Ofcom

1
Ofcoms Strategic Review of Telecommunications Pha
se 2 analyst briefing
Clive Ansell Anne Heal
25th November 2004

2
Strategic Review Timetable

• Strategic Review was announced in December 2003
• Phase 1 document was published on 28th April 2004
• Phase 2 document was published on 18th November
• Deadline for responses is 3rd February 2005
• Phase 3 Final Statement will be published in
  Spring
• Implementation is outside the scope of the
  Strategic Review

3
Phase 1 questions - Ofcoms conclusions

• 1. Attributes of a well-functioning market ?
  Innovation and choice are now more important - as
  are consumer information and the ability to
  switch easily
• 2. Effective and sustainable competition?
  Achievable in core and backbone networks, but
  more difficult in local access and other
  bottlenecks
• 3. Scope for reduction in regulation? Yes, as
  focus on bottlenecks to guarantee genuine
  equality of access creates scope for withdrawal
  from regulation elsewhere
• 4. Incentives for investment? Ofcom proposals
  should encourage investment in scale and reach by
  BTs competitors and allow BT appropriate rates
  of return for 21CN etc
• 5. BT separation or equivalence still relevant
  questions? Yes, but separation would be
  difficult equality of access is preferred

4
Phase 2 - Summary of Ofcoms message

• Telecoms is an important economic sector in its
  own right, with a growing impact on our lives
• The industry has delivered for business and
  residential customers over the last 20 years
• But the fixed sector is fragmented and dominated
  by BT
• And a complex regulatory mesh has led to
  micro-management of BT and competition based on
  regulatory arbitrage
• Faced with the technology shift to digital, it
  is becoming clear that the current market and
  regulatory structure is unsustainable. It is that
  challenge that our Phase 2 proposals seek to
  address. (Ofcom, November 2004)

5
New regulatory principles

• Promote competition at the deepest levels of
  infrastructure where it will be effective and
  sustainable
• Focus regulation to deliver equality of access
  beyond those levels
• As soon as competitive conditions allow, withdraw
  from regulation at other levels
• Promote a favourable climate for efficient and
  timely investment and stimulate innovation
• Accommodate varying regulatory solutions for
  different products and, where appropriate,
  different geographies
• Create scope for market entry that could, over
  time, remove economic bottlenecks
• Light touch regulation in the wider value chain

6
Ofcoms three options

• Option 1 across-the-board deregulation and
  reliance solely on competition law to police the
  market
• Option 2 market investigation reference under
  the Enterprise Act
• Option 3 focus regulation on enduring
  bottlenecks, and require BT to deliver real
  equality of access to its networks

Ofcom prefer Option 3 but, if this does not work,
will reconsider Option 2
7
The driver behind equality of access

• Negative perceptions dating back to the time of
  privatisation around wholesale..
• product quality
• product development
• transactional processes
• transparency

8
Two dimensions to equality of access

• Equivalence BTs wholesale customers to have
  access to
• the same or a similar set of regulated wholesale
  products as BTs own retail activities
• at the same prices as BTs own retail activities
• using the same or similar transactional processes
  as BTs own retail activities
• Behaviour substantial internal changes to BT
  including
• changes to organisation and management structures
• removal of inappropriate incentives
• better control over information flows
• transparency of internal policies and processes

Ofcom expect BT to provide prompt and clear
proposals for delivering equality of access
9
Ofcoms proposals for key markets

• Current generation broadband continue to promote
  competition at deepest level, i.e. LLU where
  economic. Potential for new regulated products
  such as naked DSL
• Voice staged withdrawal with five defined
  stages. Fit for purpose WLR is a pre-requisite
• Business voice BT may wish Ofcom to
  immediately conduct a new market review
• Next generation core networks consultations soon
  on 21CN access policy and Network Charge Control
• Next generation access networks range of options
  considered, including forbearance and duct
  sharing
• Mobile Ofcom would like to explore alternatives
  to the regulation of call termination

10
Five-stage withdrawal from voice regulation

• Stage 1 (ongoing) BT to deliver fit-for-purpose
  WLR
• Stage 2 (2005) review the withdrawal of fixed
  retail voice regulation
• Stage 3 (2005) review the withdrawal of
  regulation in certain wholesale markets, e.g.
  wholesale IDD
• Stage 4 (2008-2010) review the evolution of
  remaining fixed wholesale voice markets in light
  of 21CN implementation
• Stage 5 (ongoing monitoring, review by 2008)
  assess whether a single inter-platform voice
  market including fixed and mobile should be
  defined. This could lead to complete removal of
  SMP voice regulation

11
The regulatory contract and BTs returns

• Regulated returns must give BT the right
  incentives
• Core considerations are
• 1 relative importance of incentives for BT to
  invest
• 2 scope for investment by competing network
  providers
• 3 need to protect consumers from excessive
  charging
• 21CN - the more this facilitates competition, the
  greater the risk to BT and the higher the
  permitted return should be
• Migration to 21CN/NGNs - next Network Charge
  Control must consider incentives and regulatory
  certainty
• Current generation access networks - little new
  investment in prospect so consumer protection is
  the priority - hence the cost of copper study

12
Next generation access networks

• Ofcom raise several possibilities that could
  support the deployment of local access fibre and
  wireless technologies in a competitive
  environment
• equality of access - i.e. mandated sharing of BT
  duct - with standard rate of return
• equality of access with risk-adjusted rate of
  return
• time-limited forbearance
• time-limited forbearance plus open access to BTs
  ducts
• Ofcom also float the idea of a separate new
  entity which would provide next generation local
  access this could involve divestment of dark
  fibre and duct assets by BT
• None of these is singled out as Ofcoms preference

13
Consumer protection options

• Better consumer information
• leave provision of information to the market
• Ofcom to provide comparable pricing information
• promote provision of basic information by
  intermediaries
• encourage a responsible approach to comparisons
  in advertising
• restrict the range of tariff packages and
  structures in the market
• bill formats that are easier to understand and
  help comparison
• Simpler processes for switching supplier
• regulating retail switching costs
• positively encouraging switching
• encouraging migration between tariff plans
• encouraging providers to reduce the complexity
• of switching processes

14
USO

• Importance of the USO as a safety net for
  vulnerable consumers is reaffirmed
• There are no proposals for change now
• But the USO may need to evolve in the future
• new funding mechanisms
• new ways of providing the USO
• extension to cover broadband

15
BTs assessment of the Phase 2 document

• The document reflects BTs key Phase 1 messages
  that
• regulatory micro-management is part of the
  problem
• regulation should be focused on bottlenecks
• infrastructure competition and investment must be
  encouraged
• Ofcom recognise the radical transformation
  underway and highlight key transitional issues,
  including
• evolution of a wider communications value chain
• migration to Next Generation Networks
• implications for regulated products, potentially
  with a geographic dimension
• greater importance of innovation to consumers

16
BTs assessment of the Phase 2 document

• Many detailed proposals are positive, for example
• the clear path for deregulation of voice services
  - although we believe some of the timescales are
  conservative
• possibility of an early review of business
  services
• Some are very complex to implement
• equivalence and behavioural/organisational change
• Some options would be problematic in principle
  and practice
• potential requirements for duct sharing
• possibility of intrusive consumer regulation

17
In summary...

• We welcome Ofcoms call for a new settlement
  where regulation is tightly focused on
  bottlenecks, with deregulation elsewhere
• This would be a real prize for the industry,
  consumers and UK competitiveness
• We will engage constructively with Ofcom and the
  industry during the final phase of the Strategic
  Review, looking forward to achieving regulatory
  certainty that will encourage investment and
  innovation