Joint Committee on the Draft Communications Bill Minutes of Evidence

Memorandum submitted by Cable and Wireless plc

Cable & Wireless plc

  Cable & Wireless is a major global telecommunications business with revenue of over £5.9 billion (US$8.6 billion) in the year to 31 March 2002 and customers in 70 countries. The company consists of two core and complementary divisions: Cable & Wireless Regional and Cable & Wireless Global. Cable & Wireless Regional offers a full range of telecommunications services in 33 countries around the world. Cable & Wireless Global's focus for future growth is on IP (Internet protocol) and data services and solutions for business customers. It has developed advanced IP networks and value-added services in the US, Europe and the Asia-Pacific region in support of this strategy. With its financial strength and the capability of its global IP infrastructure, Cable & Wireless holds a unique position in terms of global coverage and services to business customers. For more information about Cable & Wireless, see

Executive Summary

  Cable & Wireless believes two fundamental, parallel issues must be given full and proper consideration by policy makers. These are:

    —  As long as the telecommunications market remains dominated by a vertically integrated monopolist, there will never be full and effective competition. There is, however, an alternative market structure that may deliver increased competition

    —  Despite the significant constraint of the current market structure, nevertheless a more effective regulatory framework can and must be developed, comprising three key elements:

  1.   The principal objective for OFCOM must be the long-term interests of consumers

  2.   The need for appropriate and effective regulatory mechanisms, for example placing burden of proof requirements upon incumbent, regulation of dominant players only and more stringent penalties

  3.   An effective appeals procedure.

  These key themes are developed in this submission.


  Cable & Wireless welcomes the Joint Scrutiny Committee's inquiry into the draft Communications Bill and is delighted to be able to submit written evidence and take part in its oral sessions.

  The draft Communications Bill must be viewed within the correct context, beginning by examining the fundamental issue that underpins it, namely, why continued regulation of the communications industry remains necessary and what alternatives, if any, exist to regulation that may better promote competition in the sector?

  It is the view of Cable & Wireless that, with regard to the UK telecommunications market at least, there exists two parallel and critical needs requiring simultaneous attention. The first and perhaps most fundamental is that despite immense and sustained efforts by industry, the regulator and government, full and effective competition remains a distant ideal. In our view the UK market structure, dominated by an ever present vertically integrated local loop monopolist, will never be fully competitive and therefore will not deliver choice, innovation and value for money to consumers. Only through the removal of BT's control of the essential loop facility can the full benefits of competition flow.

  That being said there is little doubt that a more effective regulatory framework may have dealt more capably with BT's behaviour in recent years, and hence the second need that requires action is that of the objectives, structure and powers of OFCOM. These must be cast with a view to redressing the market failure that exists. Publication and passage of the Communications Bill will therefore provide an excellent opportunity for Parliament and others to reassess how best to arm the communications regulator.

Why Regulation?

  Cable & Wireless believes that the Government's proposals to reform the UK communications regulatory structure fail to address adequately the key question as to why regulation is necessary. Instead, the development of policy in this area has assumed that the current market structure is largely fixed and therefore, going forward similar levels of ex ante regulation will be required. Cable & Wireless suggests that as a result Government and Parliament risk missing an opportunity to properly address fundamental issues such as market structure and better regulation.

Reaching the Limits of the Current Regulatory Framework

  The need for sector specific regulation is of course a function of one or more companies having significant market power or indeed, market dominance. In the case of the UK telecommunications sector the market has long been and remains dominated by BT, a direct result of its previous incarnation as a state-owned vertically-integrated monopoly through which the tax-payer provided the investment necessary to construct a ubiquitous telecommunications network. This network, or at least the local access network (the "final mile" connection between every property and BT's local exchange), remains a natural monopoly. Unfortunately wholesale privatisation of BT in 1984 simply transferred a publicly-owned monopoly into a privately-owned one, with regulation providing the proxy for competition and the means to mitigate anti-competitive behaviour. This regulatory framework was designed to ensure basic cost-based and non-discriminatory interconnection (access) to BT's network for competing operators and where applied, has been largely successful, resulting in downward pressure on retail prices and some limited innovation in voice and simple data services.

