Contents

Summary

Developing a long term strategy

….. in a changing world

….. and a changing legislative framework

….. by reviewing existing objectives and how to move forward

….. leading to a long term strategy as follows

….. and supporting principles

Application of the strategy

….. implies setting milestones and measuring achievement

Implications for industry

Implications for consumers and consumer representative groups

Taking the strategy forward – together

Oftel is developing its long term strategy to reflect the changing nature of the telecoms market – increasing competition and convergence of technologies. This means a greater focus on whether effective competition is achieved or in prospect and, if so, a move to minimise or withdraw from regulation.

But this does not imply a wholesale withdrawal from regulation irrespective of market conditions. Where effective competition is not in prospect or in instances where competition of itself will not deliver the best outcome for the consumer, Oftel will regulate to protect consumers interests and in a way which causes least distortion to the market.

To work, the strategy requires the support and participation of the telecoms industry and consumer groups to achieve the best deal for the customer. The telecoms industry needs to take a leading role in self regulatory initiatives if it wants to see lighter sectoral regulation. In particular the industry needs to be actively empowering consumers with timely and relevant information to help them exercise choice effectively. Consumer groups have a critical role in articulating consumer needs and disseminating information to consumers to enable them to be better informed.

Developing a long term strategy

Telecoms plays a crucial role in the UK economy and in ensuring access to communications to all across the country. It underpins the coming electronic age.

The goal of Oftel, the telecoms regulator, is to enable the consumer to achieve the best deal in terms of quality, choice and value for money in telecoms services. Oftel believes that competition is the best way to deliver benefits for consumers - benefits of lower prices, wider choice of services and better value for money. Thus, the main ways in which Oftel seeks to achieve its goal are:

• promoting competition in the telecoms market;

• enforcement action to tackle anti-competitive behaviour; and

• regulation to protect consumers where consumers needs are not being met by competition.

Oftel recognises that regulation may impose costs. It may distort incentives to invest and innovate and therefore work against consumers’ interests by denying them choice of supplier and availability of state of the art services. So it is important that regulation should be the minimum necessary to achieve its aim especially in rapidly changing markets as found in the telecoms sector. Controlling prices by regulation in these cases can undermine the incentives to invest in alternatives and reduce choice for customers. In general Oftel only seeks to regulate where the market, left to itself, will not deliver the best outcome for the consumer in both the short and long term.

It is therefore important for the achievement of Oftel’s goal that, as competition increases, so regulation is adapted. Increasing competition should enable regulation to be progressively "lightened" and, once sustainable and effective competition has been achieved, then the presumption is that regulation can be withdrawn, subject to remaining areas where even a competitive market, of itself, would not meet consumer needs. The balance between Oftel’s three main activities – promoting competition, enforcing prohibitions on anti-competitive behaviour and regulating to protect consumers where competition cannot do this - may therefore change as competition develops.

Regulation also needs to adapt to reflect other changes in the telecoms environment, notably changes in technology leading to convergence and the blurring of the distinctions between telecoms, IT and broadcasting, and changes in consumer rights and expectations.

Oftel believes that, in the light of these changes, it is important to articulate its strategy and chart a clear path for regulation in the next few years. This paper therefore:

• sets out Oftel’s regulatory strategy;

• provides guidance as to how Oftel will put the strategy into practice;

• provides a framework for Oftel’s future actions so to help consumers and industry understand Oftel’s approach and the constraints on Oftel’s actions;

• points to an increasing role for the informed consumer and the actions that the industry as well as Oftel needs to take to achieve this.It is important that Oftel sets out and consults stakeholders on its long term strategy. Industry and consumers need to know how Oftel will approach market and competition issues and how therefore regulation is likely to change and develop over a 4 to 5 year horizon. Shared vision gives industry greater certainty in planning investment and consumers security about how their interests will be protected.

Oftel set out its Framework for Effective Competition approach in 1994/5 which was designed to enhance competition. The telecoms market has changed rapidly since with many players now active in all parts of the market. In addition UK competition law has been strengthened considerably by the Competition Act 1998 which gives Oftel strong new powers to investigate anti-competitive behaviour and to impose fines.

