Joint Committee on the Draft Communications Bill Minutes of Evidence


Memorandum submitted by Hutchison 3G, O2, Orange, T-Mobile and Vodafone

Summary

  The mobile network operators, Hutchison 3G, O2, Orange, T-Mobile and Vodafone, welcome the opportunity to submit a memorandum to the Joint Committee on the draft Communications Bill and look forward to appearing before the Committee on Monday 10 June. The memorandum is submitted jointly as the operators share a common perspective on how regulation should be developing in the UK.

  Although, perhaps understandably, almost all media attention relating to the draft Bill has focused on broadcasting, the mobile phone sector is an important part of the UK economy. The telecommunications parts of the Bill must receive at least as much attention as the broadcasting aspects. There is much to be welcomed in the draft Bill but there are some significant shortcomings that will need to be corrected if the Government is to realise its policy objectives.

  There are now 45 million mobile phone subscribers in the UK, three of the five operators base their global headquarters here, serving over 200 million subscribers world-wide, and employing approximately 40,000 people in this country. Annual turnover of the operators now exceeds £10 billion (larger than all of the broadcasters put together). Nevertheless, it is not yet a wholly profitable industry. Of the two later entrants, for example, Orange has just declared its first profit after eight years; T-mobile in the UK is still to make a profit and, similarly, the new entrant, Hutchison 3G, will face significant start up losses. The mobile sector is therefore very important to the UK economy but not yet fully-fledged. It must not be damaged by inappropriate legislation.

  The UK mobile market is intensely and increasingly competitive. Uniquely in Europe, the third and fourth operators have each attained greater than 20% market share. In such an environment one would expect regulation to become lighter. Indeed the Better Regulation Task Force recently suggested that the sector was ready to be regulated by competition law alone. Yet, the mobile industry faces a growing intensity of regulation. It is the same regulation that has failed, after eighteen years, to bring about competition in the fixed market. It is key that the Communications Bill sets the regulator on a different path, towards a more competition law based approach.

  OFCOM's many duties, as currently defined in the Bill, provide a wide range of platforms upon which to base new regulatory conditions. This must be avoided. Our proposal for avoiding future "regulatory creep" of this type is that OFCOM's duties must be simplified so as to recognise the primacy of competition and the delivery of OFCOM's objectives through the promotion and sustenance of competitive markets.

  Indeed, the EU Directives that the Bill is intended to implement require use of general competition law in preference to sector specific regulation. The Bill changes the emphasis of the EU Directives in this respect. For example, it allows the regulator to impose fines for breaches of general conditions and encourages litigation claims by third parties for alleged breaches of conditions. No additional burdens and remedies should be imposed unless there is clear evidence that problems exist for which there are currently no adequate remedies. These new measures are unjustified and unnecessary and potentially make the UK mobile market a less attractive place to invest and do business.

  We therefore strongly recommend that the Bill should implement the EU Directives without these unnecessary and damaging extra powers for which there is no justification.

  With respect to telecommunications, the Bill, as it stands, promises too much of "more of the same". With the few, but significant, changes described in this document, the Bill can deliver a framework that will assist the Government to realise its ambition of securing a dynamic world leading communications sector.

Summary of Recommendations

  The mobile operators recommend that:

  1.  The Bill prioritises the achievement of competitive markets as the prime goal of economic regulation.

  2.  The Bill includes a clause that specifies that no ex ante measures should be imposed where there is effective competition.

  3.  The Bill requires OFCOM to produce guidelines as to how it intends to make trade-offs between its duties and to include explanations within its determinations as to how the guidelines have been applied.

  4.  The Bill provides for appropriate procedures for Parliament and the National Audit Office to review OFCOM's plan for securing light touch regulation, ensuring that it is comprehensive and stretching and that the performance is subsequently delivered.

  5.  The measures in respect to light touch regulation are strengthened by adding to the legislation a duty to intervene at the minimum necessary level consistent with OFCOM's objectives. Such a measure would have the additional benefit of OFCOM not adopting sector specific regulation when perfectly adequate general law protects against the perceived problem.

