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Home > Media and Analysts > Speeches and Presentations > 2007 > Oct > Speech on European Frame


31|10|07

Speech on European Framework - 8th Annual Telecoms Regulation and Conference Law Conference

Introduction

Good afternoon and thank you for giving me the opportunity to speak here today.

In a couple of weeks, the European Commission will publish its Framework Review package.

And I want to say at the outset that I am very confident that Mrs Reding and her team will produce a set of thoughtful, balanced and far-sighted proposals, which they will promote with vigour over the coming months.

Mrs Reding’s period in office has been characterised by her strong personal commitment to promoting the interests of EU citizens and consumers, and she has shown enormous drive and determination in reforming the EU broadcasting rules and in addressing the problem of international mobile roaming.

For all those things she deserves to be commended.

And I look forward to more of the same as she pursues what are arguably the most important reforms of all.

So, from a regulator’s perspective, what should these reforms to the Framework involve?

The starting point is, in my view, simple.

All the evidence, from a market and a consumer perspective, is that Europe is making major advances under the current Framework.

So, our starting point should be that this Review should be about significant incremental improvements rather than fundamental redrafting.

So, what I would like to do today is set out five important tests that I believe the proposals must pass if they are to deliver the competitive communications sector that the European economy needs, and the keen competition and innovation that Europe’s citizens deserve.

Firstly, can we progressively liberalise the use of spectrum, recognising that there is enormous, untapped economic value here for Europe?

Secondly, are we able to strengthen the political independence of regulators to form the bedrock of effective economic regulation in Europe?

Thirdly, in economic regulation, can we extend the range of possible remedies, including the ability to introduce Functional Separation?

Fourthly, in the field of consumer protection, can we empower our NRAs to act swiftly to solve new problems which were not fully foreseen in 2003.

Finally, can we identify the best solution to the linked issues of consistency, co-ordination and quality of regulation.

But before I turn to each of these in detail, we should remind ourselves just how much has been achieved under the current Framework.

What are the achievements of the current Framework?

Let me recap on what I see as some of the key achievements:

Moreover, the underlying approach of technology neutrality is now being shown to be robust.

Convergence, which was largely a theoretical construct in 2003, is now an increasing market reality, and the Framework provides a good basis on which to assess the effects of convergence as they play out in the market.

This basic soundness of the framework is also confirmed by the favourable financial environment, the EU communications market has made marked improvements.

For example:

Overall, the central elements of the EU approach are sound.

But we cannot be complacent for a second.

We need only look at the remarkable progress being made in places such as Korea, with its extraordinary broadband success story, or China, with its enormous economic potential and exponential growth to see that we cannot rest on our laurels.

Europe must now take the next steps forward. This is a moment where reform is necessary; where we must confront the institutional, legal and economic challenges of the next decade.

And with that in mind, let me turn to the five tests the new Framework Directive needs to meet that I described earlier.

Spectrum

First, spectrum liberalisation.

Reform of spectrum policy offers the European economy and all our citizens a major prize. We agree with the Commission that the economic benefits could be enormous.

Many of these benefits will be realised by embracing spectrum liberalisation. That means making as much spectrum as possible available on terms of service and technology neutrality, abandoning the traditional approach of picking applications and technologies for each spectrum band by bureaucratic fiat.

This approach is not just the best way forward – it is, realistically, the only practical way forward because there is so much uncertainty about which technologies and which standards will succeed.

Our spectrum experts are already making significant strides in this area.

The Commission now needs to use the Framework Review to accelerate progress in this area. That requires much clearer guidance to national spectrum management authorities to introduce service and technology neutrality as central to their approach.

And we would also like to see a clearer signal, at EU level, that licences should generally permit secondary trading.

Far from fragmenting the single market, this approach has the potential to unlock the European market and create significant economies of scale. It would allow vendors and operators to lead a process of harmonisation in favour of the strongest and most effective technologies.

Today the liberalisation agenda is facing its first big test – one which touches upon issues of vital concern to Europe. The so-called ‘digital dividend’.

Ofcom’s approach has been to safeguard the spectrum needed to provide digital terrestrial television, and in particular public service broadcasting, including the coverage obligations agreed with those broadcasters which enables this critical feature of our culture and society to be available universally, throughout our country.

In the UK, this has already led us to set aside two thirds of the analogue spectrum for digital re-use.

For the remainder, we have proposed a market-based approach to releasing this spectrum, because to date we have not been convinced that there is an overwhelming public interest case for allocating more of this spectrum to any one particular use.

Of course, the Commission is also looking closely at the question of the best European level approach to the digital dividend. We welcome this interest and we very much endorse Mrs Reding’s view that Member States should not rule out innovative use of the digital dividend at this time.