  However, this relatively successful period has come to an end. The reason for this is that, driven by rapid technological advances, the telecommunications sector is moving away from basic voice services into new and emerging markets for advanced Internet and data services, and software applications. New technologies and the opportunities they create offer greater potential for anti-competitive behaviour by BT, in particular the leveraging of dominance into emerging, nascent markets. Regulation, by its very nature retrospective, is unable to deal effectively with this type of behaviour—perfectly illustrated by the failure of Local Loop Unbundling (LLU).

The Failure of Local Loop Unbundling

  Local Loop Unbundling ("LU") is a regulatory obligation requiring BT to provide access to its copper line network, giving competing operators the opportunity to offer broadband services by installing Digital Subscriber Line (DSL) equipment in BT exchanges.

  Not surprisingly BT sought—largely successfully—to prevent competing operators from entering this market. This has been achieved by erecting as many practical obstacles as possible for other operators, to delay their market entry while simultaneously developing its own DSL roll out in order to secure first mover advantage.

  Significantly, Oftel was unable to prevent such behaviour and therefore promote effective competition in the nascent UK market for DSL-based broadband services—despite a number of vigorous discrimination and anti-competitive complaints from competing operators. The reason for this failure, in the view of Cable & Wireless, lays with its insistence on an unjustifiably high level of proof that discrimination by BT has occurred. Given BT's recognised dominance in the local access market, perhaps an alternative and more effective basis would be for Oftel to place the burden of proof on BT to establish that discrimination had not occurred. Had this been the case, there is little doubt that BT would have quickly produced all the necessary information to prove that their aggressive roll-out of their own DSL capabilities, in the absence of an equivalent, fit-for-purpose wholesale unbundled product, was a legitimate move. Instead, the burden was on Oftel to prove discriminatory behaviour yet they relied almost entirely on BT, who had no interest in assisting the investigation, to produce evidence to show discrimination. With the cards so firmly stacked in BT's favour, it is an almost impossible task for the regulator to effectively police the sector.

  Consequently, the lengthy period of time it took Oftel to collate evidence, conduct investigations and make known its conclusions meant that competing operators were entering a market characterised by increasing regulatory uncertainty and assertive behavior on the part of BT. Not surprisingly, most operators left the market.

  Moreover, the failure of LLU revealed a fundamental weakness in the current regulatory framework and Oftel's interpretation of its role. In response to complaints from operators, Oftel reasoned that because the market for DSL services is a new one, by definition BT does not have market power and as such there is no role for the regulator to act. Unfortunately, such reasoning denies the possibility of leveraging market power from upstream markets into emerging downstream ones—in our view a crucial, necessary position for a regulator to take in the uniquely fast-moving telecommunications sector.

  The LLU experience is by no means a one off, nor is it confined to BT and the UK. Similar developments occurred in the market for flat rate Internet access where BT effectively secured first mover advantage by erecting barriers to entry, and across Europe a similar pattern has emerged of vertically-integrated, dominant incumbents preventing other operators effectively competing in new markets.

Going Forward—the dual requirement for an effective market structure and an effective regulatory framework

  In order to achieve the objective of an effectively competitive market two key issues need to be addressed. The first is an appropriate market structure to support effective competition at all levels of the value chain. Second is the need to put in place regulatory structures and mechanisms adequate to redress any remaining imbalances.

  Cable & Wireless submits that the current ability of BT to leverage its dominance in the local loop to the detriment of other players in the retail and wholesale markets represents a market failure. Moreover, the behavioural regulatory remedies are insufficient to act as an effective proxy in the absence of competition. Cable & Wireless therefore urges the Government to initiate a review of the UK market structure to assess if it actively promotes the objective of maximising consumer benefit through competition. In parallel, we would urge the Government to ensure that regulation is clear, quick and effective at addressing actual and potential anti-competitive practices by the incumbent.

  Cable & Wireless further asserts that the Government's current regulation-based proposals for reform, as set out in the draft Communications Bill, are unlikely to achieve the objectives it seeks to achieve. At the very least, Cable & Wireless fears they will succeed only in continuing the current path of ever-increasing and more intrusive levels of regulation—an outcome that is ultimately in the interests of no one.

