Contents

Slide 1 - Oftel’s agenda

Slide 2 - The changing framework

Slide 3 – Changes in the Short term

Slide 4 – Changes in the Medium term

Slide 5 – All change

Slide 6 - Oftel’s goal.

Slide 7 - objectives

Slide 8 - Objectives matched to a three-strand core strategy

Slide 9 – Principles of regulation

Slide 10 – The Internet

Slide 11 – Internet access via the PSTN

Slide 12 – Competition in the access network

Slide 13 - Access to bandwidth

Slide 14 – Regulating the mobile market

Slide 15 - Price Control

Slide 16 Conclusion – Competition Plus

Check against delivery

Slide 1 - Oftel’s agenda

Over the next 45 minutes I want to give you a broad overview of how the framework of regulation is going to be changing over the next few years; to look at how the market is changing around us and Oftel's response to those developments; and then to look at some of the key issues which are live for us at the moment. I'll cover in particular the range of Internet and e-commerce issues, local loop unbundling - access to bandwidth, mobile and the review of BT's Price Control which is now underway.

Slide 2 - The changing framework

Let's start with the Framework - which, frankly, is creaking.

The Telecommunications Act was groundbreaking in its time. Now privatisation and liberalisation of telecoms markets seem entirely normal but in 1984 liberalisation was a bit of an act of faith. The Act was not designed for a multi-player, competitive industry and 15 years on it needs an overhaul. The Government has recognised this.

The telecoms market in the UK is, of course, now also subject to requirements of EU Directives. These have introduced a raft of new obligations going beyond what we had in the UK previously.

The Commission has already embarked on a review of the whole suite of liberalisation Directives. So there is the potential for very significant change ahead.

And if change is coming, what does Oftel want to see it bring? Well, technology is advancing at breakneck speed. New developments and new services will bring different, unknown - and unknowable - regulatory issues. So as a regulator we certainly need more flexibility.

And competition is racing ahead too. So we will want a framework that allows regulation to pull back wherever effective competition will do the job instead. We want to see telecoms become as close to an ordinary market as possible, with just a hard core of areas that still need to be regulated.

Slide 3 – Changes in the Short term

Some very important changes have already been announced and will be implemented in the Utilities Bill, which the Government will introduce in the autumn. The changes were set out last year in the White Paper following up the consultation on the Utilities Review. I find though that, surprisingly, people have rather lost sight of what is about to happen.

The main change to the focus of Oftel's work will be that our primary duty will in future be to promote the interests of consumers, wherever possible through competition. Up to now this has been a secondary duty along with several others. Having it as a primary duty is helpful clarification of our role.

Operationally there will be major changes for us. There will no longer be a single Regulator. The Director General will become Chairman of a Regulatory Authority.

And there is to be a statutory Telecoms Consumer Council, which will take over from Oftel responsibility for handling complaints and liaison with our Advisory Bodies.

Separately, as you will all be aware, Oftel will next year take on the new powers given to us in the Competition Act to deal with anti-competitive behaviour in the telecoms market. We will have powers to impose fines. This will involve very major changes in the way Oftel works and we are already planning hard to implement them. We are working very closely with the Office of Fair Trading and the other regulators. We have issued draft guidelines on how we intend to operate and have consulted widely on them. We'll be putting out a final version shortly.

That's just the short term. On only a slightly longer timeframe there will be other changes.

Slide 4 – Changes in the Medium term

The Government has promised a Green Paper in the autumn - November - on how it might approach a new Telecommunications Act. Oftel is putting considerable work into this - it is one of our major projects.

The Government statement published last week set out some initial views for comment. The approach is likely to be evolutionary rather than revolutionary. No changes in regulatory structure are planned. The Government considers that the existing coordination arrangements between regulators can work well for the future.

The statement also asks whether we still need to have licences to run telecoms systems. Or whether we couldn't rely on a general authorisation and an accompanying set of rules. We want to simplify licensing as much as we can.

We will be examining how far the rules can be boiled down and what mechanisms will be needed for changing them, providing appropriate consultation and agreed procedures.

In parallel the EU will be conducting its review. Obviously we'll need to see that what goes into a new Telecommunications Act is consistent with EU developments. New Telecommunications Act unlikely to be in place before late 2001. EU Review probably effective around 2003.

