Review of Utility Regulation

Contents

Preface

Chapter 1 Introduction
 
Chapter 2 Regulation and the new Competition Bill

Chapter 3 Independent regulation and the role of Government

Chapter 4 A fair deal for consumers

Chapter 5 Transparency and accountability

Chapter 6 Improving regulatory efficiency and effectiveness

Chapter 7 Director General of Telecommunications conclusions: Looking forward

PREFACE

I welcome the Government's review of the regulation of the privatised industries.

It is an opportunity to reflect on the lessons learned from the experience in the privatised industries and more importantly, to look at developments in regulated markets to identify what policy framework, in the best interests of consumers, is needed for the future.

This submission is based on my experience as Director General of Telecommunications for the last four years, a role which is part of a much wider regulatory framework involving Ministers, competition authorities and European institutions and legislation.

My submission highlights the specific characteristics of the telecommunications market; that it is:-

• an increasingly competitive market, not a utility
• is converging with the broadcasting and IT markets
• it welcomes the government's commitment to:
• a long term stable framework for regulation which is fair to all interest groups especially consumers
• the guiding principles of transparency, consistency and predictability of regulation

• bringing in equivalent powers under the Telecommunications Act to those available under the Competition Bill to allow effective action to be taken by the regulator
• adjusting the balance of the relationship between Ministers and the regulator in relation to the setting of social policy
• making the promotion of consumers' interests the primary duty of the regulator
• giving the DGT further powers in terms of the issuing of licences, and effective rule making procedures
• introducing a Communications Bill to address the regulation of the converged telecommunications and broadcasting market as part of its fulfilment of its manifesto commitment to keep the regulatory regimes for telecoms and broadcasting up to date

DON CRUICKSHANK

CHAPTER 1

INTRODUCTION

1.1 The Director General of Telecommunications (DGT) welcomes the Government's review of utility regulation. The regulatory framework for telecommunications was established by Parliament in 1984 and similar regimes have since been set up for other sectors where a former state owned monopoly has been privatised. The regimes were designed to protect consumer interests where there was a monopoly provider and to encourage competition.

1.2 The regulation of the UK telecoms industry is, however, by no means the sole responsibility of the DGT. Only Government has the power to initiate primary legislation and to make the secondary legislation needed to implement the increasingly important EU directives that provide the legal framework for the DGT's work. Under the principal legislation, the 1984 Telecommunications Act, the Secretary of State is subject to the same duties as the DGT in exercising his functions under the Act, and may intervene in the DGT's work for instance, by obliging licence amendments to be referred to the Monopolies And Mergers Commission (MMC); by issuing general directions indicating particular matters to which the DGT should have regard; by revoking and re-issuing licences; and by deciding to whom and in what form to issue licences. In addition, much of the present UK policy framework was set out in a Government White Paper in 1991, to which the DGT has substantially adhered, and key decisions on the use of the ever more important radio spectrum are taken by the Secretary of State.

1.3 Close to the centre of regulation lie the competition authorities in the UK (which include the Office of Fair Trading and, in certain respects, the Secretary of State) and at EU level, DGIV and DGXIII of the European Commission. Many of the more important decisions on market structure and mergers may be taken independently of the DGT and rules governing the behaviour of telecommunication companies with market power are not solely for DGT.

1.4 Thus the DGT has less influence in the medium to long term over matters of vital concern to telecommunications customers than is usually presumed. The overarching policy framework is set by others who in some cases have had no statutory requirement to seek DGT's advice. The DGT thus operates in a relatively narrow, tightly bounded, regulatory role. It is important that the present review recognises this, even if its terms of reference do not extend to reviewing the activities of others involved in the regulation of the telecommunications industry. This is particularly true in the review's consideration of the impact of new UK competition law and issues surrounding accountability.

1.5 While DGT fully understands the Government's desire to read across the regulated sectors and learn common lessons, DGT believes there are a number of ways in which telecoms and the telecoms market is no longer a utility and is very different from the other regulated industries. These include the market structure and the stage of market development, the international nature of the industry, the scope for infrastructure competition, and the variety of services and products delivered over that infrastructure. Interconnecting networks, be they copper wire, fibre, cable or radio based, provide the means of delivering increasingly important information and entertainment services to ­ and from ­ customers but, most distinctively, there is the real prospect of choice of services and networks for all consumers. Market developments have been such that competition is making a real difference to most customers' perception of telecoms services and how they are purchased. DGT therefore hopes that this review will focus less on lessons from the past, and more on present issues and opportunities for the future.

1.6 This need for a forward looking approach is essential to ensure the continued complementary operation of telecommunications law beside the new Competition Act. The new general competition law now before Parliament will have an enormous impact on all the regulated industries.

1.7 A number of major developments have impacted on the telecommunications market since 1984. Government policies to promote infrastructure and services competition have resulted in an increasingly competitive market for telecommunications, with a wide range of products and services flowing across a mosaic of interconnected networks. Effective competition is now emerging in a number of market segments, and as a result, only 25% of BT's retail revenues are subject to price control. The regulatory focus has shifted from one of protecting consumers against potential monopoly abuse to one of promoting effective competition through policing competition and fair trading rules and preventing anti-competitive behaviour in the marketplace.

1.8 Telecommunications is increasingly an international market, there will be a single market in telecommunications in the European Union from January 1998. The liberalisation of markets across Europe is being effected by a raft of European legislation for telecommunications. This is increasingly setting sector specific rules for telecommunication services at EU rather than Member State level, with enforcement obligations falling on designated National Regulatory Authorities (NRAs). The World Trade Organisation (WTO) agreement on telecommunications in February 1997 also ensures international markets are increasingly open. The scope for national decision making on specific regulatory principles is increasingly circumscribed, while an increasing volume of detailed implementation work falls to the NRA.

1.9 Thirteen years is a long time in the communications and information technology industries ­ of which telecoms is an important part. Telecoms no longer remains a discrete industry sector nor the relevant market for a number of competition issues. Developments in digital technology mean that traditional market distinctions between telecoms, IT and broadcasting are fast breaking down. Telecommunications is now but part of the new digital communications market which encompasses content production, storage, processing, packaging, distribution and the delivery over networks of electronic information or entertainment to customers ­ which can be in the form of voice, data or moving pictures. Regulatory developments, in the UK and in Europe, must take this into consideration.

1.10 In summary, the context for the review is complex:

• the DGT is a part player in the delivery of benefits to the consumer
• telecoms has changed from a domestic monopolistic utility to an international, competitive industry
• the overarching policy framework is no longer set at national level but is a product of EU and WTO rules
• and the industry is no longer a discrete telecommunications market, but a complex and convergent communications market.

1.12 The Government is now proposing to change the legal framework such that the UK should soon benefit from much more effective competition rules and arrangements across all sectors of the economy. This raises major questions about the future role of sector specific regulators such as the DGT. The Competition Bill gives the DGT concurrent powers to act as the competition authority in the telecommunications sector. The new legislation will be of increasing importance in telecommunications as most issues facing the regulatory body will be competition issues. Careful consideration needs to be given to the way in which DGT will be expected by those affected (including complainants) to exercise those powers ­ especially with regard to sanctions, enforcement, appeals and redress ­ and what impact having two quite different enforcement regimes will have on the way in which he carries out his existing duties under the Telecommunications Act. These important issues are looked at it more detail in Chapter 2.

1.13 All of these changes to the context in which the DGT works lead to a number of important questions which Government will now need to address as part of its review of the effectiveness of sector-specific regulation. Any review has not only to learn from lessons of the past, but also to enable effective regulation in the future. This is particularly important in the dynamic and rapidly evolving communications market.

1.14 In DGT's view the key issues which Government needs to consider, as a matter of some urgency, are:

• the impact of the new Competition Bill and the internationalisation of the telecoms market
• for Ministers and Parliament to determine issues in relation to social policy objectives for disadvantaged customers
• the need for greater accountability through transparency throughout the regulatory process of which the DGT's role is only a part
• the institutional framework necessary to secure effective regulation
• what is the market that should now be caught by sector specific regulation
• the nature of any special rules which might be needed to regulate this market, to deliver the Government's public policy objectives and ensure fair competition.

Structure of the document

1.16 The rest of this document is structured as follows:

• Chapter 2 sets out the changes which the Competition Bill, when enacted, is likely to bring and assesses the implications for the DGT and other sector specific regulators, which are to exercise powers concurrently with the Director General of Fair Trading (DGFT).
• Chapter 3 reviews the importance of independent regulation within a policy framework set by Government, and puts forward specific proposals for changes to clarify roles and responsibilities in a transparent and accountable way.
• Chapter 4 focuses on the need for the regulatory framework to deliver choice, quality and value for money to consumers and outlines DGT's experience in this area.
• Chapter 5 focuses on the need for regulatory processes which are transparent and accountable, again drawing on DGT's experience.
• Chapter 6 highlights areas where DGT's effectiveness is constrained by the current legal framework, especially in terms of administrative efficiency and effectiveness.
• Chapter 7 draws together DGT's conclusions. In the aggregate, these point to the need for primary legislation to establish a new up-to-date policy for the communications market which enables the Government's policy objectives to be achieved in an effective way while avoiding unnecessary intervention.