In many areas of the UK telecoms market there is the prospect of effective competition. Regulation should not hinder moves towards effective competition. Inappropriate regulation can distort markets by providing the wrong investment signals and undermining incentives to innovative and is always second best to competition in terms of benefiting and protecting consumers. This means that key elements for Oftel's long term strategy are: to review the existing framework to ensure regulation is just sufficient to meet market and consumer needs, which may mean some withdrawl of regulation, to regulate if there is no prospect of effective competition, and to seek to remove distortions in the market which prevent effective competition or place additional unwarranted burdens on telecoms providers beyond those in other consumer markets.

Oftel’s overall goal of the best possible deal for the customer in terms of quality, choice and value for money remains unchanged and is reaffirmed in the Utility Review proposal to make the primary duty of the regulator the promotion of the interests of the consumer wherever possible through competition.

However, with regard to Oftel’s objectives, the telecoms market has changed significantly in the five years since the current objectives were set. There are now many players at all levels of the market and there have been substantial changes in the nature of technology by which services to consumers are delivered, for example, the rapid growth of Internet services and the growing convergence of telecoms and broadcasting technologies which are blurring the traditional distinctions between these two markets. The availability of higher bandwidth services in the not too distant future, coupled with the growing convergence between mobile and fixed telephony, also poses greater opportunities for consumers and imply changes for regulation. Convergence increases the scope for competition which reduces the need for regulation. These changes are illustrated in the diagram below, with the deregulatory approach allowing a shift from left to right hand side.

The current regulatory framework was designed to deal primarily with controlling the behaviour of a single dominant firm and to manage the process of change from monopoly to competition, but with the growth of competition this model has become increasingly less relevant. Whilst there are areas where dominance exists there are many others where competition is rapidly emerging. For example, on the fixed network, 50% of residential customers have a choice of local access operators and all customers have a choice of a wide range of indirect access operators. For international calls by businesses, BT has a share of revenues of less than 50% on many major international routes. In the mobile sector there are four mobile network operators providing services to the great majority of UK customers. Nonetheless, whilst increasingly consumers needs are being met by competition there are still areas where some protection is required. Regulation has to

• adapt to these changes;

• be relevant for different markets at different stages of development; and

• seek a more careful balance between stakeholders than was the case with the regulation of a single dominant supplier.

The external environment is also changing significantly and this affects how and what Oftel does. UK regulation of telecoms takes place within a framework of Directives established at EU level. Currently the EU is reviewing the operation of these Directives to see how they should be adapted in the light of market changes taking place now and in the future. Oftel’s work needs to reflect this thinking and to be consistent with it. The advent of the Competition Act has strengthened significantly Oftel’s ability to police anti-competitive behaviour and inevitably raises questions as to how far Oftel should continue to rely on licence conditions if the new Competition Act can provide an appropriate basis for action. Figure 2 below summarises the changing legislative framework.

The statutory underpinning in recent years of consumer rights in telecoms have strengthened the consumer’s role while at the same time there have been changes in consumer expectations as technological advances are made. These changes imply a greater focus on the type of information that is available to consumers in order for them to be aware of their rights and opportunities. These developments inevitably demand changes in Oftel’s approach to regulation but in a way which is consistent with the long established principle of avoiding unnecessary regulation and minimising regulation wherever that is feasible.

The need to balance, on the one hand, regulation, with allowing the market greater freedom to make decisions on the other hand, brings into focus more clearly the issue of the costs of regulation (in terms of the costs of compliance and modification of firms’ behaviour). These costs are particularly relevant in a sector in which new technologies, products and services are being developed rapidly. Heavy intrusive regulation can delay or discourage investment and prevent consumers getting the benefits of innovation and choice resulting from greater competition.

Minimising regulation has always been an aim of Oftel and is now even more important given the position reached in terms of increasing competition and the emergence of alternative communication channels able to provide innovative products and services to customers.

The challenge for Oftel’s future work is to develop a flexible approach which can adapt to changing external needs rapidly and coherently yet which conveys clarity and predictability for both consumers and suppliers.

