Examination of Witnesses (Questions 263-279)|
MONDAY 10 JUNE 2002
Lord McNally: I do not know if you like me are
a fan of B movie westerns but it is a bit like where they finally
get the villain and somebody in the crowd shouts, "Somebody
get a rope." I do not know whether BT feels like that at
the moment if you have been listening to the other evidence we
have had. Oh, this is not BT!
Chairman: This type of thing happens in the
House of Lords all the time! Tom?
263. Now I really am depressed because I realise
how long we have still to go! I am delighted to be able to put
questions to three such distinguished companies as Energis, Nortel
and Cable & Wireless. Are you satisfied with the general duties
that OFCOM has been given by this Bill as it effects your sector?
(Mr Phillips) If I could start off from Cable &
Wireless's point of view, we see two main issues running in parallel.
The OFCOM legislation is one very important issue obviously and
we have made some comments and I would like to draw out the summary
of those now, but also we think there are some major structural
weaknesses in the industry at the moment in the United Kingdom
that however effective a regulator becomes they will never be
able to fully address. At the heart of those structural problems
is the fact that we have a natural monopoly in the local network
in the United Kingdom and we have a vertically integrated owner
of that natural monopoly, and until we address that situation
we will always struggle to get to our joint goal, which is an
ever-decreasing burden of regulation, an ever lighter touch of
regulation instead of what we have today, which in many cases
is the opposite where regulation is increasing.
264. But when led NTL and Telewest in that direction
where they identified natural monopoly and a vertical structure
they said that they did not want to kick the ball into the net
which was then presented to them. Can I put the ball on the spot
again. Do you think the answer to those two problems is the break-up
(Mr Phillips) I think that we need a thorough, independent
evaluation of whether or not the market is competitive. Cable
& Wireless has performed its own internal analysis and our
conclusion is that the market would be and consumers would be
much, much better off if BT's local access network were broken
out and managed under a separate organisation from BT's retail.
265. Would you see that as a first job for OFCOM?
(Mr Phillips) I think that would be tough as OFCOM's
first job because I think OFCOM's job should be focused on regulating
the market structure that it has and it has in front of it in
the industry. I think the Government might consider, for example,
a referral of the competitiveness of the telecoms sector to the
Competition Commission so that an independent review could be
made by the Competition Commission ahead of the formation of OFCOM.
266. The Government say they want OFCOM to be
a nimble, light touch regulator. Would you like to see it more
or less light touch in the Bill to turn this rhetoric into a reality
or do you think this desire to have a light touch is just rhetoric?
(Mr Wickham) In terms of light touch or not, I think
the issue for us is to make sure that we have got appropriate
levels of regulation. It is certainly not the time right now to
have light touch as applies to certainly the telecommunications
part of the market. Tom has already given the Cable & Wireless
view in terms of needing to look at the break-up of BT. Certainly
that is something that we would agree with over time and the issue
is that will take time. Right now from our perspective what we
need to see is an appropriate regulatory regime in effect where
it is not possible for BT in particular with significant market
power to be able to launch retail products when there is no ability
for its competitors to offer competitive products concurrently
because there is no wholesale or inter-connect product to allow
them to do so. We have been waiting now three years for an adjudication
on broadband capability. That sort of thing evidences the fact
that light touch certainly is not appropriate right now.
(Mr Hargrave) Could I give a different perspective
from the point of view of Nortel Networks which rather than being
a service provider or operator, is a solution provider. We broadly
applaud the draft Communications Bill and we think regulation
should be as light touch as is necessary. The concern that we
have about the Bill is the inclusion of a Consumer Panel. While
the Bill talks about light touch regulation, there is a set of
far-reaching powers given to OFCOM that might make this impossible.
We want to ensure that those powers are used appropriately. For
example, the inclusion of a Consumer Panel makes one wonder about
the need for other stakeholders to be involved to monitor OFCOM
and ensure that it operates, in our view, equitably.
There are many stakeholders involved. There
are service providers, there are the solution designers, those
who run the operators, the new and old style technologies side-by-side.
We feel there is some desirability in having a stakeholder panel
of some form helping to achieve the objective I have just outlinedmaking
sure that OFCOM uses its powers wisely. The same would be said
about the set-up of the Board of OFCOM to make sure that all of
these interestsand we have heard comments about the domination
of content mentioned in this Billare reflected so that
the wide powers OFCOM has been given in the Bill are used appropriately
and that all stakeholders are consulted.