CHAPTER 2

REGULATION AND THE NEW COMPETITION BILL

Changes in UK Competition Law

2.1 The Competition Bill, which is at present being consulted upon, marks a critical step in the evolution of regulatory control in the UK telecommunications industry. The proposed prohibition on abuse of market power and on anti-competitive agreements will lead to a significant change in the method by which the DGT fulfils his statutory duties. Any review of regulation must look forward to a world in which there will be more effective, new competition law in the UK.

2.2 In the past, the DGT has not used the general competition law. Action under the Competition Act or Fair Trading Act has been contemplated a number of times and in each case the DGT has concluded that enforcement action was either possible only under the Telecommunications Act or that the Telecommuni-cations Act provided the better remedy. Thus the DGT has, for 13 years, relied upon specific licence conditions under the Telecommunications Act in order to control anti-competitive behaviour. Most licences contain standard conditions aimed at controlling or monitoring anti-competitive behaviour ­ for example the broad prohibition on undue discrimination and undue preference, mechanisms to control internal cross-subsidy, an obligation to publish prices, and the obligation to supply. This route has been further refined to include in all licences a single, widely cast licence condition that prohibits anti-competitive agreements and abuse of a dominant position (the Fair Trading Condition). This condition deliberately mirrored articles 85 and 86 of the Treaty of Rome and is similar to the new competition legislation the government is consulting on. Enforcement however is under the Telecommunications Act, with no power to fine, limited sanctions and no third party retrospective redress.

2.3 The new Competition Bill will introduce prohibitions similar to Articles 85 and 86 into UK law. The Bill will give sector-specific regulators concurrent powers with the Director General of Fair Trading to enforce the prohibitions in the Competition Bill. Enforcement powers will be more effective than under the Telecommunications Act.

2.4 The chart set out at the end of this Chapter shows the key differences between the current regime (in relation to both licence enforcement and the powers under the Competition Act 1980 and the Fair Trading Act 1973) and the proposed new regime. The differences relate to:

• the basis of the legislation
• the processes involved
• the relevant criteria for action.

2.5 In addition to the powers given to the competition authorities, because the new regime is based upon statutory prohibitions third parties will also gain rights to challenge companies and to seek damages for the breach of the prohibitions directly in the courts.

The impact of a new Competition Act on the regulation of telecoms

2.6 The Competition Bill is a further step in the progression from DGT being a prescriptive regulator, relying upon detailed rules which prohibit certain activities in all circumstances, to that of an industry competition authority, with specialist knowledge of the sector, intervening where there is a competition problem, often (but by no means exclusively) after a complaint. This is a welcome and natural development of the DGT's work with the Fair Trading Condition.

2.7 Under the future regime, DGT would expect ­ in consultation with the Office of Fair Trading ­ to issue guidelines about the application of the basic prohibitions to the telecommunications markets as well as giving informal guidance to companies on particular agreements and activities. This change is also likely to be reflected in the licensing regime as more and more companies will be able to conduct their business under class, or standard form, licences with a few additional licence conditions to deal with specific matters (such as interconnection). The UK telecoms regime has been evolving in this direction for some time, and this will be reinforced by the implementation in UK law of the EU Licensing Directive. Further details of such changes are described in Chapter 6.

2.8 However, the impact of the new Competition law will be more profound than that. As the chart below illustrates, once the Act is in place, regulation of the telecoms sector will be subject to two key sources of legislation which may not easily interact with each other. When the DGT is acting under the new Competition Act to deal with competition matters for dominant operators he will have the full range of powers and sanctions available under that Act and the flexibility of working outside the licensing regime. Restraints on anti-competitive agreements will apply to all firms. However, when dealing with the abuse of market power by operators which does not fall under Articles 85 and 86 (in EU jurisprudence terms), or when dealing with issues such as universal service or numbering,(which are not issues for the new Competition Act), he will work within the more limited enforcement procedures regime of the Telecommunications Act. The appeal procedures will also be very different under the two regimes.

2.9 The key point is that between the Telecommunications Act and the old Competition and Fair Trading Acts there was a degree of balance in the broad framework of sanctions, redress and appeals which applied to both regimes. The replacement of one part of that whole removes this. To create a new degree of balance and consistency so the relevant legislation is 'of a piece', the powers in the Telecommunications Act will need rethinking so that ­ in relation to sanctions, enforcement, appeals and redress for third parties ­ they broadly mirror those in the new Competition Act.

2.10 Under the future regime, the incentives on complainants will be to press the DGT to act under the Competition Act whenever possible because of the strong investigative powers and penalties it contains. Presently the DGT considers around 100 substantive competition complaints per year. The vast majority currently concern BT and most of these involve a relevant market in which BT is dominant (and so where the prohibition on the abuse of a dominant position under the new Competition Act may apply). The DGT will have a strong incentive, and will be under pressure, to use the new Competition Act powers ­ even where the Telecommunications Act might provide more scope for action and scope for finer tuned action, at least while competition is still not fully developed in a number of telecommunications markets. The DGT believes that the solution is to bring the two regimes into line, by amending the Telecommunications Act so as to reflect the sanctions, enforcement, appeals (both the 'tribunals' and 'reporting' routes) and redress features of the new competition law. Achieving more effective sanctions will imply appeals on the substance of decisions as well as on processes. This is discussed further in Chapter 4.

2.11 There are many good reasons for legislation for the communications market, but one of the most important is to ensure that the DGT has access to a similar range of enforcement powers regardless of the Act he is acting under. The DGT welcomes the manifesto commitment to keep regulatory regimes up to date and will work hand in hand with the Government to implement it.

2.12 The new Competition law will further reinforce the progression in the telecommunications market towards the regulator focussing more of his resources on competition issues. It also reinforces the importance of distinguishing telecommunications from the concept of utility. Not only is there already substantial competition in telecommunications services and in national and regional networks, but competition is also advancing in the access (local) network with most businesses and almost half of residential customers already having a choice in terms of local access competition to BT.

2.13 The natural evolution, of course, is towards a world in which, while the operation of a telecommunications system may continue to be a licensed activity, the market will operate in a manner closer to the rest of the economy, so that the need for an industry specific competition authority would diminish. There might continue to be a need for some special rules (arising, say, because of the market's networked nature and the importance of universal service policy) but they would not necessarily require a separate telecoms specific authority. However, that point has not yet been reached. The two immediate imperatives are:

a) to ensure any sector specific authority reflects the market it is regulating. In a digital age, there will increasingly be no distinction between telecommunications, IT and broadcasting

b) to ensure any sector specific powers are consistent with the sanctions, enforcement and appeals procedures and third party rights in the new competition legislation.

KEY DIFFERENCES BETWEEN THE CURRENT AND NEW COMPETITION REGIMES 

	CURRENT COMPETITION REGIME		NEW COMPETITION REGIME
	Telecommunication Act (The Act) and other licence conditions	Current competition legislation	The Competition Bill 1997
Anti-Competitive Agreements
Basis of legislation	The licensee is in breach of its licence if an anti-competitive agreement contravenes a specific condition of its licence (or the Fair Trading Condition).	Certain forms of restrictive agreements, cartels etc may be dealt with under the Restrictive Trade Practices Act 1976 (RTPA), resale price maintenance the Resale Prices Act 1976 (RPA).	The Bill introduces an Article 85 type complete prohibition on anti-competitive agreements. Repeal of RTPA and RPA (plus winding down of the Restrictive Practices (RP) Court.)
Processes involved	If it appears to the Director General that a licensee is contravening a licence condition a Provisional Order can be made with immediate effect. A Final Order is issued if the Director General is satisfied that there is, or has been and there is likely to be again, a contravention of the licence. The FTC augments the Order making powers and formalise Oftel's current procedure in enforcing any licence condition by giving reasons in Determinations (Provisional and Final).	No concurrent powers for sectoral regulators. Agreements filed under the RTPA are placed on a public register. The DGFT asks the Secretary of State to agree that insignificant cases should not go to the Courts. Significant cases go to RP Court. Significant restrictions may be referred to Restrictive Practices court but there are no immediate sanctions.	Concurrent powers for sectoral regulators. Sectoral regulators/DGFT decide if the prohibition has been infringed and if so, set the level of fine. Exemptions to prohibition based on beneficial effects to consumers and efficiency as assessed by DGFT/sectoral regulators. Appeal to new Competition Commission.

   

	CURRENT COMPETITION REGIME		NEW COMPETITION REGIME
	Telecommunication Act (The Act) and other licence conditions	Current competition legislation	The Competition Bill 1997
Abuse of market power
Basis	Licence conditions including the Fair Trading Condition, the prohibition on undue discrimination and undue preference.	The Competition Act 1980 (CA) Scale and complex monopoly provisions of the Fair Trading Act 1973 (FTA)	The Bill introduces an Article 86 type complete prohibition on abuse of dominance. FTA provisions retained but subject to limitations. CA largely repealed.
Process	As outlined above for anti-competitive agreements.	Concurrent powers for sectoral regulators under the CA and FTA (subject to limitation in respect of telecommunications systems). Uncompetitive behaviour can be referred to the MMC which investigates whether situation in the public interest or not. Secretary of State decides on remedies if MMC find against the public interest. Power to accept undertakings in lieu of a reference.	Concurrent powers for sectoral regulators. Sectoral regulators/DGFT decide if prohibition infringed and if so, set the level of fines to be imposed. Appeal to Competition Commission.

