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| Oftel’s response to the UK Green Paper - Regulating communications: approaching convergence in the information age | |
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January 1999 Oftel welcomes the Government's decision to consult on its preliminary views on the likely implications of digital convergence for the legal and regulatory frameworks covering broadcasting and telecommunications. It is timely. Many of the issues raised are also being discussed as part of the EU 1999 Review of Telecommunications legislation. It is important that the UK has a clear view on these issues in order to build on the advantages of a liberalised telecommunications market and a world class creative sector. We agree that there is already strong supply side convergence. Increasingly the communications market is changing to become globally focussed, data based, with players and alliances within and across the traditional boundaries. Regulators face an environment, where product life cycles may be measured in weeks rather than months or years, potentially challenging traditional approaches to the application of both regulation and competition law. Fast-moving markets and different speeds in the development of competition between different service markets, mean that an overly prescriptive approach to regulation is inappropriate. Such an approach will lead to over-regulation (and therefore, consequent under-investment and under-innovation) of competitive sectors of the market and/or to under-regulation (and lack of real competition) in areas where the dominant player retains control. Getting the rules right is essential if UK citizens are to enjoy the benefits of the knowledge driven economy. Oftel believes that one of the main challenges of the future for communications regulation is to create the appropriate balance between regulation based on a competition law approach and more traditional regulation to deal with market failures and the delivery of social goals, whilst ensuring the protection of consumers. One of the key issues will be access. This spans the spectrum: at one end access to networks by service providers and competing operators, access to technical information and at the other end access by consumers to information and services. Addressing these issues requires a delicate balance between promoting the interests of consumers and ensuring that the resulting burdens placed on industry are not so great as to discourage investment and adversely impact on the quality, diversity and price of communications services available to the consumer. Oftel is currently seeking views on the first of these issues as part of its consultation on access to bandwidth (Access to bandwidth : Bringing higher bandwidth services to the consumer - December 1998). Any changes to the current framework will need to take into account, and potentially make explicit, the trade-offs that are required to maintain such a balance. Oftel has commented on these issues before (submissions to the Culture, Media and Sport Select Committee Inquiry and the responses to the European Commission's Green Paper on Convergence We do not repeat all the points made previously. Instead we highlight what we consider are the key points. Oftel is however, continuing to develop its thinking on these issues. We have established a work programme to review our long term strategy in order to ensure that the regulatory regime, in a period of rapid change, continues to empower consumers and encourages competition and innovation. Given the strong supply side convergence Oftel believes that there is a need to ensure coherent and consistent economic regulation across the converging sectors. In Section One we suggest how this could be achieved together with our views on changes to the present regulatory institutions. The regulatory regime should:
Competition law based on Articles 85 and 86 of the Treaty of Rome ought to play an ever greater part in the regulation of the communications markets. As competition becomes effective in a particular market, detailed ex ante regulation aimed to support competition will be appropriate in fewer and fewer circumstances and should be progressively withdrawn. Oftel does not believe, however, that reliance on action under competition law generally and in particular the "abuse of dominance" test (Article 86 of the Treaty of Rome) is necessarily sufficient to ensure that the customer receives the best value for money and range of services in the long term. There are a number of reasons for this including:
Supplementary tools to deal with some of these issues could take the form of guidance on the interpretation of a "dominant position". Guidance may deal with many of the difficulties of the type outlined above. This would provide certainty for firms and regulators as to which situations should be subject to behavioural constraints and what those constraints would be. Greater certainty would reinforce the deterrent effect of the existing prohibitions in competition law and more clearly discriminate between firms with and without market power which may be abused. However, case law on the way in which Article 86 can be applied may not develop in the most appropriate way, to deal with some of the gateway issues which have been identified. To that extent, guidance may not represent the whole solution. Further rules may then be considered necessary. In order to ensure a coherent regulatory system, Oftel believes that the methodological framework adopted by competition authorities is the appropriate one for designing such rules. That is to say, any special rules should provide for analysis of competition in all relevant markets and for advantages and disadvantages of intervention to be carefully weighed up. Any such rules would need to be formulated with great care to prevent unnecessary interference in the market. Any sector specific rules should:
For the foreseeable future, sectoral rules may be needed to address such issues as universal service, content, consumer protection and other social policy objectives. In addition, due to the special history and nature of telecommunications markets, the need for some sectoral rules to promote and underpin competition will remain for example where:
In Section Two we offer some views on content regulation. The shift from the broadcast transmission of content over relatively few channels to which Government has controlled entry to user-browsable content including video on demand, means that content regulation will need to adapt to these changes. Oftel agrees that the focus of regulation will shift from the direct regulation of content to regulation to enable control of access to content and from statutory to consumer-centred regulation. We suggest that content regulation should be based on self-regulatory classification of browsable or user selected content, referenced to content codes drawn up by self-regulatory bodies in consultation with the relevant statutory body. Section 1In view of the economic, social and cultural aims of Government policy towards these sectors for the future, in the light of convergence: a) what are the advantages and disadvantages of the present UK systems for the regulation of the telecoms, broadcasting and IT industries? b) what is the impact of current regulation on the development of new services? 