Draft Oftel management plan 2003-04 - Consultation, 18 December 2002

Foreword

Executive summary

Chapter 1 Priorities for Oftel's final management plan

Chapter 2 Looking ahead to Ofcom

Chapter 3 Proposed projects and programmes 2003/4

Chapter 4 Oftel's resource plans for 2003/4

Chapter 5 Consultation process and questions and alphabetical list of projects and programmes

Annex A Oftel's regulatory principles

Annex B Summary of Oftel regulatory decisions - 2002/3

Annex C Indicative EU Market Review timetable

Annex D Indicative Consumer Protection Policy Review timetable

Annex E Developing Oftel's understanding of telecoms demand

This draft Management Plan sets out Oftel's proposed projects, programmes and budget for 2003/4. Oftel is seeking views from stakeholders by 31 January 2003.

This is, of course, likely to be a momentous year for all those concerned with the regulation of communications in the UK in that the Communications Bill, currently before Parliament, provides for the transfer of Oftel’s powers and responsibilities to Ofcom. This could mean in practice that Oftel will cease to exist during the course of the work covered by the draft Management Plan. We have decided, however, that ‘good governance’ makes it sensible not to anticipate the enactment of the Bill and that we should set out an agenda for Oftel for the full year in the usual way. We also set out in chapter 2 of the draft some ‘thoughts for the future’ which Ofcom may wish to bear in mind as it develops its own Management Plan.

It is also, of course, the reality of life that the market does not stand still while organisational change is being implemented. There have been major changes in the market place over the last year as a result of competitive developments and the uncertain financial environment for all companies in the industry and the Plan reflects this. We also have a major programme of work to implement the new EU regime for communications which needs to be completed by July and thus before Ofcom begins.

Oftel wants to receive views on its proposed work from all those with a stake in the UK electronic communications market – consumer groups, telecoms operators, service providers, other regulators and Government. We would also welcome views from other European regulatory authorities.

David Edmonds

Director General of Telecommunications

Oftel plans for 2003/4 - Executive summary

S1 There have been major changes over the last year in the telecoms markets as a result of increased competition, and because of an often-turbulent financial environment. Areas where Oftel has undertaken major initiatives include Oftel's EU market review programme, the continued work to create a regulatory framework that promotes effective competition in the broadband market, and major changes in how Oftel deals with dispute resolution.

S2 Oftel’s management plan for 2003-04 reflects the need to complete these major areas of work – particularly the EU market reviews – and to ensure that on-going projects and programmes continue to run smoothly in areas such as complaint handling and number allocations.

S3 Continuity of processes will be especially important given the other major change in 2003-04, the setting up of Ofcom. Oftel will continue to work with its partner regulators in the move towards the formation of the new organisation.

S4 The management plan looks at areas of Oftel’s work that will be developed during the coming year. For example we intend to employ tougher criteria for accepting and resolving disputes, and to use data more effectively.

S5 The plan also considers how further developments to the regulatory decision making process can be made. One option that will be explored is the adoption of a regulatory approach that acts as an incentive for action. For example we consider there is potential to apply more widely the approach Oftel took to BT price controls during this year which has stimulated a new wholesale market.

S6 Looking ahead there will be key policy challenges for Ofcom – notably the introduction of spectrum trading, the challenge of balancing increased competition in communications markets with public service broadcasting arrangements, and the need to work with other appropriate lead agencies for a broadband market that successfully addresses issues of content property rights to enable consumers to access what they want to see and hear while retaining incentives for content producers to develop attractive content.

S7 The draft plan sets out Oftel’s full work programme, proposed budget for 2003-4 and details a number of consultation questions for stakeholders to give their views and comments on in preparation for the formal adoption of the plan in the spring of 2003. The feedback from stakeholders will be considered in the drafting of the management plan statement for 2003-4.

Chapter 1

Priorities for Oftel's final management plan

Introduction

1.1 For the past 5 years, Oftel has consulted its stakeholders on its annual work plan. This document sets out Oftel's proposed work for 2003/4. During 2003/4 it is expected that Oftel will transfer its functions to Ofcom (the Office of Communications) in accordance with the forthcoming Communications Act (the current Communications Bill going through Parliament). The timing of the transfer will not be certain until the Bill is enacted.

1.2 The Ofcom board will be progressively involved during 2003/4 and they are likely to have responsibility for the issues in this plan for the latter part of 2003/4. Co-ordination and co-operation with the Ofcom Board has already begun and will develop increasingly during the year. However legal responsibility for all decisions will remain with the Director General of Telecommunications until powers are vested in Ofcom.

1.3 Oftel has two major aspects to its work in 2003/4

• planning for Ofcom
• implementing EU Directives

Both of these aspects should be underpinned in legislative terms by the passage of the Communications Bill, although there are contingency plans to implement the EU Directives by secondary legislation in the form of interim statutory instruments in the event that the Communications Bill is delayed.

1.4 In addition, the document addresses several other important areas of regulatory work:

• market reviews – essential to creating the new EU regulatory regime
• ensuring that ongoing regulatory activities continue uninterrupted through the run up and transfer process to Ofcom
• taking the opportunity to look ahead to Ofcom by identifying emerging regulatory processes that could usefully be further developed to ensure proportionality and appropriateness of regulation
• identifying Oftel’s contribution to the significant opportunities that Ofcom will have to increase benefits to consumers.

1.5 The structure of this consultation document is as follows:

Chapter 1 is focused on the priorities for 2003/4, against the background of market and regulatory developments, in the current year

Chapter 2 looks ahead to Ofcom in terms of current regulatory processes being developed that are likely to be relevant in future and the opportunities presented by Ofcom to promote competition in the interests of consumers

Chapter 3 sets out the specific proposed projects and programmes for 2003/4 that Oftel is planning to carry out

Chapter 4 summarises Oftel's proposed budget for 2003/4 to support the work plan set out in chapter 3

Chapter 5 describes the consultation process and questions for stakeholders and the informal consultation processes involved in preparing this document.

Background to the plan

1.6 Oftel's long standing aim of obtaining the best deal for consumers in quality, choice and value for money is achieved primarily through promoting markets that are effectively competitive. We intervene to protect consumers where competition is insufficiently established or where there are special features of networks or services that require intervention. This approach can be described as 'competition plus' ie competition wherever feasible and intervention where it is not.

