Joint Committee on the Draft Communications Bill Minutes of Evidence

Examination of Witnesses (Questions 288-299)



  Chairman: Can I apologise, the country does not normally run this way other than the trains! Lord MacNally has got a few things he wants to say about the cinema.

Lord McNally

  288. As Lord Puttnam might say, BT evidence take two! Could you answer this question perhaps with the background of some of the other wider comments; are you generally satisfied with the powers that OFCOM are being given over your sector? Perhaps you might like to say as leader of one of our flagship companies whether you think you have been fairly pictured in the proceedings this evening.
  (Mr Verwaayen) I liked your take one rather than your take two—I was hoping for the rope!. I heard that I was presumed guilty before anything else. It is an interesting dilemma of course to ask a company that is described as the monopolist—which by the way has 73 per cent of the consumer market and less than 50 per cent of the business market—whether the regulatory environment is severe enough; it is a tough environment. If you look to the market as such I think it is no secret that telecoms nowadays is under severe criticism from the financial markets. We see countries that lose their capibilities to innovate. We see incumbents and others alike that are struggling with two Bs. One B stands for business model and the other `B' stands for their balance sheet. If you have two Bs you are struggling with then you are probably out of business already and if you have one B you had better get on with life and make sure you are there because it is important to have a telecommunications infrastructure in a country which is innovative, is alive and is spending money to make sure that we keep investing. The certainty of the regulatory climate and the transparency of the regulatory climate is a key indicator for the willingness to get investment. So from that point of view I think this is a good piece of work. We are not happy with all of that, as you have seen, but it is absolutely based on the fundamentals of the EU Directives, it is focused on the right issues, although we think that it is still too much under the assumption that this is an old monopoly instead of a market party that has to fight to make sure that it has attractiveness to its customers, attractiveness to the financial markets and an ability, as I said, to innovate and to have a state-of-the-art network.

  289. Do you see the imbalance that some of the witnesses have seen between the concern and indeed the confidence in television and radio to promote diversity and a slight conservatism in the telecoms sector? Do you fear the fact that OFCOM, the super-regulator, will be too concerned with what some people have unkindly called the "fluffy" end of the sector and not concerned enough about the technology end of the sector?
  (Mr Verwaayen) That is certainly an aspect of the need to maintain the expertise in economic regulation. Economic regulation is a different skills set, so understanding that and ensuring that that focus is there is important. At the same time this is becoming a more and more mature market. You would not say that if you hear all the testimonies. This is more and more a mature market where global companies compete with other global companies. The transparency of regulatory environments is an interesting aspect. In my previous life I was privileged enough to travel around the world from continent to continent to see how important regulatory climate is. With the EU Directive we have and this very balanced piece of work that we have here I think that we have established enough guaranteed basically to make sure that it is perfectly alright in a convergence industry to have a converged type of regulator.

Mr Grogan

  290. Reading your evidence I would put you on the side of being a believer in light touch regulation rather than appropriate and proportionate. How would you make the Bill before us more light touch?
  (Mr Verwaayen) I do not know whether I want more but let me give you a few points that I think are truly important. In the EU Directive it is stated that there will be market reviews. I gave you just a minute ago some numbers about our market shares. We have certain parts of our market where we have less than 15 per cent of market share and we are still regulated because the assumption is that this is an overall market that has generic characteristics and therefore one size fits all, which is not true. I would say step-by-step we should grow into a maturity where people will look to specific sectors of the market and attribute different sets of rules there. A light touch means nothing less than making sure you have a balance between regulation and deregulation, that you have a balance between drive for competition and drive for the rights of consumers. It is hard to see that after the experience in broadband that we would close our eyes again and not see the direct relationship between prices and an uptake in the market. It is very important to understand that a light touch does not mean a regulator that sits still and does nothing. It says a regulator that understands the dynamic of a market and uses the appropriate term light touch in order to make sure that you drive the market by the instruments that are needed given the specifics of the market.

