Examination of Witnesses (Questions 80-99)
Mr Alex Blowers, Mr Jim Niblett and Dr Yih-Choung
Teh
19 FEBRUARY 2007
Q80 Lord Geddes: Mr Blowers, you
have said twice that you think the time is ripe for proportionate
intervention: you used "proportionate"; I am using "intervention".
Do you think the Commission's proposals are proportionate?
Mr Blowers: I think it is well-known that we
have major, severe reservations about the proposal that the Commission
issued. It seemed to us, if I can comment on the process, that
the intention was good but the proposals themselves were rushed.
There was consultation; as part of the European Regulators Group,
we contributed to that consultation. We pointed out some of the
deficiencies of the proposals; some were removed but actually
others were not removed. I am very happy to comment on the detail;
actually I shall ask one of my colleagues to comment on the detail.
In outline, I would say that the proposals from the Commission
managed to combine both being too imprecise in some areas and
too detailed in others, which is an interesting kind of combination:
highly micro-regulatory in some dimensions and yet actually quite
vague and unclear in others. Sorting out that problem and moving
to regulation which would be more effective has been the challenge,
since last year, with which we and others have been engaged in
the course of the negotiation in the Council Working Group and
in the European Parliament.
Q81 Lord Geddes: Where are we now?
Mr Niblett: First can I say we took the view
that the fundamental problem was at the wholesale level, concerning
the prices which operators pay to one another to allow their customers
to roam. That is where the thrust of the regulation should begin.
In that area, we think the Commission really were a bit too lax
and their proposals were a little bit too generous perhaps to
the industry and they should have been a little bit tougher. At
the retail level, on the other hand, the Commission's proposals
undoubtedly were too tight. They would lead to the risk of forcing
the smaller providers out of the market, to a severe risk that
there would be tariff uniformity and there would not be the scope
for the innovative types of tariff which we have seen emerging
in the market over the last year or so. For example, the tariffs
which have appeared fairly recently, where a consumer pays a fixed
price in return for a bundle of minutes—it would be very
difficult for providers to offer those under the Commission's
proposals. Where I think the Council is moving to is definitely
in the direction of much more flexibility at the retail level,
so to remove the constraints slightly at the retail level, but
not too much. There is also the very interesting idea, which was
proposed originally by the German Government, of a consumer protection
tariff which would protect the infrequent roamers, who could not
expect the best deals but nevertheless deserve to be protected.
There seems to be a consensus developing around those ideas, certainly
at the Council; we see that being reflected also to some extent
in the European Parliament, although they are not so far ahead
in their discussions.
Q82 Lord Geddes: Evidence we heard
just now said very clearly there should not be any regulation
at this stage on the retail side. Would you agree with that?
Mr Blowers: No. I think we believe the debate
has moved on slightly. Again, in fairness, the position the UK
Government took, and with which Ofcom agreed, was that there should
be a significant gap, a period of time should elapse between wholesale
regulation and retail regulation, and that should allow the industry
to get its act in order. Our bias against intervention, which
I have mentioned already, strongly favours intervention at the
wholesale level over intervention at the retail level. All other
things being equal, if the wholesale regulation works, at least
that should remove the need for very heavy-handed regulation at
the retail level. I think what Mrs Reding has said is, and I think
where the consensus on the debate is now, given the length of
time which has elapsed, given the length of time that these problems
have existed in the market, it is necessary to be able to demonstrate
conclusively to the consumer and the European citizen that the
benefits will feed through to consumers on a reasonable timescale.
Chairman: We will suspend
for 10 minutes. When we come back perhaps you might expand just
a bit further on your approach on averaging of prices, allowing
the operators to average rather than have a maximum cap.
Lord Geddes: I wonder
if Mr Blowers could define, in his opinion, what gap he had in
mind: six months, 12 months, 18 months, whatever.
Chairman: There is a division
in the House, we will be back in 10 minutes.
The Committee suspended from 5.38 pm to
5.48 pm for a division in the House
Q83 Lord Geddes: The question I asked
was, with the cacophony of bells going on, in your opinion, how
long should be the interval between the regulations on wholesale
and retail?