1.7 The new EU Framework Directive sets out the overall regulatory framework, including objectives and principles that Oftel must take into account when making regulatory decisions. The general objectives set out in the Framework Directive are: promoting competition; contributing to internal market development; and promoting the interests of citizens. In operational terms this means seeking to achieve:

• effective competition - benefiting consumers;
• well informed consumers;
• adequately protected consumers; and
• prevention of anti-competitive practice.

1.8 Oftel's regulatory principles applied in pursuing these objectives are set out in Annex A.

1.9 Within this regulatory framework, Oftel needs to set its priorities. Doing this involves considering market developments and their implications, and reflecting on regulatory actions taken this year and how these can be built on during 2003/4.

Market developments

1.10 Two themes can be identified from market developments over the past 12 to 18 months:

• Demand for telecoms services overall is increasing but the focus continues to shift steadily from traditional voice telephony services towards mobile and Internet and , increasingly, broadband services.
• The telecommunications sector continues to be in a turbulent state. This inevitably has some effects on the extent of competition – and generally these effects are negative.

1.11 On the demand side consumers are increasingly active as evidenced by

• an increasing propensity to switch suppliers in newer markets
• a willingness to take up new services
• more sophisticated purchasing behaviour through looking at features of services, not just their price

1.12 The story for operators is somewhat different. A general lack of confidence by financial markets in the prospects for telecoms has undermined investment and growth plans by the telcos. This has been coupled with the legacy of the telecoms investment boom resulting in:

• over-capacity in long distance routes
• excessive debt levels reflecting excessive asset prices
• greater risk aversion.

1.13 Never the less industry turnover continues to grow.

Figure 1: Annual Turnover of UK Telecoms Industry 1996-2002

Source: ONS, all figures year to June at 2002 prices

1.14 This suggests that while there have been changes of ownership and management, the underlying infrastructure remains in place and continues to be used and the market continues to grow despite problems.

1.15 Three further aspects can be examined in considering market developments – growth rates, market shares and investment levels.

1.16 Figure 2 below sets out the rate at which different sections of the UK telecoms market grew in revenue terms between 2000/1 and 2001/2. This shows a variety of growth rates with the newer services generally growing faster than more mature fixed link switched services.

Figure 2: Estimated Retail Revenue Growth 2001 to 2002

Source: Oftel Market Information (all figures year to June except leased line figures (to March))

1.17 Market shares give some indication of competition although they are by no means the whole picture - see figure 3 – which shows that the market share of the player with the largest market share has fallen in three key markets in the last 7 years.

Figure 3: Retail revenue market shares 1996-2002

Source: Oftel Market Information (Fixed and mobile year to June, leased lines year to March)

1.18 There were high levels of investment in telecoms networks by both incumbent and competitors throughout 1990s and 2000 but more recent figures show decline in fixed link networks investment but steady levels in mobile (see Figure 4).

Figure 4: Capital Expenditure by UK Telecoms Industry

Source: 1995-2000 ONS; 2001-2003 Oftel estimates based on published company accounts and capital expenditure plans. 2003 figures subject to greater level of estimation.

1.19 Fixed build competitors are currently more interested in ‘buy’ opportunities but foresee a return to ‘build’ once capital and opportunities become available- see Chapter 2 for discussion of the possible impact of the introduction of spectrum trading on investment opportunities.

Market summary

1.20 Growth prospects can be characterised, at a summarised level, as lower in mature markets, and higher in newer markets based on a straight-line extrapolation of current growth rates. For example, taking a more mature market, the volume of fixed voice calls minutes fell by 2% in 2001/02 while fixed rentals grew by 6%. Even within the fixed calls market, though, the total volume is still up 15% over the last 5 years and some fixed voice markets are growing rapidly.

1.21 Competition prospects will again vary by market. Some markets have been found to have ‘effective competition in prospect ‘ as was the case for the last mobile market review while in others there is clear dominance and others are effectively competitive. The current round of market reviews are likely to find a range of levels of competition in the different markets and what will be appropriate in terms of regulatory action will depend on the circumstances and prospects in each market.

Regulatory action in 2002

1.22 Significant actions taken in 2002 against this background include:

• work to prepare for the programme of EU market reviews
• the price control review and the wholesale line rental product
• action to promote competition with leased lines market and broadband
• publication of Competition Act strategy
• dispute resolution
• introduction of new regulatory processes.

EU market reviews

1.23 Four new EC Communications Directives entered into force on 24 April 2002. These are the Framework Directive (FD), the Access and Interconnection Directive, the Authorisation Directive and the Universal Service Directive. These Directives must be implemented by Member States to take effect on 25 July 2003.

1.24 The new Directives include the requirement that Member States should carry out reviews of competition in communications markets, to ensure that regulation remains proportionate in the light of changing market conditions. The purpose of the new Directives is to establish a harmonised framework for regulation across Europe and establish a set of procedures to ensure the harmonised application of the regulatory framework throughout the Community.

1.25 The reviews are 'pro-active' in requiring national regulators to test whether dominance exists in defined telecoms markets and then to identify appropriate remedies. In this way they are complementary to the more 'reactive' response to specific competition cases and disputes brought to the regulators by individual telecoms network operators and service providers.

1.26 Oftel’s market review programme is now well under way and individual project teams have been set up. They have been conducting their market analysis throughout the autumn and most will be issuing consultation documents early in 2003 after the European Commission has finalised its Recommendation on the markets to be reviewed (see Annex C ). These reviews are a major piece of work and Oftel is dedicating substantial resources to ensure that they are completed and proposals put in place by July 2003.

Price control review and wholesale line rental

1.27 In June 2002 Oftel published a statement concluding its review of price control on BT in the residential fixed line market. This stated that a price control of no increase in real terms ( ie RPI-RPI) from July 2002 for 4 years would apply based on the spending patterns of the bottom 80% of residential consumers. However, in an important change from previous price control arrangements, the licence modifications proposed that the control set would be relaxed once BT provided a wholesale line rental product that Oftel considered was 'fit for purpose'. This product would allow service providers to rent lines from BT that had a direct connection to the customer, and would promote effective competition in the retail market for business and residential consumers. The service provider would be able to bill the end user for both rental and calls, and BT would not retain a direct link with the customer (unlike indirect access or carrier pre-selection arrangements).

