UK: Ofcom Consultations - Ofcom Announces Key Consultations on Critical Communications Issues

Last Updated: 11 August 2005

Ofcom’s consultation on its proposed acceptance of BT’s undertakings: A revolution in British telecoms regulation.

A major announcement this June by the UK electronic communications regulator, Ofcom, heralds a revolution in the rules for granting access to key telecoms networks, such as copper local loops, broadband connections and "backhaul" products.

BT – Britain’s incumbent telecoms operator – has been cajoled into a major restructuring designed to ensure that, in reality as well as in theory, BT networks are open to downstream retail competitors on terms no less favourable than those enjoyed by BT’s own retail services division.

A radical proposal

The new proposal is due to be ratified in August, and is likely to take effect by the end of the year. It is consistent with the EU’s regulatory framework, but goes beyond it – by effectively requiring a split between the incumbent operator’s (BT’s) network and retail divisions. If successful, it could serve as a prototype for addressing the network access issue in other countries.

That is the solution. What’s the problem? Ofcom’s announcement is the culmination of a "strategic review" into telecoms regulation which it launched in 2003, two decades after the privatisation of BT. The review’s key conclusions were published on 23 June. They reaffirmed Ofcom’s commitment to competition in the UK’s telecoms markets (subject to protecting "vulnerable groups and isolated communities"). Ofcom considered that the best mechanism for achieving competition was the deployment of alternative infrastructure.

However, Ofcom recognises obvious difficulties in a policy of promoting competition by promoting rival infrastructures. Some infrastructure assets are "either economically impossible or highly economically inefficient to try to replicate" (Offcom Strategic Review Telecommunications Phase 2 consultation document, Telecommunications Statement, 23 June 2005.)

It would not make economic sense, for example, for each and every home to be served by two or more sets of "local loop" wires. Requiring this would be prohibitively expensive and would mean that, in practice, few people (if any) would be able to compete against BT in providing domestic voice or data telephony services.

The standard solution to the problem of promoting competition without requiring duplication of expensive networks is to require the incumbent owner of a network to grant its competitors access to the network. This approach has been taken not only in the UK’s telecoms sector, but also under the EU’s regulatory and competition frameworks for telecoms (and, indeed, in the context of regulating other network industries, such as electricity and gas).

An example is local loop unbundling:In all EU countries, the owner of the copper local loop which connects the local telephone exchange to individual houses and businesses (usually the national telecommunication company) may be obliged by national regulatory authorities to meet the requests of downstream retail competitors to be granted unbundled access to those local loops, on reasonable terms and conditions – along with rights of co-location at the local exchange.

In practice, the existing rules have their limitations. While the principle of non-discriminatory access can be established – ie, the network owner must grant downstream (retail) competitors access on the same prices and terms as it grants its own retail arm, it is very difficult to ensure that this works satisfactorily for both parties in practice. Disputes habitually arise between the network owner and the downstream competitor requesting access (such as a rival retail voice service provider or an ISP) over what is the proper price which should be charged for access. From the network owner’s point of view, the concern is to be adequately remunerated for its investment in the infrastructure; its rivals should not be allowed to "free ride" on its own capital asset. On the other hand, the downstream competitor applying for access is concerned that the network owner should not charge it such high prices that it cannot realistically compete in the relevant retail market against the network owner’s own retail arm; such applicants often complain that they face "margin squeeze", meaning that the price of access to the network makes it unprofitable for them to compete in providing retail services.

Even where a benchmark for the proper price is established, such as "long-run average incremental costs", there can be disputes about how, when and where it is measured. Such disputes have preoccupied regulators and competition authorities in France, Germany, and Britain and at EU level – for example, the European Commission’s investigation of Deutsche Telekom in 2003, and Ofgem’s continuing investigations into Wanadoo’s dispute with BT about the price of wholesale internet access.

The problem arises because, as Ofcom says about BT, (though in principle this point could apply to most national telecommunication companies which own the main telephony networks), it both enjoys a substantial degree of market power in markets for the supply of wholesale access, by virtue of its network ownership, and is vertically integrated, with a presence in the directly related downstream markets, such as retail voice telephony, internet service provision, and so on. This combination gives it "both the ability and the incentive to discriminate against its downstream competitors, who are also its wholesale customers." (Ofcom notice under section 155(1) of the Enterprise Act 2002, 30 June 2005, paragraph 4.9.)