   

	CURRENT COMPETITION REGIME		NEW COMPETITION REGIME
	Telecommunication Act (The Act) and other licence conditions	Current competition legislation	The Competition Bill 1997
Criteria for Investigations, Information gathering powers, Fines, Third Parties and Interim measures
Criteria for investigations	That the licensee is contravening, or has contravened and is likely again to contravene a condition of its licence.	Public interest test.	Test based on effect on competition.
Information gathering powers	Power to call for certain types of information and documents. No power to enter and search premises.	Power to call for certain types of information. No power to enter and search premises.	Much stronger investigation powers, and right to obtain documents plus a right of entry and search powers.
Fines	Director General has no powers to impose any financial penalty on an operator that is in breach of its licence.	There are no financial penalties for past behaviour.	The Bill allows the Director General to impose a fine up to 10% of UK turnover; there is no ceiling other than this figure.
Third Parties	Rights only accrue if an Order is breached by a licensee. There is no right to retrospective damages.	Limited rights. Damages possible for breach of RTPA.	Third parties have rights to sue in Court for breach of the prohibition and seek damages. The decision of a regulator can be used by a third party in a Court action in order to establish a breach of the prohibition.
Interim Measures	Provisional Order can be made if it appears that the licensee is contravening a licence condition.	Power to seek an enforceable undertaking in lieu of a reference to the MMC.	Alleged anti-competitive behaviour can be halted during an investigation.

  

CHAPTER 3

INDEPENDENT REGULATION AND THE ROLE OF GOVERNMENT

Introduction

3.1 In its terms of reference for this Review the Government rightly recognises the fundamental importance of a long term stable framework for regulation that is fair to shareholders, consumers and other stakeholders. The Government has stated that "arms length independence of regulators will be preserved, within a framework that establishes and clarifies the issues that are for Ministers to determine and those which are for the regulators".

3.2 The DGT welcomes this approach. Independence from Government in appropriate areas is essential if a stable regulatory environment is to be achieved and private sector investment in capital intensive industries encouraged.

3.3 Investors have benefited from a stable, predictable regime which gives them confidence to invest for future returns. They are currently committing £5bn a year to building new networks, or upgrade or expand existing networks. This is a substantial figure, equivalent to 25% of the total annual revenues from the UK telecommunications sector. The period over which a return will be earned is lengthy ­ but the willingness of investors to commit resources reflects investor confidence in the UK arrangements.

3.4 Only by establishing a secure climate for ongoing shareholder investment, for both the incumbent and for new competitors, can better service quality, value for money and choice be delivered to consumers. This climate can be created if independence for the DGT continues to mean being institutionally separate; with some security of tenure; being self reliant in the sense of seeking and deploying resources directly in the public spending process; and having the capacity to form judgements and to take appropriate decisions without relying on government or the industry. Independence does not mean however, that the regulator can ignore the broad policies the government sets for the industry; and the accountability described in Chapter 5 is an important support for appropriate independence.

3.5 However, the DGT believes that the balance of powers can usefully be changed in a small number of areas, placing greater responsibility for 'social policy' objectives with government, delegating authority to issue licences to the DGT and re-examining the balance of responsibilities in relation to Brussels.

The current framework

3.6 The office of the Director General of Telecommunications (DGT) was created by statute with a clearly defined set of regulatory powers and duties, most of the latter being shared with the Secretary of State. If he does not comply with these duties he is subject to legal challenge.

3.7 The DGT is appointed by the Secretary of State for a specified term and is directly accountable to Parliament in that his annual reports are laid before Parliament and he may be called to give evidence before Select Committees.

3.8 The main statutory duties imposed on the DGT by the 1984 Telecommunications Act (which he shares with the Secretary of State for Trade and Industry) are, in summary, to carry out his functions in the manner best calculated to:

• secure the provision throughout the UK of telecoms services which satisfy all reasonable demands; and
• secure the providers of telecommunication services can finance them;

• promote the interests of consumers, purchasers and other users
• maintain and promote effective competition
• promote efficiency and economy
• promote other matters such as the ability of UK companies to compete effectively abroad.

Benefits of independent regulation

3.10 Within the framework set out above the Director General can carry out his day-to-day tasks, in consultation with interested parties, to meet the overall interests of consumers. It is in the nature of regulation for there to be potential conflicts between the interests of shareholders, consumers, companies and government. Public policy goals can be achieved through the regulatory framework whoever undertakes the regulatory functions, but independent regulators are able to balance the conflicting interests better than if they were part of government.

3.11 Through the degree of regulatory independence he possesses, together with his sector specific expertise in the telecoms market, the DGT has been able to balance the conflicting interests of consumers, competitors, incumbents, shareholders and others in a way which can be difficult for the Government of the day, which faces more short term political pressures.

3.12 The DGT's ability to focus on the longer term has been particularly important in the capital intensive telecoms industry, where investments are made and returns earned over a long period. The investment climate needs to be stable and predictable in order for investors to make such commitments.

3.13 The DGT, through his specialist knowledge of the market and of consumer needs, has been able to promote competition and protect the interests of consumers where competition does not exist. The DGT is able to acquire and publish information to enable greater consumer and market involvement in regulatory decision making.

3.14 Overall, independent regulation has provided a long term stable climate for investment by the capital markets in UK telecoms infrastructure and services. This is probably its biggest achievement. It has resulted in a strong foundation for the emerging information society and for the UK's future economic well-being and worldwide competitiveness.

Relationship with Government

3.15 In practice the DGT cannot operate effectively unless he works closely with Government taking account of relevant Government policy as expressed in the governing statutes, or in Government statements from time to time. There is a clear and important role for Parliament and Government in setting the broad policy and regulatory framework within which the DGT operates, but there is also an obligation on the DGT and Government to establish a good working relationship.

3.16 In order to carry out its work within the overall policy framework set by the Telecommunications Act, the DGT needs to be able to take decisions, based on a detailed knowledge of the market and on full and open consultation, on matters which impact on the exercise of the DGT's statutory duties. These decisions need to be made in a timely and effective way, so that companies can proceed with their business in the marketplace

3.17 As already noted, the Secretary of State and the DGT are subject to the same statutory duties (eg "to promote competition"), while having separate functions (eg the Secretary of State grants licences and the DGT enforces and modifies them). At present a balance is struck between the legitimate interest of Government in certain regulatory policy issues, and the need for stable, independent regulation. This is largely done through informal consultation between officials of the Department of Trade and Industry and the DGT, and on occasion through direct discussion between the DGT and Ministers. Although Ministers do have formal powers under the Telecommunications Act to give the DGT general directions indicating particular matters to which he should have regard (and to issue directions in the interests of national security and relations with a foreign government), these powers have not to date been invoked.

3.18 The DGT's view is that in general the present arrangements work well and strike the right balance. The DGT does not see a need to make any fundamental changes to current or envisaged future roles, responsibilities and working arrangements between the DGT and the Government on competition and consumer protection issues.

3.19 The DGT's formal independence and discretion on decision making, within the bounds set by the Telecommunications Act and with the checks and balances which exist in the system (see Chapter 5), is important for investment and stability in the industry, for the reasons already given. There will be minor changes to that relationship as a result of the Competition Bill, but the DGT is broadly content with the existing division of powers in relation to competition policy and consumer protection.

'Social and environmental policy' issues

3.20 There are, however, areas of regulatory decision making where Government and Parliament have a legitimate role to play and where a greater degree of democratic accountability is properly required. At present, roles and responsibilities are not entirely transparent.

3.21 In the DGT's view, issues which are properly for Ministers and Parliament to determine include those which relate to social or environmental public policy objectives, defined as activities which require either a net increase in costs to all consumers taken together and/or some material market distortion away from cost-related prices resulting in some customers paying, through higher prices for services, for benefits derived by others. Examples are maximising the number of citizens contactable through telecommunications networks, requiring BT to offer special low cost affordability schemes to enable low income households to get phone service, reducing environmental costs and making better use of scarce resources such as the radio spectrum.

3.22 The results of such policies are that costs are absorbed by the industry and recovered in charges to telecoms customers in ways that might not occur in a competitive market and might distort competition.

3.23 Most of the examples are elements of universal service, on which the DGT has consulted widely and upon which he has taken policy decisions in consultation with the Department of Trade and Industry and often, de facto, with ministerial agreement. It is the DGT's intention to develop his universal service work further in the field of services for customers with disabilities. These issues are also touched upon in Chapter 4.

3.24 Within the current framework, the DGT has discretion to take decisions to modify operators' licences by agreement to achieve such public policy objectives following consultation. The DGT considers such issues are more properly for decision by Parliament. The DGT therefore recommends that the current regulatory regime for telecommunications (and in future, the wider communications market) should be modified to require the policy framework for public policy issues as described in paragraph 3.21 to be set from time to time by means of Statutory Instruments made by Ministers which are subject to affirmative resolution of both Houses of Parliament. Alternatively the Secretary of State could have a limited power of licence modification by Statutory Instrument. Such a process would enable effective parliamentary scrutiny and provide for appropriate democratic accountability and transparency.