1.28 This initiative has the potential to increase competition in the retail market significantly. The incentive properties of the initiative are discussed in chapter 2 as an example of a more forward looking, effective form of regulation.

Broadband

1.29 Over the past year Oftel has continued to work to create a regulatory framework that promotes effective competition in the broadband market and is conducive to further investment and rollout of broadband services.

1.30 In June 2002, Oftel issued a direction requiring BT to offer DSL interconnection services to enable operators to connect to BT's network and therefore provide a much wider range of wholesale and retail broadband services in competition with BT. Oftel has also taken significant action to drive forward competitive access to BT's local loop via Local Loop Unbundling (LLU).

1.31 Oftel has worked to increase competition in leased lines by requiring BT to provide partial private circuits (PPC) at cost-oriented prices.

1.32 In the retail market, Oftel has ensured that BT's wholesale DSL services are available to all service providers, including BT Openworld and BT Retail, on non-discriminatory terms and conditions. Oftel also published a statement clarifying the rules that govern BT's marketing of Internet services, thus reaffirming Oftel's commitment to ensuring that other service providers can compete fairly. The effectiveness of these rules is currently under review.

1.33 In the year 2003-4 Oftel will continue to promote wider rollout of services, and access to BT's network to facilitate competition amongst broadband service providers and provide consumers with a greater choice of broadband services. Central to this work will be promoting consumer awareness of the nature of broadband services and the choices available as well as the ongoing work to promote competition.

Competition Act strategy

1.34 During 2002 Oftel published its strategy for use of the Competition Act which stated that, where faced with behaviour that could contravene both the Competition Act and the sectoral regime, Oftel’s approach would in future be to investigate under the Competition Act from the start.

Dispute resolution

1.35 In competitive markets, disputes regularly arise between undertakings. Oftel already has a duty to resolve a wide range of disputes and is bound by the duty in the current Interconnection Directive to take steps to resolve disputes in six months. The new Directives reduce this deadline in relation to all classes of disputes (including disputes about spectrum) under the new framework to four months. Meeting this target will be challenging for Oftel and will require significant change in process and systems. It will also require some behavioural change on the part of both complainants and respondents. Some of the main changes are:

• 4 month deadline for resolution of disputes and new challenging deadlines for competition cases.
• The new dispute procedure will cover all types of disputes, not simply interconnection, including disputes about spectrum.
• As a general rule, Oftel will seek all the information that it needs to resolve the dispute, using its formal powers.
• Tighter submission requirements: Oftel will specify what it needs to see before accepting a case in terms of clear evidence of commercial negotiation, clear statements by the complainant on their preferred solution, information and background to a complaint and a clear assessment of the precise condition which the target of the complaint is alleged to be infringing. Oftel will refuse to consider referrals that do not meet its published criteria. This is further discussed in para 2.6.

1.36 It is Oftel's intention to begin working with the new procedures with effect from 1 April 2003 to ensure any potential problems or issues are identified early and removed when the statutory obligation takes effect in July 2003.

New regulatory processes

1.37 As part of its strategy development process, Oftel published new guidelines on how it will review consumer protection policies and assess the potential impact of policy options in June 2002. The guidelines are designed to enhance Oftel’s analysis and decision-making processes and provide greater clarity and transparency for stakeholders.

1.38 Oftel will use the Consumer Protection Policy Review (CPPR) guidelines to review policy areas not covered by market reviews or competition policy. For example, handling consumer complaints and the publication of information aimed at consumers (see Annex D for review timetable).

1.39 The complementary Regulatory Option Appraisal (ROA) guidelines set out the framework that Oftel will use to assess different options when taking its decisions. These guidelines will be used in all areas of Oftel's work, including consumer protection and competition-related issues, as a basis for assessing the impact of different policy options. Oftel has also published market research guidelines, which set out good practice in the use of market research resources at different stages of policymaking, implementation and compliance.

Monitoring performance

1.40 In terms of performance measurement Oftel has:

• set service delivery agreement targets, agreed with the Treasury and published in November 2000. These are summarised in table 1 below, and performance against these targets will be published in Oftel's 2002 Annual Report;
• prepared a monitoring log of key decisions taken (see Annex B ) and;
• developed international benchmarking of prices paid for baskets of telecoms services in different countries (reports published six-monthly).

Table 1 – Service Delivery agreement targets

1.41 The first set of service delivery outcomes was reported in Oftel's 2001 Annual Report. As noted above, outcomes on the above targets for the current year will be reported in Oftel's 2002 Annual Report.

Pressures on regulation in 2003/4

1.42 There are a range of pressures on regulation in 2003/4 against the above backdrop of market developments and regulatory actions taken in 2002. These pressures are:

• expectations of Oftel
• existing regulatory commitments and implications of strategy implementation
• preparations for the transfer to Ofcom.

1.43 Clearly Oftel needs to take account of and respond to the expectations of stakeholders. However, it does this within a coherent and explicit framework which has been articulated in terms of its strategy ie its goal, objectives and regulatory principles set out earlier in this chapter and in Annex A. Oftel's work plan for 2003/4 is therefore a combination of actions that flow from implementing its strategy (including existing and continuing actions), measured and managed responses to requests for action by stakeholders, and preparations to enable and assist the establishment of Ofcom.

Expectations of stakeholders

1.44 he expectations of Oftel by stakeholders are significant and are, broadly, as follows:

• Competitors to BT - be tougher and quicker on BT…. and more transparent and inclusive
• BT and mobile - want less regulation
• Consumers -
  • keep current successes (eg low prices, choice, quality), and extend broadband
• Government -
  
  • encourage broadband roll out and take up but, more generally, minimise regulation.

1.45 A more specific point is that there are greater demands from competitors to use BT’s network. Oftel needs to respond positively to this, but in so doing be careful not to close off future 'build' opportunities. Oftel's Access Guidelines (published in Sept 2002 ) set out the approach Oftel proposes to follow in balancing these demands.