1.1 The current approach to regulation which emphasises liberalisation and competition have improved productivity, lowered prices and stimulated innovation. For example, average UK telecoms prices have fallen almost 50% in real terms in the last ten years and competition has fostered the development and introduction of new services. In broadcasting the growth of independent production, fostered by the opening of programme supply markets, has realised similar benefits. Prices of IT hardware continue to drop very rapidly. Technological change has played a major part in this, but so too has regulatory change notably the UK's decision to liberalise telecommunications in advance of many other countries and the European Union's various market opening and liberalisation Directives. 1.2 This approach has lead to significant economic benefits. Electronic communications, in the form of telephony, broadcasting and IT, contributes around 5% of UK GDP, provides around 700,000 jobs, and is growing fast. Telecommunications networks form the backbone of the drive to create the UK as a global hub for electronic commerce. Electronic communications also has a wider influence on economic growth and prosperity because it provides major inputs to other industries. For example, telephony is a key input for insurance and banking, computing services are vital to a wide range of service and manufacturing sectors and UK broadcasting (and the saleable information sector generally) contributes to overseas trading partners' perceptions of the UK. Information and communication technologies have significantly improved productive efficiency and the UK's international competitiveness. If the UK can maintain its lead in electronic communications it will have a key source of competitive advantage in the 21st century. 1.3 The electronic communication industries also provide other important benefits to UK citizens, including improved access to valued entertainment and information from around the globe available 24 hours a day, on demand; and delivery of high-quality education services to remote locations. Choice and diversity has increased and is likely to increase through, for example, additional TV channels and the development of interactive services. 1.4 The present regimes have proved to be remarkably flexible in delivering both economic and social and consumer objectives. However, with strong and growing supply side convergence Oftel believes that existing UK arrangements are not sustainable in the long term. Already there are strains in the system. 1.5 The existing regulatory structure has two, inter-related, disadvantages:
An example - the Internet The Internet illustrates some of the difficulties that convergence presents for current regulation. Software developments now allow telephony and broadcasting (true one to many as well as aggregated point to point services) together with a range of other interactive services to be provided to one or more displays in the home or office. The Internet is therefore a key enabling technology over which converged services are being delivered. It raises a number of questions, for example how, or even whether it is necessary, to licence these services or how to deal with content emanating from overseas. The distributed nature of the control needed to set up communication paths, and the divorcing of the provision of content from the provision of the transmission path itself, makes it difficult to determine who controls content and delivery, or who is liable if things go wrong or rules are breached.
Although various stop gap methods have been used to overcome the immediate failures that have arisen as this breaks down. But the consequence has been a proliferation of regulatory bodies, overlapping jurisdictions, and conflicting duties and objectives. This leads to the possibility of 'double jeopardy' for companies and confusion for customers. Current collaborative working arrangements between the regulators, although beneficial in the short term, are not a viable medium term solution. A positive climate for investment is incompatible with regulatory uncertainty which, in turn, follows inevitably from a plurality of regulators each requiring different and possibly conflicting objectives to be met. Although there can be no guarantee that a modified regulatory system would of itself encourage investment, an unduly fragmented one clearly risks acting as a disincentive. 1.6 These disadvantages may have significant consequences both on firms' abilities to compete and on regulators' ability to continue to deliver certain social and consumer protection objectives when applied to new 'convergence' services. Examples are set out below. 1.7 Problems with Current Licensing Mechanisms. The current licensing mechanisms are no longer appropriate for the new world of convergence and competition, where the focus of regulation should be to encourage competition, diversity, choice and innovation, while delivering an agreed set of social objectives, rather than on controlling a handful of companies with privileged access to a scarce resource e.g spectrum. Particular problems with the current mechanisms include the following:
1.8 Difficulty with delivery of certain obligations. When the organisation running the system does not know, and cannot control, what services are running over it that organisation is not in a position to deliver the service specification. If such objectives are to be obtained from regulation then the provision of the service (not the transmission system) must be subject to the relevant rules. When service providers face competition then those rules must apply to all such service providers if they are to be effective. This means regulating them directly which in the case of content providers would mean the regulation of all content providers (pictures, text, multimedia because all of them will be capable of using all forms of content) who use electronic communication systems to deliver their messages to their customers. In a world of no capacity constraints (and hence the possibility of unlimited number of content providers, located anywhere in the world) this is neither realistic nor desirable. 1.9 Even when the existing regulation appears to directly address the service in question (e.g. the positive programming requirements in the Channel 3 and Channel 5 television licences) the service definition is co-extensive with definition of a delivery system and, more importantly, the power to impose these requirements arises from the scarcity of suitable delivery systems. As suitable delivery systems multiply and services and systems become "decoupled", and provision of services is less and less closely mapped onto particular, scarce, delivery systems, this regulatory approach comes under more and more strain, and is likely to fail. 1.10 In consequence, it will no longer be possible for public policy goals to be achieved by attaching highly specific conditions to the licences of particular suppliers which require a supplier to behave in a way that is not in its commercial interests since doing so disadvantages the licensed firms relative to competitors using alternative delivery means (and which are not constrained by similar licence conditions). Where companies face effective competition, their inability to finance additional obligations means that the regulator is often unable to enforce obligations prescribed in licences if the firm in question either petitions for licence conditions to be eased or simply decides to ignore the licence requirements. Anticipation of this result weakens the effectiveness of the obligations even further. This is not to say that the old regime has, or will, disappear overnight. Only that it cannot provide a long term basis for fair, consistent and effective regulation in the future. 