1.1 Any person running a telecommunications system (as defined by the Telecommunications Act 1984) is required to be licensed, with some very limited exceptions. These licences define the system which is to be run and specify the service which can be provided and the connections which can be made to other systems. Licences are granted by the Secretary of State for Trade and Industry and the conditions in them are administered and enforced by the Director General. The Act enables the Director General through modifications to include such conditions as appear to him to be requisite or expedient, having regard to his duties under the Act. The Act provides a procedure for the Director General to enforce licence conditions.
1.2 In exercising these functions the Director General must act under his general duties in relation to telecommunications set out in Section 3 of the Act, and is subject to control by the Courts through judicial review. The Director General also has concurrent powers with the Director General of Fair Trading in relation to certain telecommunications matters. Under the Competition Act the Director General can take action on courses of conduct which restrict, distort or prevent competition, resulting in a reference to the Monopolies and Mergers Commission or the acceptance of undertakings. The Director General does not have the ability to require the cessation of any activity pending completion of an investigation. Under the Fair Trading Act the Director General can refer certain, but not all, matters of industry-wide concern to the Monopolies and Mergers Commission for investigation. In such circumstances the Commission report to the Secretary of State who can then decide whether to take appropriate action. Again the Director General is unable to require cessation of any activity pending completion of the investigation.
1.3 The telecommunications market is going through a period of fundamental change. Over the last eleven years it has moved from monopoly, through duopoly, to a market with about 150 PTO licensees and many other companies offering a range of different facilities and services. Competition has developed unevenly in different segments of the market, with some parts fiercely competitive, others still heavily dominated by BT, and still more in between these two extremes. Regulation must evolve to meet the challenges of this rapidly changing market, vibrant with the activities of emerging competition. Regulation is an imperfect substitute for competitive market forces, which can be hindered rather than encouraged by the maintenance of heavy-handed, backward-looking rules. To meet these challenges Oftel needs to be able to take effective and speedy action against anti-competitive practices, while beginning the essential process of withdrawing from prescriptive rule-making and detailed price control.
1.4 One of the main problems with the current BT licence has been the emphasis on very detailed, prescriptive licence conditions which grapple with yesterday's problems but not with today's , let alone tomorrow's. Oftel therefore considers that the time is now right for a clear move towards a regulatory approach which is at the same time lighter and firmer: lighter in that it imposes fewer a priori prescriptive rules, but firmer in that it puts the onus clearly on dominant operators to ensure that they do not indulge in anti-competitive behaviour, and gives the regulator effective and speedy tools to use against the full range of anti-competitive practices in whatever form they appear, without having first to go through the lengthy process of individual licence amendment.
1.5 Oftel has identified the following characteristics of an effective mechanism, within the existing statutory framework, for dealing with anti-competitive behaviour:
(a) fast availability of interim relief and of third party rights,
(b) comprehensive coverage,
(c) minimal regulatory burden,
(d) transparency of regulation,
(e) application to all significant licensees.
1.6 Oftel believes that its proposed condition prohibiting anti-competitive practices can meet these objectives. It believes that the introduction of the condition should be complemented by the progressive removal of detailed specific licence conditions from licences, thereby providing all licensees with more flexibility to innovate and respond to market forces.
1.7 The current process is unsatisfactory. BT's licence contains 76 conditions, many of which were drafted in 1983/84 at a time when BT had a monopoly in the provision of telecommunications services. Mercury was granted a licence similar to that of BT. Licence conditions deal with a number of specific fair trading issues, designed to reflect the needs of a market where there was no effective competition.
1.8 A further set of detailed conditions was included in 1991 when the duopoly policy was discontinued and the telecommunications market opened up to further competition. Since then 21 so-called "slimline" PTO licences have been issued to new entrants. Most Telecommunications Act licences deal with competition issues by specifying in advance an unacceptable anti-competitive practice, and imposing an obligation on licensees not to engage in that particular type of activity. An example is the condition which prevents operators from connecting new customers to their networks by means of hard wiring. This prohibition ensures that all customers will be free to switch from one operator to another without a requirement to have their telephone physically disconnected and rewired to their new operator's network.
1.9 If a licensee is found to be in breach of a licence condition, the Director General has a duty to take enforcement action. Experience to date has shown that, due to the detailed specific nature of licence conditions, it is often very difficult or impossible for the Director General to take such enforcement action because the behaviour complained of does not mirror the precise terms of the licence condition, if it is covered at all.
