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| Oftel management plan 2003-04 - 1 April 2003 | |
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Contents
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Target |
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Effective competition benefiting consumers objective Increase the extent to which the market is effectively competitive or effective competition is in prospect |
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Well informed consumers objective Increase:
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Adequately protected consumers objective All consumers protected by:
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Prevention of anti competitive practice objective Encourage and secure a reduction in significant anti-competitive practice by taking effective action. |
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Overall Spending on Oftel will deliver value for money. |
Web link to detailed list of SDAs published November 2000: http://www.oftel.gov.uk/publications/about_oftel/sda1100.htm
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 which will be published shortly.
Pressures on regulation in 2003-04
1.42 There are a range of pressures on regulation in 2003-04 against the above backdrop of market developments and regulatory actions taken in 2002. These pressures are:
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 2003-04 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 The expectations of Oftel by stakeholders are significant and are, broadly, as follows:
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 and has done so, but in so doing will continue to 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 2003-04 and will form a significant element of its work for the forthcoming year:
Preparing for Ofcom
1.47 Throughout 2002, Oftel worked closely with our partner regulators in contributing to the creation of Ofcom.
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 2003-04 session provides for the transfer of Oftel’s functions and powers to Ofcom. In particular, Oftel will work to:
1.49 As well as working to ensure a smooth transition to Ofcom, Oftel senior management, Oftel's Ofcom transition teams and project/programme managers will be actively working to prioritise appropriate projects/programmes so as to minimise any potential disruption to Oftel's work programme as Oftel becomes part of Ofcom. During this time Oftel will need to remain flexible in the allocation of resources and how it prioritises work to respond to new priorities and developments during this transition phase and ensure that Oftel’s objectives continue to be met.
1.50 Chapter 2 looks forward to Ofcom in more detail.
2.1 As noted in chapter 1, during 2003-04 Oftel is likely to cease to exist and its functions, as reflected in the Communications Act once passed, will be taken on by Ofcom. Oftel is already working closely with the Ofcom Board and the four other communications regulators (BSC, ITC, RAu and RA) to create the new organisational structure. Ofcom, in discussion with the regulators, is now beginning to address policy issues so that the benefits of a single communications regulator can be maximised. This chapter focuses on the areas of work Oftel is involved in that will be of relevance to Ofcom, in particular:
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 ill defined or inefficient processes is increased. Where regulation is well targeted it should produce benefits for consumers in terms of:
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:
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 differ in regulatory implications and can on occasion be contradictory. It is therefore important to manage and prioritise regulatory workloads.
2.5 Oftel's Network Analysis & Modelling programme (E5), is intended to give Oftel a greater practical understanding of current network deployments, and the impact of technological change on future deployment. A key issue is understanding where it is realistic to expect the development of infrastructure-based competition in the foreseeable future, and where retail competition is best served by the provision of wholesale services by BT. This improved understanding should help to ensure that any regulatory intervention is targeted in a way that maintains sustainable competition.
2.6 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
2.7 Oftel issued a statement in February 2003 on how it will 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.
2.8 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.
2.9 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.
2.10 Further actions to focus regulatory efforts in relation to casework are evident in:
2.11 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
2.12 Options for regulatory action designed to address problems identified need to be carefully considered through an open and transparent process. As stated 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.
2.13 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). The market reviews being published in March and April 2003 contain regulatory option appraisals where remedies to market dominance are proposed.
2.14 Oftel will continue to 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.
Targeting consumer information
2.15 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. As part of this process Oftel recently completed a review of its consumer information strategy to ensure consumer information decisions are made in a rigorous way. (see Annex F)
- Identifying types of consumers
2.16 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.
2.17 This is important both to help assess current initiatives from a consumer perspective, and as a preliminary look at how consumers behaviour can be considered in a more converged environment. It will, therefore, be of relevance to Ofcom.
2.18 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
2.19 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.
2.20 The intention is to develop a similar analysis for small and medium sized businesses, which should enable Oftel to ensure that its small business information initiatives (eg www.TelecomsAdvice.org.uk) are appropriately focused.
2.21 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
2.22 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.
2.23 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. Oftel is due to consult on the methodology underpinning this approach in the first quarter of 2003-4.
2.24 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
2.25 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.
2.26 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.
2.27 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.
2.28 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.
2.29 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 about the likely consequences of this, for example, that existing regulation is no longer necessary and would be removed.
2.30 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.
2.31 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.
2.32 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
2.33 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.
2.34 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.
2.35 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
2.36 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.
2.37 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:
2.38 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 may be limited, but where Ofcom will have greater opportunities for influence include:
Broadband developments
2.39 Broadband take-up is happening in the UK at a rate of over 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 greater familiarity with use of the Internet and efforts to increase broadband awareness. 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.
2.40 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.
2.41 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.
2.42 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 liaising with its stakeholders and Ofcom partner organisations and relevant lead government bodies to explore the scope for these developments at both the UK and international levels and to consider what role regulation can play to bring these about.
Radio in the local loop
2.43 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 raises questions related to the so called ‘digital divide’. 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 per cent 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.
2.44 In May of this year the RA will be awarding licences for the use of spectrum at 3.4 GHz which may be 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 are 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.
2.45 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
2.46 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 agrees with the Cave conclusions, that creating a market in spectrum has the potential to increase significantly the degree of convergence and competition across electronic communications networks and services to the benefit of consumers.
2.47 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.
2.48 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.
2.49 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.
2.50 During 2003-04, 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
2.51 Oftel is involved in the economic regulation of certain aspects of the broadcasting infrastructure in the UK. In particular:
2.52 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 its expansion beyond these analogue origins into a multi-channel, 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.
2.53 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.
2.54 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 will have concurrent Competition Act powers in broadcasting.
Conclusion
2.55 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.
2.56 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.
Source: Oftel Market Information (Fixed and mobile year to September).