1.11 Interoperability. Interoperability of networks and of customer equipment has traditionally been assured through a standardised definition of the interface between customers' equipment (be it a telephone or a TV) and the system to which it is attached (the telephone network, the particular frequencies used for TV broadcast in the UK respectively). Again, this mechanism assumes that the service being delivered is specific to the network to which the equipment is attached. Once system and services are "decoupled" established practices are insufficient to secure interoperability and to ensure that customers' equipment will successfully deliver the service available over the network. Methods will need to be devised for ensuring interoperability between different operators and between operators and service providers. As service providers provide an increasing diversity of services across undifferentiated digital networks, relying on intelligence in consumers' equipment, it will become more important to ensure that the entry barriers constituted by the technical/proprietary control systems embedded in customers' equipment are not used abusively. Regulatory intervention may be required to secure the public interest in new circumstances. 1.12 Moreover, services are being offered in such a way that it is the service provider(s), not the customer, who controls the specification and operation of the system. Many powerful new services can only work if a number of different players, none of whom can efficiently supply all elements of the delivery and service chain, agree to use interoperable equipment and software. This interdependence offers firms with market power at one point in the chain the ability to set the terms on which the whole chain operates. If the interoperability required to enable a complex system of interactions is to be achieved, without endowing particular firms with the ability to lever their bottleneck market power in one part of the system across the whole of it, consistent regulatory intervention across the converged sector is required. Oftel suggests an approach to interoperability in paragraph 1.23 (Probable Long Term Rules) below. Regulatory tradition in the IT sector 1.13 Historically the IT sector has not been subject to sector specific regulation like broadcasting and telecommunications. Isolated, non-networked systems, without any public character did not raise public policy concerns. However, extensive private networked systems, such as those used for computerised reservation systems, have already aroused significant competition concerns. 1.14 The networks over which IT services are delivered are becoming more extensive (the Internet covers most of the world), more public (anyone can get access to the Internet) and the system network and equipment attached to it is becoming more generalised and not service specific. All these trends indicate that interoperability will become more and more an inescapable public policy issue. And because the range of services that can be delivered over systems such as the Internet is so vast, interoperability will necessarily be complex. The centrality of these systems to the information economy also means that interoperability issues have a significant impact on the rest of the economy. 1.15 If the networked part of the IT sector is becoming more like the telephony and broadcasting sectors then, inevitably, consideration must be given to whether it will also be subject to similar market failures and, therefore, whether regulating it in a similar way as the other sectors will be beneficial. It is probable that over time issues of major public policy concern will arise in relation to IT, for example: affordable access to information, content controls (both to prevent access to offensive material but also the ability of service providers to control who has access to certain information), and interoperability. The very close similarity of characteristics of public network IT services to the developments in electronic communication services suggests that similar regulation in similar limited circumstances may be appropriate across all parts of the sector. Indeed, convergence is making them economically indistinguishable. Thus, market forces alone are unlikely to secure the positive outcomes which the public interest demands, whereas a well-conceived system of rules applied by an effective regulator across the whole electronic communications sector including, therefore, the public network aspects of IT, could do so. This does not mean that regulators should regulate in the same way as at present , rather there may be a need for backstop powers for them to do so. The initial approach should be to rely on the operation of the market backed up by competition law to secure the public interest objectives in IT. Any additional specific rules should first be tested against the framework outlined below. The Government aims to secure coherent regulation in a converging environment. Our view is that distinctive regulation of the communications and media industry is likely to remain justified, given its economic significance and pivotal role in shaping attitudes. Do you agree? If so, there is a need for more coherent economic regulation across the convergent sectors and how should the field of distinctive regulation be defined. What should be the common set of rules for economic regulation in that field, taking account of the powers available under the Competition Bill? Distinguishing features of the communications and media market 1.16 These sectors are, and will remain, different from other sectors of the economy. Some of its distinctive features may be short term but others are likely to be permanent. These features have significant implications for regulatory practice. 1.17 What makes this sector different from other sectors of the economy? First, both the telephony and broadcasting industries have been shaped by their particular histories. In both sectors, dominant operators or operators with a significant degree of market power were been created. First through publicly owned statutory monopolies and later, when commercial firms were permitted to enter markets, through public authorities' limitation of market entry to favoured firms. The legacy of dominant operators continues to shape UK electronic communications and will do so for some time. Second, the economic characteristics of production and/or consumption of electronic communications are unusual. Not least because of what are called the network externalities (network access, interoperability and call termination) which arise because there are two ends to the call. Correcting the network externalities in the public interest requires commercial arrangements which are unlikely to arise without regulatory intervention. 1.18 In addition, the costs of providing wire-based services are such that most customers are unlikely to take service from more than one supplier this, combined with the high costs of switching suppliers and/or externalities can lead to a bottleneck in access to networks. This provides a key basis for regulatory involvement. The same conditions apply to access control systems in broadcasting, that is, customers are likely to have only one set-top box. A further key difference between the communications sector and other economic sectors, lies in the 'market failures' which exist. For example, the various externalities (costs and benefits which cannot be reflected in price mechanisms), associated with the provision of telecommunications networks to take one example, the separation of call payment from choice of terminating operator provides the latter with an ability to maintain high prices. In broadcasting, a sector specific feature (albeit one which may have beneficial social consequences) lies in the fact this means that additional customers can be served at no extra costs. This makes licence fee and advertising funding potentially attractive funding methods. On the other hand, these funding mechanisms do not reflect people's willingness to pay which is economically inefficient. However, relying solely on direct payment will exclude customers who cannot afford to pay. So, although new technologies will allow pay-per-view and subscription-based charging, a tension between funding systems which offer access for all and those which necessitate the exclusion of some will remain. Striking the appropriate balance in the public interest may require regulatory involvement. 