The basic approach to developing a revised strategy is to identify clear, attainable objectives and then to set out how they can be achieved starting from where we are now. In the context of the existing ‘activity based’ objectives – of promoting competition and protecting consumers – a lot has been achieved and the prospects from convergence between technologies of telecoms and broadcasting is that more competition is likely with the potential to serve areas and customers not currently served by competing fixed line telcos. This indicates a need to restate Oftel’s existing objectives in terms of outcomes of what needs to be achieved over the next four to five years. These revised objectives are then supported by a set of principles designed to guide in a coherent way how Oftel regulates to meet the objectives consistent with promoting the interests of the customer whilst keeping regulation to the minimum necessary.

The principles are not mechanistic and cannot be as flexibility is needed in a changing environment. They require judgement in application and a more clearly focussed approach, concentrating attention on those areas where regulation can bring benefit and withdrawing where it is no longer required.

The strategy is as follows:

The goal of achieving the best deal for customers in terms of quality, choice and value for money is still central; the following four outcome based objectives have been set to achieve this:

·     Effective competition in all main UK telecoms markets providing value for money in existing services and a wide range of new and innovative services.

·     Well informed customers able to take advantage of choice.

·     All significant anti-competitive practices prevented.

·     Consumers adequately protected.

Compared to the previous objectives which focused on promoting competition or protecting consumers, these objectives require a more considered approach as to whether regulation is required at all.

Each of the outcome focused objectives is explained briefly below and related, as appropriate, to EU regulatory principles.

The outcome sought is the benefits of effective competition (ie lower prices, higher quality, more choice of services for consumers) rather than competition for its own sake. The term ‘effective competition’ means that it is sustainable (ie does not depend on sector specific regulation to survive) and that consumers are exercising choice. Where consumers are able to exercise choice effectively, consumer dissatisfaction should be reduced.

This objective is shown separately to that of ‘effective competition’ although clearly well informed customers are a necessary element of an effectively competitive market. Its separate status as an objective is to focus attention on achieving what is a key feature of a services market such as telecoms and one that is too easily overlooked in traditional analyses of markets.

Achieving this objective will, in part, depend on achievement of the first objective (of effective competition) but also on the effect of the potentially large fines under the Competition Act in discouraging anti-competitive behaviour.

This objective recognises both the need to protect certain groups of consumers where effective competition is not yet achieved and also the need, in some areas, to maintain protection even where effective competition is achieved because of the nature of the telecoms market and telecoms services.

The four objectives overall are consistent with the proposed EU regulatory principle which states that ‘regulation should be based on clearly defined policy objectives fostering economic growth and competitiveness by, inter-alia, promoting competition and facilitating investment, thereby creating employment and ensuring objectives of general interest, including the appropriate level of universal service where such objectives cannot be satisfied by market forces’.

The principles by which the objectives are to be achieved are set out below, in italics, with an explanatory paragraph about each:

The implication behind this principle is that there must be a much more explicit approach to assessing and weighing the costs and benefits of regulatory action: it is necessary to be absolutely clear that there is a net benefit in taking action. Where there are a number of courses which could be justified, it is important that the course which involves the minimum regulation is the one chosen. Generally this would mean the one with the minimum cost (costs being primarily the impact on those regulated and the extent of Oftel’s involvement) and benefits being measured in relation to both consumers as a whole and particular groups of consumers.

This principle reflects the EU regulatory principle which states that ‘regulation should be kept to the minimum necessary’

• competition is sustainable without regulation in the longer term and

• does not undermine incentives to invest in infrastructure by new entrants or incumbents or innovate in the    provision of services.

• Regulation to promote competition/protect consumers should become progressively ‘lighter touch’ as the market gets near to effective competition

The point about competition being unsustainable without regulation is that it should allow evolution to a competitive market and should avoid for example, setting lower prices between interconnecting telecoms companies than would be obtained in a competitive market simply to promote competition. In that context it is important that the development of competition continues through investment in infrastructure and services. Clearly the extent of regulation needs to fall back as competition develops, which is consistent with the general principle I above. Any short term increase in regulation, designed to minimise regulation in the longer term, needs to be carefully considered and would need detailed justification to be acceptable.

Promotion of competition should not attempt to promote particular technologies nor particular outcomes.

