Strategic Review of Telecommunications Phase 2 Proposals

18 November 2004

18 November 2004

Ofcom today published its proposals to support the growth of greater competition, innovation and investment certainty in the UK telecommunications sector. 

The proposals are intended to prepare the ground for a new regulatory framework as the market undergoes what amounts to a move from analogue to digital; away from the switched-circuit fixed line networks of the past and towards next-generation networks based on internet protocol.

The challenge for the sector

Responses to Ofcom's Phase 1 consultation (published 28 April 2004) and Ofcom's own research indicated the following:

  1. The telecoms sector is changing rapidly as it moves from historical business models based on the delivery of voice calls over switched-circuit networks to business models based on the delivery of data over internet protocol networks.
  2. These changes bring uncertainty as well as opportunity, particularly for investors; yet companies have a limited opportunity in time to make the significant, long-term commercial decisions required if they are to remain competitive in the future.
  3. The UK telecoms market offers choice and value to the end user in a number of areas, yet despite twenty years of regulatory intervention, competition in fixed line telecoms remains fragile. Additionally, many of the advantages upon which competitors have based their businesses are being eroded, not least by the transition to next generation networks.
  4. Consumers' behaviour is changing as new technologies penetrate the mass-market. However, with growth in choice and innovation has come an increase in the potential for confusion, as consumers seek to navigate increasingly complex competitive retail markets.

In seeking to address these challenges Ofcom has identified two key problems:

  • Firstly, an unstable market structure in fixed telecoms, dominated by BT and with alternative providers that are, in the main, fragmented and of limited scale.
  • Secondly, the continuance of a complex regulatory mesh, devised over twenty years of regulation and in many areas dependent upon intrusive micro-management to achieve its purposes, yet which, in aggregate, has failed effectively to address the core issue of BT's control of the UK-wide access network.

Options for consultation

In its Phase 2 Report, Ofcom presents three options to address these issues:

  • Option 1: Full deregulation. Removing the existing mesh of regulation entirely and relying instead on ex post competition law to resolve complaints would significantly reduce intervention in fixed-line markets. However, given BT's continued market power, this would be unlikely to encourage the growth of greater competition and as such would not serve the best interests of the consumer.
  • Option 2: Enterprise Act investigation. Ofcom could investigate the market under the Enterprise Act 2002, with the potential for a subsequent referral to the Competition Commission.
  • Option 3: BT to deliver real equality of access. Ofcom could require BT to allow its competitors to gain genuinely equal access to its networks. This option would also require BT to commit to behavioural and organisational changes to ensure that its competitors benefited from access to products and processes which were truly equivalent to those offered to BT's own retail businesses.

The large majority of respondents to Ofcom's Phase 1 consultation suggested that Option 2 would be too disruptive and expensive, favouring instead the swift introduction of real equality of access.

Ofcom shares that view. However, if real equality of access is not delivered, Ofcom will consider an investigation under the Enterprise Act and potential subsequent referral to the Competition Commission.

Real equality of access

Ofcom is proposing that the most effective way to deliver the changes required will be for regulation to address head-on the barriers preventing competitive wholesale access to BT's network.

For twenty years, regulation has failed fully to address the problem of BT's control of the infrastructure connecting customers to the network. Much of this infrastructure is very expensive to replicate; as such, collectively it amounts to a series of economic bottlenecks upon which BT's competitors are largely or wholly reliant. Without real equality of access to those bottlenecks, sustainable competition cannot flourish.

To date, the manner in which BT has controlled access to the economic bottlenecks in its network has had an impact on the roll-out of important wholesale products with the potential to offer greater choices to the consumer than would be provided by the incumbent alone. In broadband, the products affected include Local Loop Unbundling and DataStream; in voice they include Carrier Pre-Select and Wholesale Line Rental.

Real equality of access would mean that BT must offer competitors the same or similar;

  • wholesale products and prices, as are made available by BT to its own retail businesses, and;
  • transactional processes, as are made available by BT for the use of its own retail businesses.

Delivering this would not only require BT to make changes to its wholesale products, product development process and transactional processes; it would also require BT to commit to substantive behavioural and organisational changes. It is clear that such changes are a necessary pre-condition if there is to be any confidence that BT will not discriminate unfairly against competitors and in favour of its own retail businesses.

In its Phase 2 Report, Ofcom calls on BT to provide prompt and clear proposals which will achieve these behavioural changes and bring about the level of confidence required.

A new regulatory contract

Ofcom believes that if BT delivers real equality of access, its competitors will benefit from the certainty needed to make sustainable investments in the market. This in turn will increase the scope for effective, long-term competition; and as the market becomes more competitive, so the scope for a withdrawal of regulation will increase.

Ofcom's Report proposes what would be in effect a new regulatory contract for the sector, under which the delivery of genuine and lasting competition at the wholesale level would allow the removal of regulation, particularly at the retail level.

For example, Ofcom is proposing that if a fit-for-purpose Wholesale Line Rental product is successfully introduced in 2005, a staged withdrawal of retail voice regulation would follow. This would also be accelerated as converged voice and data services develop and competition between fixed and mobile services increases.

Ofcom also intends to re-examine the scope for deregulation of telecommunications services directed at larger businesses, opening up the prospect of BT having greater flexibility to package services for the largest corporate customers. Achieving real equality of access in other highly regulated markets, such as the leased lines market, could also lead to significant deregulation.

In addition, Ofcom will seek to provide the necessary regulatory certainty which operators will require before making investments which carry a higher than average risk. In the case of BT's planned 21st Century Network, Ofcom will recognise the risk involved when we recalculate the Network Charge Controls which govern BT's rate of return on its network investments.

Consumer information

Ofcom believes that the combination of truly competitive markets together with widespread consumer understanding of the choices available in those markets amounts to the most effective form of consumer protection.

Informed consumers will seek out and reward providers offering quality and value, whilst offering a strong incentive to poor performers by spurning inferior choices. Equally, in order for a market to be truly competitive, it must have the stimulus provided by informed consumers willing to change provider as the market evolves.

Ofcom's proposed new regulatory contract will place even greater emphasis on the importance of timely, neutral, transparent and accurate information as retail competition - rather than regulation - becomes the primary source of consumer protection.

Ofcom's consumer research - also published today - indicates that only a minority of consumers either have or are likely to switch supplier; less so than is the case in comparable competitive markets such as gas or electricity. The research also shows that many consumers feel they do not generally have sufficient clarity to make the best informed choices.

Ofcom is therefore seeking views on a variety of options designed to:

  • Improve the range, accuracy, accessibility and availability of neutral information upon which consumers base their decisions.
  • Simplify the process of switching supplier to make this as straightforward and cost-effective as possible.

Universal service regulation also provides protection for consumers, by ensuring the provision of public payphones for example. Ofcom's consultation seeks views on how the scope and funding of universal service regulation should evolve over time.

A new framework

Ofcom Chief Executive Stephen Carter said: "Twenty years after liberalisation, the market has made good progress. However, its foundations are unstable in parts, overly dependent on intrusive regulation and with limited sustainable competition."

He added: "As the move to the next generation of telecoms brings more choice and lower prices, we need a regulatory approach that is focused and which encourages investment and innovation in the infrastructure and services of the future."

The Strategic Review of Telecommunications Phase 2 public consultation will close on 3 February 2005.