Reply to the Trade and Industry Committee’s Tenth Report on Electronic Commerce By Office of Telecommunications (OFTEL)

Reply to the Trade and Industry Committee’s Tenth Report on Electronic Commerce By Office of Telecommunications (Oftel)

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The Committee’s conclusions and recommendations

Oftel has the following comments on the Committee’s conclusions and recommendations.

Recommendation (f)

We note the work commenced by Oftel to tackle the electronic commerce policy agenda, including issues well beyond those relating to authentication and encryption for which the Director General of Telecommunications might soon have statutory responsibility. Oftel’s electronic commerce team must quickly establish a cooperative relationship with the e-Envoy, when appointed, in order to ensure that their respective remits are appropriately coordinated.

Oftel welcomes recognition in the TISC report of its involvement in promoting the development of e-commerce. Oftel’s work on electronic commerce policy is focused on the availability of access to enhanced data services such as the Internet, and Oftel sees this as a vital element of its primary duties to promote consumer interests and competition in the provision of telecoms services. This programme of work is carried out not only through the e-commerce project, as noted in the TISC report, but also through many other projects in Oftel’s management plan. These include:

work on the costs of Internet access through the Internet project
provision of higher bandwidth services through the Access to Bandwidth project
promoting special access packages for schools and public institutions through the Learning Society access issues project
examining the principle of extending opt-out registers for junk calls and faxes to email through the Telecommunications Data Protection project
considering the impact of Internet on Universal Service Obligations
investigating the pricing of leased lines
determining revenue sharing for NTS calls
advising on radio spectrum issues for third generation mobile (broadband capability)
the establishment of a new forum, the Oftel Internet Forum, to focus on issues of interest to the Internet industry

The authentication and encryption regime proposed in the Electronic Communications Bill has parallels with other work undertaken by Oftel to promote trust in communications and to conduct approvals of business and technical processes. Oftel would thus see this new function as an extension of its role in promoting consumer confidence in telecoms rather than, as the report suggests, as a first step towards regulating other aspects of e-commerce. Indeed the areas of electronic trade and content publication are subject to the same regulations as in the physical world generally, and where competitively supplied, in Oftel’s view, may not require specific regulatory controls. However, this is a decision for other departments, not Oftel.

Oftel supports the Committee’s recommendation for further co-ordination on e-commerce policy and welcomes the opportunity to establish a co-operative relationship with the e-Envoy. Oftel has been taking an active role in discussions on e-commerce with other Government departments and will continue to contribute, through DTI, the Cabinet Office Performance and Innovation unit and other groups, to the development of policies to promote e-commerce.

Recommendation (g)

We recommend that the Director General of Telecommunications be given a specific duty to facilitate electronic commerce, at the earliest opportunity. We would expect the Director General, in response, to publish a statement of how he intends to comply with his new duty.

It is for Government to decide if it wishes to place additional duties on the Director General of Telecommunications such as a specific duty to promote e-commerce. Any widening of Oftel’s role would, of course, require changes in the Telecommunications Act. It is likely that Oftel would view the addition of a new duty as placing an increased emphasis on existing and future areas of work relating to e-commerce access services.

Whether or not a specific duty is placed on Oftel, Oftel is committed to playing its part within its current remit to contribute to Government objectives on e-commerce. And Oftel will continue to promote, through projects such as those set out above, the availability and development of transmission mechanisms to carry information services.

As recommended in the TISC report, Oftel will also examine the possibility of further focusing its work on e-commerce through the appointment of a Director of E-commerce.

Recommendation (m)

We agree with Oftel that BT’s monopoly ownership and control of the local loop could restrict the roll-out of vital new high-bandwidth services. Although Oftel has no role to play in championing the development of particular technologies – such as DSL – we believe that it must be proactive in ensuring that competitive forces exert their influence throughout the UK’s telecommunications infrastructure so that residential consumers and small and medium sized enterprises can benefit from a choice of high-bandwidth technologies from different operators.

Oftel welcomes the Committee’s support of its policies on promoting the availability of higher bandwidth access through opening the local loop to competition. It expects that in due course, consumers will be able to choose from a wide range of higher bandwidth access services provided through a number of different technologies such as cable modems and wireless. However, given the current ubiquity of BT’s local loop, Oftel believes that in the short term DSL technologies are likely to be the primary route for delivering higher bandwidth to the mass market at affordable prices.

