THE HOUSE MAGAZINE
Putting the Consumer First: Wednesday, 20 May 1998

Check against delivery

Address by David Edmonds, Director General of Telecommunications

Given the nature of the development of the Telecommunications Sector, the basic thrust of the work of the Director General of Telecommunications is to encourage, promote and protect competition.

This philosophy was embedded in the legislation of some 14 years ago.

I have a specific duty, in law, to maintain and promote effective competition.

The Green Paper underpins this fundamental principle.

The Green Paper also answers the implicit follow-up question - why do we need regulators in a sector where competition is now firmly established and growing?

The answer, of course, is that although the nationalised monopoly structure was originally designed to protect the consumer, in a de-nationalised environment, there are still powerful players, with the potential ability to create an environment in which ordinary market forces may have a malign effect on the consumer.

As a very new regulator, I profoundly believe in the premises that underpin the utilities review.

Regulation is needed to ensure that the needs of consumers are protected from the potential adverse impacts on them of the actions of monopoly suppliers or dominant operators.

This means that regulators will need to intervene in the market while monopoly or near-monopoly obtains, or where dominant operators remain.

There will need to be interventions in the market to encourage sustainable competition wherever this is possible.

The Green Paper is, therefore, right to suggest that the primary duty of the regulator is to protect the interests of the consumer.

I would define those interests in five ways:

• access
• price
• quality
• choice
• fairness.

The proposals in the Green Paper must be judged against an assessment of the extent to which they help - or hinder - regulators to support those consumer interests.

Against those criteria, the Green Paper proposals do take us forward, and consumers should benefit.

The Green Paper puts the interests of the consumer at the heart of regulation.

It underpins the concepts of transparency, and fairness in the regulatory process.

The purpose of the consultation is to give the wider-community as well as the regulators, the chance to comment.

In some areas, the proposals may be improved.

I will be publishing next week the full Oftel response to the Green Paper, which will pick up these issues.

But the fundamental tenor of that response will be that the implementation of the bulk of the Green Paper will help regulators to do a better job in protecting the interests of consumers.

So let me look at the five areas of access, security, price, quality, and fairness.

Though competition per se may drive towards this perfect world, for some years yet I see an effective regulatory overlay as an essential complement.

On security, the first consumer concern will always be - can I have my supply of this service guaranteed?

If that service is water or energy, then the concern is acute - but increasingly a basic telecommunications service is fundamental.

Even if the services are not used personally, they need to be generally available, and to work.

The Green Paper addresses this issue in at least three ways.

First, it balances the primary duty of the regulator towards consumers by requiring us to have regard to the continued ability of the regulated company to provide service.

This has to be in the interests of the consumer.

Second, we must take action to ensure that operators who are price-regulated make sufficient investment in order to meet their service obligations.

For a regulator, investment regulation, especially where markets are competitive, does raise difficult issues.

In the telecommunications sector, I envisage that as long as the regulator is able to be satisfied that investment is sufficient to meet licence obligations, and that quality standards are not falling, formal investment regulation is unlikely to be necessary.

Third, the Green Paper looks at security of supply from the point of view of the individual consumer.

Disconnection is a difficult issue.

In Telecommunications there are now voluntary Codes of Practice to find an alternative to disconnection for debt.

We have also worked with BT to produce service packages which offer cheaper line rental for light users, or which offer a ‘no frills package’ at a reduced rate.

The Green Paper proposals will, therefore, underpin our future discussions with the telecommunications companies on this issue.

Consumers want utility services that are affordable.

I welcome the continued emphasis in the Green Paper on the established RPI-X mechanism.

As competition grows in a sector, the scope of that mechanism may diminish, but its existence is a powerful protector of the consumer.

The issue of the development of the principle to build in an error correction mechanism is more problematic.

I understand fully the motivation behind the proposal - profits which represent real entrepreneurial effort or increased value of the service provided are acceptable.

The ability, however, of a company which has a real or near monopoly of a utility service to make a large profit because of factors outside its control has caused both political and public concern.

We shall need to look very hard at the detail of any new mechanism, for if it is introduced, it has to be practical, to work properly, and to leave the regulator a discretion to decide if and when to intervene.

In Telecommunications, affordability has increased as a result of a multifaceted strategy.

In a competitive market, the reduction in costs and prices through competition enhances affordability.

Where competition is inadequate, the price control has brought prices down towards the cost base and ensured that these costs are those of an efficient operator.

And when prices are still too high for certain groups of disadvantaged customers, the general principle can be supplemented by specific actions.

This session asks if consumers will benefit, and how.