Chairman: Only today have we heard about the
domination of content. All the prior evidence has been information
on the domination of economic factors over content. The two are
quite quite different perspectives as to what OFCOM might be devolved
267. Do you welcome the Consumer Panel? Do you
think it will be effective or do you think it will be an irritant?
(Mr Hargrave) I would say one needs some form of consumer
input. It is not an irritant but my point is you should broaden
that. There are many other stakeholders. OFCOM should be there
primarily to address the interests of the consumer and therefore
some consumer input is required and a panel would seem an appropriate
way of doing that. I am advocating broadening that so that other
stakeholders' interests and knowledge is taken into account as
well as just the consumer input.
268. Surely you guys are the big boys and you
can get your points across. The idea of a Consumer Panel is that
it is not part of OFCOM, it is outside OFCOM but it brings together
the little guys who cannot get their voice across. What added
value is there in putting representatives of the industry inside
(Mr Hargrave) I was not so much saying that the stakeholders
should include current industry representatives but rather people
who have experience from diverse industries. Clearly we must make
sure that the consumers are represented and that is covered adequately
in the Bill. The point that I am making is that these are quite
complex decisions and OFCOM has a wide range of powers within
the Bill. Before taking a decision OFCOM must take advice or be
advised from the whole range of interestspeople who make
the new technology, the old technology, the people who make solutions,
those who have networks, those who provide services. That input
is required in some way not necessarily from those who are currently
in the industry but that experience should be available to OFCOM
to ensure that the regulation is appropriate.
269. I want to go back to the initial evidence
that we were hearing about monopoly and I hear the message that
we ought to break up the monopoly and the vertical integration
and so on, but knowing how governments work, having once been
in government, I suspect that that is not on the cards at the
moment and we are with the Bill we have got. You make a very cogent
and powerful criticism in your evidence of the present state.
What is it that is going to make the difference between the previous
regulatory performance and OFCOM's performance in grasping some
of these issues? Is there something in particular you want in
the Bill? I asked this question, and if you were in the room you
will have recognised it, of an earlier witness where we talk about
shifting the burden of proof. At the moment the monopolist (BT)
has the advantage in a sense on the burden of proof and, indeed,
it is arguing for all sorts of additional defences. You are saying
that the burden of proof should be on the monopolist to show that
discrimination is not occurring. Is that your central proposal
or are there others?
(Mr Phillips) We have three. I quite agree with you,
the structure of the market is a long-term issue but we do feel
it is a very profound issue if we are ever going to get away from
increasing levels of regulation. In parallel we believe OFCOM
needs to focus on three things. One is that the burden of proof
should be on the incumbent BT rather than the other way round
and BT should be asked to put forward evidence that they are not
behaving in a way that is abusing their dominant position in the
market when challenged to do so by OFCOM rather than other operators
bringing complaints to Oftel (as they do today, or OFCOM in the
future) and OFCOM trying to drag evidence or material from BT,
a process which lasts many, many, many months by which time very
often first mover advantage has taken place in the market, and
BT has established a position that competitors cannot subsequently
270. Using what power are you referring to in
shifting the burden of proof. Are you talking about competition
powers or sector specific regulatory powers?
(Mr Phillips) For expediency within the sector specific
regulatory powers that OFCOM would have, they could be encouraged
to seek the burden of proof on the incumbent in the first instance.
271. Coming back to the Bill I keep wanting
to know what people want and whether they are satisfied with the
clauses as they are or if there are any changes you want. You
have got the Bill team sitting behind you on this, so now is your
(Mr Phillips) There are another two points that we
feel are particularly important for OFCOM. One is that the Bill
makes provision for OFCOM to be able to take decisions which it
believes are in the long-term interests of consumers and not merely
what may appear short-term benefits for consumers. For example,
should an operator who is dominant in a particular part of the
market reduce the price of a service in that part of the market,
it should not automatically be assumed that that short-term benefit
flows through to long-term sustainable benefits for consumers.
Thirdly and finally, we advocate strongly an effective appeals
procedure. The procedure we have today lasts for too long, it
gives too much benefit to the person that has made the first move
and is subsequently challenged, and really is not as effective
as it should be.
272. Are you happy with the provisions in the
Bill at the moment on appeal?
