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15|11|06

ECTA Regulatory Conference, 15-17 November 2006

The UK Openreach model - has it passed the test?

David Currie, Chairman, Ofcom

Good afternoon ladies and gentlemen.

The ECTA regulatory conference is becoming an increasingly recognised fixture in the calendar for telecoms policy experts across the EU, and I am delighted to be here today.

This session seeks to answer an important question: whether the ‘regulatory settlement’ for fixed telecoms in the UK, embodied in the Undertakings offered by BT and accepted by Ofcom in September 2005, has ‘passed the test’ – is it delivering better outcomes for citizens and consumers - in particular by creating a sustainable, competitive market structure for fixed telecoms in the UK?

The question is timely as Ofcom has recently published its first annual evaluation of the impact of the Telecoms review, including progress in implementing the Undertakings.

It is also timely because there is increasing interest in the UK model in the context of the Commission’s own review of the EU regulatory framework as well as elsewhere in the world. I’d like to return to that question of the wider applicability of our experiences later on.

You have heard already about the key features of the regulatory settlement:

• The requirement to provide ‘equivalence’ – the provision of the same wholesale product with the same quality, price and conditions, to BT and altnet businesses.
• Operational separation of the enduring bottleneck elements of the BT network into a new business unit Openreach.
• The introduction of separate incentive and governance structures for Openreach
• The creation of a new Equality of Access Board to oversee the implementation of the Undertakings.
• Forward-looking commitments in relation to the design and functionality of the BT next generation network.

All of this achieved via a comprehensive settlement under UK national competition law.

The agreement of the Undertakings was the culmination of a lengthy and comprehensive strategic review of the UK market. It is perhaps worth reminding ourselves of the key steps along the way.

First, we asked what kind of competition were we seeking to promote –the answer being infrastructure-based competition, at the deepest level in the network where this would be sustainable. This form of competition provides scope for innovation and risk-taking, not just ‘me too’ pricing and resale.

In pursuit of such competition, we asked whether competitive forces, including fixed-mobile convergence and the arrival of new, disruptive technologies, could remove the historic problem of BT’s monopoly control of fixed access by providing complete, end-to-end infrastructure competition. We concluded that this was very unlikely on any realistic timescale. A mass withdrawal of access regulation in the form of ‘regulatory holidays’ – the US approach - would simply not be appropriate in the UK.

We looked at why current regulation had failed to create sustainable competition in the UK. We concluded that the multiple regulatory interventions across the value chain of UK fixed telecoms had proved ineffective in providing fair access to the monopoly parts of BT’s network. Worse, the regulation was in part responsible for a weak and fragmented market structure – and high levels of regulatory dependency amongst altnets. An unsustainable as well as intensely bureaucratic structure.

Only an intervention focused on providing equivalent access to the bottleneck parts of the BT business would lead to sustainable competition. Critical to this would be to get the terms of trade right for certain key access and interconnection products. If deep deployment of infrastructure was the end-game, then the UK would in particular need to succeed where it had previously failed in creating viable local loop unbundling.

True equivalence required more than just well-designed regulation of wholesale products. We also required behavioural change within BT, with BT staff truly incentivised to treat altnet businesses as equally valued customers alongside BT’s own downstream purchasing arms. We concluded that full, legal separation was not the only way this could be achieved. But a significant degree of operational separation was required.

If all of this could be delivered, then much existing regulation could be progressively removed. In particular where equivalence of wholesale inputs was guaranteed, and underpinned by behavioural change within BT, then we could start to remove much of the downstream retail regulation considered essential over the previous twenty-odd years since BT privatisation.

That was the logical process that led us to the regulatory settlement. So how has the theory stood up to the harsh realities of the real world?

The first and most important thing to say is that BT has clearly been committed to implementing the Undertakings and has expended enormous effort in seeking to do so. I believe the essential logic of the settlement remains as compelling to BT as it does to us.

Openreach has gone from being a paper concept to a fully functioning business entity of some thirty thousand people in a remarkably short space of time. This has included:

• the recruitment of a new leadership team, including many drawn (like Emma Gilthorpe) from outside BT.
• the rollout of the new Openreach brand across the organisation and vehicle fleet.
• the relocation of staff into separate premises.
• the introduction of a new account management team.
• the introduction of a new remuneration scheme, which rewards staff for their contribution to Openreach’s performance, not that of BT Group.

BT has also established the new Equality of Access Board responsible for compliance with the Undertakings which has built and is continuing to grow its credibility as an effective and independent internal watchdog.

It is fair to say, however, that the actual delivery of the ‘equivalence’ required in respect of key products has proved more problematic. We have made clear to BT that progress needs to be made rapidly in a number of key areas, including:

• Continuing and rapid improvements in the capabilities and quality of the new system to deliver equivalence, the snappily-named equivalence management platform.
• Significant improvements in Openreach’s wholesale ethernet product portfolio.
• Further significant and sustained improvements in the service performance for key Openreach products such LLU provisioning and repair
• A more proactive, transparent and customer focussed approach and culture to addressing wholesale customer needs.

So much for the implementation of the undertakings. What does all this mean for consumers? Fundamental change in competitiveness of the market will only become visible on a longer timescale but already we are seeing very significant changes in the market.

LLU was the centrepiece of our strategy, and take up of LLU has reached over 1 million lines and is increasing at around 40,000 per week . Big investments have been announced by a number of firms including Carphone Warehouse and BSkyB. Consolidation is taking place amongst the altnets – something we always thought was likely as companies position themselves to take advantage of a scale-based market.

More than half of UK customers are now served by an LLU-enabled exchange. This deep infrastructure deployment has initiated a new wave of competition from broadband providers, and customers are benefiting from low prices and innovative bundled offers.

