Joint Committee on the Draft Communications Bill Minutes of Evidence


Examination of Witness (Questions 80-99)

MR DAVID EDMONDS

MONDAY 27 MAY 2002

  80. Do you see in this design and function an active promotion of—I am sorry I cannot think of any better word for it—the technical side of the OFCOM function? For example, the promotion of broadband and the promotion of investment into telecoms, both of which there is a big question mark about, is OFCOM going to have an active role in promoting the economic investment in these industries?
  (Mr Edmonds) I think the job of an economic regulator—and OFCOM is going to be an economic regulator as well as all the other things it is being asked to do—is in a market place to remove distortions, to take out barriers to entry, to do exactly what you suggest, to promote the conditions in which competition can come into the market place and can drive out those services that we need. If I may say so, I think that is happening now, for example, in the area of broadband, which you touched on. The short answer to your question is yes, the work of OFCOM must be heavily focused at creating a competition led environment in which services can be provided, in which investments can be made. Going back to your initial question, the current telecoms industry is investing £5/6 billions a year in capital in the UK, its turnover is over £30 billion, it is a massive industry. It is at the heart of the UK economy. OFCOM must surely see, as one of its primary functions, the developing of a regulated economic and competition framework which encourages the continuation of that investment over the years ahead.

Mr Grogan

  81. Just to briefly follow on Lord McNally's question. Are you saying that you support on the face of the Bill a specific role for OFCOM in developing broadband for example?
  (Mr Edmonds) No. I think the duties given to OFCOM in the face of the Bill cover that. You start off by looking at the interests of the consumer. My belief is the interests of the UK consumer, putting on one side the citizen part of the Bill, dealing with economics at the moment, the interests of the UK consumer are surely best served by having a vibrant and thriving communications sector in which investment is encouraged through the minimisation of barriers to entry, the maximisation of sensible access rules. I think the Bill as drafted currently is perfectly adequate for the organisation to carry out that role.

  82. Is there an argument then, given the very demanding target the Government has set us to be the best amongst the OECD countries, putting it on the face of the Bill would mean that the new regulator could give greater priority or devote more staff at the end than you have?
  (Mr Edmonds) With respect, I think I have given very great priority to the promotion of conditions in which broadband can be developed in the UK. I am not sure. I think if you add and add and add duties to those already set out in the legislation you may trammel the board, you may reduce its ability to act. I think if you give the regulator the basic power of enhancing competition in the interests of the UK consumer that is an all embracing framework which covers both broadband, it covers education of broadband, it covers the range of things that the Government and I think Parliament generally would want to encourage.

  83. Two things that are on the face of the Bill are light touch and promptness, I think Clauses 5 and 6.
  (Mr Edmonds) Yes.

  84. Do you think these are window dressing? If they existed now, what difference would they make to the way Oftel would operate now?
  (Mr Edmonds) Promptness would not. I have tough targets already. We meet those targets. We have tough targets in terms of answering phone calls, turning round complaints, dealing with major cases. An NAO inquiry a couple of years ago demonstrated that we did that very well, and actually I have toughened up the targets in the last couple of years. I think the promptness clause is important underpinning but in terms of how I operate at the moment it would not make a difference. Light touch, I think the Bill obviously encourages light touch legislation. I think the transposition in that big chunk of legislation of Directives has within it perhaps the most important bit of, if you like, deregulation or light touch regulation which is the taking away of the licence for the communications sector and replacing it by general authorisation. Last week, very much in tune with the light touch approach, I produced some, what we call, conditions which were attached to the authorisation, there are about 20 of those. The existing licence has 60 conditions, so we are already looking forward to the legislation in terms of lightness of touch. If I may, I believe regulation is about proportionate action. As a regulator, I seek now to act in a way which is proportionate to the issue which is brought before me. In many cases OFCOM is going to have to continue to intervene very hard and very toughly when it fears monopoly, when it sees abuse and dominance. I probably prefer the phrase "proportionate regulation" to light touch regulation but I understand completely the motives of those who would want us to focus on light touch.

  85. Then in Clause 7 there is the question of government directions to OFCOM, I think, in spectrum and networks and services.
  (Mr Edmonds) Yes.

