Broadband - Business, Innovation and Skills Committee Contents

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.


  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.


  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.


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.


  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.


  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.


  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.


  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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