Existing regulatory commitments and implications of strategy implementation

1.46 In a number of areas, Oftel has started or is committed to implementing regulatory processes which will be relevant to 2003/4 and will form a significant element of its work for the forthcoming year:

• Market reviews concluding summer 2003 - focus on implementation
• consumer protection policy reviews starting in 2003/4
• 4 month dispute resolution deadlines operational from start of 2003/4
• use of Competition Act growing
• licences replaced by authorisations by end of July 2003
• ensuring continuity of existing processes eg complaints handling and numbering administration.

Preparing for Ofcom

1.47 Throughout 2002 Oftel worked closely with our partner regulators in contributing to the creation of Ofcom. A key milestone was the major consultancy report completed in October 2002 and built on intensive background work by teams of regulators’ staff as well as consultation with stakeholders. It offers detailed thinking on how Ofcom should be organised and suggests an implementation plan for setting up the new body in 2003.

1.48 The Ofcom Board, to which appointments were made in October following Lord Currie’s appointment as Chair earlier in 2002, will be deciding how to take this work forward. Oftel will maintain its close involvement, right up to the point when enactment of the Communications Bill in the 2003/4 session provides for the transfer of Oftel’s functions and powers to Ofcom. In particular, Oftel will work to

• support the creation of Ofcom as an organisation that will deliver consistent and coherent economic regulation, focused on improving competition and the benefits consumers derive from this;
• ensure a smooth transition of powers and responsibilities, so that effective regulation and efficiency of operation are maintained up to the point of formal transfer.

1.49 Chapter 2 looks forward to Ofcom in more detail.

Chapter 2

Looking ahead to Ofcom

• improvements in regulatory processes emerging in Oftel that will help Ofcom develop its own regulatory approach;
• key opportunities where Ofcom can deliver benefits to consumers.

Improvements in regulatory processes

2.2 While Oftel's work is focused on achieving outcomes for consumers, it is important, in terms of accountability and inclusivity, that its processes are efficient, effective and transparent to all its stakeholders. This need will be even greater under Ofcom as the greater size of the regulator, and wider range of areas it will cover, means that the potential risk of unclear or inefficient processes is increased. Where regulation is well targeted it should produce benefits for consumers in terms of:

• faster development of products that can benefit consumers;
• less cumbersome and less resource intensive regulation in terms of development, implementation and monitoring; and
• developing competition more quickly which can reduce prices for consumers.

2.3 There are a number of current developments in terms of Oftel's regulatory processes that could be usefully considered, and as appropriate, further developed by Ofcom:

• actions to improve the focus of regulation, for example, in relation to dispute resolution, competition cases and in relation to consumer information initiatives
• actions that provide incentives to improve the speed with which regulatory responses to acknowledged problems are developed and implemented
• in developing competition more speedily which can reduce prices for consumers.

Focusing regulation

2.4 Oftel needs to ensure regulation is targeted and effective, particularly as the reduction in the availability of funds from capital markets is likely to continue to put more pressure on competitors to incumbents. This could result in more requests to the regulator to intervene to enable access to the incumbents' network. Often these demands can be contradictory and differing in their nature. It is therefore important to manage and prioritise regulatory workloads.

2.5 Where Ofcom is faced with competing demands for regulatory intervention that exceed the regulatory resources available it will need to have both robust mechanisms and a clear set of strategic objectives to allocate regulatory resources to those areas where they can be best used. Oftel’s experience in developing this approach should be helpful to Ofcom in this regard.

Targeting regulatory involvement in resolving disputes and other cases

2.6 Oftel issued a consultation document in November 2002 on how it proposed to enable disputes to be completed in four months. This will be achieved through a sharper focus of regulatory resources to enable more efficient processing of individual cases that Oftel accepts for investigation. Cases referred to Oftel which fail to meet minimum criteria will not be accepted as disputes. This is explained more fully in para 1.35.

2.7 These changes build on a number of changes to the structure and working methods of the Compliance Directorate in the course of 2002. These include the establishment of a new economic and business analysis unit, tighter case management processes and more flexible use of staff.

2.8 These actions were necessary not only to meet the new deadlines, but also to underpin greater and more effective use of the Competition Act since publication of the Competition Act strategy statement in July 2002.

2.9 Further actions to focus regulatory efforts in relation to casework are evident in

• a change in procedures which identifies weak cases early in the investigation process and the closure of cases where complainants have submitted such limited information that Oftel has little prospect of deciding whether there is a breach or not, or where possible consumer outcomes lead Oftel to decide that other cases deserve priority in resource allocation. The setting of priorities in this way allows Oftel to use its limited resources on the more promising cases
• better project planning to involve stakeholders in setting a forward agenda on areas such as Number Translation services, so avoiding the need for action to be taken forward via disputes
• work with industry focus groups to clarify Oftel's likely position on controversial areas, eg in relation to carrier pre-selection, to reduce potential for disputes and facilitate progress to agreed deadlines.

2.10 Oftel’s experience in applying and developing these approaches in the coming year should provide a useful contribution to Ofcom in its efforts to focus regulatory resources.

Use of regulatory option appraisals

2.11 Options open to the regulator to take action to address problems identified need to be carefully and transparently considered. As set out in Chapter 1 Oftel published a statement in July 2002 which sets out its approach to undertaking 'regulatory option appraisals' in respect of key policy decisions it takes.

2.12 Examples of option appraisals in 2002 include number portability framework options (published in June 2002) and proposals for improving the strategic focus of market information collected (January 2002).

2.13 Oftel will develop its approach in this area through application of appraisal techniques to policy and case remedy proposals. This experience should be valuable to Ofcom where the draft legislation requires rigorous and transparent assessment of proposals to be undertaken where these appraisals will benefit from taking place within cross-functional project and case teams responding rapidly to issues and allowing both the retention and sharing of expertise.

Targeting consumer information

2.14 As a part of its long-standing commitment to evidence-based regulation, Oftel is developing a number of techniques in relation to its understanding of consumer behaviour - which allow it, for example, to better target information designed to help consumers make more effective use of choice.

- Identifying types of consumers

2.15 Oftel's expanded market research programme is now in its third year and so provides a sufficiently extensive database to better understand consumer behaviour across the various telecoms markets in a forward looking way.

2.16 This is important both to help assess current initiatives from a consumer perspective, and as a preliminary look at how consumers can be considered in a more converged environment. It will, therefore, be of relevance to Ofcom.

2.17 The chart below sets out the main residential consumer groups identified through this analysis. (Details are given in Annex E.)