  86. Certainly it is a power the Government has not given itself, for example, regarding postal regulation. What do you see as the pros and cons of the possibility of government direction? Is there a danger that the Government will make directions for political reasons? Should they be implemented automatically or should they be reported on by OFCOM weighing up the costs and benefits and then the Government making a final decision on the basis of that report?
  (Mr Edmonds) I have been a regulator for four years. I profoundly believe in the independence of the regulator. I think it gives me as an individual regulator, and I think it gives the board, the commissions who jointly regulate, a huge authority and also a huge responsibility. Therefore, the Bill does emphasise independent regulation. Therefore in the clauses which apply to areas like national security, I am perfectly happy with the Secretary of State retaining the direction role. I think in allocation of spectrum I do have some doubts. I think you have said what are the pros. The pros are the allocation of spectrum can be perceived to be industrial policy in that sense rather than regulation, therefore the Secretary of State retaining a power I can see the justification for. On the other hand, were I the Secretary of State I would be worried that I would be subject to lobbying from interest groups from different directions and I am not sure I would want that. I think it is a finely balanced argument. I can see why the Secretary of State has taken the decision she has to include it in the Bill but I could mount an argument the other way.

  87. Just a very final question: how many people work for Oftel at the moment and how many of those are working on broadband?
  (Mr Edmonds) 228 people work for Oftel currently. Working on broadband, there are a range of projects and cases that we are looking at, I should think between 20 and 40 people at any particular moment of time have broadband in their working job descriptions.

Brian White

  88. I have had a couple of conversations about the way Oftel uses existing powers or does not use existing powers.
  (Mr Edmonds) Indeed.

  89. One of the key things about OFCOM is that it will have new powers, particularly around significant market power. How do you see those being determined? Are they effectively determined by the EU Directives, or have we scope for influencing how they develop?
  (Mr Edmonds) I think to a very large degree the definition of significant market power is set within the EU Directive. It goes back actually to work that was pioneered by Bryan Carsberg in the UK ten or 15 years ago. I think that gives the organisation a very, very strong bedrock. I think no-one should be under any illusion that the European Directives are designed to harmonise the regulatory approach across Europe. I spent Thursday and Friday talking to my fellow European telecomms regulators about how we do get a harmonisation of approach and a definition of significant market power and perhaps even more importantly which markets do you then analyse to see whether there is significant market power because Europe, the Commission, is actually going to produce a list of markets that it wants the regulator to analyse. I think there is a huge degree of, if you like, much more centralised direction. There will be more trammelling of the freedom of the organisation, yes, because of the European definition. However, there will still be enormous ability, having done the analysis, having determined there is significant market now, to decide on appropriate remedies but it is going to be a world which is much more perhaps legalistic than the present one.

  90. Are you not going to create an EU regulators club so OFCOM, whenever it has got difficult decisions, will shift it to the EU regulators club on a Thursday afternoon and then that will make the decision so you will not have to give transparent answers which OFCOM will do in terms of the UK?
  (Mr Edmonds) I would hope you know me well enough to know that I am arguing exactly the opposite case at the moment. I am arguing that the European regulators group, which is a proposal which is coming out of the Infosoc Directorate-General, that group should actually be a free standing body which discusses, which advises, which attempts to create a harmonised approach. I think that is in the interests of the UK consumer, I think it is in the interest of firms operating across boundaries but very, very firmly preserves within the organisation the ability to take its own decisions because I think at the end of the day different characteristics apply to markets in different countries. Yes, you have to accept the basic definition of significant market power. I think you accept then a methodology analysing what happens in a particular market place but you have got to keep that in the domestic regulator. Certainly I think the Bill ensures that remains within OFCOM and were I to be playing a part in OFCOM certainly I would never be saying "This is what has been decided by DG13" or "This is what has been decided in Brussels on an individual decision" I think that would be quite wrong.

  91. You are quite happy with Clauses 63, 64 etc which actually define "significant market power" and the options you have to deal with it?
  (Mr Edmonds) I think they transpose from the European Directives in a way which makes very clear what the power of OFCOM will be. As a regulator at the present time who is exercising that analysis, yes I am content.