  A way forward would be to remove, in the first instance, the incentives for dominant incumbent network operators to discriminate in favour of its own retail services. It is clear that these incentives are inherent to, and a function of, a ubiquitous vertically integrated organisation such as BT. Inevitably there will exist a rational desire on the part of the incumbent to protect itself from competition in downstream markets and hence use its ability to leverage market power from its network operations—most commonly in the form of undue discrimination. It is worth pointing out that this strategy is unlikely to be the most efficient or profit maximising for the network which, if it operated independently, would seek to maximise volume and profitability by carrying traffic from all retail providers without favour.

  Accounting separation does not remove these incentives. The level of regulatory vigilance required to identify cross subsidy is a near impossible task when the incumbent holds all the information and again, will act to thwart regulatory intervention by failing, or being unable, to provide the necessary information to test claims of undue discrimination.

  Cable & Wireless therefore holds the view that structural reform of the sector, or more precisely BT, is necessary to promote competition in the local access market. More specifically this would require the local access network to be independent of the core transmission network and crucially, it should not compete in the retail market. This model, similar to that applied in the gas market, would both create the necessary economic incentives to maximise investment on the network while at the same time reduce the need for intrusive regulation. Since its principal if not sole source of revenue would come from providing access to all retail service providers, BT included, the independent local access entity would have the necessary incentive to promote investment by all operators. The result would be a more competitive market for broadband services with all that implies for increase in penetration of products and services, downward pressure on prices and product innovation.

  This proposal for an independent local access company is seen by some as bold and radical. However it meets the Government's objective "to roll back regulation where it is no longer needed, particularly where competition can take the place of regulatory intervention" (paragraph 3.1.1, The Draft Communications Bill—The Policy, DTI and DCMS, May 2002). Cable & Wireless urges the Committee to examine means by which progress of the Communications Bill addresses the issue of structural reform.

  Moreover, Cable & Wireless would like to draw the Committee's attention to the increasing level and range of support this proposal is receiving. Within the telecommunications industry a number of companies including Kingston, Colt and Worldcom support this proposal, as do a wide range of individuals and organisations including political bodies, think tanks and consumer bodies. Following its examination of the communications sector the Culture, Media & Sport Select Committee recommended that OFCOM take into account "the proposal to require BT's network to stand on its own as a distinct business" (paragraph 74, Communications, Fourth Report of Session 2001-02, Volume 1, 1 May 2002). The European Commission's Competition Directorate appears to be taking an increasing interest in structural separation of incumbent operators (see "Europe Attacks Regulatory Logjam", Communications Week, 20 May 2002). The Adam Smith Institute recently called for BT to be restructured (Broadband Britain: The Way Forward, Adam Smith Institute, February 2002). Broadband for Britain, a campaigning body seeking to promote broadband take up in the UK also supports structural separation as do Claire Spottiswoode (former regulator of the gas industry) and Professor (Lord) Currie, Dean of the City Business School.

The Role and Structure OFCOM

  With or without structural reform of BT, OFCOM will hold a pivotal position in the development of the communications industries in the UK. Ex-ante regulation will still be required, and the need for effective policy leadership will demand a strong, sector-literate regulator. Cable & Wireless would like to identify for the Committee the areas it believes are the most important in ensuring that an effective competitive market is an achievable aim.


  OFCOM must balance short term political and customer requirements with the long term health and viability of communications and broadcast industries. It is vital that OFCOM's primary objective is to act in the long-term interest of all end-users. It has been clear that Oftel's ability to make effective decisions has been hampered by the tension brought about by conflicting short-term and long-term objectives. Regulatory initiatives by their nature take some time to implement and further time to take effect. It is often easier for the regulator to take the decision not to involve himself in the market, allowing whatever activity to continue. Where this results in a dominant market position being exploited, to gain a move into a new market, this may deliver a product to market in the short term. However in the longer term the inevitable lack of competitive pressures will allow the dominant player to control innovation, roll out, and limit opportunities for price competition.

  Whilst we agree that minimising volume and level of regulation is a worthwhile objective, where regulation is required it should be appropriate and proportionate rather than light-touch. In some situations, such as network charge controls on BT, detailed regulation is both appropriate and proportionate, in other instances, such as retail price controls in competitive markets, detailed regulation would be neither appropriate nor proportionate. It is interesting to note that whilst the draft Bill expresses the aim to introduce light touch regulation, it does in fact impose more obligations on non-SMP electronic communications network and service providers than currently apply. Measuring the volume of regulation is neither a proxy for competition nor effective regulation.

