Joint Committee on the Draft Communications Bill Minutes of Evidence

Examination of Witnesses (Questions 263-279)



  Chairman: Tom?

  Lord McNally: I do not know if you like me are a fan of B movie westerns but it is a bit like where they finally get the villain and somebody in the crowd shouts, "Somebody get a rope." I do not know whether BT feels like that at the moment if you have been listening to the other evidence we have had. Oh, this is not BT!

  Chairman: This type of thing happens in the House of Lords all the time! Tom?

Lord McNally

  263. Now I really am depressed because I realise how long we have still to go! I am delighted to be able to put questions to three such distinguished companies as Energis, Nortel and Cable & Wireless. Are you satisfied with the general duties that OFCOM has been given by this Bill as it effects your sector?
  (Mr Phillips) If I could start off from Cable & Wireless's point of view, we see two main issues running in parallel. The OFCOM legislation is one very important issue obviously and we have made some comments and I would like to draw out the summary of those now, but also we think there are some major structural weaknesses in the industry at the moment in the United Kingdom that however effective a regulator becomes they will never be able to fully address. At the heart of those structural problems is the fact that we have a natural monopoly in the local network in the United Kingdom and we have a vertically integrated owner of that natural monopoly, and until we address that situation we will always struggle to get to our joint goal, which is an ever-decreasing burden of regulation, an ever lighter touch of regulation instead of what we have today, which in many cases is the opposite where regulation is increasing.

  264. But when led NTL and Telewest in that direction where they identified natural monopoly and a vertical structure they said that they did not want to kick the ball into the net which was then presented to them. Can I put the ball on the spot again. Do you think the answer to those two problems is the break-up of BT?
  (Mr Phillips) I think that we need a thorough, independent evaluation of whether or not the market is competitive. Cable & Wireless has performed its own internal analysis and our conclusion is that the market would be and consumers would be much, much better off if BT's local access network were broken out and managed under a separate organisation from BT's retail.

  265. Would you see that as a first job for OFCOM?
  (Mr Phillips) I think that would be tough as OFCOM's first job because I think OFCOM's job should be focused on regulating the market structure that it has and it has in front of it in the industry. I think the Government might consider, for example, a referral of the competitiveness of the telecoms sector to the Competition Commission so that an independent review could be made by the Competition Commission ahead of the formation of OFCOM.


  266. The Government say they want OFCOM to be a nimble, light touch regulator. Would you like to see it more or less light touch in the Bill to turn this rhetoric into a reality or do you think this desire to have a light touch is just rhetoric?
  (Mr Wickham) In terms of light touch or not, I think the issue for us is to make sure that we have got appropriate levels of regulation. It is certainly not the time right now to have light touch as applies to certainly the telecommunications part of the market. Tom has already given the Cable & Wireless view in terms of needing to look at the break-up of BT. Certainly that is something that we would agree with over time and the issue is that will take time. Right now from our perspective what we need to see is an appropriate regulatory regime in effect where it is not possible for BT in particular with significant market power to be able to launch retail products when there is no ability for its competitors to offer competitive products concurrently because there is no wholesale or inter-connect product to allow them to do so. We have been waiting now three years for an adjudication on broadband capability. That sort of thing evidences the fact that light touch certainly is not appropriate right now.
  (Mr Hargrave) Could I give a different perspective from the point of view of Nortel Networks which rather than being a service provider or operator, is a solution provider. We broadly applaud the draft Communications Bill and we think regulation should be as light touch as is necessary. The concern that we have about the Bill is the inclusion of a Consumer Panel. While the Bill talks about light touch regulation, there is a set of far-reaching powers given to OFCOM that might make this impossible. We want to ensure that those powers are used appropriately. For example, the inclusion of a Consumer Panel makes one wonder about the need for other stakeholders to be involved to monitor OFCOM and ensure that it operates, in our view, equitably.

  There are many stakeholders involved. There are service providers, there are the solution designers, those who run the operators, the new and old style technologies side-by-side. We feel there is some desirability in having a stakeholder panel of some form helping to achieve the objective I have just outlined—making sure that OFCOM uses its powers wisely. The same would be said about the set-up of the Board of OFCOM to make sure that all of these interests—and we have heard comments about the domination of content mentioned in this Bill—are reflected so that the wide powers OFCOM has been given in the Bill are used appropriately and that all stakeholders are consulted.