So let me summarise. We remain convinced that the settlement was a genuine watershed for fixed telecoms regulation in the UK. We believe that progress in implementing the undertakings continues to demonstrate real commitment from BT. They know, and we know, that much more needs to be done really to drive equivalence at the product and operational level however.

So how should European policy makers integrate the UK experience into the wider debate about telecoms regulation?

Over the last year, interest in the settlement has increased across Europe, from regulators, competition authorities, altnets and even incumbents. Italian developments are, of course, particularly interesting. The Commission has now suggested that ‘functional separation’ – its term for operational separation – could be considered as a remedy under the Framework.

But this highlights a more fundamental point about the regulatory system – the need for appropriate flexibility to tailor remedies to individual national market circumstances.

Taking those components of the regulatory settlement I have outlined, let us consider what elements might be generally relevant for other regulators, and which aspects would need to be tailored to national circumstances.

First, I think our theoretical starting point – that the most desirable outcome is competition based on deep infrastructure deployment – should be common ground.

Where I think views differ is on the scope for complete, end-to-end infrastructure competition. Fixed -wireless convergence may eventually lead to a market of multiple access networks, but our review concluded we could not base our policy on the possibility of further competition from such sources.

This leaves cable infrastructure as the main source of end-to-end competition to the incumbent in the short to medium term – and in the UK, cable is only available to some 50% of the population. Elsewhere in Europe, cable is rolled out more extensively.

Assuming that end-to end competition is insufficient there is then the question of where the ‘deepest level’ of sustainable competition lies – this will also vary between and indeed within Member States. The nature of broadband access products in particular is that their commercial sustainability is affected by economies of density at the exchange level, which in turn is linked to the physical geography of a country and the way that exchanges were historically rolled out.

In some areas networks based on bitstream access product will constitute the ‘deepest’ deployment of alternative infrastructure, whilst in others networks based on LLU will be sustainable. Each country will need to take a view of the right mix of access products according to its national circumstances. Regulators also need to factor in the extent of current competitive deployment, and hence the scope for a ‘ladder of investment’ from one access product to another. Therefore what access products – which we called ‘enduring economic bottlenecks’ – should go in an operationally separate unit will vary.

Once you have answered the question of where to separate the next question is then what ‘degree’ of separation is appropriate in terms of the operational separation and equivalence.

The proportionality of imposing full product equivalence will also be determined by where the incumbent operator is in its own programme of network development. We were able to agree fairly quickly that BT would build ‘equivalence’ into its new “21st Century Network”, but it was much harder and more painful to determine which of its many legacy products and systems needed to have equivalence retrofitted, and on what timetable.

Finally, the cost and burden of a change of this kind needs to be borne in mind when dealing with smaller operators in smaller geographies. In the UK we did not impose full operational separation on BT operations in Northern Ireland, and we have not imposed equivalence or operational separation on our one local network operator Kingston. This was in part because of concerns as to whether the benefits would outweigh the costs.

So, whilst there is scope for agreement on the basics of a ‘functional separation’ and equivalence remedy, the reality is that each NRA will have to consider carefully whether such a remedy is justified in its territory. If the answer is ‘yes’, hard analysis is required to ensure that the remedy is tailored appropriately for national circumstances.

This is why Ofcom remains sceptical that complete harmonisation of remedies will ever be possible or desirable in Europe. And why we doubt whether a Commission veto on remedies makes sense. And if that is true of a veto on remedies, it is even more the case for a possible European-wide regulator.

Ofcom recognises that there is concern amongst stakeholders, including ECTA members, as to the aggregate performance of the regulatory framework today. We also recognise the need to improve the transparency and effectiveness of joint NRA activity. Under the leadership this year of Kip Meek, the European Regulators’ Group has committed to a strong set of processes for exchange of information and best practice, which will in our view make a real difference in raising the aggregate performance of the regulators.

Although a ‘one size fits all’ approach to remedies is very unlikely to be the right outcome for Europe, an effective single market requires that there is greater convergence of regulatory remedies than perhaps exists today. That is why I am delighted that the ERG has also committed to an important new discipline in relation to regulatory remedies at its recent plenary in Madeira. This will involve prioritising markets where greater harmonisation of remedies will have the most immediate effect on the prospects for pan-European services and on the scope for open and reciprocal market entry. Initial candidates identified for this process include VoIP, broadband access and call termination remedies, but the ERG plans to consult on the detail. I understand that the new chair of the ERG, Roberto Viola of AGCOM, is fully committed to taking this forward.

With these important developments in progress, we see no need for further institutional change in the EU framework. We are particularly sceptical about the argument for a Commission veto on remedies. A Commission veto will do little to address the problem of slow or half-hearted regulatory action – the Commission cannot veto a remedy which does not exist. As a means to increase the quality of the overall output of regulators’ decisions, a veto – a public slapping down of a regulator - is inferior to a process of peer review and exchange of best practice, as envisaged by the ERG. And as a means to impose harmonisation, an irregularly applied veto will work less well than a more thorough-evidence based prioritisation of areas for greater alignment of remedies.

Of course, your position as stakeholders may be to wait and see what concrete improvements can flow from the ERG reform programme before dismissing other alternatives. We understand this. But the ERG does need to be given time, and support.

So, to conclude: the regulatory settlement which led to the creation of Openreach is, we believe, starting to achieve the benefits we aimed for. There is, of course, much still to do. Whilst we do not say that it is a one-size fits all solution, it is certainly one that the commission should consider making available to all regulators in its review of the Framework. At minimum, I would hope that the lesson learned in the UK – the futility of a cycle of trench warfare with the incumbent – will be reflected upon by ECTA members, incumbent operators, and regulators throughout the EU.

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