Regulatory Certainty

  Updated policy objectives and a new organisation structure for OFCOM should not be considered a satisfactory output of this legislative process. This is an ideal opportunity to bring about a change to the cultures of existing regulators. Historically, a sense of fair play has prevailed, with regulators assuming that given a particular regulatory direction the relevant party would comply. Clearly this has not been the case for some time and the creation of OFCOM is an opportunity to undertake a shift in thinking and behaviour. Regulatory decisions are as influential as any product development by market players, with policy and regulatory decisions equivalent to corporate strategy and investment plans. The regulator should undertake a similar level of rigorous research and analysis before making decisions and set goals and timescales for their implementation and the delivery of results. Undergoing such rigorous processes will improve the quality of decisions, policy and expectations.

  Where enforcement is required, we are pleased that OFCOM will have the power to impose fines on the relevant parties. The level of fine must be more punishing than the business won as a result of not carrying out the obligation (eg offering the relevant interconnection service) in the first instance. If OFCOM has carried out decision making from an established policy base, it shouldn't be shy of using all available tools to ensure effective implementation.


  The introduction of an effective appeal mechanism should develop and promote transparent regulatory decision-making. It would therefore be unfortunate if the appeal mechanism was used to slow down and hamper decision-making. Appeals, like other regulatory decisions, must be concluded swiftly to ensure regulatory certainty and Cable & Wireless would argue that the Communications Bill must include maximum timescales for the conclusion of Appeals.

  Where regulation is developing it is becoming more detailed. Recent decisions by Oftel have involved detailed knowledge of BT's network (Partial Private Circuits, Local Loop Unbundling) and the relevant market and consumer demands (FRIACO). Matters brought to appeal are likely to require a detailed technical and economic analysis combined with a legal understanding of the case and it is vital therefore that the Tribunal can appoint suitably expert members when reviewing OFCOM decisions.

  There is clearly a potential for tension between the need for swift, yet expert decision making. Whilst solving such a dilemma is not easy, it could be achievable. Minimising the number of decisions that go to appeal can be achieved by ensuring OFCOM sets clear policy goals, makes transparent and timely decisions in line with policy and setting measurable targets and expectations for the outcome of regulatory decisions.

  The Bill should however secure powers for the Appeals Tribunal to effectively and efficiently collate and review evidence to ensure timely resolution.

Transposition of EC Electronic Communications Directives

  Part 1 of Chapter 2 of the draft Bill transposes the package of EC electronic communications Directives into national law. It is therefore appropriate to use terms and definitions used in those Directives. For instance, the draft Bill uses the term `end-user' instead of `consumer' (eg clause 38 (1) (a)), the term `customer' instead of `consumer' (clause 39) and gives definitions to electronic communications network and service (clause 22) in a way that differs to the EC Directives.

  As well as adding a further layer of complexity it is also difficult to see how appropriate and proportionate (indeed light touch) regulation would be implemented when in fact two separate, but overlapping obligations are introduced.

Content regulation

  The draft Communications Bill hints at the complexities that lie ahead for OFCOM as it seeks to regulate content in a converging world. In tomorrow's world, it is most likely that consumers will access a range of content currently available through a combination of different media (eg TV, PC or radio) via all and any media. The challenge for OFCOM will be to reconcile traditional approaches to content regulation with modern delivery mechanisms. For instance, the consequences of the proposal to amend the definition of broadcasting services "available for reception by members of the public" (clause 238) merits further examination in our view as it is likely to capture services that appear to be excluded elsewhere in the draft Bill. Care should to be taken to ensure that there is no spill over from broadcasting regulation in to information society regulation, which is already covered by the E-Commerce Directive.

  The EU Directive on e-commerce provides the regulation of service provider liability for on-line content. Interactive services will proliferate in the coming years to the point that Internet users will be able consume a variety of services through gateways accessible on a variety of different media (ie: Internet, digital television etc). It is therefore crucial that intermediaries, whether Internet service providers or providers of digital television distribution, benefit from the same limitations to liability in law. The draft Bill is, however, silent on this matter. To give communications service providers the legal certainty they need, we feel that the liability provisions of the Directive should be extended to cover broadcast content, as well as information society services.

May 2002

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