Care will be needed to ensure that any Commission action in this area does not cast undue uncertainty on the existing processes, both of switching over to digital and implementing digital dividend policies, such that all momentum is lost.

Political independence

Secondly, political independence.

Independent regulation is the foundation of effective regulation. Independent regulation means decisions made for the long term public interest, rather than for any political or particular corporate motive.

In the core area of economic regulation of networks and services, the current Framework rightly places great emphasis on the role of the national regulatory authorities, as the core building block of the system.

But NRAs need now also to be strengthened in relation to their political and operational independence.

The current Framework focuses on independence from market players – which is important – but is silent on independence from government.

We should be clear that where governments retain significant ownership stakes in incumbent operators, there is a real concern that there exists a clear transmission mechanism by which influence can be exerted on behalf of the incumbent by the government itself.

This has the potential to create a series of relationships and interests which act against effective liberalisation of markets and the development of effective competition across the Union as a whole.

Experience also suggests that regulators need some protection from day-to-day political interference in their work.

So, I believe that there are real benefits in moving regulation out of the political sphere as far as possible by constructing a system in which politicians impose long-term policy goals to be carried out by the regulator, but keep out of the detail.

I believe that, across many sectors, not just communications, there is an increasing recognition of the fundamental importance of independent regulation.

It is becoming both a building block of our better regulation agenda here in Europe, and one of the main components of the ‘best practice’ that we increasingly export to other parts of the world.

We therefore need to see a clear position in principle, and proposals where possible from the Commission which would strengthen our collective commitment to independent regulation.

Functional separation

Thirdly, functional separation.

NRAs must have the tools they need to address today’s competition problems effectively.

And it will come as no surprise to you that we believe that this must include the adoption of a ‘functional separation’ remedy in the Framework.

When we completed our Strategic Review of Telecommunications in 2005, we were very conscious that the requirement for BT to create a functionally separate access business, Openreach, was a bold and innovative approach to telecoms regulation.

And, although we were confident in its success, we were cautious about making the case for functional separation on a wider basis until there was clear evidence that the Functional Separation model was working.

Two years on, I believe that there is evidence that the model is succeeding. Today we have a new confidence in the telecommunications market in the UK and it has spurred a new wave of investment and infrastructure-based market entry.

That in turn is delivering real benefits for consumers. We have seen broadband prices tumble amidst a wave of new offers based on innovative pricing and packaging.

Moreover, functional separation has been good for BT. It has recast the regulatory relationship so that regulatory risk is focused on the parts of its business which constitute an enduring bottleneck. Guaranteed upstream equivalence of wholesale products has meant we could deregulate downstream.

And it has helped BT look outwards rather than inwards.

This is reflected in BT’s share performance over the last eighteen months, which has consistently outperformed its European incumbent peers, showing that the Functional Separation approach is value creating for the entire industry.

And of course, BT’s 21st Century Network invest programme – at £12bn the largest of its kind in Europe – has also benefited from a clearly expressed regulatory settlement which has removed much regulatory risk and uncertainty from this important investment.

So we want to see the Commission to include Functional Separation as a remedy to be available to all regulators under the Framework.

And you might ask why Ofcom cares about this. After all, we already introduced Functional Separation using our separate national competition law powers.

But we passionately believe in the best regulatory outcomes for Europe as a whole, not just for the UK – and that means that it is critical that all regulators have a comprehensive set of remedies available.

We do not take the view that Functional Separation is necessarily the right model for all to follow. The correct regulatory approach in each country will depend on national circumstances.

And, of course, it will be for each NRA to make a judgement, based on local market conditions, as to whether or not Functional Separation is appropriate.

But there can surely be little disagreement with the proposition that the option should be available to all regulators across Europe.

Consumer protection

Fourthly, consumer protection.

The process of convergence and the increasing levels of competition bring real benefits for consumers. Unfortunately there is also a downside.

In the UK we have seen a corresponding rise in the scope for mis-selling, scams and abusive business practices and from my discussions with DG InfoSoc and DG Sanco, I know this is a concern for Europe as a whole.

Some of this is what we call ‘old wine in new bottles’ – age-old scams like confidence tricks and pyramid schemes reappearing in new forms. For these, the general law, and in particular the horizontal consumer protection law currently under review by DG Sanco – probably provides the correct legislative basis for our response.

But there are also some specific examples, like premium rate dialler scams, which are intimately connected to the new technology itself in our sector, which I would argue the Framework Review must address.

These new abuses take place at internet speed. Someone set on defrauding customers with, for instance, a premium dialler scam can set up a shell business, buy the necessary dialler technology and make a very significant sums of money within a couple of weeks.

As the regulator closes in, it is often possible for the business in question to close the relevant company, thus escaping punishment, and simply start again.