Figure 5: Summary of consumer profiles

Base: 8404 UK residential consumers, 2001/02

2.18 In terms of application, the cross-market analysis of consumers can be of considerable benefit by helping regulation to : target consumer information initiatives on the most relevant groups; help assess the likely size of markets for new products; identify those consumers who are most vulnerable; focus on the most relevant consumer groups who can help to exert pressure at a retail level and thus complementing regulatory initiatives taken at the wholesale level. This approach will therefore help to target and prioritise the use of regulatory resources.

2.19 The intention is to develop a similar analysis for small and medium sized businesses which will enable Oftel to further focus its small business information initiatives (eg TelecomsAdvice.org.uk) on appropriate business profiles.

2.20 Oftel’s experience in developing and using these consumer profiles will be available for Ofcom to consider and further develop and apply as appropriate.

Assessing if consumers are losing out

2.21 A further example of how Oftel is developing its approach to targeting its resources is in relation to concerns that consumers are losing out by paying more than the cheapest available price for telecoms services due to confusion over complicated tariff structures. This has been a recurring theme of consumer representatives and media commentators. From a regulatory point of view, what is needed is a way of identifying if consumers are in fact losing out or, conversely, to what extent they are making well informed choices based on factors other than price.

2.22 Oftel is developing an approach that will use market research, pricing and other data specific to the circumstances of the market in question. This analysis together with better targeting, enabled by the consumer profiles described above, should result in greater focusing of regulatory action.

2.23 This type of approach is likely to have a wide range of applicability for both telecoms markets and other markets with which Ofcom will be involved, where consumers are faced with choices over the purchasing decisions they can make. With this wider application in mind Oftel will continue to develop this approach, liasing with OFT and other regulatory bodies in the lead up to Ofcom and feeding into any early consultations Ofcom may undertake on these issues.

Incentivising a positive response to regulatory action

2.24 Oftel's recent experiences of developing regulation in relation to local loop unbundling, partial private circuits and carrier pre-selection has demonstrated that detailed regulation can take several years to put in place. Given the pace of change in electronic communications markets, many argue that regulation needs to move much faster than this. But the same stakeholders are often the most keen to ensure "due process", which restricts the scope for rapid action.

2.25 Exploring the scope to 'incentivise' dominant players (in an open, transparent way which meets legal requirements) to co-operate in achieving regulatory objectives may offer a prospect of avoiding the lengthy timescales and unavoidable "micro-management" characteristic of some recent initiatives.

2.26 Oftel is currently pursuing a wholesale line rental (WLR) initiative where Oftel will relax retail price control in the fixed link residential voice market, when it considers that BT has delivered a fit for purpose wholesale line rental product that enables the development of an effectively competitive retail market. This initiative has provided an incentive for BT to provide the wholesale products both swiftly and effectively.

2.27 This 'incentive' approach may have a wider regulatory application. A regulated company has a range of legitimate responses to regulatory initiatives including the route of appealing against a particular decision in terms of compliance with due process and, under the terms of the new EU framework, on the merits of the case as well. It can be argued that the existence of these rights, perfectly justified in terms of the company’s legal position, nevertheless encourages operators to adopt a tactical approach towards regulatory issues which then have the effect of delaying the introduction of market developments. To give the regulated company an incentive to take a more co-operative approach, it needs to know how the regulator will be likely to react to different actions which it might legitimately take in response to regulatory initiatives. Greater clarity of the consequences of action by the regulated company can improve understanding and secure greater commitment by all parties to achieving the stated aim.

2.28 Where a company has dominance and acts in a co-operative and timely way to help achieve regulatory goals, then it needs to be clear of the consequences of this, for example, that existing regulation is no longer necessary and would be removed.

2.29 Conversely companies with dominance need to be clear about the consequences of actions that are anti-competitive or in some other way frustrate the achievement of legitimate regulatory goals. This is relevant not only in terms of formal penalties under the Competition Act and the Communications Bill if enacted - in terms of powers to fine and for third parties to claim damages - but also in terms of lost opportunities to secure a lessening of regulation.

2.30 Additionally where telecommunications operator display a willingness to pursue self and co regulatory initiatives, they reduce the pressure on the regulator to impose formal regulation. Oftel's experience of encouraging stakeholders to take more responsibility for tackling problem areas themselves should be helpful to Ofcom.

2.31 Ofcom will be under significant pressure to deliver effective, rapid regulation. An understanding that the regulator will stick to its stated objectives and principles in a coherent, evidence based and transparent way - when faced with demands from players in the market predicting serious consequences for their business if regulatory decisions are not the ones they prefer - will give credibility and force to initiatives designed to incentivise co-operative behaviour by regulated companies.

Minimising risk

2.32 In the period leading up to Ofcom there is scope to develop further the application of these two approaches – of focusing regulation and enabling its more rapid development where regulation is needed - in other areas of Oftel's work.

2.33 A 'focus and fast forward' approach will allow more effective management of the principal risk Oftel (and Ofcom) faces ie of not delivering on regulatory objectives. More resources can be focused on the areas with the best potential for successful development and these resources can be used to best effect by using all the regulatory levers available. Better focusing of resources should help ensure adequate resources are committed to cases and so minimise risk of successful appeals. This may involve taking carefully judged risks in order to take timely action with best available rather than perfect information - compromises which may be critical to Ofcom given volume of work and pace of change it will face.

2.34 This approach may allow risk management to be properly considered in the context of the objectives Ofcom is seeking to pursue and the way it approaches its work.

Opportunities for a better deal for consumers under Ofcom

2.35 Ofcom is being established because of the changes brought about by digitalisation - a technological step change that massively increases the capacity and flexibility of networks. Networks and service delivery platforms that have been in separate markets will, increasingly, be able to carry the same or equivalent services and so will be able to compete with each other. Consumers can benefit from increased competition brought about by such increases in convergence.

2.36 In making progress to the longer term prospect of convergence, current and emerging consumer attitudes and views will need to be taken into account, in terms of

• concerns re availability of access to broadband and what is available on broadband in comparison to narrowband Internet access
• demands for low cost high speed access in outer urban and rural areas
• consumers using the most convenient means of communication eg use of mobile when a fixed link is not immediately available
• increasing awareness and take up of multi-channel broadcasting especially amongst younger consumers.