This principle is consistent with the EU regulatory principle of technological neutrality.

This principle relates to the benefits of effective competition, that is to say, low prices, high quality of service, reasonable choice, substantial innovation, etc. The need for the assessment of effective competition to be based on standard competition analysis is to ensure consistency with the approach to the control anti-competitive behaviour in a competitive market. In this sense it would be consistent with the approach to the regulation of other sectors of the economy which are also covered by competition legislation. Within this framework, the assessment will include, importantly, a focus on trends in customer perceptions and utilisation of choice and customer satisfaction with telecoms services.

There is a good deal of standard consumer legislation on the statute book which should be assessed to see if it is sufficient before imposing further regulatory intervention to help inform consumers. ‘Encouragement’ does not necessarily mean direct action by Oftel, though this may be necessary, but rather encouraging the market to produce information that enables consumers to make informed choices. In part this might mean taking action to ensure that independent information suppliers are able to enter the market to meet consumers needs more effectively and flexibly than by relying on regulation; ensuring pro-active and strategic management of Oftel's relationships with advice agencies and other agencies to enable identified group of customers to exercise their rights under standard consumer legislation.

Where Oftel takes direct action to address gaps in information provision for customers, it will seek to do this on a basis which enables third parties to pick up and develop suitable methods of information provision.

Principle V is related to principle IV but focuses on making operators and suppliers aware of their responsibilities to customers; the logic is that making operators aware of the need to respond and listen to their customers and their representatives, as firms in competitive markets must do, will have the desirable effect of minimising dependency on Oftel in the long term. Industry should respond collectively where this is the most effective approach to facilitate consumer redress, information or safety.

Regulation of anti-competitive behaviour should increasingly be carried out under the Competition Act, which provides appropriate incentives through fines, on both dominant undertakings and on undertakings that are parties to restrictive agreements, to encourage the operators to put their own house in order and not to rely on Oftel’s licence compliance procedures. It is a key step in ensuring that as competition develops telecoms becomes more like other sectors of the economy wherever feasible.

Principles VII and VIII run together in the sense that licence conditions provide greater flexibility than competition legislation when the promotion of competition is in order (quicker, less rigorous, lack of appeal, etc) but as promotion becomes less important, as competition develops, then reliance on standard analysis of anti-competitive behaviour becomes increasingly relevant. Even if the licence condition is used, the nature of the analysis should follow that which is used under the Competition Act in order to ensure a seamless transition to the policing of anti-competitive behaviour through competition legislation.

It is recognised that certain forms of ‘social’ provision – including provision to people with disabilities – will still be necessary even if all markets are competitive. However, they should be provided in a way which maximises the options for competitive supply and minimises the possibility of creating disincentives for alternative routes or emerging suppliers to meeting the social needs. A key issue is clearly the price at which such services are made available. Whilst recognising that social provision is based on the concept of affordability, this should not lead to general tariff structures that are not cost related.

Currently universal service is provided at a geographically averaged tariff and this is not cost reflective: it is used as a crude proxy for ensuring universal access but this is not necessarily a model for all time, for example, targeted schemes with tariffs such as BT's Light User Scheme (LUS) may well be more appropriate in the longer term. The issue of proportionality is an important one to bear in mind: are distortionary tariffs really needed to meet the specified objective?

This principle reinforces the generally accepted concept that Oftel should only directly regulate prices where competition cannot and is unlikely to provide protection for users in the foreseeable future. Because of the possibility of its disincentive effects on potential entrants, use of this needs to be considered extremely careful, with an appropriate assessment of short term and long term trade-offs.

Following on from principle X, where competition cannot be the basis for the provision of services, the regulatory approach should seek to mimic that of a competitive market which is efficient and in which there are incentives to innovate. However, the aim must be to seek market solutions wherever that is possible and to avoid, if feasible, long term dependence on regulation. Clear review dates in the future are a way of matching short term and long term concerns.

Certain areas are likely to require some form of longer term regulatory involvement, ie

·     call terminations

·     interoperability and standard setting

·     universal service (eg reasonable access to affordable minimum set of services and free access to 999 services)

·     numbering scheme policy

·     metering and billing

·     essential requirements in fields of security of network operations and maintenance of network integrity

·     protection of customer privacy

·     premium rate services call barring.