Mr Blowers: I think, in a way, the debate has
moved beyond the idea of there being a stay of execution on any
retail provisions, which was the position which a number of Member
States were taking at the outset and a number of experts were
taking. Now the question is "What provisions on the retail
side"? Remember we are talking about potentially the Consumer
Protection Tariff to which I referred, which is the guaranteed
tariff or benchmark to which everybody is entitled. That is one
element of the proposal on the table in the Council on retail,
then possibly an average retail price cap as well in addition,
and there are some other complexities, but basically those are
the two key component parts. Our expectation at the moment, Jim,
if I have this correct, is that we expect the consumer protection
tariff to come in with almost immediate effect, so the regulation
goes into force and two months, three months, after the regulations
come into force that Consumer Protection Tariff is available.
Q84 Lord Geddes: Sorry; as a layman,
could I describe that as a ceiling, beyond which he cannot go:
is that what you mean by consumer protection tariff?
Mr Blowers: Yes. The idea is that this would
be a tariff set at some reasonable level to which anybody, even
the most infrequent user of roaming, would be entitled. To go
back to the point which Lord Dykes was making earlier, about the
different interests that different groups of consumers have in
roaming, this would be the tariff which would be ideal for the
person who roams infrequently. It would guarantee that everybody
would benefit from a significant reduction, over and above where
roaming prices are today, so all of us would benefit from that.
But some people, who are particularly heavy users of roaming,
ought to be able to benefit more; that is the idea. We are not
setting a single price for all users. I am saying all users should
be entitled to a price that looks like this, and then of course
operators can bundle, can be creative, can package, so as to produce
even more attractive pricing for those who are really heavy users
of roaming. This addresses a political concern that if we move
purely to average retail price caps some consumers might lose
out because all of the benefits would flow to the heavy users.
From our point of view, that is a significant consideration; it
means that with this particular part of the proposal, to use the
horrible expression, all boats will rise, as a consequence of
introducing the regulation. What we are saying is that Consumer
Protection Tariff could be introduced very quickly; it could be
introduced within a matter of two or three months from the regulation
coming into force. It does not involve major changes in systems;
it does not involve major changes in the underlying economics.
However, there is a very important caveat to that, which I would
like to get on the record, which is, that has to be an opt-in
tariff, not an opt-out tariff. Were you to move to an opt-out
tariff, which means that everybody, without asking for it, is
moved automatically on to that tariff, that is a massive issue
for the industry to accommodate. It means a mail-out to, however
many, let us say, 100 million customers and a contract change
for 100 million customers, some of whom, of course, will not want
to make that contract change; they have to opt back in then to
the package which they wanted. That debate about opt-in or opt-out,
which sounds relatively trivial in the overall scheme of things,
in our view, is one of the things which turn this regulation from
being a reasonably sensible and proportionate piece of work to
something which would introduce massive cost for not much additional
benefit. That is one point which I was keen to emphasise, that
difference between opt-in and opt-out.
Q85 Lord Geddes: You favour the opt-in?
Mr Blowers: Indeed. Does that answer your question
on timing?
Lord Geddes: Yes. Thank you.
Q86 Lord Haskel: From the evidence
which we received before and from what you have been saying, you
have been talking about innovative tariffs and have just explained
to us how you are going to try to reduce the prices, one gets
the impression that there are a lot of reasonable prices already
in existence. Then are you saying to us, it is because of the
lack of knowledge of people, they do not know about these reasonable
prices, that you are concerned about it, and is it part of your
responsibility, as regulators, to make sure that this lack of
knowledge is compensated for, that people know about this? If
this is so, is not this one way of dealing with it?
Mr Blowers: This is a very interesting question
and I am going to answer it by pointing out that—when was
it?—a year ago, Ofcom published quite a lot of information
with the specific intention of guiding people through the complexities
in this area and trying to encourage people to see that there
were choices available, there were options available to them.