  92. As Kim Howells once famously phrased it, I am a refugee from the Utilities Act. Having seen the absence of issues around environmental issues and social issues being excluded from setting up Ofgem, and the almost collapse of the CHP market as a result of Ofgem's decisions, how do see OFCOM working in relation to things like digital vice, the Government's social objectives and, also, linked to that, how you divide up using competition powers before and after the event?
  (Mr Edmonds) I think the answer I give is that as a regulator I am a creature of statute. What you and your colleagues in both Houses of Parliament decide the regulator should do, the regulator should do. I think the social obligations, environmental obligations, need to be written in to the face of the Bill if that is what Parliament wishes to happen. I suppose my answer is where those social obligations exist at the moment, for example with the Universal Service Obligations—I am deliberately keeping out of the whole area of television at the moment—certainly in my own area of Universal Service Obligation it is there, we apply it. We ensure BT provides a telecommunications system across the UK. We ensure that people who need it get reduced tariffs. We ensure that people who are blind and deaf have a special service. Now that is there and that is written in and we apply it and it works very well. If Parliament wants us to do that in OFCOM, my hope would be it appears on the face of the Bill. Ex ante and Competition Act Regulation: ex ante regulation is brilliant when you are in an area that you know well, unmetered access internet. To give you an example to illustrate, ex ante works very well when BT comes along and says, thanks to pressure, "We would like to introduce an unmetered internet access product a week on Tuesday". We say "Hold on now, you cannot do that because you have to produce a product that your competitors, service providers, can buy in to at an earlier stage in the process so there is true competition." That is how ex ante regulation I think can work very well. In other areas where, for example, you have got a product you can use and it is in the market place and we are looking then at whether or not competitors' margins are being squeezed, the Competition Act route may be better. At the moment we operate both. I have Competition Act powers, my staff are fully trained in Competition Act powers. We have a joint training course with the Office of Fair Trading. We have a concurrency working group so that we apply the powers consistently across the piece so I have no problem, I have had no problem working with both the Competition Act and the ex ante sectoral regulation over the last 18 months to two years.

Mr Lansley

  93. Can I follow up on another point arising from the Utilities Act because the Utilities Act where it structures the responsibilities and the duties of Ofgem does so in a way that seeks to promote or protect the interests of consumers wherever appropriate by promoting effective competition. I was interested, Patricia Hodgson, when she was talking to us last week, she said also that where general duties are concerned one of the ways of structuring it would be to refer to achieving objectives, whichever particular duties they were, as far as possible through competition.
  (Mr Edmonds) Yes.

  94. Now, of course, the structure of the general duties as they stand at the moment certainly do talk about promoting of competition but they do not lay upon the regulator, upon OFCOM, an obligation to seek to pursue all of these objectives through competition where practical or alternatively wherever possible. Would you not see some advantage in structuring the general duty in a way which gave the regulator a responsibility to use competition wherever possible?
  (Mr Edmonds) It would be a clarification that could be useful. It so happens that I believe that the duties as currently drafted would enable the regulator to have competition as the primary instrument in many of the areas about which we are talking today, though not in all the others, as the primary instrument for driving forward the interest of the consumer. I would see no need actually given how the Bill is drafted currently to set it out as sharply as you propose. I think economic regulators believe in competition. It is what we spend our life trying to produce, trying to protect, trying to sustain. I am happy with the drafting as it is now. Somebody who was perhaps more driven by competition might prefer the kind of wording you have used.

  95. The wording as it stands at the moment in the draft Bill to some extent reflects the Telecommunications Act.
  (Mr Edmonds) Indeed.

  96. Has it not been the case that you or your predecessors as Oftel have had in effect to define the way in which you interpret the protection of consumers on the one hand and the promotion of competition on the other in order to make it clear that you in practice do see your role as one of using competition wherever possible? Would it not be simpler to reflect that changing practice since 1984 in the way in which the Bill is to be drafted this time round?
  (Mr Edmonds) I would have no objection to it being drafted in the way that you described because I do have competition as a primary goal for much of the work that I carry out. On the other hand, as I have said in my previous answer, I do not think it is necessary for the regulator to have competition as his or her key priority, given the Bill as drafted.