The EU Review is another of Oftel's major projects. It's very important that Oftel and UK stakeholders play a full part in the review process. It will set the scene for telecoms regulation for first decade of the new millennium. In the EU, as at home in the UK, Oftel wants to see flexibility built into the framework and the ability to pull back from regulation when it is no longer needed.

We don't know - can't know - what the market will be like in 2003. Four years ago you would never have guessed what the market is like today and the future is likely to be more dynamic - more uncertain - than the past.

What this means, it seems to us, is that any new Directives can't hope to set in stone detailed rules for all Member States. They will need to set out broad principles at EU level and leave it down to national regulators to decide the detail. We've been discussing with the Commission and other Regulators how this might work.

Slide 5 – All change

But while the regulatory framework is changing, the market is changing even faster. More true of telecoms than any other regulated sector. Slide 5 highlights just some of the key drivers for change.

First, convergence. After all the talk of the past few years, it is finally arriving. Similar services e.g. home shopping, Internet access are being delivered over different infrastructure – via the TV and via the PC. And this is just the start. I believe we are at the threshold of an explosion of choice for consumers – and Oftel will play its part in ensuring this happens.

Second and of course related to the first, the rapid advances in technology. I am not going to predict what might happen – I’m not a technologist and in such a fast-moving world, predictions rapidly become out of date. But it is clear that costs are reducing quickly, and that IP networks are going to have a major impact on telecoms networks in the near future. For the regulator this may mean significant changes to the way in which services to consumers are delivered and priced. No longer will length of time connected be the driver of charges but rather the capacity used. Distance will be less important too.

Third, and of particular interest to a City audience, the growing pace of mergers and acquisitions and the resulting globalisation. Oftel is not, of course, a competent authority for mergers – this is either for the OFT or the European Commission. But we do have an interest and, as appropriate, our advice is given to the competent authorities. My interest is in the effect on consumers and competition in the UK, and the climate for UK operators abroad.

Fourth, changing consumer demands. My task is to promote the interests of consumers. But we need to recognise that consumers’ demands change - just as markets change. For example, a major growth area of consumer demand is wish for protection of personal information and protection from unwanted communications. I must recognise these demands. And those in the telecoms industry need to recognise there is a commercial interest in so doing. Unless consumers have confidence in the new technologies they will not use them to the full. A second increasing complaint is that competition has lead to confusion. How does the consumer find his way through the plethora of competing offers to find the best price? I’m all in favour of competition. But I want it to work. This means consumers must be able to make informed choices, not be confused. So this too is a focus of regulatory attention.

So how does the regulator find his way through? I have to say that press commentators offer very little help. On the one hand I see calls for the regulator to get out of the way – the message seems to be that its all too fast-moving for the regulator to stand a chance. On the other hand, I get calls to intervene in very minor matters. "Something must be done" and you are the regulator. But I believe there is a way through – and one which will lead to sensible, coherent regulation to the benefit of UK consumers and the UK telecoms sector.

First, just as in the commercial world, the regulator needs to be clear where we are going and the route to get there. Important for regulatees, investors and consumers. We have many duties imposed by a variety of legislation – Telecommunications Act, a plethora of EU Directives and the Competition Act among them. We have encapsulated these in a single goal underpinned by five primary objectives.

Slide 6 - Oftel’s goal.

All our regulatory action should be judged ultimately by the practical effect it has towards achieving this goal.

Slide 7 - Objectives

Two key messages from these five objectives. First, wherever possible our goal is delivered through competition. Through competition the consumer is most likely to get quality, choice and value for money. Second, we may also need to regulate where competition is not sufficient to protect consumers.

As I mentioned earlier, the Utilities Bill – expected later this year – will give all the regulators a new primary duty to exercise functions in a manner best calculated to "protect and promote the consumer interest" which, wherever possible and appropriate, is to be pursued through competition. I don’t believe that you will see great difference in Oftel’s approach as a result of this. Ever since I was appointed, I have made clear that the consumer is at heart of what Oftel is about. This remains a constant even though everything around us is changing.

Slide 8 - Objectives matched to a three-strand core strategy

I’ve explained our goal and objectives. Now the route – a three-pronged strategy to achieve our goal. This is very much the purpose of regulation i.e. why we exist. First promoting competition. We want competition at all levels – both in networks and in services. Key issues for regulator is how far we need to intervene to promote competition. And when we can stop regulating and rely on normal competition law to protect competition.

Second, protecting the consumer. First where competition is not yet effective. Price control is clearest example. We currently have price controls on some of BT’s prices and on some calls to mobile. We limit price control to areas where there is no effective competition and therefore there is a risk of the consumer suffering from excessive prices. However this area of regulation should decrease as competition grows.

