3.1 In markets such as telecommunications identified as needing a specialist competition authority, the nature of economic regulation is such that the Director General must take informed decisions on issues which would not normally arise in a competitive market place; or if they did arise, the outcome would be determined by market forces. For such regulation to be effective, it is crucial that the Director General has clear access to information and expertise, and sufficient discretion, to enable him to take appropriate decisions. When it imposed statutory duties on the Director General, Parliament decided the broad scope and nature of the decisions which it felt were appropriate and necessary for him to take. This defines the area of discretion - or regulatory penumbra - within which, subject to the definition of a set of general principles, the Director General is required to operate.
3.2 The area of discretion identified in the Telecommunications Act as appropriate for the Director General includes decisions on whether a licensee ought to be subject to certain obligations under licence conditions. This discretion is subject to review by the Monopolies and Mergers Commission in the event that the licensee does not consent to a new condition. Once a condition has been inserted into a licence, the Director General has discretion in determining whether a licensee is in breach. To ensure that this discretion is exercised reasonably, its exercise is subject to judicial review. The proposed new condition, while allowing flexibility of application, retains these safeguards. It is designed to enable the Director General to fulfil his statutory duties, and is proposed under the powers granted to him by Parliament through the Telecommunications Act. It does not extend the scope of his decision making; it merely introduces flexibility into the decision making process.
3.3 The need for the Director General to be equipped with the appropriate range of discretion to enable him to perform his duties must be balanced by a need to give the appropriate degree of clarity and certainty to licensees and others affected by regulation. In a fast-moving market, such certainty cannot be absolute. Indeed absolute certainty could only be provided at the expense of the flexibility and adaptability which is necessary to enable market participants to innovate and respond to market developments.
3.4 The proposed condition is designed to prevent a wide range of anti-competitive behaviour and ensure fair competition in the market. For this reason, it is worded in broad terms. To provide as much clarity and certainty as possible, Oftel wishes to provide all concerned with guidance on the parameters of the behaviour likely to lead to enforcement action under the condition. Guidelines will promote clarity and will enable operators to assess the likelihood of any particular commercial practice being found to be in breach of the condition. They will provide a measure of assurance about how the condition will work in practice, and will show the weight that Oftel intends to give to particular factors in deciding whether behaviour is anti-competitive. A first draft of these guidelines is provided at Annex D.
3.5 Oftel accepts that there are limits on the certainty which guidelines can provide. For instance, the guidelines cannot bind the Director General in law. Parliament has decided that the Director General must take decisions having regard to the individual circumstances of any particular issue. The guidelines will undoubtedly change in the future, as the market itself changes. Not withstanding those limitations, the industry will find that the guidelines draw on Oftel's 11 years experience of telecommunications regulation to cover, in some detail, a range of the most relevant issues. In particular, the guidelines set out how Oftel will interpret dominance, how it will approach questions about market definition, and how it will analyse the effects of particular behaviour in specific market circumstances. The guidelines also set out in practical terms how Oftel proposes to have regard to the existing body of law and expertise on competition issues including the jurisprudence that has developed in the European Union.
3.6 Oftel recognises the importance that the industry will attach to these guidelines when giving its views on the overall proposal and the proposed condition in particular. For this reason, comments are invited on all aspects of the guidelines, as set out in Annex D.
3.7 It is intended that these guidelines will evolve as the market develops. Oftel will involve all concerned in this evolutionary process. Changes will generally come about in one of three ways. Firstly, where enforcement action has highlighted an area of the guidelines which requires change, this will be publicised along with (or following) the announcement of enforcement action. Secondly, where the relevant case law changes, this could have an impact on the interpretation of the obligations under the condition. Where the facts of a particular case have made it necessary to depart from previous decisions, Oftel will set out its reasons for doing so, together with any change in the precise wording of the guidelines which might be appropriate. Finally, Oftel would expect to keep the guidelines under continual review and to consult on proposed changes periodically.
3.8 The successful application of the new condition in practice, and in particular the usefulness of the guidelines, is dependent in part on the input provided by the industry at all stages. Oftel hopes that all market participants will take a constructive approach to these guidelines and will provide ongoing feedback to Oftel on areas where they could be improved in order that the guidelines can be kept up to date.