In the case of interoperability and standard setting, the industry, by engaging in effective self regulation, should be able to take on these activities itself.

The aim of this principle is to encourage industry to recognise its increasing maturity and begin to co-operate without colluding in specific areas where this is necessary to meet consumer demands and needs. Self regulation is more flexible, should be less costly and ought to produce a better deal for customers than statutory regulation. Oftel may initially need to facilitate this, as we do in terms of pricing and quality of service comparisons, but the long term aim should be for the industry, working together, to agree appropriate arrangements without resort to the regulator. This may not always be possible, even in a competitive world if the incentives to ‘go it alone’ are strong and here Oftel will need to be involved, but this needs to be clearly identified and fully justified.

Self-regulatory arrangements should include structures for consumer representation and consultation, adequate protection procedures for redress and transparent reporting of standards, breaches and complaints.

Overall the principles set out above are consistent with the EU regulatory principles of

·     balancing flexibility and legal certainty, and

·     enabling regulation to be enforced as close as practicable to the activities being regulated.

The strategy – comprising Oftel’s goal, objectives and principles – is a basis for Oftel’s decision making. Beyond the strategy itself there are existing, and developing, sets of licence conditions, rules and guidelines which allow or constrain implementation of strategy decisions in practice. Figure 3 below illustrates the relationship between the strategy and these other elements – in summary, where licence conditions, guidelines and rules are not consistent with the strategy, then Oftel will work to amend them through appropriate channels.

Where appropriate and feasible it may be necessary for Oftel to forebear from applying a licence condition where it conflicts with the strategy eg where enforcement action would conflict with the Director General’s duties under section 3 of the Telecommunications Act 1984.

This section sets out the tests that Oftel will apply in assessing the need for regulatory activities. It applies to both Oftel’s policy making and enforcement activities. Although evolutionary, the strategy does represent a significant development in Oftel’s approach in the following ways:

Paying more careful attention to the need to regulate at all by earlier, more rigorous and frequent assessment of whether effective competition has been achieved or is in prospect in order to determine if regulatory action is required.

• Withdrawing from the promotion of competition where effective competition exists.

• Identifying the range of regulatory options from at one extreme on-going, intrusive and sector specific, and at the other, one-off, less intrusive regulation which is closer to general competition and consumer protection law, to include self-regulation where feasible and consistent with objectives.

• Choosing the minimal regulatory option consistent with the objectives where regulation is required, and attempting to              identify the potential costs and benefits of the different options.

• Being explicit why the choice of intervention has been made and being clear as to how and when regulatory controls will          be relaxed in the future – initially focusing on key topic areas where greater deregulation and self-regulation is needed.

• Identifying clearly how the action is designed to meet the outcome objectives.

• Being more rigorous and focused in assessing the impact of the action on meeting the outcome based objectives, and in setting and achieving milestones.

• Take account of guidance issued by Government, within the framework of the strategy’s goal, objectives and principles.

6. In overall terms this approach can be illustrated as Figure 4 below:

Oftel’s move towards lighter regulation can be illustrated by the following specific instances:

• Numbering:

The Big Number Campaign has been funded and is being managed by the industry;

The move towards using a more market based approach of charging telecoms operators for numbers rather than the regulator allocating numbers and trying to recover those unused;

• Price control:

• Successive reductions in the proportion of BT's revenue that is subject to a regulatory retail price cap;

Replacement of individual interconnection determinations with a network charge control using safeguard caps.

BT have been allowed to bundle specific services and aggregate business customer UK wide spend to apply the Dual Discount scheme ( ie where BT is judged to be ‘not dominant’ ) Consumer information:

Comparable performance indicators have been published by fixed link telcos on a voluntary basis, since 1996 and were published by mobile operators in October, 1999.

A voluntary industry funded initiative has been launched to help residential customers to make price comparisons.

The Small Business Task Force has been established to bring together industry and small business consumers and government agencies on a voluntary basis to improve information available to small businesses to get the best deal from telecoms;

• Encouragement of competition and co-operation between telecoms companies:

A directory enquiries policy has been developed which provides a framework for the industry to develop arrangements itself to share directory information and to enable competition to grow

The telecoms companies have been encouraged to compete in providing special packages to schools for affordable internet access.