However, recognising the fundamental importance of telecoms to modern life, there is likely to be some continuing need for consumer protection measures even in areas where there is competition. For example we need to ensure access to the emergency services; to protect disadvantaged groups; to safeguard privacy, etc.

Third, compliance. This is about protecting competition – the other side of the coin to promoting competition. We need to ensure that those with strong market positions don’t act anti-competitively. This is already part of our work but next year we will get stronger powers under the Competition Act. But these are powers that apply throughout the economy; they are not unique to telecoms. Oftel is simply using its specialist knowledge to apply them to the telecoms sector, acting concurrently with the Office of Fair Trading.

In a nutshell, I’d sum up our strategy as "Competition Plus" reflecting the twin keys to regulation are competition and consumer protection.

Slide 9 – Principles of regulation

So far I’ve concentrated on why we regulate. Now a bit of the how. We are developing some basic principles to guide us. And there’s a link here with development of the EU legislative framework. We are actively participating in discussions in the EU about the future shape of the EU framework – and in parallel we are reflecting these discussions in our own current approach. First principle, regulation should be based on objectives of competition and consumer protection. I’ve said quite a bit about these already. But always bear in mind when regulating what we are trying to achieve.

Second principle: regulate only where necessary. In other words, regulation should be the minimum necessary. Given that regulation is directed towards achieving a competitive market, this means that regulation should decrease as competition increases. But it may not always be a smooth downward slope – there may be bumps along the way. But the goal is clear.

Third: we must adapt our regulatory tools to the development of competition. As competition develops so we can move to "softer" measures. Where there is a dominant operator and little prospect of effective competition, then we may need "hard" measures such as price control to protect consumers. Also interconnection at cost-based prices so to assist entry by new players. But as markets become more competitive, so lighter tools may be more appropriate. Starting to see this in our approach to mobile markets where developing the concept of "retail minus" prices. Early days but this is the direction in which we hope to go.

Fourth principle: regulation should be technologically neutral. Self-evident – and increasingly important in a converged world. Which leads onto the fifth principle: that regulation should be coherent and consistent. I get lots of calls for stability in the regulatory framework. I can’t guarantee you this in a fast-moving world. But I am clear that the key principles should be capable of application across very different areas e.g. mobile, digital interactive services, cable networks, BT’s local loop. I am also very conscious of the need not to diminish incentives for investment and innovation.

Now is also probably the time to say a few words about the organisation of regulation in the UK. Yes we have a number of different regulators with responsibilities in different parts of the communications world. In an ideal world, their responsibilities would be brought together. But this would require legislation and legislation takes time. So instead I instigated arrangements whereby instead of arguing with each other in public, there are proper procedures to ensure we work together. This is increasingly important as convergence arrives and I’m glad to say I believe the arrangements are working well. You have seen the first joint ITC/Oftel consultation on whether cable television and telephony services should be unbundled. We are also working on our first joint complaint. No doubt there will be more of both to come.

So how does Oftel apply its strategy to real market developments?

Slide 10 – The Internet

The first of today's hot issues is the Internet and e-commerce. The Internet is already changing the way we work, do business and how we entertain ourselves. It is immensely powerful as an instrument of change which will affect all our lives.

The government as you will know is committed to ensuring that the UK is the best place to do business electronically by 2002. A lot of things need to be put in place for that to be a reality. The whole framework of electronic trading and the acceptability of electronic signatures needs to be clarified. The Government is doing this in a Bill which will be introduced shortly, with the aim of building confidence in electronic commerce and the underlying technology.

Oftel is working closely with DTI on this and could have a role as an approvals body for cryptographic service providers seeking voluntary accreditation. We are also working closely together on the problem of junk-email - spam - which could be a plague as more people use the Internet. We want to do for junk-email what we have recently done for junk faxes and phone calls. Make sure only those who want it get it. The DTI will be consulting on how we go about this very shortly.

A prime concern for me will be ensuring that access to the Internet is available at fair prices.

Slide 11 – Internet access via the PSTN

The telephone network is still the primary route to the Internet for most people and is likely to continue to be for the immediate future. 95% of people have the potential for access via this route.

Access to the Internet over the PSTN has a cost. And it can tot up if you are on line for hours. There is, as you will know from the press, a considerable lobby calling for free local calls, as they have in some parts of the States, or for unmetered access.