3.25 The DGT would be expected to give published advice on these issues. Any additional costs imposed should be reasonable, and where they were not de minimis should be justifiable in terms of longer term economic benefit to society. They should also be fair, proportionate, non-discriminatory and transparent in order not to distort competition. Such opportunity needs to be bounded, however. Regulation should not be a means of imposing additional taxes on the customers or participants in regulated markets.

3.26 In considering the DGT's recommendation that Ministers and Parliament should determine social policy in regard to telecommunications it should be noted that in telecoms the scope for Government and Parliament to set policy in these areas is increasingly bounded by the European regulatory framework. This framework while it is designed to liberalise telecommunications markets and prevent measures which could distort competition, nevertheless allows Member States some discretion to pursue defined social policy goals.

Power to issue licences

3.27 One area where powers should pass the other way, to the DGT, is the delegation of powers to issue licences.

3.28 Under section 7 of the Telecommunications Act 1984, the Secretary of State can delegate to the DGT the power to grant telecommunications licences. The Act is now more than 13 years old and this power has yet to be exercised.

3.29 The DGT was the first regulator appointed to regulate a former public utility, to be followed by the regulators for gas, water, electricity and railways. All the other regulators already have at least some licence granting powers, conferred on them by the statute which created them.

3.30 There was some logic in the Secretary of State retaining licensing powers when the telecommunications market was not fully open to competition and decisions were needed by government on the rate of such opening. Both the domestic and international markets are however, fully open now. Arrangements under which the Secretary of State issues but DGT enforces and has sole responsibility (subject to a licensees agreement) to change licences are no longer cost effective. Both organisations need to retain a high degree of expertise in licensing and there has to be very close liaison between both groups of officials. Not surprisingly, the industry is confused by the overlapping roles which the DGT and the Secretary of State are obliged to fulfil. Moreover, if licences are issued by an organisation which does not have to enforce them, there is a danger they will not reflect enforcement practicalities. There is an opportunity to save resources and to avoid problems created by separate organisations carrying out licence drafting and enforcement if, as far as possible, licencing functions were all dealt with by the same body.

3.31 There is no need to wait for legislation for such a transfer of powers to take place. It could be done by an authorisation under the existing Act.

The relationship with Brussels

3.32 Although an increasing amount of policy with regard to telecommunications now comes from the institutions of the European Community, the DGT's role in relation to Brussels is currently restricted and not necessarily used to best effect in the UK's interest. The DTI is currently in the lead on all such issues. Decisions on European matters are clearly a matter for government. However, as the European framework for telecommunications becomes more detailed with the advent of the single market in telecommunications from 1998, there must be real advantages for the UK in the sector specific regulator having a clearer responsibility for ensuring the compatibility of the two regimes. This could be achieved by clear operational responsibility resting with DGT, albeit within a broad framework laid down by government similar to domestic regulatory issues. If these roles are not clarified, there is a real danger of a mismatch between UK and EU regimes at a detailed level which could have a serious restrictive effect on the operation of the market. The current regime also involves an unnecessary duplication of resources.

3.33 Similarly, extended responsibilities for the DGT as the 'National Regulatory Authority' under EC legislation could helpfully limit duplication of effort and resources. And finally, there may be benefits in the DGT being recognised as a competent authority under EU competition law for cases involving telecommunications, at least under Articles 85 and 86.

3.34 Certainly, as the role of the EU expands in other regulated sectors, analysis of the experience of the DTI and DGT in telecoms would be helpful to other Government Departments and to other regulators.

CHAPTER 4

A FAIR DEAL FOR CONSUMERS

Introduction

4.1 The Review is considering whether the current regulatory framework needs to change to ensure that regulation is fair to all consumers, as well as fair to shareholders and other interest groups. The Review is also to cover profit levels and formulae for determining prices, service quality, and the social implications of commercial decisions.

4.2 Getting the best possible deal for consumers in terms of quality, choice and value for money is the DGT's overall goal. In pursuit of that goal the DGT has set five key policy objectives to

1.    promote fair, efficient and sustainable network competition
2.    promote fair, efficient and sustainable services competition
3.    secure licence enforcement and fair trading
4.    secure a fair distribution of the benefits of competition between different groups of customers; and
5.    protect consumer interests, especially where effective competition is not yet fully developed.

4.4 Telecoms is the most widely competitive of the sector-specific regulated industries. The promotion and development of competition within the telecoms market has had beneficial effects for all stakeholders ­ consumers, investors and employees. Most significant has been its positive impact on the quality, choice and price of services received by customers.

4.5 Consumers as a whole have seen a fall in prices for the main telecoms services, in real terms, of nearly 50% since 1984. Quality of services delivered by BT has improved ­ and its competitors are now competing on quality of service as well as price. Increasingly, the benefits are being shared more equitably between different classes of consumers, and more consumers are on the network.

4.6 Choice has also improved. Nearly 40% of households now have a choice of at least two telecoms suppliers who can directly connect to their home and this should rise to 70% by the year 2000. The choice of services over networks is already much greater.

4.7 The number of employees in the telecoms sector, after declining for a number of years after 1984 (when it was 230,000) is now increasing again. The current figure stands at 217,000.

Balancing consumer and shareholder interests

4.8  In a fully competitive market, a fair balance between producers (shareholders) and consumers would be struck by the market itself. Consumers who felt they were not getting a fair deal would exercise their choice and migrate to better value competitors. In an uncompetitive market, regulation of the dominant firm needs to balance consumer and shareholder interests. This balance is achieved, primarily, through the setting of retail price caps to ensure reasonable prices for customers, compatible with the need for an efficient operator to have the opportunity to earn a reasonable rate of return and to continue to invest. Price controls are set to take account of the cost of capital (ie a reasonable rate of return on relevant investment), along with other costs reasonably incurred by the operator. The calculation is based on the assumption that the operator achieves a demanding level of efficiency improvements.

4.9 As competition in the telecoms market has grown, DGT has been able to start to withdraw from detailed regulatory intervention in retail price controls. Only 25% of BT's retail revenues are now subject to price control and it is expected that retail price controls may no longer be needed after 2001. Effective competition is always preferable to second guessing by the regulator in terms of delivering better value and keener prices to customers.

4.10 Some regulation of network prices is still required but it is intended that it should now be through a more flexible network price cap on BT, rather than through detailed regulatory determination of individual interconnect prices.

4.11 The DGT has considered the arguments for different types of price control (RPI-X, profit sharing, rate of return) most recently in two consultation documents and a statement on Pricing of Telecommunications Services from 1997 issued in December 1995 and March and June 1996.

4.12 RPI-X was identified as the most effective mechanism as it controls prices charged to consumers but also provides BT with strong incentives to improve efficiency and reduce costs. Profit sharing, in contrast, is more detailed, complex and uncertain and is less likely to encourage efficiency as the regulated firm retains a smaller proportion of unanticipated profits. This is likely to distort actions taken by the regulated company by encouraging it to avoid reporting and distribution of profits.

4.13 The DGT has sought to apply the RPI-X price control from 1997 in a manner that maximises the benefits of this approach and reflects the current and likely development of the market over the period of the control by:
 

• focussing the price control protection on customers who had least prospect of substantial immediate benefits from competition ­ the lower spending 80% of residential customers and small businesses;
• applying the control over a four year time period as this was seen to balance incentives for efficiency (indicating a longer time period) and the pace of technological and competitive change (indicating a shorter period);
• the use of RPI which was seen as appropriate due to its high level of transparency ­ rather than less broad ranging indices including sector specific indices.
• setting a control such that BT's expected rate of return is brought into line with its cost of capital by the end of the next price control period allowing the benefits of expected efficiency gains over the coming period and of unanticipated gains in the previous period to be passed to consumers in the form of lower prices.

4.15 In order for the RPI-X approach to work effectively requires:

• all interested parties have access to relevant information obtained and published by the regulator, so that consultation on price controls is thorough and broad ranging
• price controls are focussed on those customers who are 'captive' ie do not currently have a choice of supplier.

4.16 Consumers may be concerned that promised investment does not take place, leading to deterioration in quality of service and greater inefficiency. Generally speaking, as competition develops so operators find that incentives to invest increase in order to maintain a competitive advantage. In price control reviews, the DGT has taken account of BT's proposed levels of investment. It has tried to link this investment to particular outputs, since incentive regulation should focus on outputs rather than inputs if it is to be effective. In setting price controls, the DGT has made it clear that he regards improvements in service quality resulting from network investment as a part of the overall package. While the DGT has not sought to manage the detail of BT's investment programme, he has monitored the modernisation of the network and BT's service quality to ensure that BT has delivered on its non-price obligations to customers.

4.17 However, the DGT's actions to promote effective competition have been much more powerful here. Competition has both encouraged BT to invest to defend its market share, and has encouraged new entrants to invest to build networks and gain market share.

4.18 Where there has been potential concern over shortfalls in service delivery, the powers available to the DGT to modify licences (as recently in the context of BT's globalisation plans) appear to be satisfactory. The DGT's focus in these cases, as in reviews of price controls on BT, has been on investment outputs rather than inputs and on uncompetitive segments of the market.