Ofcom’s proposed solution

Faced with this conundrum, Ofcom was minded to refer the whole matter to the UK’s Competition Commission, which would then conduct a full-length investigation (lasting many months or even years) into possible market failures, followed by legally-binding orders to "remedy" any market failures it identified. This would have been an expensive, time-consuming and distracting burden for BT.

However, by deploying this "sword of Damocles" over BT, Ofcom succeeded in persuading BT to offer – by way of a negotiated settlement – legally-binding "undertakings" to address the problem, and so avoid a full Competition Commission investigation. On 30 June, Ofcom announced that it considered the undertakings offered by BT to be "appropriate and proportionate to address the competition concerns", and launched a six-week statutory consultation on the proposed undertakings. Assuming that Ofcom remains minded to accept the undertakings following that consultation, it is likely that they will be finalised before the end of the summer.

The essence of the solution is to seek to remove BT’s "ability and... incentive to discriminate" against its downstream competitors. This is to be achieved by attacking the vertical integration between BT’s wholesale business of granting access to its network and its retail arm. There is a precedent for this in Britain’s gas industry, where British Gas was demerged, with its network business (now called Transco) being split from its retail gas supply arm (Centrica).

The proposals for BT do not go as far as a full demerger. Both the network and retail divisions will remain in the same corporate group. However the proposed undertakings involve structural, managerial and financial changes within the BT group which have the effect that the two become autonomous profit centres. This is thought sufficient to address the problem without taking disproportionate steps which could deprive BT shareholders of legitimate value in their investment.

To achieve this, the key elements of the proposed undertakings are:

Establishment of a new "Access Services Division" within the BT group, to take over the network arm and offer wholesale services both to BT’s own retail arm and to retail competitors. The Access Services Division is to control and manage the physical assets of the access and backhaul networks, and employ all 30,000 staff operating and managing those networks. It will be separately branded from BT’s retail arm, have separate accounts, have its own senior management and its own management incentive structure (related to the Division’s own performance, rather than that of the BT group as a whole), move to a separate physical location, and be "ring-fenced" from the rest of BT in terms of information flows etc. The assets under its control are to include the copper local loop, local exchanges and other civil infrastructure – and its business will include wholesale line rental, local loop unbundling, fibre access products, and "backhaul" services which connect the local access network to the core network.

"Equivalence of inputs" rule: The Access Services Division will be required – in respect of a defined set of wholesale markets – to provide the same wholesale products and services, by means of the same systems and processes, on the same terms and conditions, to downstream retail competitors as to BT’s own retail services. These include wholesale line rental, shared and fully unbundled local loops, IP-based bitstream network access services and BT’s backhaul extension service – and, in future, successors to these existing services and various new services such as wholesale end-to-end ethernet services. The obligation will not, however, cover partial private circuit, which are upstream inputs to retail leased lines market.

Next generation network technology: As BT upgrades its network, there is a concern that it would exploit this opportunity to impede its downstream rivals’ ability to compete. The undertakings require BT to design its upgraded network in such a way that any products (in respect of which the Access Services Division will have Significant Market Power (SMP)) are offered to the same standard, and on the same terms, to downstream competitors of BT.

Other management arrangements: Wholesale products outside the Access Services Division which are supplied to retail competitors of BT will be supplied by a wholesale division which is to be information ring-fenced from the retail division.

Equality of Access Board: BT must establish a new compliance board, chaired by a BT group non-executive director and including some independent directors, to monitor and enforce the undertakings independently of the financial objectives of the group.

This, then, is a model design to remove the financial incentives which a vertically-integrated network operator has to discriminate against its downstream competitors – while falling short of full demerger. It offers new opportunities for entrants in UK telecoms markets. If effective, it could serve as the prototype for regulatory reform elsewhere in Europe and worldwide.

Giving teeth to the new regime

Although these undertakings represent a compromise settlement – in that BT has avoided a full Competition Commission investigation – they have real teeth. Any breach of the undertakings can give rise to enforcement proceedings, under section 167 of the Enterprise Act, by Ofcom or by any third party (eg, a retail competitor of BT) who has sustained loss or damage as a result of the breach. In addition, if there is a breach, it is open to Ofcom to refer the matter to the Competition Commission.

