Memorandum submitted by Scottish &
Southern Energy
Scottish and Southern Energy plc (SSE) is a
major energy company with interests throughout the supply chain
of activity from power stations; through ownership of regulated
network infrastructure in electricity and gas; to the retail supply
of energy-related products to a customer base of around nine million.
SSE also has interests in the communications markets as discussed
below.
In the last few years, SSE has developed retail
product offerings in fixed-line telephony and in broadband, using
the wholesale products available in the market. For these products,
SSE owns no technical infrastructure used in delivering the product
and is in a similar position to that of a "supplier"
in energy markets, who uses regulated network use-of-system products
to deliver a service to customers. However, SSE also has a subsidiary
(Neos Networks Ltd) that does own communications network and equipment
and is actively involved in the provision of capacity and bandwidth
services to large business customers and on a wholesale basis
to other communications operators. It is also worth noting that
communications services support the energy industry—the
communications services SSE uses support our own contribution
to "critical national infrastructure".
SSE is therefore interested in the development
of the UK's communications markets and has contributed views to
the Government's Digital Britain project. SSE has views on some
of the questions raised by the Committee in June and these are
set out in the attached memorandum.
In essence, SSE believes that there is a clear
and urgent need for appropriate regulation and governance of the
UK's telecoms market in order to achieve the Digital Britain goals
in a fair and competitive manner. Without a "step-change"
in this area, the current structure will not deliver, competition
will be inhibited and companies with existing market power will
dictate the evolution of the market.
SSE would be keen to discuss these views in
more detail with the Committee and requests the opportunity to
give oral evidence.
SUMMARY
1. SSE's role as a utility spans electricity,
gas, telecoms and water. Looking across these components of the
"critical national infrastructure of 21st Century Britain",
SSE believes that there is a clear and urgent need for appropriate
regulation and governance of the UK's telecoms market in order
to achieve the Digital Britain goals in a fair and competitive
manner. Without a "step-change" in this area, the current
structure will not deliver, competition will be inhibited and
companies with existing market power will dictate the evolution
of the market.
2. SSE believes that the forthcoming Digital
Britain Bill should go further than it currently does in terms
of examining market structure. SSE would urge the Committee to
press the Government for reforms to ensure that the telecoms market
has the following characteristics:
— A co-regulatory governance of market
processes. Current market processes are piece-meal, confusing
and therefore inefficient. Ofcom and industry need to work together
to deliver governance arrangements that set out simple requirements
for market participants' behaviour, clear technical and commercial
standards, fair and standardised customer migration processes,
and the means with which to enforce market behaviour.
— A truly competitive market for retailers
and network operators. Retail package providers (suppliers)
must be allowed fair access to mass-market communications infrastructure
to encourage retail competition. The newly created Network Design
and Procurement Group must ensure that there is proper contestability
in the roll out of infrastructure provision. The "new deal"
for telecoms cannot allow existing operators to dominate the future
provision of infrastructure and services, or else a significant
opportunity would be lost.
3. As we move forward over the next decade,
there are bound to be further technological developments in the
fast-moving communications markets. SSE believes that if the market
is set up as proposed in this response, the market would be in
a stronger position to react to new developments than it has been
with the introduction of NGA technology.
INTRODUCTION
4. Scottish and Southern Energy plc (SSE)
is a major energy company with interests throughout the supply
chain of activity from power stations; through ownership of regulated
network infrastructure in electricity and gas; to the retail supply
of energy-related products to a customer base of around 9 million.
SSE is also active in the communications markets, offering retail
telephony and broadband products to residential customers as well
as capacity and bandwidth services using our own communications
network to other communications providers and to large business
customers.
5. SSE agrees with the view emerging from
the Digital Britain work, that the communications sector can increasingly
be regarded as providing a vital range of services which necessarily
underpin everyday life in the UK—in other words, it is a
critical "utility" sector, like energy and water services.
This leads us to the view that there is a significant need for
greater coordination of the underlying communications infrastructure
platforms in order to achieve efficient investment, together with
market governance arrangements to allow coordinated maintenance
and development of normal utility market processes such as those
which allow customers to change supplier.
6. Our response to the third of the Committee's
questions, in particular, provides further details of our views
on this point.
RESPONSE TO
SPECIFIC QUESTIONS
1. Whether the target for universal access
to broadband at a speed of 2Mb/s by 2012 is ambitious enough?
7. SSE will leave the Committee to judge
the level of ambition outlined by this target. SSE would support
an approach of "service competition as far as possible",
where a mix of technologies is contemplated in achieving the aim.
2. Is the Government right to propose a levy
on copper lines to fund next generation access?
8. SSE supports the Government's intention
to raise funds to assist with the extension of a next generation
access (NGA) roll-out to reach the significant majority (around
90%) of households in the UK.
9. SSE understands that the aspiration of
the proposed Next Generation Fund is to enable a certain level
of "fast" connectivity and quality for most of the UK
households that are not likely to be served by the commercial
roll-out of NGA infrastructure. Rather than concentrate on a particular
method of delivering this—fixed line fibre—and establishing
a fixed line tax base to support this, SSE would recommend that
the levy also be applied to mobile telephony services. This would
appear more equitable and "technology neutral", while
avoiding introducing a distortion into the retail market for fixed
and mobile telephony services by increasing the tendency for householders
to give up their fixed line link in favour of mobile telephony.