We would say still that any regulatory system which does not reflect
and recognise that complexity, that difficulty of exercising choice,
in what actually is a fairly non-transparent market, is likely
to be defective. Transparency is a very important component of
this but it is not enough just to have transparency. Going back
to what I said right at the beginning, there is a fundamental
market failure problem because of this discontinuity between the
person setting the wholesale charge and the person who is setting
the retail charge, for you, the customer. We could have as much
transparency as we wanted but I think still we would have a core
problem which would need regulatory intervention, over and above
simply making choices more transparent.
Q87 Lord Haskel: Does not that imply
that what you have to regulate is the wholesale market?
Mr Blowers: Certainly it implies that wholesale
is the core of the challenge here, and this has been Ofcom's position
throughout this exercise: above all else, get wholesale right.
If we can get wholesale right, we can put in place price caps—wholesale
charge controls is a better way of putting it—which reflect
a keen and competitive cost so that they do not allow over-recovery
of costs at the wholesale level. That is the core of the problem;
it is the nub of the issue here. As I have said, the politics
of the situation demand immediate results, demand a rapid feed-through
of those benefits to consumers; that is why the retail component
also has come in for close scrutiny, and there has been a strong
push for a retail element as well, but wholesale is the core of
what needs to be regulated in this situation.
Q88 Lord Dykes: Coming back to that—and
again we apologise because, as outsiders, it is very complicated
for us, I am sure you understand—was the reason why you
said that attacking the wholesalers is the key to it not just
because of the excessive prices that were being operated anyway
but because, inevitably, there is a degree of at least quasi-cartelisation,
the way in which the companies operate together, there is bound
to be at that level and at that incipient stage of price-fixing,
in a way?
Mr Blowers: As a competition authority, we are
very, very careful about the use of the word `cartel' and I would
certainly not describe the situation as a cartel.
Q89 Lord Dykes: I said quasi-cartelisation?
Mr Blowers: Thank you for that clarification.
It is always something regulators find very difficult to admit,
that they do not know the answer to something. We do not know
what the answer is to the exam question of why is this wholesale
stickier than it should be; we know that there is an issue around
incentives, because everybody who is a seller of wholesale has
an incentive, obviously, to raise those prices, and to some extent
they are insulated from the retail customer, so there is an obvious
issue there. Why is there not more competition between providers
on the wholesale rates themselves; why is it that in some markets
clearly wholesale rates are significantly lower than in other
markets? I have to say, after a lot of examination, there is no
very clear understanding of why we are in that situation, and
you can see, I think, why that encourages the view that regulation,
quick, effective regulation at the wholesale level, is the best
way to crack this problem.
Q90 Lord Dykes: Presumably you cannot
do it, other than suggesting a price cap; that was what you were
referring to?
Mr Blowers: Yes.
Q91 Lord Dykes: You are still in
favour of a single cap, I think, are you not?
Mr Blowers: We are.
Q92 Lord Dykes: Would there be any
other mechanisms one could have to make sure that there is not
even minimalist quasi-semi-cartelisation operating?
Mr Blowers: Do you have any thoughts on that?
Dr Teh: I think our view is that a single, average,
wholesale cap which would apply between operators is the best
way.
Q93 Lord Dykes: Leaning on the tougher
side?
Dr Teh: Yes, indeed: on the basis that we have
seen a problem in terms of wholesale rates which appear to be
very high over the course of quite a number of years.
Q94 Chairman: Just for the sake of
the record, are you defining, I think you said, a single average
cap as a maximum price, or is it the average of the operators'
prices meeting a single cap?
Dr Teh: What we mean is a maximum on the average
price which can be charged from one operator to another. Just
to explain why we think that is important, in a lot of the charge
controls that we apply, we do that as an average over the charges
which are made for different elements. The reason for that is
a concern might be one of over cost-recovery, that is cost plus
a normal profit margin, and by setting an average control over
that, you allow operators to have flexibility in charges for different
times of day. For example, they can charge more at peak times,
which would be more efficient, so that they can encourage usage
of their networks at off-peak times, or there may be certain destinations
which are lower-cost than others, so you allow the industry to
have that flexibility, at the same time as sorting out the objective:
that you do not want them to charge excessively. We believe a
single cap of that nature, which would apply between every pair
of operators, is what would be most appropriate in this instance.