I entirely agree that it is important that consumers have a choice of tariffs for what they are buying, and that prices are fair.

That was the thinking behind our review earlier this year of the charging arrangements for number translation services - the arrangements most subscription-free internet services use. The proposals we have put forward would allow operators/service providers, not BT, to decide what prices they put their services into the market at. This will allow competitors to compete and give customers greater choice.

Oftel is all for different types of tariff packaging which allow customers to choose what best fits their needs. We welcome them. In BT's case though we have to be sure that any deals aren't anti-competitive. That they are not below cost and being subsidised from other services or other customers.

And the market seems to be delivering on this. Many operators are offering bundles packages of free minutes for a subscription payment and other types of deal.

But for most people at the moment the Internet is a narrowband world. One of our main projects very live at the moment is access to higher bandwidth services over the copper phone lines.

Slide 12 – Competition in the access network

The telephone isn’t the only way to connect to the Internet however. These are exciting times, with a whole load of different technologies starting to become commercial reality.

Higher bandwidth services such as high speed Internet, video on demand and other e-commerce services are of fundamental importance to the development of the UK’s electronic economy and are likely to play a vital role in the future of communications. Oftel is committed to ensuring that UK consumers and businesses are well placed to make use of new Information Age technologies that will deliver these services.

Slide 13 - Access to bandwidth

The ubiquity of BT’s copper loop means DSL may have the most potential in the short term to deliver higher bandwidth to the mass market. Oftel is considering whether it needs to act to ensure consumer gets choice, quality and value for money. In our consultation last year, we set out two main types of regulatory action.

In the first type, BT upgrades its network but is required to provide fair and non-discriminatory access to other operators and service providers. This option would have the potential to reach a wide audience, both of residential and business consumers. But it would leave the pace of development in the hands of BT and would require considerable multi-billion pound investment from BT.

Second, allowing other operators to have the opportunity to upgrade BT’s local loop. This would have the advantage of letting a wide range of competing operators into the market. Would promote innovation and competition, but may not deliver early rollout of higher bandwidth services to the mass market.

The two options may not be mutually exclusive.

There are some difficult judgements that need to be made. We are still analysing these issues and expect to publish a second consultation document very shortly

Slide 14 – Regulating the mobile market

Mobile communications is another current focus of attention. The mobile market is of course one of the fastest growing at the moment, and may be expected to grow even more in the future. UK penetration rates are around 25%; many forecasts assume they will reach current Scandinavian levels – 50/60% at the moment. Over the past four years mobile has changed from a low penetration, largely business market to a mass market. These developments mean that the mobile market is coming under the spotlight as a result of Oftel’s duty to promote the interests of consumers. At the same time as consumer interest is increasing, mobile technology is allowing the development of lots of new services. Pre-pay is a recent example, and others such as high speed Internet access and fixed/mobile convergence are coming soon.

There is a tension for us here; on the one hand, the mobile market has historically been fairly lightly regulated in comparison to the fixed market. On the other, we have pressures both from consumers and industry to intervene in the market. Customers tell us prices are too high. On calls to mobile for example. We looked into this and told the operators to reduce their charges. They refused so we took the matter to the Monopolies and Mergers Commission. They agreed with Oftel. We now have price control on BT, Vodafone and Cellnet, which will produce savings of up to £1 billion for consumers over 3 years. Oftel is also currently considering a request from BT to determine the termination rate for calls to One2One.

Whether Oftel should introduce some form of price control on calls from mobiles is the subject of a current consultation. Prices are coming down but customers still feel they are too high. In February, we issued a consultation document, which said that such controls were not necessary. We are due to report on the result of the consultation next week. Can't say more than that.

Given customers' concern, however, Oftel is setting up a new system for monitoring changes in prices of calls from mobile phones so we can get a comprehensive view of what’s happening to calls from mobile from the consumer perspective. This will be going out to consultation shortly and will be an important input to our review of market competitiveness in 2000. More immediately, we are working with the operators to produce quality of service indicators which will allow customers to understand, for a number of given geographic areas, the level of network quality they are likely to get from each operator.

An example of industry pressure on Oftel to intervene in the market is the current consultation on Indirect Access. In this case, potential Indirect Access operators have been unable to come to commercial agreements with the networks, and Oftel has been asked to intervene. In February, we proposed that Indirect Access should be an obligation on mobile networks with market power, but at a price, retail minus, which would allow the mobile operator to protect its investment in network infrastructure and customer acquisition. Again, our final conclusions on Indirect Access are due next week.