  6.  OFCOM's regulatory interventions are justified by Regulatory Impact Assessments. OFCOM should not proceed with an intervention unless the overall benefits of an action substantially outweigh the costs. In the interests of transparency, such assessments should always be published and include adequate detail for third parties to assess the major assumptions underpinning the RIA.

  7.  OFCOM should only be able to fine for "economic" infringements using its powers under the Competition Act, so that the basis for regulation is the same as for other high tech sectors.

  8.  Third party litigation for regulatory breaches should only be possible

once OFCOM has successfully completed enforcement action.

1.  OFCOM'S PRIORITIES AND ACCOUNTABILITY TO PARLIAMENT

(a)  Priorities:

  1.1  The Communications Bill presents the Government with an excellent opportunity to make a fresh start in the regulation of communications in the UK and deliver the right regulatory framework for communications.

  1.2  Oftel was established nearly 20 years ago. Looking at the parliamentary debate at the time, there was a clear expectation that it would work itself out of existence within a few years by establishing effective competition to the privatised monopoly, British Telecommunications (BT). But the intentions of Parliament were not properly reflected in the Telecommunications Act 1984. It did not give Oftel a clear mandate to prioritise the creation of competition, leading to withdrawal from sector specific regulation. The Communications Bill, as currently drafted, threatens to repeat the mistake.

  1.3  While by no means being the only factor, the legislative framework has contributed to the outcome that BT still commands an 85% share of the UK access market and 70% of the residential calls market. Not one alternative fixed line carrier has established itself as a profitable, credible threat to BT's hegemony. It will not be at all easy to reverse this situation and the mobile operators do not want the policies that have failed in the fixed market being carried across to the mobile market. Even though the mobile companies are large, they are still young, growing companies, wrestling with the complexity and cost of introducing new technology. If consumers are to benefit from vigorous competition between a choice of well financed entities in the future, OFCOM's must pursue policies that will sustain this.

  1.4  It is clear from the EU Framework Directive, which the Bill is intended to implement, that reliance on competition law, as opposed to sector specific regulation is a primary objective. Recital 27 of the Directive says: "It is essential that ex ante regulatory obligations should only be imposed where there is not effective competition ie in markets where there are one or more undertakings with significant market power, and where national and Community competition law remedies are not sufficient to address the problem." The draft Bill does not reflect this.

  1.5  Customers and competition must be at the heart of policy. In the field of economic regulation, the Bill must set a priority duty of protecting consumer interests by fostering policies that lead to the establishment and sustenance of effective competition. In the field of content regulation, the Bill must set a priority duty of protecting consumer interests through the promotion of diversity and high quality and, wherever possible, through competition.

  1.6  In addition, in accordance with the recommendations of the Better Regulation Task Force, OFCOM should be required to be public and explicit in the way it makes trade-offs between objectives (something that would be required, even if priority objectives were reduced to two). This transparency should take two forms: written guidelines that indicate how OFCOM intends to make the trade-offs and, secondly, explanations within its determinations that lay out how the guidelines have actually been applied.

(b)  Accountability to Parliament:

  1.7  The mobile operators welcome measures in the Bill aimed at securing light touch regulation. The Government clearly has an intention that, in contrast to the 1984 Telecommunications Act, there should be a presumption of withdrawal, when appropriate. However, it is far from clear that the Bill, as currently drafted, will achieve this.

  1.8  The duty to prepare a statement of how light touch regulation will be achieved does not appear to be subject to adequate scrutiny. OFCOM is very much left to set (and change, if need be) its own performance targets. It is absolutely essential that this process be subject to external scrutiny.

The Mobile operators therefore recommend that:

    —  The Bill prioritises the achievement of competitive markets as the prime goal of economic regulation.

    —  The Bill includes a clause that specifies that no ex ante measures should be imposed where there is effective competition.

