Speech by Ed Richards on the European Framework, 27 February 2008

Good morning and thank you very much for giving me the opportunity to speak to you today.

I am delighted to be able to address the Parliament as it considers its response to the proposals from the European Commission.

What I would like to do today is make some remarks from the perspective of the practical experience of a regulator like Ofcom which I hope can help you in your task.

There are three general remarks I would like to make at the outset.

First, that we continue to believe the original Framework package was a major step forward and provides a very solid basis for regulators across Europe. It is a credit to all those involved in the drafting of that original package, many of whom I know are here today.

Second, looking at our own experience in the UK but also across the EU, I am more convinced than ever that the focus of the package - the need to promote strong and effective competition - is being proved correct by outcomes delivered to European consumers. We need to build and strengthen that focus going forward.

And third, the identification of well-resourced, independent national regulators as the front line means for implementing this common Framework was undoubtedly the correct decision.

This means that regulation has been able to be flexible and responsive to consumer and market needs. It has also enabled the development of an increasingly powerful regulatory network for the exchange of information and best practice.

From my experience of both visiting and hosting visits from around the world, I am clear that EU communications regulation is now seen as among the best in the world and is a system which other countries, such as China and India, are keen to consider emulating.

Let me turn to the new proposals.

We welcome much of what is being proposed by the Commission, including the proposals on reform of spectrum management and Functional Separation and the general determination Mrs Reding is showing to promote competition and the single market.

As you know, Ofcom has introduced Functional Separation in the UK, but I want to strongly emphasise that that I am not here today to argue that Functional Separation is the only way that telecoms markets can or should be regulated.

Whilst functional separation has proven successful in the UK, we have never argued that it is necessarily appropriate for other markets. Clearly, many Member States may find that Functional Separation is not a suitable or proportionate remedy, given their specific market circumstances.

However, many of the claimed concerns about Functional Separation are dramatically overstated. Indeed, some of them are simply myths.

For instance, we hear that Functional Separation has reduced investment in the UK telecoms market. This is the exact opposite of the truth. The introduction of FS led to a wave of new investment in the UK from competitor companies because it has significantly increased their confidence that the regulatory system will address anti-competitive practices – and thereby increases their willingness to invest.

The incumbent BT has benefited from increased regulatory certainty, allowing it to move forward with a £10bn investment in its core next generation network, the biggest of its kind in Europe.

And consumers are also benefiting from the focus of regulation on the real sources of market power in other ways. In particular, the focus on the real economic bottleneck through functional separation has allowed us to deregulate in other areas of their business, instead relying more on competition law, as the drafters of the Framework intended.

So the UK experience is that Functional Separation can work and can enhance outcomes for business and residential consumers. That is why we believe it should be available to all regulators as a potential remedy under the Framework, but as I have said, not by any means proposed as some kind of automatic or default position. Any such presumption would in our view be extremely unwise and would not respect the need for judgement to be exercised in relation to particular national market conditions.

This reflects our wider belief that it is usually those who are closest to and best understand their national markets that are best able to judge whether a particular remedy contained in the EU policy Framework will be suitable, proportionate and successful for that particular national market’s circumstances.

We believe that the heart of the current Framework, and a major element in its success, has been the concept of independent economic regulation.

That independence has several facets.

Independence from the regulated industry itself;
Independence from national governments, where I welcome the clarity of the additional language being proposed by the Commission;
But also day-to-day independence for regulators to implement the detail, within an agreed policy framework.

Crucially, this means that regulators need also to be able to do their work without excessive control by any body including the Commission.

I do not mean that regulators should be unaccountable. But the best framework for complex economic decision-making has been proven to be one in which political institutions set broad policy objectives and hold regulators to account for their delivery of those objectives, rather than themselves stepping in on a day-to-day basis.

The current Framework seeks to strike a judicious balance in the division of responsibilities. In our view the Commission’s new proposals are likely to unacceptably alter that balance in two significant areas that do concern me.

The first is the proposed inclusion of a new power of veto over regulatory remedies.

There is some logic to the Commission’s existing powers of veto over market definition and the assessment of market power, since these are intimately connected to competition law principles of which the Commission is the guardian. It is a very bureaucratic, lengthy and burdensome procedure which can often delay decision making by many months - but it does have some logic.

Conversely, remedy design is a core task of the regulators themselves and the logic is far less clear. There is no particular reason to believe a monopoly of good practice or wisdom resides within the Commission or indeed anyone else.

Indeed, I would argue that no single institution can know all the right answers in a fast-changing environment such as modern communications. But a Commission veto implies that a single right answer can simply be rolled out, top-down. This risks leading to an uniformity of regulation and a loss of regulatory innovation in the system across Europe as a whole. One key strength of a ‘regulatory network’ is that it can encourage a plurality of ideas and facilitate regulatory innovation from which best practice can emerge in a creative way, rather than through the exercise of centralised command and control.

The second area of concern is the proposed creation of the new Authority. There are good legal reasons why the Authority cannot plausibly take on executive functions and responsibilities and can only therefore play an advisory role. But an advisory body of some 130 people and that is just to begin with! There is clearly a risk that to justify its existence this body actually starts to encroach into areas which are already being properly addressed by other institutions.

More fundamentally political independence is also a real concern. I recognise Mrs Reding’s personal commitment to independence but like all other agencies, the Authority would be under the ultimate supervisory role of nominees of Member States and the Commission itself. This seems fundamentally at odds with the goal of achieving appropriate balance between policy formulation and delivery, and fundamentally at odds with the principle of independent regulation which many of us – including many of you here today - have championed as a central feature of our approach to economic regulation in Europe.

If the aim is to ensure best practice and effective co-ordination of regulatory efforts to promote the single market, this can be achieved readily without the need to create a new Authority and in a way which is significantly less intrusive and less bureaucratic. And it can be achieved in a way that places the principle of independent regulation at its heart.

In this respect I warmly welcome the fact that the group of independent regulators have unanimously agreed to help to develop a proposal for a significant enhancement of the existing European Regulators Group – thereby offering a route to safeguarding the balance of responsibilities, to securing the principle of independence but also to meet the challenges of enhanced European coordination and collaboration, absolutely this means a body (“ERG plus, plus”) embedded in European law and fully accountable to the European Parliament.

This is a great opportunity to strengthen the internal market in electronic communications. We hope our advice is useful, but of course we look to the Parliament to strike the right balance in the interests of Europe as a whole.

Thank you.

Speech by Ed Richards on the European Framework, 27 February 2008

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