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29|11|07

Ofcom Perspectives on the European Telecoms Framework Review - 8th ECTA Regulatory Conference

David Currie

1. Introduction

Good afternoon ladies and gentlemen.

I am delighted to have been invited to address this year’s ECTA annual regulatory conference.

Although this Session is focused around functional separation, and I will cover that, I will range more widely because such a remedy is only one part of a very large jigsaw.

The proposals that Viviane Reding and her team have produced contain many thoughtful, balanced and far-sighted reforms. I think it’s worth sharing with you what, as an independent national regulator, we think of what the Commission is proposing.

2. The achievements of the current Framework

All the evidence, from a market and a consumer perspective, is that Europe is making major advances under the existing EU Framework. Broadband penetration is high, prices are keen, the consumer- residential or business- is getting wider choice and more innovation.

Against that backdrop, Ofcom has consistently called for incremental improvements to the Framework, rather than any fundamental redrafting.

In speaking for evolution rather than revolution, I do not mean to imply that the communications sector in the EU does not face important challenges. A healthy competitive, innovative sector is vital in its own right for Europe’s consumers and citizens. And also as an underpinning for wider competitiveness. But unlike energy, where trans-European interconnectors and the EU’s heavy dependence on non-EU energy suppliers give rise to major strategic questions that call for a more fundamental overhaul of the regulatory framework, in communications we have something that is already good, and needs to be applied uniformly and modernised a bit to be even better. How?

As a regulator, I believe that there are five important principles that need to be realised if a revised Framework is to continue to deliver the competitive communications sector that the European economy needs, and the keen competition and innovation that Europe’s businesses and consumers deserve.

3. The five principles

First, introduce the market into radio spectrum.

It is in spectrum that the greatest prize for Europe may lie in the Framework Review now underway. The key is liberalisation across Europe. That is, making as much spectrum as possible available on terms of service and technology neutrality in place of the old command and control approach of picking applications and technologies for each spectrum band.

In the longer term, technological developments in wireless may affect the judgement of what is and what is not an ‘enduring bottleneck’, as new wireless technologies may start to substitute in whole or in part for fixed networks.

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

The Radio Spectrum Policy Group’s 2005 Opinion on Wireless Access Policy for Electronic Communications Services – WAPECS for short – has set a course for future allocation decisions on spectrum to be made on principles of service and technology-neutrality.
And the Commission’s Communication on Rapid Access to Spectrum earlier this year endorsed this approach as the way forward for Europe.

Taken together with a clear signal at EU level that licences should permit secondary trading, this approach could unlock the potential of the European single market, allowing operators and equipment sellers to harmonise through the market around the strongest and most effective technologies. Such an approach would be likely to enhance further the economic value of the 350 or so megahertz below the 3 GHz band that we, in the UK, aim to release to the market over the next three years or so – a huge amount of prime spectrum.

Of course, standardisation of usage can bring enormous economies of scale in chipset and wireless device manufacture.. If the market evolves around a strong technology, well and good. The economies of scale will flow and a virtuous circle will be established. But if the market throws up two or more competing uses or standards, that is not an argument for reverting to command and control - why would we believe that a group of officials and regulators will always or even often choose more wisely than the market between them?

So we very much welcome the Commission’s proposals to modernise and liberalise spectrum regulation.

Secondly, political independence for regulators .

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.

We wholeheartedly support the Commission’s proposals here. Indeed, political independence is one of the reasons why, elsewhere in the dossier, we have doubts about the Commission’s European Agency proposal: the Commission may not have intended or wished it but the governance structures that they are allowed by Treaty and convention to use, perforce require that such an Agency is controlled by a steering group composed of the national Ministries and the Commission. That is not a basis for political and operational independence.

Thirdly, effective consumer protection .

The process of convergence and the increasing levels of competition bring real benefits for consumers. But there are also downsides.

Increased competition has also brought about a rise in the scope for mis-selling, scams and abusive business practices. And these new abuses take place at internet speed.

The enforcement system contained in the current Framework no longer works. Fly-by-night rogue companies can simply scoff at a system whose only sanction is to require them to stop doing whatever it was that was causing harm, with no further redress. Even larger, more established operators have little incentive to go that extra mile to provide the quality of experience that consumers have a right to expect.

So we warmly welcome the Commission’s proposals to beef up the Regulators’ enforcement powers to protect consumers.