3. Will the Government's plans for next generation
access work?
10. SSE is not optimistic that the Government's
plans for NGA will "work smoothly" without greater attention
within the developing framework for NGA to the provision of the
following matters:
— A greater degree of coordination,
both to support the smooth running of the underlying communications
infrastructures and to allow market developments to be implemented
in a coordinated manner;
— Transparent, non-discriminatory wholesale
access arrangements to allow suppliers of NGA services to
reach customers in a fair and economic manner, no matter what
NGA infrastructure network they are connected to; and
— A market framework that supports contestability
of NGA infrastructure provision, so that NGA infrastructure
can be built up in the most economic manner, drawing on the skills
and innovation of new infrastructure providers, where these provide
the most efficient solution in a particular location.
11. SSE discusses each of these in turn
below.
COORDINATION
12. SSE believes it is evident that coordination
between infrastructure providers in the areas of technical standards
and interconnection arrangements is necessary in order to allow
communications traffic to flow between different networks. To
some extent, this is happening in the NGA context with the establishment
of the NICC to deal with the evolution of standards in these areas.
This is a welcome development but still, in our view, lacks two
features which would make it more effective and sustainable.
13. The first of these is a governance mechanism
to establish and enforce the initial standards and to develop
and subsequently enforce a consensus way forward on necessary
amendments to them as the market evolves—there is currently
no statutory or regulatory requirement on any party to abide by
NICC standards for NGA. Transparent governance arrangements form
the authority and means by which changes to the standards can
be proposed, debated, implemented and enforced—a framework
that SSE believes will support competition and innovation in infrastructure
provision.
14. In practical terms, governance within
a market usually involves setting up a market body, independent
of market participants but answerable to them, in order to administer
the documented standards of the market. The second feature that
SSE believes is necessary is that there should be regulatory involvement,
at a high level, in setting the objectives and direction for the
market body that looks after the standards such that they evolve
in a manner compatible with consumer and citizen interests.
15. In order to support the commercial working
of the market, SSE also strongly believes that there needs to
be coordination and governance of commercial standards and market
processes that support service level competition. A key example
of such a market process is that of the arrangements to allow
customers to switch between different suppliers of NGA services,
which are a vital component of a vibrant telecoms service market.
Particularly as communications technology evolves, migration arrangements
between retail products using different underlying technologies
need to be transparently coordinated to protect the end customer
experience.
16. As outlined above, this "market
governance" must be mandatory for relevant market participants
and have regulatory oversight for the ultimate benefit of end
customers. SSE therefore believes that the overall framework for
governance should be "co-regulatory", in the sense that
it is a regulatory obligation for relevant parties to "belong"
to the arrangements; the regulator is involved at a high-level;
and the industry is self-governing as far as possible within this
framework.
17. The benefit of self-governing market
processes is that they are able to deal with more detailed issues
and can be adapted more quickly to cater for developments in the
market. They can also develop proactively, when problems are anticipated,
whereas regulatory intervention is often "after the event"
once a problem has become evident. Activities such as house move
processes and requirements for network termination equipment in
customer premises require input and agreement from both suppliers
and infrastructure providers, so both must be involved in and
subject to the governance arrangements in order for the activities
to be properly coordinated.
NON-DISCRIMINATORY
WHOLESALE ACCESS
ARRANGEMENTS
18. SSE supports open access for suppliers
of NGA services to the various NGA infrastructures that may evolve.
This supports the entry into the market of a wide variety of suppliers,
leading to increased customer choice and innovation in the services
provided. SSE believes that every care should be taken to ensure
that end customers do not become locked in to the retail offerings
of the infrastructure provider to which they happen, due to their
location, to be connected. The best means of achieving this objective,
in our view, is a combination of regulatory requirements on NGA
infrastructure providers and supplier involvement in the market
governance arrangements described above.
19. By analogy with the open network access
arrangements that exist in energy markets, SSE believes the formal
regulatory requirements to protect suppliers would need to include
the following obligations on NGA infrastructure providers:
— Clear rights for any person to seek to
"use" the NGA network infrastructures in order to provide
services;
— Transparent charging methodologies which
are appropriately set in relation to the cost of the "use
of system";
— Clear regulatory timeframes for the provision
of terms for "use of system"; and
— Appropriate rights for any party to refer
a dispute over "use of system" terms to the regulator,
who could then determine those terms.
CONTESTABILITY
20. Just as there is benefit in the ready
ability of suppliers to enter the market for NGA services through
the provision of open access to infrastructure, there is similarly
benefit in ensuring that new infrastructure providers can readily
provide new NGA infrastructure. In this case, the benefits arise
from the efficiencies, innovation and downward pressure on prices
that the new entrants could bring to the whole market. Furthermore,
where public funds are to be made available, SSE believes it is
imperative that Government ensure that all potential providers
have an equal chance of securing funding.