1.19 The broadcasting sector has, in addition, traditionally been distinguished from most other sectors by a number of public policy, rather than economic, considerations. These considerations include; concern over the content of programmes; a desire to ensure plurality and diversity of ownership in the commercial provision of content; securing commercially (and politically) neutral reporting; and a desire to ensure that some classes of information are made available to all citizens at affordable prices. These public policy concerns will remain, although some of them may be met through the normal operation of the market if competition is effective. 1.20 Moreover, it is unlikely that effective competition will develop in all sections of a converged digitalised electronic communications market. Five years or more into the future, the electronic communications sector may still be characterised by high barriers to entry in the provision of new transmission networks or new access control systems (although the networks which do exist may not be capacity constrained); by economies of scope and scale within transmission networks; commercial disincentives to interconnection and interoperability with competing networks (including transmission networks and networks of competing computers and computer software) and by very low (or zero) marginal costs of consumption of content. Moreover, even if content providers enjoy unfettered access to transmission systems, intervention and regulation are likely to be required to reduce negative externalities (too much "bad" content) and maximise positive externalities (ensure enough "good" content). Coherent economic regulation 1.21 Convergence of the telecommunications, broadcasting and IT sectors indicates that the old, technology based definitions, used by policy makers, may no longer be appropriate in the medium term. In this section Oftel uses the term electronic communications to mean all communications which use electromagnetic transmission. The term thus includes broadcasting and telephony and certain features of devices attached to electronic communications networks. Oftel suggests that this definition of the electronic communications industry is adopted to define the field of distinctive regulation. 1.22 Technological convergence, and the common economic characteristics of the electronic communications sector, suggests that a consistent approach can be adopted by an economic regulator to electronic communications networks and to the supply of services over those networks. Any sector specific rules used should form a coherent whole with EC legislation. Common approach for economic regulation Generally:
1.23 Oftel does not believe that competition law by itself is necessarily sufficient to ensure that the customer receives the best value for money and range of services in the long term. Certain types of sector specific rules are always likely to be needed, while others may not be needed in the medium term depending on the way in which jurisprudence on Article 86 develops. Probable Long term rules:
Further rules which may not be needed in the medium term:
1.24 Supplementary tools to deal with some of these issues could take the form of guidance on the interpretation of a "dominant position". Guidance may deal with many of the difficulties of the type outlined above. This would provide certainty for firms and regulators as to which situations should be subject to behavioural constraints and what those constraints would be. Greater certainty would reinforce the deterrent effect of the existing prohibitions in competition law and more clearly discriminate between firms with and without market power which may be abused. However, case law on the way in which Article 86 can be applied may not develop in the most appropriate way, to deal with some of the gateway issues which have been identified. To that extent, guidance may not represent the whole solution. 1.25 Further rules may then be considered necessary. In order to ensure a coherent regulatory system, Oftel believes that the methodological framework adopted by competition authorities is the appropriate one for designing such rules. That is to say, any special rules should provide for analysis of competition in all relevant markets and for advantages and disadvantages of intervention to be carefully weighed up. Any such rules would need to be formulated with great care to prevent unnecessary interference in the market. 1.26 If these are accepted as common rules for economic regulation, the implication is that a number of detailed specific rules which go outside these common parameters should be reviewed with the intention of removal unless they can be objectively justified. The principles for the common rules set out above will ensure that any remaining rules will apply to relatively few operators, and, even then, only in closely defined circumstances. Is any adjustment needed to the scope of concurrent powers to be exercised by the DGT under the Competition Bill? 1.27 We very much welcome the introduction of the new Competition Act and its provisions to allow sector specific regulators to continue to share concurrent powers with the Director General of Fair Trading in their sectors. 1.28 In looking at this question we believe it is helpful to separate the short term from the longer term. In the context of convergence, we believe that until a decision has been made in respect of the overall framework it would be premature to have a detailed discussion on the precise wording of scope. We do, however, make some general suggestions as to the future scope in the context of the regulatory framework we suggest in paragraphs 1.64-1.81 below. 1.29 However, we do believe an adjustment is needed to deal with shorter term issues. Under the new Act the DGT will have concurrent powers so far as relating to agreements or conduct "which relate to commercial activities connected with telecommunications". Unlike with the other regulators, the phrase "commercial activities connected with telecommunications" in the Act is actually defined in statute (under section 4 of the Telecommunications Act 1984): the provision of telecommunication services, the supply or export of telecommunications apparatus and the production or acquisition of such apparatus for supply or export 1.30 The use of this phrase "commercial activities connected with telecommunications" is different than the scope of concurrent functions currently available to the DGT under the Competition Act 1980 which refers to: the production, supply or acquisition of telecommunications apparatus or the supply or securing of telecommunications services 1.31 The main difference between the two definitions is that the 1980 Competition Act includes the "securing of telecommunication services". Such a change would ensure that service providers who may not actually provide telecommunications services but secure them on behalf of their customers would definitely fall within the scope of the DGT's concurrent functions. During the passage of the Competition Bill through Parliament, the Government recognised that it would be helpful to amend the scope to reflect this wording used in respect of concurrent powers under the Competition Act 1980. Although an amendment was tabled to this effect, in the event the amendment was not formally moved. We believe such an amendment would remain helpful to ensure that gaps are not left which an operator could exploit to the detriment of consumers. What digital services should be available at an affordable price? 1.32 Social policy objectives such as encouraging greater take up of broadband digital services are for the Government to set. However the means by which such an objectives might be achieved raise important issues. Oftel concentrates on these in the paragraphs below, drawing on Oftel's regulatory experience, including the universal service obligation in telecoms. 1.33 In telecoms there are 2 aspects to universal service:
1.34 In 1999, Oftel will be reviewing the second aspect of the universal service ie the list of services that are provided at geographically averaged tariffs. Oftel will be looking at whether the list of services should be expanded to include, for example, broadband digital services, something that will also be considered in the EU's 1999 Review of telecoms legislation. While not wanting to prejudge these reviews, Oftel's preliminary analysis suggests that the following factors need to be taken into account:
1.35 Although using the telecoms "universal service" concept might be inappropriate, it is a legitimate question to ask how the social policy objective of ensuring greater take up broadband digital services should be addressed. 1.36 When deciding on any public interest objective (including universal access), the Government may wish to consider a two stage approach. First, developing principles which establish a legitimate basis for the objective. For example: the objective should aim to deliver:
1.37 The first two are more easily identifiable than the latter, which is largely a political judgement. In addition, action to achieve the objective should only be taken if:
1.38 The above has been drafted in terms of services but can also be applied to content regulation and consumer protection. 1.39 Assuming that a public interest objective has met the above test, the second stage is to give separate consideration to the appropriate measures which can be put in place to achieve the objective. We have explained above why the model of the universal service obligation may not be appropriate for digital services. Nevertheless there are other ways to achieve the objectives. In Oftel's experience a useful model is industry self- regulation backed up by a reserve power for the regulator to intervene. A voluntary initiative by the industry can forestall the need for regulatory action. It can be effective to make a clear statement of the Public Interest Objective and then let the industry take ownership and responsibility for finding solutions. 1.40 A good example of the way in which voluntary action by the industry can be effective and where it is not always necessary to use formal regulation is the issue of disconnections policy in the UK. Oftel was concerned by the high level of disconnection for overdue payments within the industry and entered into discussions to see if changes to procedures could be introduced which would reduce the number of unnecessary disconnections. This led to the development of a policy which has now been adopted across the industry whereby customers with outstanding debts are contacted and offered the possibility of a repayment plan accompanied by an outgoing calls barred (OCB) service. This is now established and seems to be working well. Although Directive 98/10/EC also addressed this issue, measures in the UK were established outside a formal legal framework. 1.41 However, there are still a number of roles for the Government/Regulator to take:
1.42 The latter power is important. The threat of regulatory intervention can have an incentive effect on the industry to solve the problem and mean that such intervention ultimately becomes unnecessary. It is also important to ensure the timely delivery of certain objectives. Consumer Equipment 1.43 Access to services and infrastructure is a necessary but not sufficient condition of universal service. In addition to access to connectivity, consumers need to know how to use the pieces of equipment that provide connectivity. Some intervention by Government or regulator could be needed to minimise the numbers of information have nots and ensure that people can use essential services. Competitive supply will help ensure keen prices and user friendliness. However, there may be potential consumers who can neither afford the direct costs of the equipment needed to become individually connected nor develop unassisted the skills required to make use of connectivity. 1.44 Government can help by ensuring terminals and training are publicly available for example, at access points such as libraries. The Government could also ensure that the social security system recognises the changing requirements for access to information (for example, by including the cost of connectivity e.g. to voice telephony and to public service broadcasting in supplementary benefit calculations). 1.45 Competition will meet most of these needs. In the short run, the Government may need to ensure the provision of publicly available terminal points to fill in the gaps. In the long run, provision of essential equipment at affordable prices may be part of a universal access policy. The education system must be able to deliver appropriate training. Access for the disabled 1.46 The disabled have special needs. Some needs, such as those related to provision of basic telecommunications services and teletext subtitling of television programmes for the deaf, could be dealt with by inclusion in the universal access "basket." Responsibility for meeting other needs of the disabled may fall on the suppliers apparatus to ensure that, as far as possible, they conform to the principles of 'design for all'. The Disability Discrimination Act places a general responsibility on all to meet the needs of the disabled and a communications regulator could monitor, and even enforce compliance, with these requirements if given appropriate powers. Regulation could also encourage industry initiatives to ensure that special equipment is affordable (for example, through collective bulk purchasing) and facilitate any special training in use of such equipment. Or Governments could recognise the needs of this community by making special provision for the supply of specialist apparatus. Affordable access to information 1.47 Pervasive, quasi-universal, access to networks and to the terminals and skills required to make them work, would create an extremely powerful, and cheap, distribution network for all types of information and entertainment. Although Internet access is still confined to a minority of UK homes, the UK is ahead of most (but not all) EU countries in Internet penetration and growth of an on line industry sector. Moreover, domestic Internet penetration is growing fast. 1.48 Universal access to the Internet means that public information can be provided (e.g. by Government, museums, commercial firms and private individuals) and accessed at very low unit costs. 1.49 Technological change has also reduced the costs of creation and dissemination of information (from efficient word processing software through to digital TV cameras). Thus the costs of information creation and dissemination will fall making affordability easier. But competition for scarce talent may put up the price of these inputs, increasing the affordability problem. 