4.19 In general terms, competitive forces tend to be the most effective tool in delivering service quality, and meeting the needs of different customer segments. Competition drives greater efficiency, more innovation and a continuous process of seeking to enhance customer satisfaction in order to retain customer revenues.

4.20 Quality of service for physical aspects of telecoms service, measured by indicators such as number of network faults, or number of payphones out of order, has improved to very high levels since BT was privatised. For example, BT call failure rates have fallen from around 4% to 0.5%; and payphone serviceability has risen from 80% to 95% since 1984. Modern technology enables networks to be far more resilient than they were in the 1980s, and remote network management techniques result in earlier fault identification and resolution. The main areas where customers still have concerns about service quality now tend to be on softer 'customer service' issues such as complaints handling. Customers are more concerned about service quality when they are unable to choose an alternative supplier.

4.21 DGT has taken action to help improve service quality for customers in a number of ways;
 

• through agreeing with BT and others improved complaints handling procedures
• through persuading BT and other companies to voluntarily offer compensation schemes to their customers, where stated service quality levels are not met
• through negotiating with the industry the collection and publication of Comparable Performance Indicators so quality of service can be compared across different companies
• through monitoring consumer complaints to Oftel and taking action as necessary with companies to prevent recurrence of the cause of the complaint.

Sustainable development

4.23 The Government, and consumers, are concerned that regulation supports environmental policy objectives and encourages sustainable development. This is less an issue for telecoms than for other regulated sectors. In general the trend for electronic communication over telecoms networks to substitute for physical communication using road and rail systems has the potential to be of considerable environmental benefit. Investment and competition in the telecoms sector will help telebusiness, electronic commerce and home-working develop further.

4.24 One area of telecoms policy which clearly relates to efficient use of scarce resources is the management of radio spectrum. Even within the constraints of physical laws and international agreements, UK policy does not maximise the benefits to our economy which could be derived from spectrum use. Commercial activities based on spectrum currently contribute around £30bn to the UK economy: it could be much more. Moves towards spectrum pricing and auctions are clearly of long term benefit but more needs to be done than is envisaged in the current legislation before Parliament. There should be a secondary trading market in spectrum to ensure its efficient use. Market based incentives to use spectrum to secure maximum economic benefit should have greater weight than the case in current decision making on allocation taken in an often untransparent way by Government.

4.25 The development of telecoms networks does, however, raise some environmental concerns ­ in respect of the laying of cables or the siting of transmission masts, for example. Under the Telecommunications Act the Secretary of State grants 'Code Powers' to public telecoms operators to enable them to lay cables or erect masts or poles, under conditions set out in the Act. Much of the responsibility here already lies with government, and should be treated as 'social or environmental policy' which the DGT believes should lie with government (see paragraph 3.20 to 3.26).

4.26 The Code does not require mast or duct sharing (although the DGT and the EC Interconnection Directive will permit and encourage the sharing of infrastructure). The DGT may intervene to ensure facilities are shared where alternative methods of delivery are not economic and effective competition is thus at stake. A balance is likely to be needed between those circumstances where enforced facilities sharing is justified and the wider interest of network development in the UK. If all operators were required to share the same network, the UK would lose the benefit of competing networks which has been so important in reducing costs and improving service and choice for consumers.

Regulation that is fair to all consumers

4.27 There are many different types of telecoms consumer ranging from large corporate users to small businesses, from people on the move using mobile phones to low income households in rented accommodation. The DGT has a statutory duty to ensure that services are provided to meet all reasonable demand. In practice this means ensuring that all groups of consumers ­ including those not currently on the telephone ­ can get a fair deal from the telecoms marketplace.

4.28 The DGT has taken the view that the needs of the majority of consumers are most likely to be met by providing an enabling framework for effective competition. But competition takes time . . . networks need to be built, new services developed and rolled out, and commercial agreements reached with other players. The DGT has therefore focussed his attention on those consumers who have yet to benefit from competition because of where they live, or who might not be attractive to commercial companies because they may not be profitable to serve in the short term.

4.29 This work has aimed at ensuring the availability throughout the UK of a basic level of telecoms service available to all on reasonable request, on affordable terms. The level of basic service includes the ability to get connected to the network, make free 999 calls, make and receive voice calls, have access to directory information, itemised billing and call barring services, and the reasonable availability of public call boxes.

4.30 In addition, special service packages are available for consumers on low incomes and for consumers with disabilities, so they can still receive basic service on reasonable and affordable terms.

4.31 A further measure ensures that BT's basic prices are geographically averaged across the UK such that consumers in remote areas are charged the same as those in other areas and also benefit from the effects of competition even if there is no alternative operator in their area.

4.32 Geographic averaging is achieved through the application of the undue discrimination provision in BT's licence which ensures BT does not discriminate between customers in different parts of the UK. This is particularly important for residential customers.

4.33 All of the above measures have been widely consulted on over the last three years as part of the DGT's Universal Service work. This work has been carried out in close consultation with government. The DGT has sought to define in a transparent way the level of Universal Service, cost it and ensure it was delivered across the UK in a fair and pro-competitive way. The DGT has judged that at present Universal Service does not impose an undue financial burden on BT, which carries most of the obligations. Should this change then the DGT would wish to see a cross industry funding mechanism established that was proportionate, non-discriminatory and transparent and which therefore did not distort competition. The DGT would ensure that any such mechanism complied with the requirements of EU law, in particular the Interconnection Directive. Where a funding mechanism is required it would need to be in accordance with EU legislation which limits the scope of universal service funding to certain basic services.

4.34 The DGT has taken other actions which also help address the potentially adverse consequences of some companies' commercial behaviour. For example, all public telecoms operators are now, at the DGT's request, reviewing their disconnection policies, and BT has committed to offer customers in debt a reasonable repayment plan with an 'outgoing calls barred' service instead of disconnecting them. The DGT has also persuaded BT not to levy automatic security deposits from new customers but rather to set 'usage limits'. The DGT has endorsed published Consumer Codes of Practice across the industry which confirm levels of service customers can expect and how complaints are dealt with.

4.35 For elderly and disabled customers, the DGT's intent is to consult widely in the Autumn on basic services which all public telecoms operators should make available to meet the needs of people with disabilities. In doing this, the DGT is working within the government policy framework of the Disability Discrimination Act 1995. A number of services are already being provided, either by licence condition or on a voluntary basis, but the DGT believes certain services should be universally provided where the cost involved is reasonable ­ and would not require a shared funding mechanism as these obligations would fall on all operators.

Telecoms Act framework

4.36 The DGT believes that the interests of consumers can be taken into account within the existing regulatory framework as his statutory duties to cover all classes of consumers. This does however create tensions as to whether it is the right role for the DGT to decide what measures should be provided for disadvantaged customers. As discussed earlier he takes the view that establishing the precise level of universal service is, essentially, a matter of social policy best dealt with by government and parliament. That is why this submission recommends that the policy framework for such issues should be set by Parliament (see paragraph 3.20 to 3.26).

4.37 The DGT believes, however, that if legislation is to be enacted, the opportunity should be taken to overhaul his statutory duties in respect of consumers in two ways.

4.38 First, although the DGT has put consumers at the centre of his activities, there would be value in making his statutory duty to promote the interests of consumers his primary duty. Such a duty should make explicit reference to disadvantaged and low income customers, as well as the meeting of all reasonable demand. Such a duty would obviate the need for a separate appeals mechanism for consumers on licence decisions. Consumer rights would be protected by statutory duties.

4.39 A corollary of this position in terms of the regulator's duty would be that, in a competitive market with few price controls, the DGT's duty under section 3(1) (b) of the Telecommunications Act to secure that telecoms operators are each able to finance the provision of their services should be deleted. Given the number of operators now in business it is impractical for the DGT to perform the duty which, in any event, is inappropriate in a competitive marketplace. Such a change would not leave the companies at risk. The DGT could not require companies to provide services they are unable to finance.

4.40 In the DGT's view, Section 3(1)(b) of the Telecommunications Act should be repealed by any future legislation. Should special mechanisms be needed to ensure the continued funding of universal service, then these should be specifically dealt with along the lines described in paragraph 4.33.

CHAPTER 5

TRANSPARENCY AND ACCOUNTABILITY

Introduction

5.1 The DGT welcomes the emphasis in the Review's terms of reference on the transparency, consistency and predictability of regulation. The DGT considers that transparency and openness of the regulatory process is the key to ensuring regulatory accountability and the legitimacy of the regime in the eyes of customers, the industry and Parliament. The DGT is aware of the need to strengthen the legitimacy of his independent role in two quite different ways. First, is legal or formal legitimacy meaning keeping abreast or ahead of developments in administrative law, ensuring due process and establishing predictable procedures. Here the DGT, without explicit requirements under the Telecommunications Act, has put in place new, more transparent processes as set below at 5.8. Second, and at least as important, is substantive legitimacy, meaning getting the job done via good and appropriate policy making. An important feature of this aspect of legitimacy has been an inclusive and increasingly transparent process, again in ways not specified in the Telecommunications Act.