2.37 All these factors are relevant to Oftel's, and subsequently Ofcom's, consideration of regulatory challenges in the years ahead. Key policy areas, in which Oftel's current locus is limited, but where Ofcom will have greater opportunities for influence include:

• broadband developments;
• spectrum trading; and
• public service broadcasting and competition.

Broadband developments

2.38 Broadband take up is happening in the UK at a rate of almost 30,000 households a week. This represents an increase over previous levels and is likely to have been spurred by a combination of price falls and developments in broadband capability. Current broadband is, however, in most cases simply providing faster access to services and content that are also accessible by narrowband on a largely satisfactory basis particularly in terms of price of unmetered dial up services.

2.39 However if broadband is to achieve its potential to become a mass market service – similar to mobile – then users will probably need to be able to access more attractive content through broadband than is currently available. The need for compelling content was a key finding of a recent report commissioned by Oftel on factors to drive mass broadband take up.

2.40 If broadband is to access more attractive content and enable use of high definition websites then the issue of protection of intellectual property rights ("IPRs") and copyright over content will need to be addressed especially in relation to films and music where content producers have concerns that broadband will enable content to be pirated on a large scale. The concerns of producers of content - whether films or music or websites - is that if they fail to receive rewards for producing output then the incentive to develop further content will be undermined. Against this is the need to find ways of providing attractive content to make use of broadband capabilities.

2.41 Technology advances plus appropriate protection of intellectual property rights may provide the opportunity to exercise sufficient control to reward content providers while increasing access to attractive content for users. Oftel will be working with its stakeholders and Ofcom partner organisations and relevant lead government bodies, such as the Patent Office, to explore the scope for these developments at both a UK and international level and to consider what role regulation can play to bring these about. Given the scale of the task this is likely to be a major issue for Ofcom to tackle.

Radio in the local loop

2.42 The primary means for delivering broadband in the UK is via copper delivered ADSL or cable networks. However these fixed networks have their limitations in terms of being able to reach rural households; and hence tackle issues related to digital divide concerns. It is possible to use radio to provide wireless local loop services. Radio has a number of advantages, not least of which is the ability it offers to by-pass a local loop incumbent and promote competition in the provision of broadband services. It also has the advantage that in terms of economics, it is more suitable for lower population densities than the laying of new cables. To this end the Radiocommunications Agency (RA) has set aside spectrum for wireless local loop services in a number of frequency bands. The most recent was the award of spectrum in the 28 GHz band for broadband wireless access (BFWA). Licences for 60% of the UK population were taken up last year, and the companies that won these licences are beginning to trial and deploy such systems. There is also the possibility of using satellite based services for the provision of broadband in rural areas. However to date, although ubiquitous in availability, the cost of these technologies is high relative to broadband available via cable or copper.

2.43 The RA is also currently considering the award of spectrum at 3.4 GHz for wireless local loop, which will be especially suitable for provision of ADSL type services in rural areas. This is because of the technical characteristic of the spectrum, which gives it greater range than higher frequency bands (and hence greater coverage). There also developments in new radio technologies that allow the data for one household to be relayed by other households in the same radio network (mesh technology). This could allow deregulated spectrum (that is spectrum that is not licensed to any single user, but can be used by all) to be used to provide ADSL like broadband services using cheap and widely available radio equipment. This again would be especially useful in lightly populated areas such as hamlets and villages.

2.44 Looking forward, Ofcom will see the management of the radio spectrum and the regulation of telecommunications moving to a single organisation. This will help in providing a more of a joined-up approach for using both spectrum and network access (telecommunications) regulation to tackle such issues as broadband provision in rural areas.

Spectrum trading

2.45 Spectrum plays a pivotal role in the development of competition in the UK telecoms market and the Director General has a duty under the Telecoms Act 1984 to provide advice to the Secretary of State on competition issues relating to the licensing of spectrum. The review by Professor Martin Cave of spectrum management in UK published in February 2002 concluded that there was significant scope to release more radio spectrum into active, economic use by the introduction of spectrum trading. The Government response published in October 2002 agreed with the Cave report’s conclusions. Oftel considers, in agreement with Cave, that creating a market in spectrum has the potential to significantly increase the degree of convergence and competition across electronic communications networks and services to the benefit of consumers.

2.46 Spectrum is a vital part of the telecommunications market. The Radiocommunications Agency estimates that the value of spectrum to the UK is £20 billion a year. Spectrum supports a range of telecoms services including mobile phone services and wireless broadband networks. The current financial climate has put an even greater focus on the use of spectrum to provide competing infrastructure, because radio networks offer a cheaper alternative to creating networks including broadband, particularly in rural areas, compared to traditional cable or wire networks. All this makes access to spectrum vital for creating a potentially competitive telecommunications environment.

2.47 Given the ever increasing speed of technological change and convergence, and the complexity of decisions required to allocate spectrum by central planning, a market based system is essential to maximise the benefits to consumers and business that spectrum based services can provide. A flexible spectrum trading environment would allow the buyers of spectrum to make the commercial and technical judgements about what will be a viable business. In such a trading environment new and innovative ideas using spectrum could be more easily tested in the commercial world and those businesses that are best able to deliver the services consumers want would prosper.

2.48 Spectrum trading is a very important element in reducing barriers to entry into the telecommunications market, as well as being able to boost the UK's position in broadband. Whilst spectrum trading cannot remove all such barrier problems, easier access to it could become very important element in facilitating entry at the network level. Any spectrum trading environment does need to take account of concerns regarding harmful interference and international commitments. But the need for proportionate intervention to achieve this does not negate the benefits of improved economic efficiency; and the opportunity to enable broadband Britain to happen more quickly, and be available to a greater part of the UK population - particularly in rural areas - as a result of effective trading.

2.49 During 2003/4 Oftel will seek opportunities to work with Ofcom colleagues and stakeholders to develop key issues that will need to be addressed to underpin spectrum trading – in particular defining a spectrum property rights and a spectrum property register, and developing dispute resolution policy in relation to spectrum matters generally in line with the new EU framework.

Public Service Broadcasting and competition

2.50 Oftel is involved in the economic regulation of certain aspects of the broadcasting infrastructure in the UK. In particular:

• Regulating the terms and conditions for the supply of digital conditional access, access control and access to electronic programme guide listings (the latter jointly with ITC) to broadcasters; and

• Licensing, and applying, a price control to terrestrial analogue transmission.