The enforcement system contained in the current Framework does not work in such circumstances – it is designed for a more ‘gentlemanly’ relationship with established telecommunications providers.

Europe’s consumers need and deserve the highest level of protection – otherwise confidence in the digital economy will be fatally undermined, trust will be reduced and competition will be weaker as a result.

Exploiting the full potential of the European single market

Finally, what of the challenges of consistency, co-ordination and the overall quality of regulation?

We expect significant proposals in this area from the Commission. It is argued that, despite all the good work that has been done since 2003, there is still a fundamental weakness in the consistency and effectiveness of economic regulation under the Framework.

I remarked earlier that the move to the new Framework addressed many of the real world problems that were being encountered by competitive entrants previously.

But the Commission has made the case that at present, regulation remains unjustifiably fragmented and incoherent – and this is undermining the single market in telecoms.

There is undoubtedly scope for improvement in the way that the regulatory Framework is being implemented on the ground.

So the question of how we can improve the quality and consistency of the regulatory system is one we do have to address.

The Commission has in fact identified three specific problems:

The latter two concerns have some merit, but the number of genuinely pan-European services requiring central authorisation is small at present.

Pan-European authorisations are already possible under European law; the current plan for mobile satellite services provides one example. The co-ordination required is tricky and complicated – but that would be true under any institutional model.

And the Commission and the European Regulators’ Group could work together to provide the necessary co-ordinated approach to the regulation of pan-European services.

So it is not in our view possible to make a strong case for creating new institutional arrangements – extended Commission powers, or a new Agency – on such fairly limited grounds.

The justification for the new institutional changes seems to rest on the question of inconsistent application of regulatory remedies.

The consistency problem

Let us consider the problem of consistency in more detail.

There is now significant agreement that consistency for consistency’s sake should not be the aim. As Mrs Reding has said in her recent speech to the ERG in Athens ‘one size fits all’ regulation will not work.

Our markets remain highly diverse on such basic fundamentals as the extent of fixed network roll-out – 95% in the UK, but nearer 30% in some central and eastern member states or cable roll-out – 96% of homes passed in the Netherlands, 3% in Greece.

Even subtly different variations in the build profile of local networks and the distribution of population can radically alter the balance to be struck between, for instance, LLU and bit stream access.

Nor should we be satisfied with harmonising regulation at the level of the lowest common denominator. Our aim should be to constantly raise the quality threshold of regulation by building and refining best practice.

This dynamic exchange of ideas is vital in a time of profound change in technology and business models.

I believe Europe will continue to benefit from having individual regulators acting as pathfinders in particular areas with new innovations and new techniques.

I am certainly not ashamed to admit that we study closely our fellow regulators’ work and are quite happy to borrow from them ideas which will translate effectively into the UK market.

Equally, we enthusiastically share our own thinking where this will help and assist our European colleagues.

If we accept this basic proposition, then the problem becomes how to identify best practice and how to share this between regulators in a way which encourages rapid adoption by all regulators.

Where regulators adopt different approaches to similar problems, that isn’t necessarily a bad thing – experimentation followed by review and refinement might be a good model to develop effective regulation in complicated and fast-moving times.

The Article 7 process

Of course we already have one model in place for addressing consistency problems.

That is the existing Article 7 procedure, in which a task force of Commission officials scrutinise market notifications for compatibility with Commission guidance on market definition analysis and the identification of SMP.

As a reminder, the case for the Commission having this role was hard-fought, but there is some logic to the Commission – the ultimate guardian of competition law – providing a quality control mechanism of this kind.

We would accept that there are examples of where the commission has improved poor quality NRA analysis. But what it has not shown, in our view, is a picture of consistently poor quality regulatory proposals salvaged only through the intervention of the Commission.

Indeed in our experience, the Article 7 process can sometimes feel like a not particularly helpful additional bureaucratic process to go through, especially given that the real test of our analysis may come in national appeals processes.

Having made these observations about the existing Article 7 process in mind, it will come as no surprise that we are at present unconvinced about the case for the Commission now extending its powers of veto into the area of remedies.

Not least because the arguments for the Commission playing the role of quality control manager when it comes to remedies appears to be a little weaker. It is difficult to see from first principles why the Commission would be better at designing such remedies than properly independent national regulators themselves.

One further point. The arms-length separation from political pressures which I noted earlier as a key to the successful conduct of regulation, could be put at risk in a situation where the Commission itself starts to substitute for national regulators in the design of remedies.

The Commission may be insulated to a degree from national political pressures, but that is not to say that it is not a fundamentally political organisation in a way which Ofcom, for instance, is not.