BT has reached a compromise settlement with Ofcom to resolve the problem of network access. BT has no choice but to abide by it. The rest of us will be watching to see whether it really works.

Responses

Ofcom is inviting views and comments on the proposed changes by 12 August 2005.

Consultation on Ofcom’s key policy proposals to ensure competitors are not unduly prejudiced by BT’s migration to its next generation network (21st Century Network – 21CN).

This consultation document should be read together with the consultation over BT’s proposed undertakings as discussed above. The specific issue dealt with by this consultation is the need to ensure that competitors will continue to have adequate access to BT’s SMP access and interconnect arrangements once BT migrates to its next generation network. The concerns over such migration are that BT may effectively design-out competition unless it is obligated to factor in competitor’s needs in its design and implementation of 21CN.

What impact could BT’s NGN 21CN have on competition?

Ofcom is well aware that BT’s proposed migration to a new network structure will entail a range of profound changes to the way it runs and operates its own business, and by extension, to the way competitors are able to interconnect and rely on BT for the delivery of their own competing services. These changes can have a substantial impact on the competitive landscape in the UK. Having worked so hard in the past decades to get BT to where it is today vis-à-vis competitors, Ofcom wants to ensure that its progress is not negated by the introduction of new working practices in a new network environment.

Therefore, Ofcom is proposing a set of policies which will ensure that competitors continue to have adequate access to BT’s next generation SMP products.

Ofcom’s aims: Ofcom defines its primary objectives to be:

  • Ensuring that equality of access is designed into the new network from the start.
  • Reducing and clarifying regulatory risks.
  • Ensuring that consumer services are not disrupted during the long process of migration.

Ofcom’s proposed policies – the subject matter of this consultation

Ofcom’s proposed policies would focus on five main areas:

Adapting regulation to ensure an attractive investment climate for NGNs. This means, for example, working out the correct pricing mechanism for narrowband interconnection charges in a next generation network so that network providers are properly rewarded for their NGN investments.

Ensuring a proper migration to new SMP products and continuing support, as needed, for existing SMP products. Ofcom is keen to ensure that existing SMP products continue to receive adequate support at least until a time when most service providers have moved their offerings to the next generation networks. Although it is not attempting to establish definitive timelines for transition, Ofcom is proposing to establish tests which would enable it to consider SMP products for withdrawal from the market. Ofcom makes it clear, however, that BT will not be allowed unilaterally to decide to stop providing existing SMP products, and that Ofcom retains the right to maintain or remove such obligations. The consultation also looks at compensation arrangements for SMP migration as well as geographic issues relating to migration.

Ensuring the development of competitive next generation SMP products. In addition to proper migration concerns, Ofcom is also intent on ensuring that the NGN is planned and rolled out in such a fashion as to enable the provision of competitive SMP products. This means, for example, ensuring that charges for next generation SMP products are based on an efficient design principle, and that equivalence of input for next generation SMP product is factored in from the start. Ofcom is also keen to ensure that unfettered network access is maintained and enhanced, and importantly, that BT not be allowed to offer retail services without first being able to offer any wholesale inputs which it controls, to other market participants.

Ensuring that general next generation network issues are addressed. BT’s 21CN is the largest, but by no means the only, NGN in the UK. Thus, in addition to issues relating to how competitors will access BT’s new network, there are also wider issues which will need to be considered by all providers implementing NGNs. These issues include number portability requirements, end-to-end call quality, emergency call prioritisation, emergency call location, call termination, text relay services, and crucially, reciprocal arrangements to ensure any-to-any capabilities to consumers (any consumer, on any network, to any other consumer, on any other network).

And lastly, ensuring that the consumer is protected in this period of transition.

This means, for example, the requirement that new services offered to consumers on NGNs should at least be equivalent to existing services, and that consumers should not suffer any detriment during the transition (for example, lower call quality or loss of access to emergency services). Finally, Ofcom wants to ensure that consumers are kept fully informed of all changes throughout the process.

Responses

Ofcom is inviting views and comments on the proposed changes by 12 August 2005.

Consultation on Ofcom’s proposed changes to the way it investigates undue non-price discrimination by SMP providers

This consultation considers the prohibitions imposed on SMP providers not to discriminate unduly between customers.