2.51 Oftel's involvement in broadcasting regulation reflects both broadcasting’s traditional basis in terrestrial analogue services, where there were only a limited number of free to air channels, and of its expansion beyond these analogue origins into a multichannel, interactive future. As digitalisation increases the opportunities for more services, Ofcom faces a significant challenge in enabling the benefits of public service broadcasting to be retained alongside its role of promoting competition in the broadcasting sector.

2.52 The ITC’s review in 2002 of the programme supply market has focused attention on key aspects of this, including the ability of independent producers to negotiate retaining key rights to programmes (eg for overseas sales or repeat showings) which they have made for PSB broadcasters. Ofcom will have the opportunity to address any significant adverse effects on competition that may arise where those commissioning programmes are in a stronger position in terms of market power compared to those making the programmes.

2.53 Oftel will, where appropriate, contribute to the evolution of policy in the above areas through its experience of regulation in broadcasting and in telecoms. Its experience of successfully managing the development of competition alongside the operation of universal service obligations is usefully analogous to public service broadcasting. Oftel's experience of using the Competition Act in telecoms will also be valuable since Ofcom has now concurrent Competition Act powers in broadcasting.

Conclusion

2.54 Oftel is committed to helping Ofcom to be a successful regulator that delivers benefits to consumers. Ofcom will be an economic regulator to a substantial degree and therefore Oftel's experience and knowledge of regulating a £45 billion turnover telecoms industry will be a key asset for Ofcom.

2.55 Ofcom presents exciting opportunities at both a strategic level to improve the outcome for consumers and at an operational level, to adopt efficient and effective operational processes. Oftel will be working hard with its stakeholders and future Ofcom colleagues to realise these opportunities as soon as possible.

Chapter 3

Proposed projects and programmes for 2003/4

Introduction

3.1 The proposed projects and programmes for 2003/4 are described in this chapter. Table 1 lists the projects and programmes by quarter (beginning April-June).

Any organisation or consumer who wants to discuss a project or programmes should contact the named project or programme manager directly. This applies to

• suggestions as to the appropriate evidence base including market research;

• discussions of policy options; and

• suggestions on ways of conducting the project.

3.2 A number of Compliance Directorates projects have been combined into the Compliance Management Office (CMO). The CMO will cover the work of the previous projects of Retail Pricing, the Compliance Monitoring Unit and any parts of the former Casework Quality Programme that are not covered by the Business Assurance Programme (F4). The CMO will allow for a more focused and co-ordinated approach to these areas.

3.3 The EU Market Reviews Programme (A1) is under way and Oftel intends to have completed all necessary market reviews by the time the new Directives come into force in July 2003. An indicative timetable for the reviews can be viewed in Annex 2.

Stages of work

3.4 The planned work against objectives and type of activity reflects our focus in each subject area in 2003/4. Projects and programmes will contain elements that relate to other objectives and activities. Projects are likely to have the sequence of review – implementation – monitoring. The timescale will depend on the scale and complexity of the issue.

3.5 Oftel is committed to monitoring and evaluating its policies to see whether they are achieving the policy objective initially set. This will be on the basis of both pro-active monitoring and response to specific complaints.

3.6 Where a review, concludes no specific regulatory intervention is necessary, then the cycle of review – implementation – monitoring will end.

Evaluation of policy and case decisions

3.7 During 2003/4, Oftel will be using its review and appraisal processes to establish the basis for more rigorous assessments of the impact of its policy and case decisions.

3.8 Establishing more explicit criteria to assess and evaluate outputs and outcomes in individual areas is consistent with a more robust, targeted and faster evidence based approach as discussed in the previous chapter. In applying this approach, Oftel recognises there is not a mechanistic relationship between actions to promote competition and the resulting outcome. Outcomes need to be considered in relation to specific areas, but also 'in the round' at a broader level as picked up by Oftel's Service Delivery Agreement measures and targets.

Stakeholder involvement

3.9 The scope for stakeholder involvement will vary by subject area. Stakeholders can for example participate by providing evidence of competition, or evidence of consumer detriment and comment on which forms of regulatory intervention may be appropriate. For implementation activities, stakeholders may comment on operational details of how a policy is to work in practice. For monitoring activities, stakeholders may be involved eg as an end user in assessing comparative information produced by telcos. For all three stages of review, implementation and monitoring, Oftel will continue to ensure that progress towards the deadlines and outcomes set is maintained at an acceptable pace.

3.10 For the projects and programmes set out in Table 1 below, stakeholders are invited in to indicate where they would like to be involved.

Advisory Committees on Telecommunications and consumer experts

3.11 The Telecommunications Act 1984 establishes a number of committees (the ACTs) to give advice to the Director General, to represent the interests of consumers, and to give emphasis to especially those with least power. The Acts feed in suggestions to Oftel project managers to help Oftel focus on consumer concerns.

3.12 The ACTs respond to Oftel consultations, hold public meetings, meet the Director General and his senior staff, host seminars, participate in Oftel/industry working groups, liase with other consumer organisations, and publish their views via an independent web site (www.acts.org.uk). They are supported by secretariats in Cardiff, Belfast and Edinburgh, and a small unit within Oftel (see project C7).

3.13 The ACTs are independent of Oftel. Their annual objectives and work plans are therefore not incorporated in Oftel’s Management Plan but are consulted on and published separately. For information please contact the ACT Secretariat on:

e-mail: tamara.clements@oftel.gov.uk tel: 020 7634 8984.

Table 1- Proposed projects and programmes for 2003/4 – summary table as of October 2002

C10) Monitoring the Telecommunications 
Ombudsman Service

Business support

F1) Human resources

F2) Learning and development programme

F3) Budget management programme

F4) Business Assurance programme

F5) IS and IT

F6) Communicating Oftel's work to external audiences

F7) Research and Information Unit

List of projects and programmes for 2003-4

NB Q1 = Apr- June 2003 , Q2 = Jul- Sep 2003, Q3 = Oct- Dec 2003 , Q4 = Jan – Mar 2004

Effective Competition

Review

A1 EU market review programme

Objective: To ensure that the effective competition reviews required when new EU Directives come into force are carried out in a timely and efficient manner. Provide ongoing assistance to project managers to ensure that Oftel strategy is applied consistently across reviews and that individual reviews are carried out in an efficient manner, identifying synergies across reviews as appropriate.