    —  The Bill requires OFCOM to produce guidelines as to how it intends to make trade-offs between its duties and to include explanations within its determinations as to how the guidelines have been applied.

    —  The Bill provides for appropriate procedures for Parliament and the National Audit Office to review OFCOM's plan for securing light touch regulation, ensuring that it is comprehensive and stretching and that the performance is subsequently delivered.

2.  THE REGULATORY IMPACT OF OFCOM'S WORK AND ITS CHARGING STRUCTURE

(a)  The regulatory impact of OFCOM's work:

  2.1  The very existence of a sector regulator has the potential to introduce market distortions that would be absent from a "non-regulated" market. It is also widely recognised that, with respect to economic regulation, effective competition will deliver greater benefits to consumers than any amount of regulation. This is why it is so important that OFCOM is mandated to concentrate on the establishment of competition and then withdraw from sector specific economic regulation. It would then just rely on its powers under competition law (as strengthened by the proposed Enterprise Bill).

  2.2  OFCOM must develop an action plan that cuts away swathes of peripheral activity, allowing it to focus on its primary duty to encourage competition and allow it to thrive. As oftel in 1994 itself acknowledged (in a Framework for Effective Competition): "Such regulation is inevitably very complex, tends to be risk averse and intrusive. It is therefore for serious consideration that the UK regulatory regime now starts to move towards a framework more suited to a competitive market". It has long been recognised that inappropriate intervention can distort markets and indeed have the opposite effect to that intended. For example, in its last review of the mobile market, oftel recognised that regulatory measures concerning service provision could have the effect of "chilling" competition. Furthermore, a recent National Audit Office report (Pipes and Wires, April 2002), in paragraph 3.27 pointed to evidence that BT's share price actually went up when oftel announced price controls, "perhaps because lower prices may act as a deterrent to new entrants".

The mobile network operators recommend that:

    —  The measures in respect to light touch regulation are strengthened by adding to the legislation a duty to intervene at the minimum necessary level consistent with OFCOM's objectives. Such a measure would have the additional benefit of OFCOM not adopting sector specific regulation when perfectly adequate general law protects against the perceived problem.

(b)  Charging structure:

  2.3  If OFCOM's action plan is streamlined and focused, the costs should be brought under control and kept to a minimum. The mobile operators do not want to see more of the double digit growth in Oftel's annual running costs that has prevailed over the last five years or so. OFCOM's internal structure should reflect the specific domains of content regulation, economic regulation and spectrum management. The charging structure should reflect the amount of regulation "consumed", so that licensed spectrum users pay for spectrum management and providers of licensed content pay for content regulation

3.  INVESTMENT IN THE COMMUNICATIONS MARKET

  3.1  OFCOM's work impacts heavily on the investment climate for the communications infrastructure. It is therefore vital that the regulator both uses appropriate analytical tools and avoids the asymmetric approach of regulating success and ignoring failure.

  3.2  Oftel has carried out its market analyses using tools that are more appropriate for stable utility markets. Telecommunications, in particular mobile, is not a utility. A water company can plan its investment for the next century or so, safe in the knowledge that water will continue to be water and people will need to consume it. It is therefore well suited to the "single solution" static approach used by regulators in pursuit of their desired outcomes. But telecommunications is characterised by constant technological renewal and consumers are much better served by a dynamic process whereby suppliers seek out new ways of meeting market demand through trial and error, failure and success. Failure leads to low returns, success to high returns.

  3.3  A recent report prepared for the DTI, OFT and Oftel by Charles Rivers Associates (Innovation and Competition Policy, March 2002) highlighted the need to analyse high technology "new economy" markets in a different way to traditional industries. The Bill should reflect this.

  3.4  OFCOM must not penalise high returns that result from successful risk taking, as this distorts the signals that allow competition to develop, sparks innovation and fosters a confident investment climate. If regulators habitually remove higher than average returns through price controls, an artificial glass ceiling is created and telecommunication companies are forced to pursue more risk-averse strategies, which will diminish the richness and diversity of services available to consumers.