1.50 Although electronic communication systems do, and will, provide abundant information free at the point of use, this information may not be sufficient to enable everyone to participate fully in society. Government and/or regulatory intervention will be required if essential information is to be accessible to all, either free or at affordable prices. A key role of public service broadcasting is to ensure that information, which otherwise would not be affordable by all viewers and listeners, is provided on an affordable basis (over the Internet if necessary). And of course, to discharge this mandate public service broadcasters must be sufficiently well funded to produce, acquire and distribute the information specific to their mandates. 1.51 Technical change is reducing the costs of creating and supplying information general affordability should become less of a problem. Where affordability remains a problem, the public service broadcasting mandate should include delivery of information at affordable prices. While spectrum will always remain a finite resource, digital will allow it to be used more effectively. Increasingly consumers and suppliers may wish to choose between wired and wireless technologies, and broadcast and on-demand techniques. In view of this: a) should the statutory basis for licensing telecommunications, broadcasting and spectrum usage be brought more into alignment? b) If a closer alignment of licensing is desirable or necessary, should the prime basis of licensing be according to the services involved (as now in some aspects of broadcast licensing), the systems/apparatus employed (as now in telecoms), or some other basis (including possible variants of these approaches which have tended to define regulatory approaches according to method of delivery)? 1.52 The economic value of radio spectrum is now well recognised. In 1995/96 the total contribution of radio based services to UK GDP was estimated at £13bn, and to be growing at 11.0 % every year. In the fastest growing area of cellular telephony growth rates are over double this figure and most analysts expect this level of growth to be maintained over the next decade. As consumer demand for interactive multimedia services grows, demand for mobile multimedia services, as well as for services to home and office, is likely to rise in line with established trends for voice telephony. These trends will provide strong incentives to reallocate radio spectrum to these new services. 1.53 Digitalisation and alternative transmission media, such as fibre optic cable and communication satellites, will progressively reduce barriers to entry to conventional "one to many" broadcasting markets, and hence will reduce the importance of spectrum scarcity as a factor constraining access to this market. However, increasing demand for mobile provision of multimedia services, for which radio is the only viable medium, means access to spectrum will remain a bottleneck for providers of these services for the foreseeable future. Spectrum allocation problems show both that policy and regulatory issues must now be thought through in a "converged" way, and that a consistent policy and regulatory framework (not just in relation to licensing) is required if access to the electronic communications market is to be both transparent, fair and equitable on the one hand and economically efficient on the other. 1.54 Oftel supports the introduction of auctions for the allocation of major new radio spectrum as an important step towards technology and application neutral allocation of a scarce public asset (and realisation of economic value for the public). The first such auction, for the mobile multimedia service known as UMTS (Universal Mobile Telephony System), is expected to take place next year. For the first time the market rather than the Government will set the price of spectrum access. However, this represents only one step towards the creation of a true market in radio spectrum, an essential development if the full benefits of convergence are to be realised and a satisfactory return achieved from a public asset. Oftel believes that further measures, to build on the Wireless Telegraphy Act, are needed such as the introduction of secondary spectrum markets, so that spectrum can be traded between users to reflect shifting patterns of demand. The long term objective should be to remove the regulatory role as far as possible and rely on market forces, backed by general competition rules, to optimise use of this valuable public resource. 1.55 The future of analogue broadcasting spectrum is itself a sensitive issue affecting almost everyone in the UK who rely on it for access to their primary source of information and entertainment terrestrial television. Oftel believes that, except when a specific public service obligation applies to spectrum users (e.g. the fire service, the police and public service broadcasting) spectrum should be priced to reflect its full economic value. 1.56 Oftel also advocates a more flexible and transparent approach towards management of the radio spectrum. This should include, insofar as it is consistent with international constraints and obligations, removal of the existing demarcations between broadcasting and telecommunication services to facilitate the development of convergent multimedia services. This would build on the precedent of digital broadcasting licences which permit up to 10 per cent of transmitted content to be for non-broadcast applications and which make possible the inclusion of text and images in digital sound radio services. It would facilitate market entry for firms delivering interactive multimedia services, for which conventional wired infrastructures may not be suitable, and move towards "technology neutral" electronic communications policy and regulation thereby promoting efficiency and innovation. 1.57 This raises the question of how this more flexible and market oriented approach to spectrum management might best be facilitated in institutional terms. One option which we feel deserves serious consideration would be to bring the day-to-day licensing and technical functions currently carried out by the Radiocommunications Agency (RA) within the remit of a future independent economic regulator. This would leave the RA, as an integral part of a Ministerial Department, to focus on strategic issues, such as international treaty obligations and provision for public sector use. Devolving the RA's licensing functions in this way would facilitate rationalisation of the current two-tier licensing regime under which radio services are licensed under the Wireless Telegraphy Act and either the Telecommunications or Broadcasting Acts. By bringing all communications licensing matters, including radio spectrum, under the remit of a single independent regulator, this complex system could be replaced by an integrated "one stop shop" licensing process. This should include specific provision for consumer interests, an issue which is increasingly important in a free market environment. In taking forward changes to the present regulatory systems and institutions, views are invited as to: a) What further arrangements would help the regulators to deal effectively with the challenges in the short term? b) Whether there would be merit in imposing a duty to co-operate on the regulators? 1.58 Oftel does not object in principle to a duty to co-operate, although if imposed we would suggest that the more appropriate duty is that set out in the Utility Review White Paper (A Fair Deal for Consumers, Modernising the Framework for Utility Regulation: The Response to Consultation) i.e. a duty on the regulators to give collective consideration to matters of common interest. Whether there is any merit to it, depends on what the Government wishes to achieve. If it is to facilitate discussion between the regulators then we are not certain that it adds anything to the existing structures to facilitate close co-operation and to improve co-ordination between the ITC/OFT/Oftel (Group of 3). Oftel is fully committed to these initiatives. 