Why the need to revise the guidelines for investigation? According to Ofcom, the current approach (as set out in Oftel’s "Imposing access obligations under the new EU Directives, September 2002"), which predates the enactment of the Communications Act 2003, can benefit from a review and update. In particular, Ofcom is keen to remedy what it considers an unduly restrictive approach which considers harm to competition solely at the time of evaluation. This means that today Ofcom is unable to find a contravention of competition if the behaviour in question either ceases under investigation or if the harm is not yet in evidence.

Under the new approach, Ofcom is specifically proposing to consider behaviour which has in the past harmed competition, or which may in the future harm competion, as well as behaviour which is deemed to be currently harmful to competition.

The proposed approach

The approach to investigating compliance with the requirement not to discriminate unduly between customers, which is proposed in this consultation, has two parts:

Firstly, in all cases, the proposal sets out the questions that may be considered during an investigation. Ofcom will consider:

  • whether any differences in transaction conditions offered to two customers reflect relevant differences in the customers’ circumstances. Examples of such non-price differences include the functionality of the product supplied, the timing of provision, the reliability and efficiency of transactional processes, and the availability of information that is critical to the purchase or support of the product.
  • whether any relevant similarities in customer’s circumstances are reflected in transaction conditions offered to two customers.
  • whether any differences (or similarities) in transaction conditions that are not objectively justified by relevant differences (or similarities) in the customers’ circumstances might harm competition.
  • as explained above, in determining whether any differences (or similarities) identified might harm competition, whether such differences or similarities have in the past, or currently, or may in the future harm competition.

Secondly, Ofcom proposes that it may presume undue discrimination when a vertically integrated SMP provider offers the same price, but different non-price transaction conditions, to an external wholesale customer, when compared to a downstream business owned by the SMP provider. This would be deemed a "special case". The SMP provider will of course have the opportunity to provide evidence demonstrating that differences are objectively justified, and Ofcom will consider any evidence provided in light of the questions above.

Responses

Ofcom is inviting views and comments on the proposed changes by 8 September 2005.

Two other Ofcom consultations


On Universal Service Obligations: The USO review is focused on the next two to five years and is being carried out alongside the Strategic Review of Telecoms (Telecoms Review) which looks at longer term Universal Service issues. The USO structure ensures that basic fixed line services are available at an affordable price to all citizen and customers across the UK. USO services include: special tariff schemes for low income customers; a connection to the fixed network, which includes functional internet access; reasonable geographic access to public call boxes; and a range of services for customers with disabilities including the text relay service.

Ofcom's review of the USO has four main aims:

  • ensuring that the obligations continue to meet the needs of consumers as demands and technology change;
  • finding the right balance between the needs of vulnerable customers and changing commercial conditions;
  • making sure the benefits of measures reach those who need them by targeting and creating incentives; and
  • preparing for the future by linking with Ofcom’s strategic review.

Responses

Ofcom is inviting views and comments on this consultation by 28 September 2005.

On the possible liberalisation of the regulation of GSM gateways under the Wireless Telegraphy Act. Ofcom is consulting on possible liberalising changes to the present regulations governing use of GSM gateways in the UK. GSM gateways are devices which enable calls from fixed telephones to mobile telephones to be routed directly into the intended mobile network.

Ofcom has recently clarified that it is legal under UK law for end-users to buy, install and use GSM gateways for their own use. However it is currently illegal for anyone to use GSM gateway equipment to provide a communications service by way of business to another person or organisation. This prohibition on "commercial" use applies equally to the mobile network operators and to other organisations.

The consultation reviews different options for the future of this service, ranging from full liberalisation to the continuation of the current prohibition. According to its release: "Ofcom has tentatively concluded that the chief difference between the appropriateness of each of the options is the risk of harmful interference and the extent to which such risk can be effectively managed. On the basis of its analysis to date, Ofcom believes that there is some scope to liberalise the use of gateways through a limited revision of the existing Exemption Regulations, and that this can be done without unacceptable risk of harmful interference. This exemption is unlikely however to extend to all types of gateway use."

Responses

Ofcom is inviting views and comments on this consultation by 6 September 2005.
The European Commission's study on a Community initiative on the cross-border collective management of copyright.

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