Indeed since the publication of Oftel’s consultation Access to Bandwidth: proposals for action in July, progress has already been made in the provision of DSL technologies. BT has announced a programme of upgrading its local loop to provide an ADSL access service that will allow consumers to access both BT’s retail broadband services and the services of other providers (recommended as option 4 in the Oftel consultation). The first phase of the roll-out is due to take place by March 2000, with the upgrade of 400 exchanges covering almost six million households and businesses.

In addition, two industry groups have been set the task of developing implementation plans to support Oftel’s proposals on local loop unbundling (option 2 of the consultation). Providing Oftel’s conclusions are confirmed in the statement to be published later this year, Oftel is committed to introducing competition into the upgrade of the local loop by July 2001. This will feed through into greater choice in both access and services for consumers and small businesses.

Recommendation (o)

For most residential customers and SMEs using the internet local telephony charges are the marginal cost of going on-line and, as such, are a key influence over the extent to which such consumers and enterprises engage in electronic commerce. The possibility of receiving a substantial phone bill as a result of regular use of the internet, and the widespread perception of this occurring, seem to us to be obvious disincentives to greater use of the internet and, therefore, participation in electronic commerce

Charges are currently structured on a time basis because part of the cost of the network depends on the number and duration of calls. However, it should be possible for operators, including BT, to offer a range of cost-based tariffs that are more appealing to those who are online for a long time. Telephony prices in the UK are above cost in order to fund the below cost line rental. This has significant cost implications for Internet users because of the relatively long duration of their calls. However, operators are free to offer packages of cost based line rental in connection with lower call charges. Such tariffs would, of course, have to meet the terms and conditions of the operator’s licence and not be anti-competitive.

Recent innovations in the market have seen some movement away from time based charging. Oftel is aware of one ISP, 08004U, that is offering unmetered access to the Internet for a flat rate of £49.99 per month. Other examples of recent tariff offerings include the BT Internet Plan Unlimited, £11.99 a month, with free access at weekend, and the NTL Internet service whereby if you live in the franchise area it costs 1p/min to access the Internet at all times for a monthly charge of £8.95 (which also includes Cable TV). A more comprehensive list of examples is shown in the attached table. Oftel would welcome further innovations, including operators offering unmetered tariffs.

Recommendation (p)

The more widespread availability to residential customers of unmetered local telephone calls would give electronic commerce in the UK a substantial boost. We judge that Oftel has been unduly cautious in emphasising the possible disadvantages of unmetered local calls, at the expense of the potential benefits. In line with our recommendation that the Director General of Telecommunication be given a duty to facilitate electronic commerce, we recommend that Oftel investigates what, if any, regulatory actions are required to encourage innovative tariff packages being offered to internet users throughout the UK; and devote resources to studying and publicising the comparative costs of internet access packages, in order to dispel the seemingly widespread perception that anything more than a cursory use of the internet would prove prohibitively expensive.

Oftel will consider further whether there is a need for regulatory action in this area. Oftel is committed to ensuring that consumers receive the best deal in terms of quality, choice and value for money. Oftel welcomes the innovations in tariff packages that have taken place and would welcome further innovations, including operators offering unmetered tariffs.

However, Oftel considers that the best way of securing continuing choice for the consumer is to ensure strong, sustainable competition in both services and infrastructure in the telecommunications industry. Oftel considers that the rapid changes that are taking place in the market are indicative of competition. In this context we believe that regulatory intervention in this area could be counter productive. The appropriate structure of tariffs is a commercial decision best left to companies themselves.

Oftel does have an important role in working to remove any remaining impediments to sustainable competition. This is the purpose behind our consultation document on interconnection charges for NTS services. It is also the rational behind our proposal to unbundle the local loop. Oftel’s proposal is designed to facilitate the competitive provision of higher bandwidth services. Such services make unmetered tariffs more practical because they allow "always on" connection to the Internet, meaning that costs are not driven by usage.

Oftel is facilitating an initiative by the main fixed link telcos serving residential customers to provide customers with a basis for ‘whole bill’ comparisons between suppliers (see response to recommendation (q) below). There is scope as part of this initiative to include the costs of customers calling specific telecoms companies’ own Internet service providers where these calls are charged at less than the telco’s standard local rate call charges. The model is due to produce its first set of publishable results this autumn. Depending on the level of funding and co-operation from telcos, further comparisons will be produced periodically (quarterly or half yearly) with a wider range of operators included.

