Strategic Review Telecommunications Phase 2 consultation document

Nearly two years ago, as Ofcom was established, it was 20 years on from the privatisation of British Telecommunications as a vertically-integrated monopoly and the first introduction of competition.

Ofcom, and previously Oftel, had also been a leading regulator in Europe in helping to design and then implement the new regulatory framework for telecoms, and we had conducted most of our initial market reviews at that time. It seemed the right time to step back from the detail and to conduct a strategic review of the UK’s telecommunications market.

Today, we are close enough to the conclusion of that review to set out our key conclusions and proposals and give stakeholders a timetable for a series of related announcements which will provide industry with certainty about major inputs to the price and delivery of key wholesale products to stimulate competition; and on the conclusions of our review of the Universal Service Obligation.

It is worth recapitulating briefly the ground this Review has covered. We established at the outset the key questions for the Review to address: what, from the consumers’ perspective is a well-functioning market- in other words, what should good look like? Where can effective and sustainable competition be established? Where can regulation be rolled back? How to incentivise efficient and timely investment in next generation networks? And the question of structural or operational separation of BT and full functional equivalence.

The core problem is in the fixed line market. 20 years of pro-competition regulation has led to some improvements for consumers. But years of intrusive regulation have not created the conditions for the sustainable competition necessary for long-term consumer benefit and which, in other countries, has spurred investment in next generation core and access networks.

Ofcom’s overall approach, therefore, both in the individual decisions that we have taken over the past year and in the Strategic Review, has been to create a regulatory framework which seeks to encourage and incentivise sustainable, scale, infrastructure competition at the deepest extent possible.

However, some assets in the network are either economically impossible or highly economically inefficient to try to replicate: the so-called enduring bottlenecks- mainly, though not exclusively, in the access part of the network. Without open and truly equivalent access to such assets, sustainable infrastructure based competition would be too risky and too easily frustrated.

In our Phase 2 Report, we therefore posed three Options. Firstly to step back from all ex ante regulation. This found no takers. Secondly to make a reference forthwith to the Competition Commission under the Enterprise Act since, notwithstanding our sectoral competition powers, there were aspects inherent to the market structure that would continue, unaddressed, to provide the incentives for anti-competitive behaviour to an unacceptable extent. By its nature such a Competition Commission investigation would take time - many months at least - to complete; and its outcome would be inherently unpredictable.

The third option was to seek to secure from BT ‘real equality of access’ – which had two dimensions:

• requiring BT’s own downstream operations use the same products, processes, and prices as those used by their retail rivals – equivalence of input in the jargon;
• and alongside that, operational separation within BT that would ensure that those responsible for overseeing BT’s bottleneck assets had real incentives to wish to serve other operators in practice and on the ground with the same zeal, efficiency and enthusiasm as they served the remainder of BT’s downstream activities.

Though a small minority in the industry favoured an immediate reference under the Enterprise Act, most agreed that we should first pursue our preferred option of real equality of access. But almost all of BT’s wholesale customers pointed out the importance of any arrangements being enforceable.

In February, BT offered some voluntary changes to its own business and organisational structure which, it argued, would address Ofcom and industry concerns.

• A new Access Services Division within BT which would provide unbundled local loops to wholesale customers, and would be a functionally separate division of BT, with its own CEO, and its own incentives and reporting structure;
• A new Equality of Access Board which would have responsibility for ensuring that BT fulfilled the commitments that it would make towards Equality of Access.
• ‘equivalence of input’ in relation to new products, and indicated that it was willing to move towards input equivalence of legacy products including WLR, LLU and broadband leased lines, starting in 2006 and completing by 2010.

We said at the time that this BT proposal was a significant step forward, but the true worth of BT’s offer could only be demonstrated by carefully working through the detail. Since February 2005, working with BT and with other key industry players, we have sought to address issues and concerns with BT’s initial proposals.