1.59 Improvements, however, can be made to the workings of the Group of 3. It is likely to be necessary to develop closer liaison with other regulators and organisations such as the Data Protection Registrar and the Financial Services Authority so that all the implications of any new services can be considered and regulatory activity, if necessary, can be co-ordinated. 1.60 If the purpose of such a duty is to ensure regulatory certainty and to reduce the cost of capital by limiting regulatory risk, then the duty as presently framed will not meet that objective. It has the potential to mislead the market as, although it may limit, it does not avoid the possibility of 'double jeopardy' for companies and confusion for customers. Such a duty does not change the separate and occasionally conflicting duties of the regulators involved. Each will, and must, consider any issue in the context of those duties and until they are aligned the possibility for differences in approach to the same issue remain. 1.61 This objective would be better addressed in the short term, pending any future legislation, by establishing a consistent analytical approach by all the regulators, to common issues such as economic regulation and the exercise of Competition Act or quasi competition law powers. We have set out what we believe the common rules should be in the response to question [3a] above. The benefit of a similar analytical approach is that it limits the potential for forum shopping and gives greater predictability to the regulatory process for those companies whose activities span the traditional regulatory boundaries. c) How long the present regime can be sustained in this way? 1.62 As communications technology is developing rapidly the regulatory structure is lagging behind. Change is needed imminently in relation to the creation of a coherent and consistent approach to economic regulation given, as the Consultation Document acknowledges, strong demand side convergence. Oftel recognises that supply side convergence is slower and changes to the rules on content may only be required at a later stage. However consideration should be given now to how such rules can be enforced given the increasing difficulty of imposing negative and positive requirements on operators in an increasingly competitive environment together with limitations on regulators, abilities to take enforcement action against extra territorial material. Can the necessary changes be achieved in a step-by-step manner or is a comprehensive approach necessary? 1.63 As argued above, the existing regimes for economic regulation are unsatisfactory and will be under increasing pressure as markets develop and the convergence process deepens. The introduction of new services may be inhibited unless a clear and coherent approach to economic regulation across the convergent sectors is developed. On the other hand, Oftel recognises the Government's caution in relation to regulation of content, given uncertainty about the speed of change. All this suggests that reform of economic and content regulation could usefully be decoupled. The steps to be taken in reforming economic regulation are:
The first and third steps are in any case likely to be necessary in the context of the EU 1999 Review of telecommunications legislation. What institutional
models seem most likely to be appropriate as convergence advances?
The institutional structure of regulationIntroduction 1.64 Previous sections have set out Oftel's view of the regulatory functions that need to be undertaken in a converged digitalised electronic communications world and proposed general principles that should underpin regulation. In this section Oftel considers how regulation should be conducted and evaluates alternative institutional structures for regulation against the background of the assumptions made about the likely direction of regulation in those sections. Scope: Electronic Communications 1.65 Oftel has argued that the electronic communications sector, in both the long term and short term, requires special rules. Coherent, consistent and predictable regulation can only be delivered if the rules for the sector (and hence the remit of a sector specific regulator(s)) are congruent with the special characteristics of the sector notably its distinctive economic characteristics and its social and cultural importance. 1.66 A perfect fit between the rule set and the special characteristics of the sector is almost certainly not possible. The special economic characteristics of the sector are pervasive and cover all content distributed by electronic communications systems. However, because many of the content concerns are essentially social and cultural in nature, congruence between sector characteristics and established rules dealing with content is less pronounced. Some content concerns do "read across" different types of content for example issues relating to giving customers filtering type control others vary by the type of content, not by its means of delivery for example moving pictures are often seen to require more stringent regulation than pure text irrespective of the means of delivery. Although there might be some synergy between economic and content regulation within the 'old' sectors, in the converging market there is more synergy between economic regulation across all sectors and between content regulation across all sectors. Therefore, Oftel considers economic/social regulation and content/cultural regulation in this sector separately in the following analysis. 1.67 Technological convergence, and the common economic characteristics of the electronic communications sector, suggests that a consistent body of rules can be applied by the economic regulator to electronic communication networks and to the supply of services over those networks. In the longer term it would therefore appear sensible to ensure that rules and regulation should cover all the electronic communications industries and not be restricted to definitions based on out-of-date technological divisions. Specifically, the regulators' remit should include (using old definitions):
Options for regulatory structure general framework 1.68 The legal and institutional framework which will be needed to apply the rules identified in above, is very different to the current patchwork. The lynchpin of economic regulation should be the general competition law (enhanced by the current Competition Act), which must be applied vigorously to electronic communications. The current system of concurrency (giving the sector-specific regulator concurrent powers with the Office of Fair Trading to apply the competition legislation in that regulator's area of competence) should be continued. But it is vital that the scope of those concurrent powers matches the regulator's powers under other legal instruments, which must be based on the scope of the emerging electronics communications sector as defined above, and not leave gaps which an operator with market power could exploit to the detriment of consumers. That is why we argue in paragraphs 1.27-1.31 that these powers must not, apply only to the "commercial activities connected with telecommunications" (the scope as currently defined in the Competition Act), but cover "the supply, or securing of electronic communications services or the production, supply or acquisition of electronic communications apparatus, or activities connected with them". 