5.2 Nevertheless, concerns with the accountability of regulators have been expressed in several recent Parliamentary Select Committee reports and by others. These concerns centre on the issue of 'how can an independent regulator be made accountable?'.

5.3 The importance of a regulator's independence was stressed in Chapter 3. Yet independent regulation cannot operate in a vacuum. If it did, regulators would not have the legitimacy which ultimately is essential if all stakeholders are to feel regulatory decisions are fair. The corollary of independent regulation is therefore accountability.

5.4 There are three main issues:

• how accountability is built into existing statutory requirements
• what additional actions have been taken by the DGT to further enhance accountability
• what further action may be needed to improve accountability.

5.5 The DGT has to account for the exercise of his powers in a number of respects:

• providing the Secretary of State with an annual report of his activities, to lay before Parliament;
• being called to give evidence to Select Committees of both Houses of Parliament;
• replying to aspects of Select Committee reports which apply to the DGT;
• being called before the Public Accounts Committee to account, as Accounting Officer, for the economy, efficiency and effectiveness of the DGT's use of public money;
• through the close public scrutiny of proposals and decisions by the industry, customers, consumer bodies, other interested parties and the media
• responding to any directions from the Secretary of State indicating particular matters to which he should have regard.

5.7 The regulatory framework also provides other important checks and balances in that:

• the DGT's activities are subject to the governing statute including the duties it lays down;
• the DGT's functions are restricted to those conferred by the statute and performed for the purposes of the statute;
• the terms of operators' licences not only impose duties upon them but also confer important rights and protections. Licences conditions may only be changed by the DGT with the licensee's consent or after reference to the MMC;
• the DGT must have regard to advice from statutory independent advisory committees;
• the DGT must consult before making final enforcement orders against licensees, and the validity of such orders may be challenged in the courts.
• EU telecommunications law will also act to constrain the DGT's discretion ­ particularly through requiring licensing procedures to be objective, proportionate, transparent and non discriminatory.

5.8 The DGT is keenly aware of the need for openness, transparency and accountability in view of the important impact which his decisions may have on the marketplace and on consumers. Transparency of process and effective consultation mechanisms are the key to ensuring 'due process', embodying the principles of natural justice. Over the last few years the DGT has striven to develop policies and procedures to enhance its transparency and accountability. He recently published a Consultative document Improving Accountability to seek the views of others on how it could further develop its practices in this area.

5.9 Key actions taken by the DGT to improve the transparency and accountability of his work include:

• publishing and inviting feedback on his annual Management Plan
• holding public hearings, open meetings, workshops and seminars for consumer and industry representatives on key issues, both prior to and during consultation on policy proposals
• publishing consultative documents on all key policy issues prior to reaching any regulatory decisions, and giving respondees an opportunity to comment on the comments of others (two stage consultation)
• giving feedback to respondees and publishing reasons for regulatory decisions
• commissioning and publishing independent market research to test consumer satisfaction with current services
• establishing Expert Advisory Panels (eg the Consumer Panel, the Large Business User Panel, the Advisory Body on Fair Trading in Telecommunications, the Economic Experts Panel, the Technical Experts Panel) to give independent advice to the DGT
• publishing guides on how the DGT works for the benefit of customers and those with competition complaints
• publishing consumer booklets on key policy issues.

• consulting consumer groups and others on the shape of his forward work programme
• clarifying and simplifying response times to complaints and enquiries
• greater use of the Internet for providing access to responses to consultative documents
• regular publication of data showing the type and number of complaints received about telecoms operators
• establishing a new Panel including members from consumer bodies to focus on consumer research needs.

5.11 There are however further actions that could be taken to improve accountability as set out below.

Liaison with other players in the regulatory process

5.12 DGT believes transparency is essential to the legitimacy of the whole regulatory regime ­ not only to his actions but also those of the other competition authorities, including UK government departments, European directorates and the World Trade Organisation (WTO). He is conscious, in particular that the Monopolies and Mergers Commission (MMC), (to which licence modifications are referred when agreement cannot be reached) is a very important part of the regulatory decision-making process. Under the new competition legislation DGT will also be working increasingly closely with the Office of Fair Trading.

5.13 It is clearly important that all the bodies involved in the regulatory process should adopt consistent approaches on procedural issues. If the sector specific regulators are to be more transparent and accountable, the bodies such as the MMC and OFT will need to adopt similar processes. DGT will be seeking to work with both organisations to achieve this objective and ensure continuity and transparency of process on issues that cross the boundaries between their respective functions. As part of this the DGT would not wish to depart from the substance of any licence modifications proposed by the MMC in its reports.

5.14 The review will need to consider the issue of transparency of regulatory process at all parts of the regulatory chain of policy and decision making.

Obtaining and making available information

5.15 The DGT currently has powers under the Act and under licences to acquire information from telecoms companies needed to carry out his statutory functions. He also has powers under the Act to publish information.

5.16 These powers have proved sufficient in most cases. The DGT uses them regularly to acquire detailed information from licensees in the course of competition case investigations, and has used them to acquire and publish data on other matters, for example on BT's disconnection statistics.

5.17 There have, however, been occasions when current powers have not proved adequate. For example, the DGT is not authorised by the Act to disclose commercially confidential information to certain relevant third parties to assist them in the exercise of their functions (such as the ITC, or in certain cases the European Commission or the Federal Communications Commission). There is a need for the Telecoms Act to be revised to allow the list of bodies to whom the regulator can disclose information to be updated as appropriate by statutory instrument. For example as internationalisation of communication markets develops over time the identity of those bodies may change. The EU licensing directive will provide an overall context within which such improvements can take place.

5.18 The DGT also considers it desirable that, so far as is possible under the EU directives, the power to publish information should be widened to make it easier to publish information in the interests of consumers or the promotion of competition (the Telecommunications Act is currently silent on the publication of information in the interests of competition). The DGT considers the argument advanced in the report by the Trade and Industry Select Committee ­ that the more market power an industry player has, the higher the hurdle should be before publication is disallowed in an area in which it has market power ­ has some force behind it.

5.19 The Competition Bill, described in Chapter 2, should address some of these issues as it includes a provision to allow information to be published unless it would cause 'significant harm'. However, similar powers (including the investigative powers referred to above) could usefully be incorporated into a future primary legislation. Communications Bill. Again the EU Licensing Directive will be relevant to these considerations.

5.20 This approach would accord with the DGT's present policy of greater disclosure where justified by the relevant company's market power or dominance. Publishing such information would help competition to develop as the imbalance in information is reduced and new entrants can take more rational investment decisions.

Consumer representation

5.21 The DGT has sought to maximise the effectiveness of consumer representation and issued a consultative document in 1996 Meeting Consumer Needs in Telecoms: The Role of Consumer Representation. Feedback on this document has helped steer Oftel's work.

5.22 If regulation is to promote the consumer interest as its primary task, then regulators must have effective consumer feedback mechanisms. The DGT's experience is that regulators need as many channels of communication with consumers and their representatives as possible, in order to get a plurality and balance of view and ensure specific interest groups are not missed out.

5.23 One important source of feedback is the 40,000 or so consumer representations received by the DGT each year. Not only can the DGT intervene effectively on behalf of consumers to ensure their complaints are resolved, but he can get immediate feedback on the key issues of concern to consumers at any one time. Analysis of this information feeds directly into policy development. Were complaints to be handled by another body, this rich source of consumer input could be lost.

5.24 The DGT has also chosen to undertake considerable market research, on specific issues and with regard to particular consumer segments. This has proved invaluable as a source of representative and objective feedback on consumers' views and aspirations with regard to telecoms services.

5.25 Consumer views are also represented to the DGT in other important ways:-

• The six independent Advisory Committees for Telecommunications (ACTs), set up under the Telecommunications Act, advise the DGT on any relevant consumer issues. Those for England, Wales, Scotland and Northern Ireland are appointed by the Secretary of State; those for Disabled and Elderly People and for Small Businesses are appointed by the DGT.
• The DGT's own expert Panels, set up under the DGT's powers under the Act, include a special residential Consumer Panel to review price control and universal service policy, and a Large Business User Panel to advise on issues impacting on large corporates. A further Panel to advise on convergence issues and residential consumer interests is to be established.
• The DGT liaises closely with national consumer bodies, especially the National Consumer Council and the Consumers' Association; national voluntary bodies representing people with disabilities; and special telecoms user groups such as the Telecommunications Managers Association and the Telecommunications Users' Association.
• The DGT regularly convenes workshops, seminars and other informal events on key policy issues which enable consumer representatives, sometimes with industry participants, to discuss policy options and input into policy development.

5.27 A number of commentators have argued that consumer representation could be more effective were there to be separate sector specific Consumer Councils. Were such a development to take place, there would be considerable risk that the economic regulator would become less, rather than more, consumer focussed. The DGT often finds that the information gained in his role as protector of the consumer is vital to the proper regulation of the sector. Separating out the consumer interests into a distinct body creates a risk that consumer representation is seen as antagonistic to the regulatory process rather than an essential part of it ­ two players with substantially the same role. The DGT considers that the effect of such a move would be likely to be, in the round, counter productive to the consumer interest.

