Examination of Witness (Questions 80-99)|
MONDAY 27 MAY 2002
80. Do you see in this design and function an
active promotion ofI am sorry I cannot think of any better
word for itthe 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 regulatorand
OFCOM is going to be an economic regulator as well as all the
other things it is being asked to dois 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.
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
(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
87. Just a very final question: how many people
work for Oftel at the moment and how many of those are working
(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
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
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 ObligationsI am deliberately
keeping out of the whole area of television at the momentcertainly
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.
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
(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
(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 nownowlooking 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.
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 mandatedand again I go back to narrow
band for the momentthe 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.