  3.5  For the most part, OFCOM's methodology will be set through the work practices developed as it begins to operate, providing the legislative framework is correct. However, the risk of OFCOM intervening inappropriately can be mitigated if the Bill requires that all their interventions are backed up by thorough and transparent impact assessments.

The mobile network operators recommend that:

    —  OFCOM's regulatory interventions are justified by Regulatory Impact Assessments (RIA). OFCOM should not proceed with an intervention unless the overall benefits of an action substantially outweigh the costs. In the interests of transparency, such assessments should always be published and include adequate detail for third parties to assess the major assumptions underpinning the RIA.

4.  STRIKING THE RIGHT BALANCE BETWEEN THE WIDER INTERESTS OF THE CONSUMER AND THE PROVIDER

  4.1  In theory, there should be no difficulty in striking the right balance between the interests of consumers and the interests of communications providers. The policy objectives of the Government and the strategy of the providers are aligned; they both want to bring a wide variety of products and services to the consumer. In practice, it never seems to be that simple, as an unavoidable pre-condition for effective competition is that the market be populated by more than one business that can sustain the fight over the long term. The policies of oftel, in placing price controls over BT, have had the unfortunate side effect of debilitating the alternative carriers to the point where BT has no credible competition in the fixed market.

  4.2  Regulation of telecommunications needs to have a much longer-term strategy when judging what is in the interests of consumers. Cellular mobile telephony was launched commercially in the UK in 1984 but it was not until 1997, thirteen years later, that subscriber uptake really took off. This occurred for a variety of reasons—new technology, new tariff plans and the right competitive environment. From this platform, the industry eventually created its own momentum and, as a result consumers have benefited enormously; prices have fallen 24% between January 1999 and Q2 2001 (source: oftel) and a host of new services have been developed.

  4.3  The fixed market makes a poor comparison: it has taken 18 years for prices to fall 50% and there is not yet an environment in which narrowband services could be delivered through effective competition—never mind broadband.

  4.4  The policies of the last 20 years have not produced the desired outcome in the fixed market and the threat is that OFCOM's policies are now extended to the entire communications market. OFCOM must take a long view and focus on creating a structure in which competition can thrive. Furthermore, the political environment must support this strategy. Only then will consumers truly benefit from the variety of new services and cheaper prices that dynamic competition can deliver.

  4.5  These factors reinforce the requirement to give OFCOM, with respect to economic regulation, a priority to promote effective competition. Once effective competition is present, OFCOM must be mandated to withdraw from sector specific regulation and rely on its competition powers.

  4.6  There are further measures the draft Bill could include that would ensure the providers of electronic networks and services are treated equitably in relation to businesses in the wider economy. On the other hand, measures that increase the intensity of sector regulation compared to other high-tech businesses should be removed from the Bill—for example the ability to use sector powers to fine for infringements of economic regulations—especially when they go beyond what is required to implement the Directives.

  4.7  Allowing OFCOM to levy fines for sector specific infringements flies in the face of all that the Government is trying to achieve in terms of light touch by making too easy to use sector powers to apply fines. The whole point of having fining powers under the Competition Act is that OFCOM is encouraged to use these powers in preference to sector powers.

  4.8  In addition, the draft Bill would make possible third party actions for regulatory breaches even before OFCOM has found a breach. This contrasts with the current position whereby Oftel must have first taken enforcement action.

  4.9  These additional burdens, by going beyond what the Directives contain, have the potential to make the UK mobile market a much less attractive place in which to invest and do business than the rest of Europe.

The mobile operators recommend that:

    —  OFCOM should only be able to fine for "economic" infringements using its powers under the Competition Act, so that the basis for regulation is the same as for other high tech sectors

    —  Third party litigation for regulatory breaches should only be possible once OFCOM has successfully completed enforcement action.

June 2002


 
previous page contents next page

House of Lords home page Parliament home page House of Commons home page search page enquiries index

© Parliamentary copyright 2002
Prepared 5 July 2002