5.28 There does remain, however, the real issue of resourcing independent consumer representation. The DGT has been struck by the constraints within which many national bodies representing residential consumer interests have to operate. While these bodies carry out admirable work, they do not always have the resources to input to important consultation exercises. The DGT recommends that this issue should be given careful consideration by Government in taking decisions on the funding of the National Consumer Councils and reviewing what consumer representative structures and processes might be required. Funding and resources are probably more important than legal status and structures.

A Director General or a Commission?

5.29 A number of commentators have suggested that individual regulators should be replaced by regulatory Commissions. At present a wide range of powers and responsibilities, some albeit shared with the Secretary of State, are vested in one individual, the DGT, who is supported and advised primarily by civil servants in his office, Oftel.

5.30 The DGT considers it is preferable for decisions such as he has to take to be taken by a group of people rather than an individual. He has sought to create an analogue of more collegiate decision making through the appointment of a number of expert advisory panels, comprising individuals whose expertise and reputation in their respective fields is highly regarded. These panels are free to publish their advice to the DGT. Some of the bodies meet with the industry: the Consumer Panel for example had private meetings with licensees during its work on BT's price controls.

5.31 This approach has succeeded to an extent, but the DGT's view is that, when legislative opportunities arise, and in any case as part of future communications legislation, a single regulator should be replaced by a regulatory commission. The DGT believes that a Commission would be more accountable, provide more stability, and improve the quality of decision making. There is no reason why, with appropriate procedures, a Commission should slow down or blunt effective decision making. It is unusual in the UK's constitutional arrangements (and even more so in a world wide context) for important decision making functions which are material to the rights and privileges of third parties to be vested in one individual.

5.32 A regulatory commission could have further important advantages. It should be possible from a Commission to conduct its decision making processes in open session which interested parties could attend. This would give greater transparency and accountability to independent regulatory bodies. Confidential matters ­ which are fewer than generally believed, in part because of the concentration of a regulator's resources on companies' with significant market power ­ would need to be dealt with in closed session, but the agenda could be constructed in two parts ­ open and confidential ­ as is commonly the case in other publicly accountable bodies.

5.33 Clearly the constitution and operation of any regulatory commission would need careful consideration ­ how many members, on what terms, from what backgrounds, who would appoint, etc. These issues are all capable of resolution.

5.34 A small number of commissioners with relevant expertise, devoting a substantial proportion of their time, not representative of particular interest groups, with clear chairmanship and voting arrangements should be able to avoid any potential disadvantages of a commission. The benefits of such a model would be considerable.

CHAPTER 6

IMPROVING REGULATORY EFFICIENCY AND EFFECTIVENESS

Introduction

6.1 This Chapter makes a number of recommendations for improving the efficiency and effectiveness of the regulatory regime, based on 13 years of experience with the Telecommunications Act. Necessarily, these suggestions relate, broadly speaking, to the telecoms sector, but they have implications for the future regulation of the communications sector as a whole.

Background

6.2 The regulation of telecommunications (and in the new world, communications) will increasingly be governed by European legislation and the agreement reached in the World Trade Organisation. In 1998 the following European Directives will all be implemented: the Amending Voice Telephony Directive, the Interconnection Directive, the Licensing Directive, the Transparency Directive, the Data Protection Directive and the Customer Telephone Equipment Directive.

6.3 The impact of these Directives is considerable. The Directives both stipulate what has to be done and restrict what can be done. The UK regulatory regime for telecommunications has to comply with detailed requirements as to its substantive content and also in relation to the manner in which the licensing regime has to be applied.

6.4 The rules which are imposed by the European Community have to be reflected in all licences. At present there are approximately 1000 individual licensees in addition to all the companies and individuals that operate telecommunications systems under a class licence. This figure is a marked contrast to 1984 when the only nationally licensed operators were BT and Mercury (Kingston was licensed in 1987 when telecommunications ceased to be a department of the city council).

6.5 With each Directive there is a need to analyse all the relevant licences to ensure compliance with European law and, if necessary, to make modifications to them. As a result of the implementation of the Licensing Directive and the Interconnection Directive all UK licences under which commercial operations are conducted are having to be amended (some twice or more) over the next 15 months. This illustrates the urgent need for changes to the legislative regulatory framework to reconcile properly the substance of European and UK legislation. This matter is discussed further below in relation to the proposals with reference to class licences and the need for rule-making powers. Because the UK has had a fully liberalised market for a number of years and licences have evolved into sophisticated regulatory documents, the UK has a much more difficult task in implementing EU legislation. The licensing resources available to the DGT over the next 12 months to complete this task are therefore stretched.

Modification of individual licences: the need for a general rule-making power

6.6 In carrying out his statutory duties the Director General faces increasing difficulties in trying to regulate effectively what is now a large and complex market, using the limited and cumbersome powers in the Telecommunications Act.

6.7 The licence modification process prescribed in Section 12 of the Telecommunication Act 1984 was principally designed to enable the Director to make the changes needed to BT's licence as the market developed. This process, which involves obtaining the prior consent of the licensee and carrying out a full statutory consultation, was perfectly viable when the modifications would only apply to BT, Mercury and/or Kingston. After the duopoly review in 1991 the system could still work satisfactorily when it was applied to only a few licences. Since that time, however, the number and variety of licensees have increased dramatically.

6.8 The ability of the Director to refer a proposed licence modification to the MMC in the event that the consent of the licensee was not forthcoming, was seen at the time the Act was passed as striking a proper balance ­ between the ability of a telecommunications operator to resist licence modifications where they were considered to be inappropriate and the need to enable the Director ultimately to proceed with the licence modifications if the MMC considered that the proposal was in the public interest.

6.9 The current market position is very different. With approximately 1000 individual licensees and with the market constantly changing this necessitates continual changes to telecommunications licences. Many of the licence modifications which the Director General proposes, or EU legislation will require, involve the modification of many, sometimes many hundreds, of telecommunications operators' licences.

6.10 At present, the DGT is in the process of conducting three licence amendment exercises which have just completed statutory consultation, each of which involves a mass modification of between 100 and 400 licences. These exercises have shown that even relatively non-controversial modifications, which the industry recognises as beneficial, take a considerable time to implement and involve a huge workload for Oftel. These are expensive exercises both in terms of staff time (for Oftel and the licensees) and in terms of the cost of advertising the modifications.

6.11 The consistent implementation of a rule change by licence modification is also contingent on obtaining the consent of all of the licensees concerned. In some cases a tiny minority of these operators may resist change where they think that it is to their own narrow commercial advantage or to others' disadvantage. In other cases apathy and disinterest on the part of some operators could frustrate the whole exercise.

6.12 The DGT suggests that the licence modification process needs to be altered as soon as possible. In the place of the current system there needs to be a 'rule-making procedure' along the lines of the permissive articles in the Licensing Directive so that modifications can be made if necessary without each individual licensees' consent following the completion of full consultation procedures and due consideration having been given to the comments of all interested parties. If such rule making powers were introduced, some sort of appeals procedure would be needed ­ to the MMC or its successor ­ but it would be important to ensure this could not frustrate changes which benefited consumers and the industry.

6.13 Such a change would also have the beneficial effect of moving BT further away from the centre of the regulatory process. Presently, too many general licence modifications (ie those which are relevant to all industry players and consumers) appear in BT's licence as a substitute for general rule making in the industry. The precise drafting and interpretation of these policies involves BT to too great a degree, and easily lead to policy making being seen as a negotiation with BT, no matter how transparent is the process.

Class licences

6.14 The Licensing Directive encourages Member States to move progressively to class licences. BT and certain other operators with market power or special privileges will continue to be individually licensed, but in due course, almost all of the 1000 or so individually licensed operators will be moved to class licences. This change is generally welcomed by the DGT and the industry but it will cause problems due to the difficulties of licence modification to class licences under the existing legislation.

6.15 Under existing UK legislation the difficulties of modifying a class licence are even greater than modifying individual licences. No modifications have been made to class licences in the past because of the possibility of the modification process being frustrated by a single objection or representation. In the event that any such objections or representations are not withdrawn then the DGT has no alternative but to refer the proposed modification to the Monopolies and Mergers Commission involving a great deal of work and much delay while the matter is considered by the MMC. In consequence the practice has developed of revoking and reissuing class licences instead of attempting modification.

6.16 From 1998 even more of the activities of the operators will be carried out under class licences. However, there will continue to be a need to change the conditions which attach to such licences due to changes in technology and in licensing requirements. If the number of class licences is to increase and activities which are currently the subject of individual licences are migrated into class licences, then the existing shortcomings with the modification of class licences will become extremely serious.

6.17 The DGT believes that the solution to the problem on class licences is to introduce a power for 'rule making' as described in paragraph 6.12 in relation to them as well as individual licences.

Divesting of functions

6.18 The DGT currently has a wide range of functions to perform some of which result from his original remit, others of which have been added by Parliament and by the European Community. Oftel is a small Government Department with limited resources and practical limitations on its ability to recruit and retain specialist staff. As discussed in this Chapter and elsewhere in this submission, the DGT's role increasingly requires him to act on competition issues for the industry in order to deliver his goal of the best possible deal for the customer. The ability to fulfil this goal is at present partially constrained by the need to devote resources to certain functions which could be equally effectively undertaken by independent bodies financed by the industry. It would be more appropriate for the policy responsibility to be with the DGT but the delivery mechanisms operated through the private sector.