3.9 Oftel proposes to introduce an internal audit system as a check on the procedural aspects of enforcement work. BT have specifically requested such a measure to add a further element of administrative fairness to enforcement procedures. The system will apply to significant investigations under the proposed condition, and can be accessed by anyone who has made or is the subject of such a complaint. Having analysed various models, including that adopted by the European Commission, Oftel considers that a procedure can be designed to fit within the current licensing regime in the UK. The system will ensure both that any administrative defects in the enforcement process are addressed, and that a reasonable balance is struck between the need for swift enforcement action and the need for procedural fairness.
3.10 Oftel has noted the responses to consultation on BT's suggestion that an Advisory Committee be set up to advise the Director General on competition issues. Responses were mixed, with particular reservations expressed in relation to potential delays if such a committee were to be involved in the handling of specific complaints. The Director General currently obtains a considerable amount of expert advice from independent sources. He intends to continue to obtain such advice, but does not believe it is appropriate to formalise these arrangements through the establishment of a formal committee at this stage.
3.11 Oftel has taken steps to improve the transparency of its enforcement casework, and is implementing a wide-ranging review of its casework procedures and information systems. All casework, whether or not instigated by complaints, will be conducted in a manner which gives all parties concerned a better understanding of Oftel's procedures and the reasons behind Oftel's decisions.
3.12 Summaries of Oftel's decisions will be published and made available to the industry on a regular basis. Over time these will build up to form a body of precedent, which will help operators to take commercial decisions in the light of the most up-to-date information and, where necessary, to make complaints on a better informed basis.
3.13 Oftel intends to ensure that the standards expected of operators are mirrored by the standards of administration and enforcement within Oftel. The industry has the right to expect Oftel to be professional in its work as a competition authority, and to be prepared to justify its decisions. Where he departs from previous decisions the Director General will provide reasons for doing so.
3.14 BT has produced an alternative draft condition which was circulated with the papers prepared for the Public Hearing held to discuss the Oftel proposal on 23 November. BT's proposal was described in its presentation to the Public Hearing. These paragraphs refer to that alternative proposal. Our understanding of it is as follows:-
(a) a practice is identified and if it is caught by an existing licence condition, the Director General can take appropriate enforcement action under the terms of a relevant specific licence condition;
(b) if it is not caught by a specific licence condition, a "Cease and Desist" direction can be issued. Note: this is not an enforcement order under the Telecommunications Act and therefore it involves no redress for third parties;
(c) the behaviour should then stop; if it recurs an enforcement order can be made enabling third parties to seek redress for any further breach;
(d) if, on examination, Oftel decides that the practice is anti-competitive, it then proposes a specific licence modification to deal with it;
(e) the specific licence modification is then either agreed, or is the subject of a Monopolies and Mergers Commission reference.
(f) the modification becomes part of the licence (or falls away if the MMC do not find the practice to be against the public interest) and the "Cease and Desist" direction lapses;
(g) if the behaviour recurs, the Director General can take enforcement action and third party rights may be available.
3.15 BT has argued that one advantage of their proposal is that it seeks to include an appeals procedure within the framework of the licence. Oftel recognises that licensees need to have confidence in the fairness of the operation of the regulatory regime. Oftel proposes to take several substantive steps to provide this confidence. The draft guidelines published today set out in some detail how Oftel expects to interpret the condition. The guidelines include Oftel's proposals to take account of existing law and practice. Oftel is taking several due process steps including ensuring transparency of its enforcement casework and introducing a casework audit system. This statement also sets out Oftel's continuing commitment to using expert advisers. Oftel has been advised that it does not have the power to include an appeal process which fetters the Director General's discretion.
3.16 In making this proposal, it is apparent that BT agrees with the general demand for a more swift and effective enforcement process. It has suggested a modification which it believes could achieve that end. Oftel welcomes their initiative in seeking satisfactory proposals to improve the current regime. It is not convinced, however, that the BT proposal achieves the desired objectives.
3.17 Under the existing licence, which seeks to specify particular practices, the enforcement process can be very slow and inflexible. This reduces the confidence of all concerned that Oftel can in practice prevent anti-competitive behaviour and take effective action where it occurs. Oftel's proposal seeks to import flexibility into the regime. Such flexibility will ensure that where the need arises, provisional and final enforcement orders, as envisaged by Parliament and set out in the Telecommunications Act, can be issued to prevent continuing anti-competitive behaviour. Oftel has identified the following objectives of an effective enforcement process which it believes are met by its proposal:-
(a) fast availability of interim relief and of third party rights,
(b) comprehensive and flexible coverage,
(c) minimal and regulatory burden,
(d) transparency of regulation,
(e) application to all significant licensees.