1.10 A licence cannot specify in detail every conceivable type of anti-competitive behaviour. It is clear that there are gaps in the current conditions in BT's licence: an example is Condition 35 which, although designed to prevent linked sales, does not cover the supply of rented equipment. In a market which is going through a rapid stage of development and innovation, the types of anti-competitive activity which can and do arise are not always predictable. The current detailed licence conditions were better suited to a market where competition was more limited.
1.11 Detailed specific licence conditions cannot be comprehensive. The only practical solution open to the Director General, when a gap is exposed in the licence, is to seek to modify, and hence to expand, the licence to ensure that the newly identified practice is caught in the future. BT's licence has been in a continual process of modification, and hence expansion, for several years. Examples of this process in practice include the issue of number portability and the issue of BT's apparatus supply business. This system is slow and it does not provide any redress to those who suffer in the meantime as a result of the anti-competitive behaviour. The anti-competitive behaviour can continue unrestrained until the licence modification takes effect.
1.12 Now, when competition has emerged and is growing steadily, is precisely the time when effective control of anti-competitive behaviour is most needed. It is now that the weaknesses in the current BT licence conditions are being highlighted. Ineffective powers to control anti-competitive behaviour expeditiously acts to the detriment of other operators and consumers, and erodes the confidence of investors. Equally in a market where competition has emerged it is appropriate to impose the minimum level of detailed regulation in order not to hamper the development of the industry.
1.13 Oftel's proposals are designed, within the framework of the existing legislation, to promote the development of sustainable competition in the market. Parliament saw the need, when it privatised BT, to set up an independent competition authority - the Director General of Telecommunications - with specialist powers to promote and maintain effective competition in telecommunications. These powers were in addition to the general fair trading powers in the Fair Trading and Competition Acts. It gave the Director those special powers, including the ability to propose such licence modifications as he considers requisite for the performance of his duties. The licences were never intended to be rigid inflexible instruments. They need to be flexible in a dynamic market.
1.14 The current BT licence has further drawbacks, including its sheer length and complexity. Unless the current approach to licence modifications is altered, this complexity will only get worse. Very few people understand what rights it grants BT and what obligations it imposes. The cumulative effect of this complexity and lack of transparency is detrimental to BT, its customers and shareholders and BT's competitors.
1.15 The test of effectiveness of a competition authority such as Oftel must include an assessment of its level of intervention in the market place. An effective regulator withdraws wherever and whenever competitive market forces reach a sustainable level. Oftel wishes to withdraw from setting detailed inflexible rules. It can only do so where both Oftel and the telecommunications market have confidence in the swiftness and effectiveness of action to deal with anti-competitive practices where and when it occurs.
1.16 The proposed new licence condition seeks to introduce this necessary flexibility and effectiveness into the licence enforcement process. It is also intended to introduce an element of deterrence which is currently lacking. This in turn should improve the investment climate by reducing the risk of unfair competition and the effects this can have on investor confidence. It should also provide consumers with the benefits of a competitive market place, by enabling the competition that has emerged to be sustained.
1.17 The proposed condition should enable another development which is significant in terms of the impact of regulation on the developing telecommunications market. It will enable Oftel to reduce the ever increasing level of detailed specific regulatory rules currently imposed on BT and other licensees. Section 2 below describes Oftel's proposal to delete 17 detailed conditions from BT's licence, simultaneously with the introduction of the new condition, and with the prospect of more deletions to come. The objective of these proposals is to produce an effective yet flexible regulatory framework where the regulator intervenes only when and where necessary. Oftel intends to withdraw from intrusive regulation and to enable market forces to replace regulation where market conditions allow. These proposals enable that process to begin.
1.18 Where detailed obligations are lifted, both Oftel and the telecommunications market in general need confidence that sufficient regulatory tools are available to tackle anti-competitive practices in a timely and effective way. There must also be confidence in the efforts which licensees are willing to make to ensure compliance with their licence obligations. The new condition is intended to provide such confidence. Oftel has made it clear that this process of deregulation, and similar deregulatory measures announced as part of the review of pricing of telecommunications services from 1997 onwards, can only proceed when the tools needed to create this climate of confidence are in place.
1.19 The package of deregulatory measures will require both licensees and Oftel to change their approach. Oftel's role in the market is undergoing a shift in emphasis from that of a regulator engaged primarily in designing detailed licence conditions and dismantling entry barriers, to that of a competition authority ensuring that emerging competition is sustainable and not put at risk by anti-competitive practices. Oftel will need to have swift, transparent and fair administrative procedures to enable fair and timely enforcement action. Such action must be consistent and comprehensible. Oftel has begun its shift in emphasis and expects operators to do so too.
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