You’ll of course all be aware of the government’s intention to auction five licences to use spectrum for 3^rd generation mobile services, with the largest block of spectrum reserved for a new entrant. Oftel very much supports the introduction of new network competition into the market. It’s clear that the previous new entrants, Orange and One2One brought substantial benefits to customers in terms of innovative tariff packages and reduced prices. We hope to see the same from the new 3G entrant, as well as bringing an exciting new range of services to customers.

New entrants will have an uphill task breaking into a market with four established players who have a high market penetration and an established customer base. Oftel and Government consider that temporary measures are needed to level the playing field. That's why we've proposed that the entrant should be able to roam on an existing network. Oftel is currently consulting the industry on the approach we would take if the parties failed to reach a commercial roaming on roaming. It’s important to note that we see the proposed licence condition very much as a backstop; new entrants made it clear that they needed the assurance that roaming would be available if they were to enter the auction. If Oftel has to become involved in determining terms and conditions for roaming, the proposed consultation makes it clear that we would be fair and reasonable to both incumbents and the new operators. We would also apply a form of retail-minus to any proposed charges; again, we want the incumbents to be able to realise the value of their investments as well as allowing the new operators to compete on a level playing field. The new entrant doesn't get a cheap ride.

Slide 15 - Price Control

Reviewing price control is one of the most important parts of a regulator's work. Certainly it's the one thing that ordinary consumers are aware of. They will be aware what is happening to prices even if they haven't a clue what X in the RPI-X formula is.

The current Retail and Interconnect controls on BT expire in 2001 and we have already started the work of the review. We only want to use price control where competition is not sufficiently effective to determine fair prices. So our first step is to kick off a major debate on the likely level of competition in the period 2001-5 which would be the period for the next control.

We'll be publishing a major consultative document in two to three weeks setting out the issues we think need to be taken into account. And we'll be asking for views. We want to see what competition there will be for the different services which might be controlled. And whether competition will be effective for some types of customer but perhaps not others.

It's such a major issue for consumers - residential and business - that we are planning to have public meetings around the country to promote debate.

My predecessor said he hoped the current retail control would be the last. But equally he was clear that this would only happen if competition delivered the goods instead. The competition analysis enables us to decide if there needs to be another control. And if so what services and customers it needs to cover.

We'll also be looking, on the interconnection side, at what wholesale services still need to be charge capped and doing a major review of our approach to charging for call origination.

Slide 16 Conclusion – Competition Plus

The market is changing around us. Regulatory structure is changing too. Regulation itself can't stand still. Where are we going? How far can telecoms be a normal market? What does the end-game look like?

There are the questions we've been asking ourselves. One of our key projects is development of long term strategy. It is very, very important. Industry, consumers and the regulator should share a vision of where we are heading. What do we see for the future in our crystal ball?

Well, the key touchstones that of promoting competition, protecting consumers and ensuring compliance with Fair Trading Rules and licence conditions will I believe remain as our core interest over the next year or two. But they will change in emphasis to meet the needs of the changing market: promotion of competition will need to fall back where there is effective competition and the form of consumer protection will begin to put greater emphasis on ensuring consumer awareness. Making sure consumers know what choices are open to them so that as competition grows we are more able to make informed choices. Legislative changes both in the UK and from Europe, as noted earlier, will have an important impact on the regulatory environment. We must ensure that the UK is able to influence such changes to the benefit of the UK telecommunications sector.

There will continue to be areas where we need to keep close supervision to protect consumers and ensure nascent competition thrives. We need to recognise that entry into telecoms network competition is not easy and networks do bring rather different regulatory issues to do with scarce resources, such as spectrum, and interconnection, such as interoperability and standards. This means that the level of regulation will tend to be more intrusive than in most other sectors, and this explains why promoting competition is an important part of Oftel’s responsibilities.

However, we are seeking to minimise prescriptive and intrusive regulation, to focus on preventing anti-competitive behaviour and to work with other regulators to develop a coherent regulatory framework. We need to recognise our limitations, in particular not to set terms which make regulation inevitable for far too long, or have unfortunate knock-on effects in adjacent markets.

It is my intention to put out for discussion the principles of Oftel’s regulatory strategy over the next four months so that all stakeholders can be involved in developing the appropriate framework for regulation in a rapidly developing market.