• track progress on individual reviews and work with project managers to gain benefit from synergies across projects (Q1-2); and
• work with project managers to ensure that Oftel strategy and EU Directives and are applied consistently and results communicated systematically (Q1-2).

A2 Competition in mobile markets

Programme Manager: Elaine Axby (tel: 020 7634 8915, e-mail: elaine.axby@oftel.gov.uk)

Other contacts: Nic Green (tel: 020 7634 8891, e-mail: nic.green@oftel.gov.uk) Chris Handley (tel: 020 7634 8863, e-mail: chris.handley@oftel.gov.uk) Michael Knowles (tel: 020 7634 8706, e-mail: michael.knowles@oftel.gov.uk)

Objective: To ensure effective progress towards the development of competition in mobile markets.

• review mobile market competitiveness, including calls to mobile phones in line with new EU Directives (see project A1 for timings) and;
• implement any regulatory proposals agreed as a result of the market review (including the removal of regulation if appropriate).

A3 Access to the radio spectrum

Project Manager: Roberto Ercole (tel: 020 7634 8905, e-mail: roberto.ercole@oftel.gov.uk)
Other contact: Helen Hicks (tel: 020 7634 5316, e-mail: helen.hicks@oftel.gov.uk)

Objective: To work with the Radiocommunications Agency (RA) and the Department of Trade and Industry (DTI) policies to ensure that spectrum allocation policy and spectrum pricing promotes the economically efficient use of the radio spectrum; and to ensure spectrum is used to promote competition in the telecommunications market. To provide the competition advice regarding the use of radio spectrum as required by the Secretary of State under the 1984 Telecoms Act. By these actions promoting the interests of consumers in the management of the UK Radio Spectrum

• Contribute to wider debate on the future of spectrum management in the UK, in particular in relation to Government decisions and action following the Cave Review of Spectrum policy, implementation of those decisions and the development of spectrum policy and legislation through the Communications Bill, this work will flow into Ofcom (Q4-03); and
• contribute to RA implementation of spectrum trading in the UK. (Q2 - 03)

A4 Competition in broadcasting markets

Project Manager:Margaret Doherty (tel:,020 7634 8828, e-mail: margaret.doherty@oftel.gov.uk)
Other contacts:Jim Niblett (tel: 020 7634 8780, e-mail: jim.niblett@oftel.gov.uk)
Anil Patel (tel: 020 7634 8928, e-mail: anil.patel@oftel.gov.uk) Naaz Rashid (tel: 020 7634 8849, e-mail: naaz.rashid@oftel.gov.uk)

Objective: To develop with Ofcom partners a policy framework for the promotion of competition in broadcasting markets and to increase understanding and awareness of Oftel’s regulatory role eg in regard to conditional access and access control, Electronic Programme Guides (EPGs) and terrestrial transmission. This project will involve consolidation with the ITC on areas of overlapping responsibilities.

• Implement joint regulatory regime for EPGs with the ITC (Q1); and
• implementation of EU Directives in relation to broadcasting following the market review into terrestrial transmission (Q1-2).

A5 Internet policy and narrowband access

Project Manager:Justin Moore (tel: 020 7634 8859, e-mail: justin.moore@oftel.gov.uk)

Other contact:Lucy Rhodes (tel: 020 7634 8836, e-mail: lucy.rhodes@oftel.gov.uk)

Objective: To promote competition in narrowband Internet access and ensure that the UK regulatory environment is appropriate for the Internet.

• Review the wholesale narrowband Internet termination market, applying regulation where appropriate in this and the related call origination market (Q1);
• coordinate Oftel's strategy on FRIACO (Q1-Q4);
• monitor developments in Internet access, infrastructure and services, providing policy guidance where appropriate (Q1-Q4); and
• contribute as appropriate to the development and implementation of Government’s Internet and e-commerce strategy (Q1-Q4).

Implementation

A6 Strategy, development and implementation of broadband networks

Programme Manager: Jim Niblett (tel: 020 7634 8750, e-mail: jim.niblett@oftel.gov.uk)
Other Contact: Alistair Bridge (tel: 020 7634 8782, e-mail: alistair.bridge@oftel.gov.uk)

Objective: To promote effective and sustainable competition in the provision of broadband access and services within a regulatory framework that is conducive to further investment and more widespread roll-out.

• Ensure that local loop unbundling is made available in compliance with the relevant legal obligations (Q1-Q4);
• monitor the rollout of BT’s wholesale and retail ADSL products to ensure that other operators and service providers are able to compete fairly (Q1-Q4);
• monitor the provision by BT of partial private circuits (PPCs) for leased lines to ensure that other operators are able to compete fairly(Q1-Q4);
• liaise with the devolved administrations and other government departments in relation to their plans to stimulate broadband roll-out e.g. in rural areas (Q1- Q4);
• promote a high level of consumer awareness of the nature of broadband services and the choices available (Q1-Q4);
• continue to publish the bi-monthly broadband brief (Q1-Q4); and
• consider whether it would be useful to publish additional information e.g. a broadband guide similar to the Internet guide published in 2002 & the guide produced for UK Online by the SBTF (Q1).

A 7 Numbering Programme

Programme Manager: Ray Thornton (tel: 020 7634 8704, e-mail: ray.thornton@oftel.gov.uk)

Project Managers:

Numbering Allocations: Nicholas Good (tel: 020 7634 5333, e-mail: nicholas.good@oftel.gov.uk)
Numbering Administration Alan Pridmore (tel: 020 7634 8910, e-mail: alan.pridmore@oftel.gov.uk)
Corporate Numbering Liz Greenberg (tel: 020 7634 8758, e-mail: elizabeth.greenberg@oftel.gov.uk)
Premium Rate Services: Gavin Daykin (tel: 020 7634 5338, e-mail: gavin.daykin@oftel.gov.uk)

Objective: To enable consumers to benefit from competition and new services by ensuring the provision of adequate numbers and numbering ranges. To promote efficient number management by operators through number charging.

• To allocate numbers to communications providers within 21 days in accordance with agreed policy (from Q2);
• implementation of web