Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Memorandum submitted by the Computing Services and Software Association


  1.  It is now evident that OFTEL has failed markedly in its quest to have BT provide access to other carriers at the local loop level. So far, despite promises from both OFTEL and the Government that wide-spread access was likely before the end of the English summer to enable competing suppliers to offer high speed broadband services such as digital subscriber lines (ADSL), just 361 BT exchanges have been listed. The European Commission has reacted strongly, saying the UK has been "far slower" in introducing competition at the local loop level than other EC member states. Other critics point out that even the exchanges listed are in lower traffic areas, leaving the plumpest sites to BT's on-going monopoly.

  2.  What we are witnessing here is a sad example of regulatory failure. This fundamentally calls into question the continued relevance of current independent arrangements for regulation of telecommunications in the UK. At best, OFTEL is revealed as an organisation basically powerless to push BT into opening up the local loop. At worst, OFTEL will be cited in history as a stunning example of the captured regulator—a variation on the Stockholm syndrome, where hostages become converted to the cause of their captors. Of greater concern, Government ministers at the recent Labour Conference reverted to BT data to refute OECD criticism, implying they may also be in the same position. One hopes not!

  3.  On top of this, research firm Ovum recently stated that because of its dominant ownership of the local loop, only BT will be able to afford to roll out broadband services such as ADSL to consumers and small businesses. Unfortunately, BT will be constrained in the rate at which it makes these services available by the limits of its own resources, not to mention the absence of any significant incentive to cannibalise existing services such as ISDN.

  4.  The result of all this? Britain will be much slower in achieving roll out of broadband services than the US, but more seriously, our European neighbours look set to overtake us. Indeed, the Government's response has been to lobby the European Commission to weaken the original EC proposal, which called for EU member states to provide third parties access to the local loop by 31 December 2000, at the latest. The UK proposed this deadline be extended where member states face "technical problems" in meeting the timetable, and this will be accepted. But the reality in the UK is not a technical problem but regulatory failure. This will naturally affect how the UK is viewed as a location for investment in, and development of, broadband content and related services. There is already evidence of this, with reports that major suppliers such as Global Crossing are withdrawing from supplying broadband services at the local level.

  5.  All this is in marked contrast with the promise of OFTEL when it was set up in its ground-breaking, independent regulation role back in the mid '80s, when Brian Carsberg (as he then was) spoke valiantly of "patrolling the boundaries" of BT's monopoly to ensure competition was not stifled.

  6.  Perhaps now is the time to consider if there is another way to promote competition and re-establish the UK's reputation as a priority location for communication services.

  7.  In economics, when discussing issues of regulation and competition, it is critical to survey characteristics such as market structures and identify the incentives that drive the market—and which likewise might be harnessed to produce change.

  8.  In the case of the local loop, there is now significant evidence of demand by consumers for a wider choice of services that can be delivered using their existing telephone connection—especially broadband, "always on" internet connection. Equally, many competing suppliers are willing to offer such services; indeed, one of the alleged reasons for the failure of BT and OFTEL to open up the loop on schedule was because of the large number of suppliers wanting to locate equipment in local exchanges, apparently causing concerns about physical space, power supplies, cooling, static electricity risks and the list—compiled by BT—goes on.

  9.  In these circumstances, one must favour a market mechanism to deliver to consumers the services they demand. But this immediately raises the question of ownership of the resources and assets that can be exploited to deliver the services. These are the local loop and the exchanges which switch them.

  10.  In the UK, the first approach to this was to encourage the development and deployment of alternative cable networks, based initially on meeting demand for subscription TV services. Some of these also carry telecommunications but penetration has not been as high as was hoped by policy-makers. In any case, pay TV demand can be, and has been, equally well met by terrestrial and satellite services. Likewise, communications services can also be provided by alternative services such as wireless local loop technologies, and these should be encouraged.

  11.  However, the fact remains that the vast majority of consumers are served by BT's local loop and, under current arrangements, BT is likely to be limited (or to limit) in the speed with which broadband services are deployed.

  12.  One solution to this might be to separate, structurally and commercially, ownership and control of local loop assets into a separate company. Unlike the current position, this new company would have a clear incentive to meet consumer demand in a timely fashion, and respond to suppliers by investing in capacity to meet their service needs. That is how it would make money, rather than by offering competing services as is presently the case.

  13.  There are plenty of precedents for this. In the US, local telephone companies effectively play this role (and the idea of separate local or regional local loop companies ought not be ruled out in the UK). In modern electricity and gas supply arrangements, there is a clear differentiation between firms providing infrastructure and supply, enabling contestability and competition. Finally, of course, there is Rail Track—mention of which may be the kiss of death—but the circumstances between railways and telecommunications are markedly different.

  14.  It is time for debate to begin on these types of reforms. UK is clearly falling behind and that will affect the competitiveness of knowledge based industries.

  15.  As to the future of OFTEL, if the right market structure can be established, one must question the ongoing relevance of independent regulation of competition and suggest that general competition rules, as administered by the Office of Fair Trading, might work best.

3 November 2000

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