  291. Can I put a couple of suggestions that people have made to us to you. Some people have suggested that vertical integration almost by definition is wrong in this market. What would you see as the benefits to consumers of the vertical integration that you provide? Some people have suggested to us that the primary duty of OFCOM should simply be to promote competition in all the decisions it makes. What disadvantages could you see in that or could you see any disadvantages?
  (Mr Verwaayen) First of all, I apologise but I am Dutch and the Dutch are not always very great diplomats. If I were to compete with somebody who was an incumbent or existing player I would file five complaints a day because there is no down side. Of course you do that and you find a business model that is based on the fact that a neighbour is the cause of your problems. The issue is very simple; the whole concept of break-up in a vertically integrated business goes against three main principles. First of all, this is a business like any other business that has a business logic. The business logic here is very simple. You need a network to drive traffic and traffic to drive a network. If you are going to cut that in pieces you get a nightmare. Just imagine wanting to innovate where the specifics of service are not generic. This is not like water where there is only one brand, one colour and one taste. There are very specific services that need the interaction between the computing part of the network and the physical part of the network. Just imagine having to negotiate between different companies in all those integrated steps. It has been studied all over the world. I spent five years in the US and every state had a vision about it and time and time and time over it was proven to be against the other priorities that there are, which are do we get the best prices, do we get on with innovation, and do we get for the companies that are dealing with this market enough attractiveness to attract the capital to invest. So the whole break-up idea has been tried over and over and over again. I was hoping that people would be a little bit more creative than that one. That is one issue on that. If you look to what is in the interests of the market as such, it is that we have a stimulation of creative, new ideas to get for the people services up and running—and that is not just the consumer, it is also business. This is an integral part of the productivity drive. What telecoms delivers is either lifestyle or productivity. That is why it matters to people what we do. You could say to us we think you should do a better job and that is what the market has told us. There are many, many occasions when the market can tell that. The financial market can tell us that when it comes to financial performance, the consumer can tell that when they raise their voices and the regulator can tell it when it is in a regulatory framework but you cannot translate that all into one element and say therefore the regulator needs to be the voice of everybody else.

Lord Crickhowell

  292. You gave a picture of BT as an organisation, a creature that has to fight. You will have heard the criticisms which have been presented which puts you in the position of a lion and its prey who very firmly keeps the hyenas and vultures also trying to get in on the prey out until he has had all the better flesh. The trouble is that among the hyenas and vultures may be those creative, new ideas and competitors who may be providing things rather more agilely than you. That has been the line of attack that has been advanced this evening and some have suggested that the Bill needs tightening up so that you have fewer weapons to hold up the process of investigation. Yet the whole of your written evidence to us in section 6 seems to suggest that you need a great many more protective elements, that you need a whole lot of new powers written into the Bill to make sure that you are not hurt in any way, including a good many references to human rights legislation and so on. Are you not moving the thing even more against your competitors if we are asked to write in these additional protections? Why do you think you need them so badly?
  (Mr Verwaayen) There are a few matters of principle and one of the principles is that if it is just the presumption of innocence that is at stake and you let it go, that is a very important issue of principle. If you say that the burden of proof that you have not offended is on you, that is also a novelty that I think is quite surprising that people put forward. I think there are a number of principles at stake here and it is how you deal with that. The more important part of your question was the question of the hyena and our pound of flesh because there is of course a lot of perception that if you look to an issue like local loop unbundling that everybody was dragging their feet. However, last week I was in Brussels and I spoke to our EU Commissioner, and the reality is that, besides Denmark, the United Kingdom was the only country that fully fulfilled its commitments. We paid a price of approximately £100 million to have today in the whole of the UK 360 lines that are using local loop unbundling. That is not a great business plan and it would be in our interests to get a lot of people now since we spent the money anyway to get onto local loop unbundling. The reason is you cannot go to a drawing board and describe a market and design a market. If I were a competitor of BT local loop unbundling is not what I am waiting for. If we look to the realities of the market, it is an economic reality, a technological reality and our customers want to take up business if it makes sense to them. If we fail to persuade a customer with anything else other than saying it is different than BT then we have a problem. So I am not saying that we have a sainthood for BT, far from that, we have a lot of things we have to look at and improve. It is not that we are the hyena of the market that is waiting for the next meal in order to make sure that the rest of the market will starve.