6.19 Such a model already exists. The Independent Committee for the Supervision of Standards in Telephone Information Services (ICSTIS) is an industry financed body which supervises the content of premium rate services in the UK albeit backed up with Oftel's enforcement powers if necessary. The telecoms industry has also set up a body to develop initiatives to combat telecoms fraud. Both bodies are examples of the type of effective industry self regulation. This year, the DGT persuaded the industry to establish an industry funded body to undertake the collection and publication of Comparable Performance Indicators, a task previously performed by Oftel.

6.20 The DGT believes that there are other functions, such as the organisation of the new national 05XX business numbers which could, subject to consultation, be carried out by the industry. The DGT also considers that if there is a need to set up a universal service funding mechanism after the 1999 review, this is again the type of activity which could be administered by the industry. The administering of numbering allocations is a certain candidate. In line with his duties under the Act the DGT will still retain policy responsibility for such the activities and ensure they were delivered effectively.

6.21 By divesting the transfer of certain operational functions ­ but not the policy responsibility ­ the DGT would thereby be able to concentrate his office's resources on competition and consumer protection issues. This would enhance his ability to deliver his goal for customers in terms of quality, choice and value for money. It would also ensure a better balance between public and private sector activities. The DGT looks forward to working with government to achieve this objective.

CHAPTER 7

DIRECTOR GENERAL OF TELECOMMUNICATIONS CONCLUSIONS: LOOKING FORWARD

7.1 The Director General of Telecommunication's submission to the Government's review of utility regulation has looked at a wide range of issues having an impact on the way in which the telecommunications industry might be regulated in the future ­ against a background of the convergence of telecommunications with broadcasting. In doing this he has recognised that the communications sector, with its greater degree of competitive development, no longer bears very much similarity to the other regulated sectors and that its regulation may need to be considered separately.

7.2 These changes imply a need for more wide ranging action. Primary legislation is likely to be required in the very near future in order to provide a regulation framework consistent with market developments.

7.3 The context for the review needs to be recognised:

Director General of Telecommunications (DGT) ­ not the only player in communications regulation

• a number of players are involved in the regulation of telecommunications ­ the Secretary of State, UK competition authorities, DGIV and XIII of the European Commission, the World Trade Organisation, as well as DGT.
• DGT's decision making powers are significantly restricted by such players.

• the telecoms market is developing fast from a monopolistic utility to a competitive, multi-competitor industry in terms of market structure, scope for infrastructure competition, the variety of services and products delivered
• telecoms is part of a complex and convergent communications market including IT and broadcasting
• and competition issues are an increasingly important focus of the DGT's work.

• because of these changes the focus needs to be forward not backward looking
• the new competition law will have a significant impact of on the work of regulators, particularly DGT
• The DGT believes that the action needed as a result of the review is as follows:

• to ensure stability and investor confidence the DGT's powers under the Telecommunications Act should be consistent (in relation to sanctions, enforcement appeals and redress for third parties) with those in the new Competition Act.

• social or environmental policy issues ­ which usually involve some costs to, or cross subsidy between, customer groups ­ should be for Ministers and Parliament to determine.
• the framework for these issues should be set by means of Statutory Instruments providing for appropriate democratic accountability and transparency.
• the DGT would be expected to give published advice on these issues. Any additional costs imposed should be reasonable, and where they were not de minimis, should be justifiable in terms of longer term economic benefit to society. They should also be fair, proportionate, non-discriminatory and transparent in order not to distort competition and not impose additional taxes on the customers or participants in regulated markets.

• one area where powers should pass the other way, to the DGT, is the delegation of powers to issue licences which the Secretary of State can delegate to the DGT under the Telecommunications Act 1984.

• DGT heads a non-Ministerial Government department and should, consistent with a framework set by government, undertake more direct liaison and negotiation in Brussels to ensure consistency of UK and European telecommunications legislation.
• similarly, extended responsibilities for the DGT as the "National Regulatory Authority" under EU legislation and as a competent authority under EU competition law for cases involving telecoms at least under Articles 85 and 86 could helpfully limit duplication of effort and resources.

• The RPI-X approach works effectively especially where price controls are focussed on those customers who are "captive" ie do not currently have a choice of supplier.

• DGT considers powers under the Telecommunications Act and Competition and Service (Utilities) Act 1992 are sufficient in terms of promoting quality of service ­ provided the regulator takes a pro-active role.

• environmental policy objectives and encouragement of sustainable development is achieved by promoting the trend for electronic communication over telecommunications networks ­ telebusiness, electronic commerce and homeworking to substitute for physical communication using road and rail systems.
• scarce resources of the radio spectrum could be much more efficiently used through market based incentive arrangements ­ such as spectrum pricing and auctions and a secondary trading market in spectrum to ensure its efficient use.
• environmental concerns raised by the development of telecommuni-cations networks ­ in respect of the laying of cables or the siting of transmission masts ­ and the scope to minimise the environmental impact by telecoms companies sharing ducts or masts, should form part of the 'social/environmental policy' determined by Ministers and Parliament.
• facilities should be shared where there are competition reasons to do so but should not hinder the development of competing networks which underpin the improvements in UK telecommunications.

• the DGT is to consult widely on basic services which all public telecoms operators should make available to meet the needs of people with disabilities. In doing this the DGT is working within the government policy framework of the Disability Discrimination Act 1995. A number of services are already being provided, either by licence condition or on a voluntary basis, but the DGT believes certain services should be universally provided where the cost involved is reasonable.

• the statutes governing regulatory regimes should be revised to put the interests of consumers, as well as the meeting of all reasonable needs, as the regulator's primary duties. This statutory focus would then allow the appeals process for licence modifications to be focused on licence holders and would not need to involve consumers.

• the DGT's duty under the Act to secure that telecoms companies are each able to finance the provision of their services should be deleted. In a competitive market with few price controls, the large number of operators now in business it is impractical for the DGT to perform this duty

• the DGT has taken actions to improve the transparency and accountability of his work including, as appropriate,
• publishing and inviting feedback on his annual Management Plan
• holding public hearings, open meetings, workshops and seminars for consumer and industry representatives on key issues, both prior to and during consultation on policy proposals
• publishing consultative documents on all key policy issues prior to reaching any regulatory decisions, and giving respondees an opportunity to comment on the comments of others (two stage consultation)
• in addition the DGT is now planning further measures to improve openness and accountability, including:-
• consulting consumer groups and others on the shape of his forward work programme
• clarifying and simplifying response times to complaints and enquiries
• greater use of the Internet for providing access to responses to consultative documents
• regular publication of data showing the type and number of complaints received about telecoms operators
• establishing a new Panel including members from consumer bodies to focus on consumer research needs.

• the principle of transparency should extend to all stages of the regulatory process including competition authorities, Government departments and European institutions
• whilst not being able to fetter his statutory discretion, DGT would not wish to depart from the substance of any licence modifications made by the Monopolies and Mergers Commission (MMC) in its report(s)

• the Competition Bill should enhance the DGT's ability to obtain and publish information unless it would cause 'significant harm'. Similar powers (including investigative powers) could usefully be incorporated into a future primary legislation on the communications industry.
• within the constraints of EU directives, the DG's power to publish information in the interests of consumers or for the promotion of competition should be widened. The arguments for an assumption of greater disclosure for players with market power merit serious consideration

• the DGT considers the existing consumer representation arrangements work effectively but accepts that the key is regulatory commitment within the broad policy framework to focus on the consumer. Placing the interests of consumers as well as the meeting of all reasonable needs as the regulator's primary duties could ensure this emphasis was guaranteed.
• Separating out from the regulator all consumer interests into a distinct body creates a risk that consumer representation is seen as antagonistic to the regulatory process rather than an essential part of it ­ two players with substantially the same role.
• The DGT recommends that the issue of national bodies representing residential consumers having insufficient resources to effectively respond to policy consultations should be given careful consideration by Government ­ both in taking decisions on the funding of the National Consumer Councils and reviewing what consumer representative structures and processes might be required. Funding and resources are probably more important than legal status and structures.

• the DGT's view is that, when legislative opportunities arise, and in any case as part of future communications legislation, a single regulator should be replaced by a regulatory commission. This should provide more accountability and stability to the regulatory process

• The DGT suggests that the licence modification process needs to be altered as soon as possible to a 'rule-making procedure' along the lines of the permissive articles in the Licensing Directive so that modifications can be made if necessary without each individual licensees' consent following the completion of full consultation procedures and due consideration having been given to the comments of all interested parties.

• Some form of appeals procedure would need to be introduced under such a regime.
• the DGT believes that the existing licence modification process as it applies to class licences similarly needs to be replaced with a power for rule making.

• The ability of the DGT to fulfil his goal of 'best possible deal for the customer' is at present partially constrained by the need to devote resources to certain functions which could be equally effectively undertaken by independent bodies financed by the industry. It would be more appropriate for the policy responsibility to be with the DGT but the delivery mechanisms operated through the private sector.