Recommendation (q)

We welcome Oftel’s recognition that consumers need full and clear information about the tariffs charged by different telephone operators in order for them to take full advantage of the opportunities offered by competition in the telecommunications market. Urgent progress in this area is now required.

Oftel together with consumer groups has been encouraging and facilitating the development of a pricing comparison model by the main fixed link telecoms companies serving residential customers. Due to the complexity of pricing packages and the competitive tension between telcos, this process has taken considerable time to develop.

Telcos accounting for 98% of total UK residential telecoms customer revenues (BT, C&WC, NTL, Telewest and Eurobell) are currently working with pricing consultants, Analysys, to produce a first set of comparisons by the end of October this year.

Where this output is seen as useful, Oftel will encourage the telcos to fund a regular series of price comparisons, with an expanding range of telecoms companies’ tariffs included in the model in subsequent quarterly or half-yearly publications.

Recommendation (r)

Without high bandwidth services, in particular leased lines, UK businesses will be unable to offer effective and innovative electronic services, resulting in their competitive advantages being ceded to foreign rivals. Ensuring that UK firms have a choice of competitively-priced high-quality high-bandwidth services must be an urgent priority for Oftel. We support the Government in its efforts to focus the attention of the European Commission on the need to ensure that European leased lines prices are competitive with those offered in the US.

Oftel recognises that leased lines are an important input for UK businesses, particularly in the development of electronic commerce. Oftel also recognises that UK leased lines tariffs should be internationally competitive otherwise UK businesses are put at a competitive disadvantage. In order to establish to what extent UK leased line tariffs are competitive with US tariffs, Oftel has commissioned an independent benchmarking study from Phillips Tarifica Limited. Oftel plans to publish the results of this study, together with a further review of the level of competition in the provision of leased lines in the Autumn.

The European Commission is also investigating leased lines and Oftel is contributing actively to the Commission’s work.

Recommendation (w)

We recommend that the Government begin a national debate about how the universal service concept can be applied to electronic commerce.

Oftel agrees with the Committee on the need to consider whether the universal service concept should be extended to higher bandwidth services. The issue was included in a consultative document published by Oftel in July 1999 on Universal Service. It asked for comments on increasing the level of universal service to improve access to new products and services and to avoid social exclusion.

In particular, the document looks at what this would mean in practice if it were introduced now. Following the current universal service model, it might mean requiring BT to roll out higher bandwidth access technologies such as ADSL to all parts of the country, whether or not a commercial case can be made for it. Further, if the cost of such a service were too expensive for some consumers, it could mean developing low cost service packages at a loss. This would involve a cross subsidy from other telecoms customers. This approach would raise significant issues since the amount of cross-subsidy required would be very high. If the subsidy were to be provided only by ADSL users these high costs might have to be borne by a minority of users. Alternatively, a cross-subsidy from ordinary telephony users would mean that general telephony prices would be forced higher than otherwise.

A universal service obligation might be damaging to the development of a competitive market for providing such services. The imposition at this early stage of a universal service obligation delivered by a particular technology might reinforce the adoption of that technology even though it may not be the most efficient for providing services in the longer term. Further, the imposition of the universal service at charges below economic cost might stifle the development of cheaper alternatives for serving those customers. The document also noted that access costs are only one part of the costs of obtaining broadband services.

Oftel suggests in the document that it might more appropriate at this time to consider extending the scope of universal service at some stage in the future when higher broadband services are being used by the majority and if they come to be seen as essential for full economic and social inclusion. The document points to a range of other measures which the Government can take in the meantime to address some of the real barriers to greater take up of higher bandwidth services. These include encouraging the telecoms industry to offer special tariff packages for public libraries, FE colleges and Citizens’ Advice Bureaux and promoting the take up of digital television services.

However Oftel has not made a decision on the matter and has opened the issue up for debate. Oftel is keen to receive comments on these issues and the consultation runs until the end of October. Oftel will publish a summary of responses and its conclusions shortly thereafter. It is important to note that the legal framework for universal service is established at EU level. Any conclusions reached that would require significant policy changes would therefore have to be negotiated at European level.