Fourth, improving the consistency and quality of regulation across the EU .

The Commission has identified three specific issues:

the perceived lack of consistency in remedies across Member States;
the need for an effective mechanism to enable regulatory coordination, to identify trans-European services and
the need for an effective mechanism for issuing a single authorisation for spectrum and perhaps numbers for use on a pan-European basis.

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

What then of consistency and effectiveness of regulation across the EU?

Let us start from two widely accepted propositions.

First, consistency for its own sake should not be the aim. Commissioner Reding has herself recently said that a ‘one size fits all’ approach will not work.

Second, at a time of dynamic technological change, we cannot rest on the status quo. Our aim should be constantly to raise the quality threshold of regulation, building and refining best practice.

The issue is what is the best mechanism to achieve this?

There are two broad models: a centralised Agency, overseen by the Commission and the Member States’ Ministries, or the model adopted in financial services in Europe of organic coordination between the National Regulators and with the Commission. In our sector that means a re-vamped and revitalised ERG with a clear mandate from the Commission.

I suggest four broad criteria to help us judge between them:

independence and objectivity
transparency
responsive to different national market conditions
focused, efficient and value for money.

In the case of the Agency proposal as it has been tabled, there are inherent difficulties on at least three of these criteria. And, on the fourth, while the EU- wide effectiveness of regulation is a significant nut to crack, the extent of the Agency’s proposed functions and size and scale of its budget, suggest that it may be something of a sledgehammer to crack that nut.

Equally it is clear that the ERG will need to continue the process now underway of radical transformation to meet these criteria. But the key point is that, inherently, it can. Enhanced resource, strengthened governance and much more open decision making and pre-consultation processes are all needed. We are working with the current ERG Chairman, Roberto Viola and his successor Daniel Pataki to effect these changes.

Together with a clear mandate from the Commission, there is a real prospect to show that it can deliver, consistently and effectively over the coming year. I would urge that it be given a fair chance to do so.

Functional Separation

Fifthly and finally, I want to address the issue that I raised at the beginning of this talk: the inclusion of functional separation in the Commission’s proposals.

Let me start with definitions: functional separation, as we understand it, is more than simply regulated accounting separation between the upstream and downstream businesses of the incumbent.

Nor yet is it full structural separation which denies the incumbent wholly legitimate capital market synergies.

Rather, it is the full operational separation of the business unit controlling those assets that are, for the foreseeable future, economic bottlenecks.

But also coupled with the requirement to provide a range of key regulated wholesale products and equivalence of input for those products: that is, the incumbent’s retail arm gets the same product at the same price at the same time and on the same terms as do its competitors.

Thus, functional separation cannot be seen in isolation from the other remedies in the NRAs’ toolkit. They are integrally bound together.

It is not full infra-structure competition, only partial; but it is certainly not correct to characterise it, as some do, as solely a form of services competition. And it is important to note that we have implemented functional separation as deep into the network as infra-structure competition can reasonably be expected to thrive, and that we will do the same in the NGN world.

Functional separation is also no easy panacea. But it does address the twin evils of heavy non-price discrimination against competition which vertically-integrated incumbents, subject only to accounting separation, can apply; and, on the other hand, the indifferent and inept monopoly supplier of bottleneck asset services which could result from structural separation.

What has been the UK’s experience to date?

We started from the position where we had tried pretty well everything else over the previous 20 years with at best partial success.

Ofcom inherited a fragmented competition dependent on drip feed support from the regulator, and an intrusively micro-regulated BT with hundreds of separate regulatory interventions into its business without achieving the goal of effective competition in telecoms.

When I was appointed to Ofcom, at my very first meeting with Christopher Bland and Ben Verwaayen when I was the sole person in Ofcom, I said that there must be a better way of doing things, and that was the germ that grew into the undertakings, functional separation and equivalence of input.

Since then, our experience of Functional Separation has been sufficiently positive that we fully support the European Commission’s proposal to include it among the possible Remedies in each national regulator’s toolkit to be used if, but only if, the NRA thinks it is right for the circumstances of its own market, and in concert with other remedies already available to NRAs.

I firmly believe that functional separation has created greater certainty for BT’s competitors, allowing them to make significant investment in new infrastructure. And we have seen a wave of new investment by well-resourced competitors like BSkyB, O2, Tiscali and Carphone Warehouse.