In Telecommunications, the combination of competition and judicious price control has brought prices down, sometimes dramatically.

Since privatisation, the average cost of the basic telephony service, has fallen by 49%, in real terms.

In that period, the cost of BT’s national rate calls has fallen by between 40% to almost 80%.

International call rates have fallen dramatically.

Special price packages, such as the Light User Scheme - which is a licence requirement on BT by Oftel - mean that it is possible to have a telephone, to take incoming calls, and to make a small number of outgoing calls, for only £5 per month.

And, if the consumer wants only incoming calls and emergency outgoing calls, there is a BT service - again required by the licence - that reduces this to £3 per month.

And because the regulator requires the cost of these services to be averaged across the country, they are available at the same price in the heart of the urban area or in the remote countryside.

But price, of course, is not the sole criterion.

Customers want the service to be affordable, but they also want the service to be reliable and diverse.

In a competitive market, poor quality allows the consumer to go to another supplier.

In the regulated markets, this has not always been possible or easy.

It is also true that the quality of service has to be a key component in price control to ensure that RPI minus x is not achieved through service degradation.

The regulator has a role to see that services are of high quality.

The Green Paper suggests ways in which quality standards and comparable performance indicators can be used.

These are very useful developments.

I believe that in Telecommunications we can build on existing work, particularly in terms of performance indicators, to give customers a much more intelligible understanding of comparative performance - and price.

Many customers are baffled by the complexity of the tariff material that they currently receive.

Their ability to compare performance is limited.

The publication of comparative data, either on a standardised basis agreed by the industry, or if necessary required by the regulator independently should be a priority in the telecommunications sector.

The next area is choice.

The customer wants the ability to leave a supplier and to go elsewhere if dissatisfied with price or service.

Customers also want to make positive choice between service packages that meet needs and circumstance.

Choice has to be good for the consumer.

In Telecommunications, though we do not have complete competition, there is substantial choice, which is growing.

We are not complacent about those areas where choice is still limited, but arguably in the UK there is more choice than in much of the rest of the world and the Green Paper with its emphasis on sustaining competition underpins that the approach we have taken until now.

Consumers are not monolithic.

They all want security of supply, affordable prices, quality and choice.

But not all consumers are equally capable of gaining access to those benefits.

Some may require benefits to be made available in a specific way.

That is why I use the word fairness as the final component of my definition of consumer interest.

Some consumers, for example, live in remote areas where a rational market would not supply the service at all, or would charge prices that would prevent connection to the service.

Some consumers have very low income, and fairness to their needs requires the telecommunications company to take a positive and flexible attitude about credit-management, and an imaginative approach on the package of service that meets these needs.

Other consumers may not be able to use standard apparatus, or are unable to read standard billing information.

These need a different and tailored approach for their needs.

In Telecommunications some policies already exist to protect the interests of those on low incomes or in rural areas.

For example, Oftel requires that the prices charged by BT for its basic services are geographically averaged across the country.

As I noted above, we have worked with BT on packages for people on low incomes.

We are also in the middle of a major review of existing policy on the needs of consumers with disabilities.

The Green Paper suggests that there is scope for addressing these issues even more directly through Government guidelines to regulators.

That proposal has my full support.

Though competition and its encouragement is the most powerful pressure towards consumer interests, a firm guidance from Government will bolster the primary duty of the regulator and provide a helpful supplement to the basic pro-competition environment.

Regulators may sometimes be pulled in two directions to encourage competition and at the same time intervene in the market to protect consumers.

That simply makes our life more interesting.

There are two further issues which I would add in the list of consumer interests - transparency and advocacy.

The consumers and those companies operating in the sector want to know how the regulator works, what are the factors underlying decisions, and to ensure that a clear rationale exists.

Regulation not only has to be fair, but has to be seen to be fair.

I, therefore, welcome the measures proposed to improve transparency and accountability.

The new duty to protect the interests of consumers is important.

But that there will be a need to promote those interests effectively.

The Green Paper suggests that the consumer representative bodies should be strengthened and given a strong advocacy role.

This is an important area - I have no strong view as to whether the advocacy role sits with the regulator, or with an independent committee: but it must be clear where the responsibility lies, and resources must be made available to follow the responsibility.

Equally, it will be key to ensure that there is a powerful information flow between the regulator and all consumer bodies.

As a very new regulator, the Green Paper has come at a good time for me.

It has helped to bring early focus on the way in which regulation in the telecommunications sector will develop.

I look forward to working with Ministers, the other Regulators, with the industry and with consumer groups to turn the good intentions of the Green Paper into realistic and workable policies.