  293. Coming back to the Bill you do make a number of specific criticisms of the Bill in your evidence. Bearing in mind you have had every opportunity to influence the Bill team and the Government up to now, how far are you pressing these changes on us? If you are, why?
  (Ms Fletcher) The draft Bill that we have got in front of us does introduce a significantly stronger enforcement regime in relation to electronic communications than exist under current legislation. We have got powers to impose penalties, we have got powers to suspend or restrict operators' entitlement to provide networks or services. We have an enforcement regime here that applies to all. It must be seen to be fair to all. I get the impression from what I have been listening to this evening that there is a view that the enforcement regime relates only to BT. This is an enforcement regime that relates to everybody. As it stands we do not think there is a fair balance between the powers of the regulator and protection for providers. It is an issue of fairness and an issue of checks and balances. We have raised some issues around the Human Rights Act and communications' providers large or small are just as much entitled to the protection of the law as private citizens.

Mr Lansley

  294. Can I take that first point about the Human Rights Act. I confess that I do not understand it because the decision of the Competition Appeals Tribunal in Napp Pharmaceuticals was quite clear that they took the view that Article 6 implied no specific standard of proof. It requires an independently charged tribunal but it does not require a particular standard of proof. There is no standard of proof in ECHR because different Members States have different standards of proof, and the one that they adopted was simply that it was a civil sanction not a criminal sanction and therefore they should not adopt the criminal standard of proof but it is a very severe potential civil penalty and therefore it should be a more severe test of proof than the normal balance of probabilities. Is that not utterly fair?
  (Ms Fletcher) The penalties are penal in nature.

  295. They are not criminal.
  (Ms Fletcher) But they are penal in nature and potentially very significant.

  296. They are civil penalties.
  (Ms Fletcher) They are penal in nature.

  297. So you are saying that the whole regime under the Competition Act 1998 of penalties should be transferred to a beyond all reasonable doubt basis of proof?
  (Ms Fletcher) I am looking specifically at the Communications Bill.

  298. You are referring to the Competition Act because you are citing the Napp Pharmaceuticals case.
  (Ms Fletcher) Looking at the Napp case that suggests a test higher than the balance of probabilities but falling short of beyond all reasonable doubt. Our view is that that leaves too much uncertainty to be workable in practice, and rather than leave those issues to be tested in litigation, we think it would be better for the Bill to spell out the burden of proof from the beginning and and put the matter beyond doubt. I do not think any of us want to get into a situation of messy litigation under this Bill.

Baroness Cohen of Pimlico

  299. Can I have another shot at this whole question of litigation. Mr Verwaayen, you were not there at the time and nobody in their right mind expects a dominant player to behave anything over than as a dominant player, but to take one specific example, which will not recur again in future, where the roll-out of broadband was delayed, presumably because BT was unwilling to let people get on to the network at a sufficiently low wholesale price (so that as a specific example is the sort of thing that one is looking not to have happen again) it is a question of whether that was an inefficient monopoly practice which caused a hold-up to the whole process. No, it is not a question of sitting over your prey and guarding it from the hyenas but it is a case where a substantial monopoly prevented other people developing. I may be one of the few people who has read the Oftel draft licence, a frightening document that goes into such detail of control that it really makes you wonder whether there would not be a better way of handling this whole market. You have spoken out very eloquently against the idea that you might do what the gas industry has done and break up into Lattice and Centrica but that would at least introduce enough competition to make the Oftel draft licence you are faced with a bit better. Would you like to comment on that?
  (Mr Verwaayen) I am delighted because, as you know, a few weeks after I arrived they declared broadband in the very heart of the BT. You could say that is a personal choice of an individual CEO and one likes it and the other does not like it, but that is not the case. Let's talk about why the take-up of broadband in the United Kingdom by BT was so small

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