Q95 Chairman: It is more flexible
than what is proposed by the Commission and the Parliament?
Dr Teh: Yes, it is.
Mr Blowers: I am not sure the Parliament has
got to the point where they have a clear view on this.
Q96 Chairman: That is the Commission?
Mr Blowers: The Commission, certainly, I think,
we have major concerns about the inflexibility of their proposal.
Chairman: That is helpful.
Q97 Lord Dykes: Can I ask a question
particularly of Jim Niblett on international policy, as that is
your title. Are the companies being a bit unfair saying that the
Commission has been abrupt? Although you said yourselves that
they rushed at this slightly, and it is a massive exercise anyway
and maybe they did not leave themselves enough time, it is understandable,
in a way. The companies, particularly in this country and elsewhere,
may be being a bit harsh about the Commission, because the Commission,
and dealing with the creation of the single market was a huge
task, in so many different sectors, is trying to transfer from
international policy, or transnational, across frontiers, to one
single European policy area, in all these fields? Take bank cards
and credit cards, two lots of rigidities and disutilities there
as well, as we know. Do you feel, therefore, that the Commission,
maybe having started somewhat hastily at the beginning, is right,
as you have inferred before, to have done this now, that everything
is correct to proceed with it; it should be a tough regime but
a fair regime, where the public know exactly what is happening,
and you would be satisfied, in terms of international policy development,
in that context?
Mr Niblett: Yes, I think so. Clearly, there
is a transnational issue at the wholesale level, where you have
got companies which are buying in one country and they are buying
from companies which are based in another country; that is an
obvious transnational element which justifies the European approach
to this regulation. I think it is rather less clear that there
is a transnational element at the retail level, where I am buying
a service from my retail provider in my country; it is less clear
that there should be a rigid European approach at that level.
That is one reason why originally the UK Government advocated
the idea of national discretion at the retail level; generally
that has not found favour, it is thought to be much too complicated.
Clearly, there is a much greater case for strong harmonisation,
as you say, reasonably tough harmonisation, at the wholesale level;
less so at the retail level, I think.
Mr Blowers: Mrs Reding has said, and we would
say that she is correct, that this is one of the areas where you
can take internal market policy, which is highly arcane, generally
speaking, and present a very obvious consumer upside as a consequence
of having taken decisions at European level. All of us can see
the benefits of a lower-cost, more seamless regime for roaming.
At least, all of us who ever travel in Europe can see those benefits,
and that I think is one of the reasons why, as well as having
a strong underlying rationale, this has political resonance, which
a number of people have grasped as being a real example of the
internal market in action, delivering real benefits to consumers.
Q98 Baroness Eccles of Moulton: We
have been concentrating very much on the effects on the consumer
but is it possible that the regulations, when they come in, are
not paying sufficient attention to the small provider and that
there could be unintended consequences, either making it easy
for the big boys to squeeze out the little boys or, on the other
hand, giving the little boys too much advantage over the big boys?
Mr Blowers: I think one of the areas—we
have alluded to this already—where it is very, very important
to get the calculation correct is over the setting of the retail
charges, because if that regime is too tight the big boys, some
of whom probably are still in this room, could absorb that, but
the smaller operators may struggle to absorb a retail regime which
is too tight. The nightmare scenario is a high wholesale charge
which the small retailers have to absorb and a very, very tight
retail control. So that is one of the areas. I think the other
area we would say goes back to this point about the opt-in/opt-out
nature of the tariff, there is a lot of hidden costs if you go
for the opt-out approach. There are a couple of areas like that
where it is very important to get the calculation right, and I
think that is a legitimate concern.
Q99 Baroness Eccles of Moulton: Is
the Commission aware of it, are they taking that into their calculations?
Mr Blowers: I think the way we would answer
that is that the Council Working Group absolutely has that issue
in mind and we hope that it will improve the Commission's proposal
significantly in that regard.
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