The industry is increasing shouldering the task of agreeing interoperability standards through the NICC.

Access to bandwidth – proposing a time limited period (three years from mid 2001) for service providers to get access to BT local loop to provide high speed services and setting terms and conditions which would reflect a competitive market.

Carrier pre-selection (CPS) - industry working groups agreeing processes for the introduction of CPS.

• Licensing:

Specific licence conditions have been removed from BT and other telcos licences, although EU Directives have required the introduction of other conditions.

The focus of Oftel’s long term strategy and work is the consumer. The strategy does not aim to protect or promote particular competitors. Where competition is deficient in meeting the needs of customers, Oftel will address that if it can bring benefits by doing so in a way that

• does not reduce incentives to invest,

• does not encourage inefficient suppliers to enter the market, and

• encourages all players to meet the needs of customers.

Efficiency and sustainability of competition are key as is the policing of anti-competitive behaviour.

The challenge for Oftel is to clearly identify the minimum regulation options and to select these over other options which may meet the demands of certain groups but which undermine effective competition in the longer term.

To make the strategy meaningful and relevant it must set out criteria against which progress towards the strategy’s goal and objectives can be assessed ie setting milestones and defining measures in relation to these milestones.

In particular it should be possible to identify, for those specific regulatory activities that primarily relate to achieving the objectives of effective competition and well informed customers, the circumstances under which it should be possible to withdraw from regulation. These milestones which will need to be developed for Oftel's forthcoming management plan should include

·     benchmarking to identify how UK telecoms customers fare relative to telecoms customers in other comparable economies.

·     setting forward timescales for the review of major sectors of the telecoms market to assess if they are effectively          competitive

·     identifying key indicators of consumer behaviour that are consistent with a consumer focused, competitive telecoms      industry (eg a reduction in the total volume of complaints about telecoms suppliers received by Oftel).

The presumption in making decisions on the need for continuing regulation would be to err on the side of removing regulation when the indicators showed the position as being close to achieving the milestone rather than waiting, in every case, for the milestone to be passed. This would involve, on a more rigorous and systematic basis, comparing the costs and benefits of withdrawing from regulation.

For Oftel to continue to move towards lighter regulation means that consumers must have confidence in the behaviour of the telecoms industry if regulatory controls, particularly those providing consumer protection, are to be removed, and secondly industry players need to understand Oftel’s strategy and direction.

A key feature of this is with regard to the industry adopting self-regulatory initiatives. The industry needs to be pro-active, consumer focused and dynamic in increasing the transparency of the telecoms market – to help customers exercise choice and to remove non-competitive barriers to customers switching suppliers. Where this happens and the industry subsequently maintains its commitment to consumers – both residential and business – then Oftel’s disengagement from regulation will be easier to achieve and to demonstrate to consumers. The industry should aim to treat customers better than the regulator.

On the other hand if the industry does not take and subsequently maintain a positive approach to such issues, then it will be harder to justify moves to lighten regulation. The challenge is therefore for industry to support, participate and drive cross-industry initiatives for the benefit of consumers.

The advent of the Competition Act and the emergence case law rather than licence conditions should reinforce the incentives for effective self-regulation for suppliers.

Effective competition will widen the proportion of customers who can directly benefit from the opportunities of a dynamic telecoms market. Consumer groups and organisations have an important role to play in articulating consumer demands, pressing telecoms suppliers to deliver on their promises to consumers and disseminating information and advice to help customers choose.

The challenge for consumer groups is to facilitate the development of ‘well informed consumers’ as well as focusing regulatory attention on those remaining consumer groups requiring consumer protection eg via universal service (Light User Scheme, schemes for disabled people etc). Better 'signposting' by the regulator of those issues where consumer group input is most needed should help them to focus their efforts.

Oftel’s long term strategy is to recognise that effective competition means benefits for customers and less need for regulation. The speed with which the move to lighten regulation is achieved depends critically both on Oftel’s actions and on the constructive and responsible response of the telecoms industry and consumer representatives to implement the strategy.

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