Broadband - Business, Innovation and Skills Committee Contents

Examination of Witnesses (Question Numbers 40-59)



  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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