Let me be clear, however, that opposition to a veto wielded by the Commission does not mean that NRAs should be free from any external scrutiny when it comes to their choice of regulatory remedies – or indeed from pressure to justify remedies that may appear to be sub-optimal. The question is how such scrutiny and pressure can best be brought to bear.

The blunt instrument of a Commission veto may not be the best option. But we look forward to hearing the commission’s arguments in this area.

The role of an Agency/Authority

Indeed this set of issues may be why a potential role for a new Agency is under serious consideration.

So let us consider what additional value such an institution would provide.

As an important point, the general legal consensus is that an Agency cannot take on policy functions which currently lie with the EU institutions – nor indeed, can it take on new determinative functions.

So an Agency could itself not assume powers to veto or impose remedies - at least, not without a specific Treaty change to this effect, an option which we do not believe is currently being considered.

It has been suggested that the Agency could, however, play a role in advising the Commission on its use of the veto, and play an as-yet undefined role in promoting pan-European services.

I do not know what the outcome will be of the inter-institutional debate on whether the Commission should get the extension of veto powers that it seeks. We do know of course that the Council was implacably opposed to this extension in 2002. Therefore we should consider the merits of the Agency in both a veto and no-veto scenario.

Even if the case was accepted that the Commission should have a power of veto over remedies, we are not currently persuaded that an Agency would be the best vehicle to provide the advice that the Commission needs.

Let me set out why.

First, a centralised Agency runs the same risk of being divorced from the reality of national markets as the Commission itself.

Second, it risks becoming a very serious obstacle to and drag upon regulatory innovation and the valuable diversity within our approaches.

Third, it runs the risk, certainly on the basis of the current proposals for a 110-person body, of being much too large for the task at hand with the danger that it starts to duplicate or substitute functions properly carried out by NRAs.

Fourth, there is a great risk that the Agency does not have the necessary political and operational separation from the Commission itself, from the Member States, and even from the European Parliament to carry out its tasks effectively and without fear or favour.

These concerns could be ameliorated through skilful design and governance. There could be a model of an Agency that might play a useful role.

Clearly, to respect the principle of independent regulation, supervision would need to be by independent NRAs.

But there is every chance that Member State and Commission involvement in supervision will be put on the table – sacrificing regulatory independence on the one hand, and on the other hand leading to the almost absurd outcome of the Commission advising itself.

In designing such new institutions, what appear at the outset relatively small flaws can disproportionately undermine the capability of the organisation to actually play a positive role.

For all these reasons we are presently very unpersuaded that the creation of a new Agency is the right way forward.

An alternative model

So how would Ofcom like to see the consistency, coordination and quality of regulation challenge addressed?

Let me very very clear here. While we are not persuaded by the case for a new agency, the status quo arrangements for addressing these issues clearly do not pass muster.

As I said at the beginning of my remarks, we do now need to take steps to meet the challenges of the next decade.

In our view, the problem can be best addressed by rigorous and effective reform of institutions and instruments already available to us.

This has the great advantage, of course, of offering the prospect of delivering improvements well ahead of 2011.

The first important component of this is to make more effective use of the existing advisory body of NRAs, the European Regulators’ Group.

Ofcom is working closely with the current chairman of ERG, Roberto Viola, and his successor Daniel Pataki, to develop a more effective model for the ERG.

There are a range of views, but in my view we need to achieve the following:

Much of this work is in fact already in hand. But to really deliver, ERG will need to make real commitments to strengthen both its capability and credibility:

The ERG of course, exists as a result of a formal mandate established by the Commission in a Decision, but the current mandate is quite vague as to the specific tasks and expectations on the ERG.

So, that Decision should be recast to make much more explicit the Commission’s expectations of what the ERG will do – in particular, the promotion of efforts to increase the consistency and quality of regulation.

This is a clear opportunity for the Commission which would require very little additional effort – indeed the Commission has said that it may need to revise the Decision anyway to recognise the expansion of the EU 25 to the EU 27.

And if the Commission wanted to go further to promote consistency, it could of course bring forward a Commission Recommendation on remedies paralleling those already in place for relevant markets and market analysis.

One of the first tasks of a revamped ERG could be to work together with the Commission to draft such a Recommendation.

The principle that effective regulation is best delivered by independent, expert regulators familiar with their own national markets is critical. The regulators must, however, step up to meet this challenge and address the legitimate concerns raised in the debate so far.

That is an ambition well worth pursuing in the interests of citizens and consumers across Europe.

So, let me summarise,

As the date of publication for the Commission proposals nears, so does our sense of anticipation.

I hope that the proposals will meet the challenges I have outlined:

If it does, I am confident that Europe will be poised to take the next major step forward on the road to being the pre-eminent digital economy of the 21st Century.

An ambition I am sure we all share

Thank you.


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