(Mr Wickham) There is one specific area that I am
not happy with which is that there is an appeals process in there
but it sets no time-frame for the appeal. It is that time-frame
that is absolutely key and I would like to see a three month beginning
to end limit on that process for appeal.
273. Nortel say, picking up their evidence,
that such a requirement will enable efficient investment in infrastructure
and promote innovation. Should any regulatory system or any legislation
do that? Surely the object is to create a free, competitive, open
situation? Can a regulator do anything to enable efficient investment
in the infrastructure?
(Mr Hargrave) It is difficult. We made that comment
in light of operators with a super market presence. It can also
be related to the concern voiced earlier about this Bill and the
need for it to be future-proof. We have had discussions about
broadband which may be debated today and how things are going
to change in the future, but OFCOM must be confident about where
things are going and somehow try and regulate in a way that encourages
innovation and encourages the roll-out of infrastructure for things
such as broadband. It is a hard question, but in order to make
the Bill future-proof they should at least take these issues including
how to encourage investment into advanced technologies, into consideration.
274. But you are requiring a duty. I am not
quite sure how your duty would be drafted without seeking to impose
investment decisions or interfere with the market in a way I suspect
you would be first to object to.
(Mr Hargrave) Yes indeed. I am not clear how it would
be done. Can I rephrase it somewhat and suggest that OFCOM in
some way be required to take into account innovation in the changing
environment of the market-place. I am a technologist at heart.
We have heard things discussed previously about how things change
so fast and how we do not know how the environment will go and
some areas of roll-out of new innovation could be impeded if there
is a super market presence in some area. In some sense they could
have a duty to take these matters into consideration in their
deliberations, something along those lines.
275. I am still confused about what it is you
wish the Bill to do precisely in order to achieve your objective.
As I understand it, there is no burden of proof issue in relation
to significant market powers conditions. There is no requirement
on OFCOM if it uses these conditions to do other than demonstrate
super market power and a need therefore to apply conditions. Why
do you think there needs to be a change in the burden of proof
on the SMP conditions.
(Mr Phillips) I think it is more the modus operandi
of OFCOM perhaps than the specific drafting point we are getting
276. A more aggressive use of conditions.
(Mr Phillips) A more aggressive use and a presumption
that as a monopolist with dominance in the market you will behave
as a monopolist does behave when one is dominant in the market.
277. SMP conditions, according to your evidence,
is not what you are looking for because you say accounting separation
and all the things that go with SMP conditions are not enough
and you have got to effect the structural reform of the market,
but what you are looking for is a market investigation under the
Enterprise Act when it comes.
(Mr Phillips) I agree. What we put forward in our
evidence is two parallel paths of study. One looks at the overall
structure of the market, which we think is an important context
to the Bill, but the other focuses on the Bill itself.
278. There is no way you can change the burden
of proof on the Enterprise Bill provisions/competition legislation
provisions. They are going to inevitably work in the way they
do in the Enterprise Bill. We cannot change that in the Communications
Bill. There is no reason why we would do that for other sectors,
so why do it in communications? Can I come on to appeals. Mr Wickham
was expressing concern about time limits, but there are no time
limits on appeals under communication legislation for other sectors
so why for telecommunications?
(Mr Wickham) You can correct me if I am wrong but
in terms of the way in which we see Competition Appeals Tribunals
being set up under the Enterprise Bill and looking at the way
in which appeals might be treated, there is no doubt the two go
hand-in-hand. If you correct one side maybe you do not have to
correct the other, but if we have got a situation where there
are appeals being heard at the moment against a situation in the
telecoms industry where the burden of proof is falling upon the
competitors rather than upon the incumbent, as a fact we would
like to see a speedier resolution of appeals. As I have already
evidenced at the moment we can wait three years for the thing
to be heard to be put into place for them not to be sufficient
and by that time the game is over. I hate to bang on about this
particular subject because I know it has been an issue which has
come up time and time again, but in the broadband market we hear
about 500,000 broadband customers connected and yet 350,000 had
to come through other competitors in the market and we have been
trying to service our customers through broadband through an inter-connect
enabled by BT and it still is not there even at its most basic
level. That is why we worry about the fact that when things do
not get delivered that the appeals process can take so long and
we would like to see a timeframe put around it. Frankly, I cannot
speak about other industries because I am not a part of it.
279. Are you talking about appeals under competition
legislation or appeals only against decisions made under the Communications
(Mr Wickham) I am referring to communications.