debate?
Mr Paul: EC recommendations, which
are still in a draft form, which would have been in force had
there not been delays for intellectual property reasons, basically
identifies that there is a danger with Fibre-to-the-Cabinet and
these new investments are actually reversing the position. The
fact of the matter is that the reason why we have a competitive
broadband environment in the UK is because companies like TalkTalk
could get hold of the components. That is still the requirement
for going to the next phase. The question is the granularity.
If you have a situation between Saltash and Hatt where, on the
old technology, that market was open and one could get hold of
the components, the clear requirement is that if there is a change
in technology those connections back to the Saltash exchange are
not closed. At the moment, with the concessions that have been
granted to BT, the market has been foreclosed to us and we cannot
make Hatt economic without having a change in the regulatory environment.
Mr Heaney: I think Ofcom has got
the tools to do the job. A lot of what regulation comes down to,
at the end of the day, is whether you have, in a sense, got the
guts to go for it, because it is a bit of a battle. Back in 2004
Ofcom and BT had a bit of a battle and it came out with some new
rules on unbundling, and that worked. Just thinking about the
Government's role in this, it is for the Government to say to
Ofcom and the outside market: "What we would like is for
this market to be opened up." That would help it to happen,
and Ofcom has the tools.
Dr Whitley: I do not agree with
the position that Aidan has laid out. I think that by and large
regulation is heading in the right direction. Ultimately the most
important thing for all of these investments, which are, as we
have said in the earlier stages of this session, highly risky,
is certainty. All of these investments have very long paybacks,
and therefore certainty in the regulatory regime under which they
are operating is important for all parties. In the context of
the so-called passive remedies that have been discussed, the most
likely outcome of those, if they were to exist, is that they would
encourage further investment in the areas where we already have
commercial plans and will have roll-out. I do not think they will
necessarily mean that it will suddenly be economic to go to much
more remote areas. The evidence for that is that when we look
at the LLU market today, in 60% of the UK exchanges, despite the
fact that LLU exists there—a passive remedy that is there—BT
is the only company that has invested. So I think the idea that
opening those up would—
Mr Heaney: We go to 80% and are
soon to go to 90%.
Dr Whitley: Of exchanges. Your
stat is population coverage, which does point to the trickiness
of this. There are 5,600 exchanges in the UK, geographic locations,
and I think you are probably in just under 2000, and that is probably
80% of the population covered. So I do not think those remedies
will be the things that encourage further investment in those.
Mr Heaney: Just because competitors
cannot get to the last tenor 20%, I do not think you should in
that case stop them getting to the first 50 or 80%.
Mark Oaten: Thank you! I thought it was
going to be really dull; it has been really interesting—
Q60 Chairman: — afterwards,
Mark, but you did it for the record. I knew you would get engaged.
Aidan Paul did not even mention business rates in answer to your
earlier question. I do understand the importance of that issue.
We do not have time to go into it now. It is in your written submission.
Mr Paul: There is one further
piece. There is the draft 2010 Central [Rating] list that has
come out and I have copies of that. It indicates that between
2005 and 2010 BT's business rates will have gone down by 54%.
There is no apparent reason or justification for that. Interestingly
enough, that represents something like £190 million a year
reduction in the rates charge, which curiously—we think
is accidental—is about the same amount as is proposed to
be raised from the Broadband levy. We have a situation where it
appears that BT has been given what amounts to a large concession
on its rates bill, and we do not know the reason why, which seems
to be about equal to the sum of money proposed to be raised by
the Levy. The simple thing to do would be not to give BT the concession
on the business rates and allow the Treasury to disburse that
money that it would otherwise have spent and not have the Levy.
Q61 Chairman: I am very conscious
about running out of time, but I think Mr Whitley ought to be
given the chance to respond to that point.
Dr Whitley: It is actually subject
to ongoing legal proceedings so I probably will not comment on
that.
Q62 Chairman: I do think this is
an important point. Aidan Paul and I have been in regular correspondence
on the issue of business rates for a very long time now, and I
have not always given him the detailed replies he would like to
his very detailed representations. This is an important question.
What we have done for this investigation, unusually—normally
committees for reasons I do not understand to do with Parliament
where everything is in public afterwards, when the witnesses come
in—is we have put all the evidence on the Web, and we are
just about to put some new bits on that came to us recently. What
I would love you to do, and also the wider Internet community
that is looking at this, is to look at this and other issues raised,
look at what is in those written representations and give us responses
to them. There is not time to do it now with the four of you,
but it is all out there and we would really like to have an interactive
debate about these issues. What you have just said about the equivalence
of the 50p levy and the business rate issue seems to me to be
hugely significant. I had not heard you make that point before.
Mr Paul: This is the BT rateable
value that was updated on 22 September—presumably it was
negotiated before that but it was only published on 22 September,
so we did not have a chance to submit it.
Chairman: These things are frustrating
because, as always, we get engaged with the issue and we ask more
questions than we plan to and run out of time, but I am grateful
for that very interesting exchange. The liveliness at the end
showed some of the underlying tensions for the first time, and
I was very pleased to see that. Thank you very much. You have
been very constructive and very helpful, and the differences are
just as important as the areas of agreement. Thank you very much
indeed.
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