  97. Do you think it would be desirable to do so, given that we were previously talking about the introduction of the new EU regime, significant market powers and so on, that in relation to that, it would be desirable to express the purpose of seeking to withdraw competition for fear that OFCOM might see the use of SMP conditions as the end objective whereas the end objective of the regulator would be to get to the point where the conditions are removed? Even the EU legislation makes that clear but actually it is not set out in quite the same way in the Bill, the objective is to move to the point where competition applies and nobody is able to use dominance effectively to act in a way independently others market it
  (Mr Edmonds) Surely. What one is seeking to do all the time is to create the conditions for entry, to create a competitive environment which at the end of the day means significant market power or dominance disappears, that is what one is about. In large areas of the work that we have done so far we have moved away, once there is competition established in a particular market place. I take the point you make. I have not addressed it in the way that you have done.

  98. I think, as Mr Grogan was intimating, sometimes it is useful to try and think about very particular instances. The application of these powers in relation to broadband would be a very particular instance. Now, if these powers in the draft Bill were available to OFCOM in the same way as drafted now, how would anything have been different in relation to broadband in the past? You and I have been through the history of this. Without trying to do the whole history of this, let us say for the sake of argument that Oftel has been struggling in the situation where it has a company exercising significant market power and the route of conditions which you could tell us more about than I could tell you, the number of occasions on which you have tried to set conditions which would have led to the introduction of broadband and have not done so, and yet in the end it was a change in the way in which Oftel was thinking about competition, and allowing BT, therefore, to go down the reduction in wholesale which has opened up the possibility of significant increase in broadband subscriptions. Does that not lead you to the conclusion that it is better to change the structural powers so that Oftel move to the point where a company does not have dominance or if it does have dominance it is required to operate in a competitive way?
  (Mr Edmonds) It has dominance if it has significant market power. If that dominance or that market power is being abused, and if the regulator, having done the analysis, having discovered from the evidence that is the case, wants to redress that, we have the power at the moment and the Bill will carry that forward. Using your example of broadband, would things have been different, I suspect not. As you know, what we did in broadband in the first place was to say to BT that its local loop through a licence amendment should be opened up. The threat of that led BT to drive out broadband in its own way. The Competition Act then worked because we refused to let BT roll out its own broadband product without at the same time offering a wholesale product. I think there is a totally logical sequence of regulatory steps to do with the promotion of competition which have underpinned broadband in the UK. Actually it has taken a year longer than I would have hoped but broadband in the UK will roll out at 20,000 units a week, it is moving very quickly indeed and there is competition there. There is competition between cable, there is competition between cable and BT, there is competition between BT and the people who take the wholesale products from BT. Rather than a failure of competition I think that the story of broadband is actually now—now—looking to be a success story. I say it has taken longer than it should have done, I do not think that the wording of this legislation would have made any difference to the way that I have operated in that market place over the last three years. It has been identifying the market failure and trying to redress it.

Paul Farrelly

  99. I want to tramp similar grounds to Andrew there and likewise I am going to avoid naming a company but you have already named a company. From Oftel's experience of dealing with, shall we say, a well established or even dominant telecoms network, does this Bill leave OFCOM better placed than the OFT to improve network access and I am trying to avoid the horrible phrase local loop unbundling, and secondly, in particular to promote what we might call promising broadband infrastructure for the UK? A further question, what else if anything would you like to see on the face of the Bill itself which might improve OFCOM's powers and prospects in these respects?
  (Mr Edmonds) I think the Bill does significantly enhance OFCOM's power. It gives OFCOM for example the power to fine, which Oftel does not have at the moment, in terms of licence breaches. I think that is a very important new weapon that the regulator will have. In terms of network access, I think network access is going to be absolutely key to the future of getting network access right. It is going to be at the heart of the work that much of OFCOM will carry out. Network access I think can actually be, and indeed has been, mandated under the present regulatory regime very effectively. The number of points into the BT network of which access is now mandated—and again I go back to narrow band for the moment—the whole introduction of unmetered access into narrow band, by driving it into the BT network, much higher into the network than possibly before, was a good example of using ex ante regulation, using the licence and licence conditions to force that access in. The work we are doing at the moment on broadband under Competition Act powers to get into the network at a different point for companies who want to take a broadband product again illustrates the powers are there and are being used. I think the Bill codifies the powers differently because it brings in the SMP definition, and then it ensures that where you have defined a market place and you have discovered dominance, and you want to move, it is set out, it is set out very clearly. I do not think the Bill in those areas actually makes a great deal of difference. I think it is the ability to fine and I think it is that set of extra powers around which will make OFCOM hopefully an even more effective body than its predecessors.


 
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