  Chairman: Only today have we heard about the domination of content. All the prior evidence has been information on the domination of economic factors over content. The two are quite quite different perspectives as to what OFCOM might be devolved into.

Anne Picking

  267. Do you welcome the Consumer Panel? Do you think it will be effective or do you think it will be an irritant?
  (Mr Hargrave) I would say one needs some form of consumer input. It is not an irritant but my point is you should broaden that. There are many other stakeholders. OFCOM should be there primarily to address the interests of the consumer and therefore some consumer input is required and a panel would seem an appropriate way of doing that. I am advocating broadening that so that other stakeholders' interests and knowledge is taken into account as well as just the consumer input.

Nick Harvey

  268. Surely you guys are the big boys and you can get your points across. The idea of a Consumer Panel is that it is not part of OFCOM, it is outside OFCOM but it brings together the little guys who cannot get their voice across. What added value is there in putting representatives of the industry inside OFCOM?
  (Mr Hargrave) I was not so much saying that the stakeholders should include current industry representatives but rather people who have experience from diverse industries. Clearly we must make sure that the consumers are represented and that is covered adequately in the Bill. The point that I am making is that these are quite complex decisions and OFCOM has a wide range of powers within the Bill. Before taking a decision OFCOM must take advice or be advised from the whole range of interests—people who make the new technology, the old technology, the people who make solutions, those who have networks, those who provide services. That input is required in some way not necessarily from those who are currently in the industry but that experience should be available to OFCOM to ensure that the regulation is appropriate.

Lord Crickhowell

  269. I want to go back to the initial evidence that we were hearing about monopoly and I hear the message that we ought to break up the monopoly and the vertical integration and so on, but knowing how governments work, having once been in government, I suspect that that is not on the cards at the moment and we are with the Bill we have got. You make a very cogent and powerful criticism in your evidence of the present state. What is it that is going to make the difference between the previous regulatory performance and OFCOM's performance in grasping some of these issues? Is there something in particular you want in the Bill? I asked this question, and if you were in the room you will have recognised it, of an earlier witness where we talk about shifting the burden of proof. At the moment the monopolist (BT) has the advantage in a sense on the burden of proof and, indeed, it is arguing for all sorts of additional defences. You are saying that the burden of proof should be on the monopolist to show that discrimination is not occurring. Is that your central proposal or are there others?
  (Mr Phillips) We have three. I quite agree with you, the structure of the market is a long-term issue but we do feel it is a very profound issue if we are ever going to get away from increasing levels of regulation. In parallel we believe OFCOM needs to focus on three things. One is that the burden of proof should be on the incumbent BT rather than the other way round and BT should be asked to put forward evidence that they are not behaving in a way that is abusing their dominant position in the market when challenged to do so by OFCOM rather than other operators bringing complaints to Oftel (as they do today, or OFCOM in the future) and OFCOM trying to drag evidence or material from BT, a process which lasts many, many, many months by which time very often first mover advantage has taken place in the market, and BT has established a position that competitors cannot subsequently match.

Mr Lansley

  270. Using what power are you referring to in shifting the burden of proof. Are you talking about competition powers or sector specific regulatory powers?
  (Mr Phillips) For expediency within the sector specific regulatory powers that OFCOM would have, they could be encouraged to seek the burden of proof on the incumbent in the first instance.

Lord Crickhowell

  271. Coming back to the Bill I keep wanting to know what people want and whether they are satisfied with the clauses as they are or if there are any changes you want. You have got the Bill team sitting behind you on this, so now is your moment.
  (Mr Phillips) There are another two points that we feel are particularly important for OFCOM. One is that the Bill makes provision for OFCOM to be able to take decisions which it believes are in the long-term interests of consumers and not merely what may appear short-term benefits for consumers. For example, should an operator who is dominant in a particular part of the market reduce the price of a service in that part of the market, it should not automatically be assumed that that short-term benefit flows through to long-term sustainable benefits for consumers. Thirdly and finally, we advocate strongly an effective appeals procedure. The procedure we have today lasts for too long, it gives too much benefit to the person that has made the first move and is subsequently challenged, and really is not as effective as it should be.