3.18 Of the above objectives, BT's proposal goes some way to meeting the first one: in that it provides a route for the Director General to require early cessation of what he considers to be anti-competitive behaviour. It enables Oftel to issue a "Cease and Desist" direction. What it does not do is to provide effective deterrence by enabling third parties to seek damages. The licensee is not at risk of damages if it fails to comply with the "Cease and Desist" direction, as third parties have no immediate right of redress. Oftel believes that it is only at the time of a further breach, in effect the third time it happens, that third parties could recover damages. This would involve significant delay in enabling third parties to sue for damages and therefore it does not fully meet the objective.
3.19 The second objective identified by Oftel is comprehensiveness and flexibility. BT proposal does not and cannot be comprehensive. No practice is actionable unless and until the lengthy licence modification procedure BT proposes is begun. It is this delay in the ability of the regulatory regime to prevent anti-competitive practices that Oftel wishes to avoid. BT's proposal also fails to be flexible. The "Cease and Desist" direction-making power could in theory cover a broad range of practices, but by the end of the procedure suggested by BT, a specific licence condition must be drawn up, dealing with a specific practice. This leads to all the problems with specific licence conditions which are set out in section one above.
3.20 Oftel's proposal will enable regulation to be effective by imposing minimal interventionist controls on market activities. This is the third objective. The licence condition is simple in concept, and decisions taken under it will be based on clear and well understood principles. The regime will thus be transparent and will promote investor confidence. BT's proposal does the opposite. Enforcement action, using BT's proposal, will lead to further specific licence conditions. Licences will continue to increase in size and complexity. The only way to avoid this would be to have a continuous process of taking out of the licence detailed conditions that had become redundant. The length and complexity of licences, and the perpetual process of modification, create significant and unnecessary uncertainty. It is at odds with Oftel's aim of simplifying and reducing the level of interventionist controls.
3.21 Oftel's proposal can be applied to all licensees. It would represent a uniform application of fair trading principles across the industry. It would thus promote certainty and stability. BT's proposal would result in significant differences between licences. Under BT's proposal, where a particular licensee had been found to engage in an anti-competitive practice and had been through BT's suggested procedure, that licensee alone would be subject to a further specific condition. The end result would be an intricate assortment of different licence conditions applying to different operators, leading to inconsistency and lack of clarity. This is an unnecessary and unhelpful way to achieve the objective of fair trading. Under BT's proposal, the system would never reach its ultimate goal of stepping aside to enable competitive forces to replace regulatory decision-making.
1. Is Oftel correct in believing 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 respective 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 an effective and speedy tool 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 amendments?
2. Are the characteristics identified by Oftel, and set out at 1.5 above, for an effective enforcement mechanism, within the existing statutory framework, for dealing with anti-competitive practices, the correct ones?
3. Is Oftel correct in its belief that its proposed condition prohibiting anti-competitive practices and 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?
4. Oftel has noted at paragraph 2.2 above that the test of an abuse of dominance, the tests that apply when seeking to establish that a practice restricts, distorts or prevents competition impose less obligation on BT than is currently the case under certain of BT's licence conditions. Is this the appropriate long term approach to take in the UK telecommunications market?
5. Oftel would welcome views on those conditions contained in List A of Annex B and in particular reasons why consultees believe the behaviour described in any of the conditions would not be caught effectively by the proposed new condition, and why such behaviour still needs to be specifically prevented. Any suggestions for further conditions not included in Lists A or B which might be deleted without causing detriment to the telecommunications market would also be welcome.
6. Do consultees agree with Oftel that the proposed new condition be introduced into all significant Telecommunications Act licences and that the existing condition in the licences listed at paragraph 2.11 be modified to include the proposed new condition? Comments are also invited on the proposed timetable set out in Annex C.
7. Oftel invites comments on its proposal to introduce a casework audit system as a check on the procedural aspects of enforcement work and the application of that system.
8. Do consultees agree with the Director General's belief that it is not appropriate to formalise the arrangements for him to receive Expert Advice as set out in paragraph 3.10?
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