1.69 General consumer protection policies must also be applied effectively in this sector. Traditionally the principle of concurrency has not extended to consumer protection law, though obligations specific to telecommunications providers based very closely on general consumer law have commonly been placed within licences as a convenient mechanism for applying and enforcing such rules. Some of these rules (for example, requirements relating to billing accuracy) could, and probably should, continue to be applied and enforced through general authorisations, where it is felt that this is the most convenient and certain way to ensure compliance in this sector. 1.70 These general laws should be supplemented with special rules defined in Electronic Communications legislation (and enforced through a system of general authorisations applied consistently to all those operating in this sector), and by public service broadcasters which could be enforced in the future through "contracts" set up to ensure that Public Service Broadcasting is delivered in accordance with the wishes of Parliament. 1.71 The special rules should cover two distinct groups: economic issues and content issues. The economic/social issues range from dealing with anti-competitive behaviour, through protecting consumers from economic exploitation where competition has not developed, to ensuring access and a fair distribution of costs between customers (on the basis of directions or guidance from Ministers). The content issues concern the quality and character of material transmitted over networks (including the continuing role of Public Service Broadcasting), and the extent to which customers can control their exposure to particular types of material which they might find offensive. 1.72 Although both economic/social and content regulation seeks to secure and protect the interests of consumers, the criteria which inform regulatory decisions in the two domains are usually quite different. Regulatory intervention on content involves judgements on morality, national identity, the relative quality of a programme on opera compared to a music-based quiz show etc.. Economic/social regulation, on the other hand, concerns economic efficiency, price levels compared to costs, economic market power, interoperability and consumer protection. 1.73 The different skills and competencies required for the two regulatory domains suggests strongly that different institutions are needed to carry out the different functions. However, the two sets of decisions cannot be made completely independently. A decision in one domain sometimes affects outcomes in the other. Objectives on content may need competition to be "distorted" if they are to be effective (e.g. making all TV households fund the BBC even if some don't watch BBC TV). The institutional structure must be capable of efficiently resolving any conflicts which may arise from this interdependence. 1.74 It is unlikely that the skills required to effectively discharge judgements on content standards can be combined effectively with the skills required to discharge the economic/social functions. The dynamics of institutions suggest that if a single organisation is charged with both activities one type of consideration could come to dominate the other. However, if rules can be formulated so that the interdependence of economic/social and content regulation is minimised then the cost of conflict resolution will be low and will be offset by the desirable public character of regulatory conflict favouring transparency and accountability. 1.75 However, to choose more than one regulatory body is not to solve all the problems, as there is more than one way of dividing regulatory mandates. Accordingly, Oftel evaluates below the relative merits of a division of regulatory functions between either a regulator of services (which would include content and competition between service providers) and a regulator of infrastructure; or an economic/social and content division of regulatory functions, as well as the merits and demerits of a single regulator. Structures compared 1.76 Three main options for the organisation of the statutory duties to regulate the electronic communications industries are considered below:
1.77 Variants of each of these options exist. For example, a variant of option two would be for the economic/social issues to be taken on by the general competition authority rather than having a separate sectoral regulator. This might be a desirable long term goal, but in the short and medium run regulatory (as well as competition policy) functions will remain, which are better addressed by a sectoral regulator with concurrent powers under general competition law and with focus and expertise in regulating this complex economic sector. 1.78 Another alternative suggested in the Consultation Document, is a horizontal split, dividing regulation either according to Option 1 or 2 but to add a co-ordinating body to span both areas of regulation. In our view such a body would add another layer of bureaucracy to the system without a significant benefit. It may also give rise to difficult issues of regulatory independence . Such a body would only be necessary if a workable divide cannot be made between the different roles. Oftel believes that it is possible to make such a distinction. 1.79 The pros and cons of the three main options are summarised in the Table below. Option 1 separate regulators for infrastructure and services is not attractive. Indeed, in Oftel's view, it is likely to be less effective than the current regulatory structure. It would not solve the problems of overlap and potential inconsistency that are features of the status quo. And, in addition, it would introduce a more rigid distinction between infrastructure and services than currently exists, when many issues will arise from the interaction between the two, especially as firms operating in these markets are very often vertically integrated across this division. 1.80 Positive and negative programming rules and special rules on media and cross media ownership are implemented for cultural and moral reasons, but they often have significant economic implications. They are thus matters in which both economic/social and content regulators would have legitimate interests. Broadcasters' (to use a convenient "pre-convergence" term) costs and/or revenues will be affected by any content rules applied. There could also be a significant impact on competition, especially if the rules are applied to some broadcasters or transmission systems, but not to others. Therefore, one question that provides a useful discriminator between options is whether the interactions and trade-offs between content and economic/social issues should be considered within the same organisation or as a debate between different regulators. If the calculation of such trade-offs were a central feature of the new regulatory regime, they would probably be best addressed by the same organisation, which would point towards a single regulator. Offsetting this is the need to ensure that the appropriate (i.e. different) regulatory skills are applied to content and economic regulation. 1.81 Oftel believes that when capacity constraints have largely disappeared, and access control systems are ubiquitous, competition will deliver most of the diversity and plurality required in the public interest. Oftel therefore favours Option 2, two regulatory bodies one to deal with content issues (the "Electronic Communications Standards Authority") and the other to deal with economic/social issues (the "Electronic Communications Commission"). Table [1]: Pros and cons of options for regulatory structures
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