  272. Are you happy with the provisions in the Bill at the moment on appeal?
  (Mr Wickham) There is one specific area that I am not happy with which is that there is an appeals process in there but it sets no time-frame for the appeal. It is that time-frame that is absolutely key and I would like to see a three month beginning to end limit on that process for appeal.

Lord Crickhowell

  273. Nortel say, picking up their evidence, that such a requirement will enable efficient investment in infrastructure and promote innovation. Should any regulatory system or any legislation do that? Surely the object is to create a free, competitive, open situation? Can a regulator do anything to enable efficient investment in the infrastructure?
  (Mr Hargrave) It is difficult. We made that comment in light of operators with a super market presence. It can also be related to the concern voiced earlier about this Bill and the need for it to be future-proof. We have had discussions about broadband which may be debated today and how things are going to change in the future, but OFCOM must be confident about where things are going and somehow try and regulate in a way that encourages innovation and encourages the roll-out of infrastructure for things such as broadband. It is a hard question, but in order to make the Bill future-proof they should at least take these issues including how to encourage investment into advanced technologies, into consideration.

  274. But you are requiring a duty. I am not quite sure how your duty would be drafted without seeking to impose investment decisions or interfere with the market in a way I suspect you would be first to object to.
  (Mr Hargrave) Yes indeed. I am not clear how it would be done. Can I rephrase it somewhat and suggest that OFCOM in some way be required to take into account innovation in the changing environment of the market-place. I am a technologist at heart. We have heard things discussed previously about how things change so fast and how we do not know how the environment will go and some areas of roll-out of new innovation could be impeded if there is a super market presence in some area. In some sense they could have a duty to take these matters into consideration in their deliberations, something along those lines.

Mr Lansley

  275. I am still confused about what it is you wish the Bill to do precisely in order to achieve your objective. As I understand it, there is no burden of proof issue in relation to significant market powers conditions. There is no requirement on OFCOM if it uses these conditions to do other than demonstrate super market power and a need therefore to apply conditions. Why do you think there needs to be a change in the burden of proof on the SMP conditions.
  (Mr Phillips) I think it is more the modus operandi of OFCOM perhaps than the specific drafting point we are getting at.

  276. A more aggressive use of conditions.
  (Mr Phillips) A more aggressive use and a presumption that as a monopolist with dominance in the market you will behave as a monopolist does behave when one is dominant in the market.

  277. SMP conditions, according to your evidence, is not what you are looking for because you say accounting separation and all the things that go with SMP conditions are not enough and you have got to effect the structural reform of the market, but what you are looking for is a market investigation under the Enterprise Act when it comes.
  (Mr Phillips) I agree. What we put forward in our evidence is two parallel paths of study. One looks at the overall structure of the market, which we think is an important context to the Bill, but the other focuses on the Bill itself.

  278. There is no way you can change the burden of proof on the Enterprise Bill provisions/competition legislation provisions. They are going to inevitably work in the way they do in the Enterprise Bill. We cannot change that in the Communications Bill. There is no reason why we would do that for other sectors, so why do it in communications? Can I come on to appeals. Mr Wickham was expressing concern about time limits, but there are no time limits on appeals under communication legislation for other sectors so why for telecommunications?
  (Mr Wickham) You can correct me if I am wrong but in terms of the way in which we see Competition Appeals Tribunals being set up under the Enterprise Bill and looking at the way in which appeals might be treated, there is no doubt the two go hand-in-hand. If you correct one side maybe you do not have to correct the other, but if we have got a situation where there are appeals being heard at the moment against a situation in the telecoms industry where the burden of proof is falling upon the competitors rather than upon the incumbent, as a fact we would like to see a speedier resolution of appeals. As I have already evidenced at the moment we can wait three years for the thing to be heard to be put into place for them not to be sufficient and by that time the game is over. I hate to bang on about this particular subject because I know it has been an issue which has come up time and time again, but in the broadband market we hear about 500,000 broadband customers connected and yet 350,000 had to come through other competitors in the market and we have been trying to service our customers through broadband through an inter-connect enabled by BT and it still is not there even at its most basic level. That is why we worry about the fact that when things do not get delivered that the appeals process can take so long and we would like to see a timeframe put around it. Frankly, I cannot speak about other industries because I am not a part of it.

  279. Are you talking about appeals under competition legislation or appeals only against decisions made under the Communications Act?
  (Mr Wickham) I am referring to communications.

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