21. SSE therefore welcomes the proposed
establishment of the Network Design and Procurement Group (NDPG)
and would hope to see this body develop a transparent process
for determining which projects will be supported by the funds
available. SSE believes there would be merit in considering the
awarding of local franchises, so that an operator winning a tender
process for providing NGA roll-out in an area has exclusive rights
to provide that infrastructure - on an "open access basis"
as discussed above.
22. A framework for contestability would
also entail, in our view, a clear set of technical standards for
inter-operability between the new NGA network and the nearest
suitable existing infrastructure, together with clear commercial
terms and conditions for new NGA infrastructure to "plug
in" to existing network infrastructure. In communication
networks, interconnection can take place at different levels of
network capability from "low level" connection of, for
example, dark fibre extending the reach of an existing network's
capability to more sophisticated "high level" styles
of interconnection at more intelligent network layers, including
traffic management arrangements between two physically separate
networks. SSE would suggest that for all these levels, it has
to be clear to a new network provider what standards they need
to abide by and what terms they would reasonably face for such
interconnection. In effect, SSE believes that all the regulatory
protections set out in paragraph19 above for the benefit
of suppliers should also be replicated with "interconnection"
substituted for "use of system" for the benefit of new
infrastructure providers.
23. Finally, it is important for there to
be a level playing field for all interested parties in assessing
the economics of different projects. In this regard, SSE is aware
of one significant anomaly in the imposition of rates for making
optical fibre ready for communications use ("lighting"
the fibre). Currently, BT pay a significantly reduced fibre taxable
rate compared with other operators, which would naturally affect
the economics of any fibre-based schemes tendered for NGA roll-out
funds. SSE recently looked at the acquisition of a communications
network with a significant fibre component of around 1000km. However,
a business case could not be made once the significant cost of
fibre rates was included.
WAY FORWARD
24. SSE believes that the above areas could
be addressed through a combination of legislation, regulatory
action and careful design of the role of the NDPG, which SSE considers
will be of fundamental importance in establishing, in a cost-effective
and pro-competitive manner, the underlying infrastructure on which
current and future generations of broadband (and other future)
products will depend. In our view, there may also be an ongoing
role for the NDPG in maintaining an overview of infrastructure
matters throughout the whole communications infrastructure as
this develops over time.
25. There are bound to be further technological
developments in the fast-moving communications markets. SSE believes
that if, in particular, the arrangements for technical and market
governance are set up as SSE has proposed, the market would be
in a stronger position to react to these developments than it
has been with the introduction of NGA technology. With the industry
itself (under high level regulatory supervision) owning the detailed
processes necessary to make the market work, SSE believes that
subsequent technological changes, service innovations and other
developments could be addressed far more quickly and effectively
than at present without needing the regulator—or indeed
the Government—to intervene to establish the necessary coordination.
Importantly, once the framework for customer migrations is coordinated
and governed as suggested, one of the key consumer protection
concerns about an end customer's experience in seeking to switch
between different product offerings will be addressed on an ongoing
basis.
4. If companies are providing the speed of
access which they promise to consumers?
26. No comment.
5. The extent to which current regulation
strikes the right balance between ensuring fair competition and
encouraging investment in next generation networks?
27. SSE believes that encouraging investment
and fair competition do not need to be set against each other
as competing objectives. For a utility market, SSE believes that
the key enabler of both market investment and the protection of
fair competition is appropriate coordination mechanisms within
a high level co-regulatory framework, as SSE has discussed above.
If these are established, SSE thinks it follows that: obligations
on different market participants are clear; market processes develop
flexibly under industry control; and market participants have
the confidence to invest and innovate. SSE is therefore of the
view that all the proposals SSE has put forward for allowing next
generation access plans to work smoothly should also be applied
to the current regulatory framework. In particular, SSE notes
that there is not yet a coordinated and comprehensive framework
for customer migrations across all products and all networks.
6. Any other views stakeholders think the
Committee should be aware of.
28. Although the current emphasis in the
communications market is on the roll-out of broadband, SSE believes
that a "broadband" product, at whatever speed and quality,
is just one example of the sort of use that can be made of the
underlying connectivity of communications networks. SSE is aware
of other applications and products such as utility "smart
metering" requirements and remote healthcare monitoring that
are likely to seek to use available communication networks in
the future.
29. SSE therefore believes that it is the
underlying connectivity of the communications infrastructure that
should be governed both technically and from a market process
perspective. In particular, SSE does not believe that the capacity
of the communications channel into a customer's premises should
be "owned" by one retail supplier. Instead, it will
be necessary in our view, for this channel to be managed independently
of suppliers, at the infrastructure level, as an open-access "portal
to the home". SSE believes this will provide the greatest
flexibility for suppliers to develop a variety of different future
NGA products and for customers in seeking to use them in a manner
which best suits their lifestyles and interests.
30. Finally, in tune with our other comments
from a "utility" perspective, SSE suggests that consideration
is given to measures to protect continuity of service in the event
of failure of market participants. By analogy with measures taken
in energy and other utility sectors, provision could usefully
be made for both an equitable "supplier of last resort"
arrangement and special network administration in order to protect
the position of customers and the continuity of the services on
which they may depend.
25 September 2009
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