To give a sense of scale, the broadband capital expenditure of just one of these companies – Sky, who happen to have published their figure – is over 350 million Euros.

Such investment is multiplied if you think of each competitor investing in exchanges throughout the UK. Today almost 800 exchanges house the equipment of four or more competing suppliers.

There are now nearly 4 million unbundled lines with more than 100,000 more being added every month – a huge shift from the grand total of 100,000 unbundled lines just two years ago. More than half of all households now have broadband, and that proportion is rising fast.

Three in five homes have a choice of four or more broadband suppliers. Four in five are served by an unbundled exchange with at least one LLU operator.

That competition has brought innovation both in service and in price. Competing operators have attached ADSL 2 plus kit to the dark copper loop providing higher speeds and VOIP.

BT has upgraded its consumer proposition in response. Average headline speeds doubled last year to just 4.6 Mbit/s per second. And prices have fallen. Headline prices are down 9 per cent over the past year; more if one includes the effects of “free” broadband as part of a wider bundle of services.

So the consumer has certainly seen benefits. And benefits shared widely around the country, not just in the metropolitan areas.

Two charges are laid by opponents of functional separation. First that it is costly and bureaucratic; secondly that it deters investment. Let me deal with both in the UK context.

Functional separation has, of course, had some transactional costs for BT. But, as they recognised early on, it can also bring them benefits.

As regulation focuses on the business unit that manages the natural monopoly assets, the rest of the Group can think like, be managed like and run like a competitive international-focused plc, not a regulated business hamstrung by intervention.

And as regulator we can step back increasingly from regulation, both at retail level where we ended price regulation 15 months ago and increasingly at wholesale level. We are currently consulting about deregulating wholesale broadband in newly-competitive sub-national markets. And we expect to announce further deregulatory measures in the coming weeks.

As to investment, the relative performance of BT’s share price both in the UK market and by comparison with Continental peers, suggests that the UK’s approach has not troubled the capital markets.

Nor has it constrained BT’s ability or appetite to undertake efficient investment. It is currently embarked on a 15 Billion Euro programme of investment in its next generation core network

“Efficient investment” are the key words when it comes to Next Generation Access too.

It should be no part of a regulator’s brief to secure investment for its own sake.

Misdirected or premature investment leads to allocative inefficiency in the wider economy. Rather, the regulator’s job should be to enable investment when a competitive market is ready for it and to ensure that there are no perverse incentives in the way which artificially constrain new investment.

It is that thinking which underpins the approach in our current consultation on next generation access. Our core principles are straightforward:

contestability, which has served us well to date: any operator who thinks there is a business case for deploying next generation access should be able to do so as soon as they wish;
maximising scope for innovation in the same way that in the current generation LLU gave much more scope for innovation than bespoke products like IPStream;
equivalence of input for key bottleneck products;
reflecting risk in returns, since investment in next generation access is inherently more uncertain and riskier than in today’s networks.
regulatory certainty so that investors know that the rules of the game will remain consistent for a sufficient period for operators to invest with confidence.

Underpinning those principles are the practical possibilities. Earlier this week, Virgin Media, the UK’s cable provider, announced its intention to roll out 50 MB to 70% of its base by the end of next year. Even if this is a bold claim it means that up to 8 million UK households could have access to very high speed broadband, delivered by a competitive market.

For the fifty per cent of the country not addressed by cable, we are seeing investment in trials for sub-loop unbundling fibre to the street cabinet.

Another option we canvas is next generation anchor product regulation; a single key product or product family, regulated at risk-adjusted cost- reflecting the riskier nature of investment for next generation access.

Measuring that risk is, of course, challenging. Here is where functional separation helps: outside that anchor product, BT products would not be price regulated but simply offered on an equivalence of input basis.

In short, we as regulator will need the wisdom of Solomon only on the narrowest bit of the product range. For the rest BT would be free to invest and price for a competitive market.

Of course, what drives the demand for investment is bandwidth hungry services which consumers want. And they are coming. Only this week, the three largest UK broadcasters joined forces to offer a full on-demand service compete with and complement the commercial movie and sport led VoD services.

So let me finish, as I started, with a substantial point of agreement with the Commission. Our philosophical belief, and I think hard empirical evidence, is that liberalisation, open markets and competition are what best drive innovation and productive investment delivering the benefits for Europe’s consumers, citizens and competitiveness that we all want to see.

Thank you.