Much flak has been directed at BT and telecoms regulator Oftel. Tim
Conway looks at the troubled history of communications regulation
in the UK and suggests a new way forward to promote
competition
It is now evident that Oftel, the UK telecoms regulator, has
failed markedly in its quest to have BT provide access to other
carriers at the local loop level.
So far, despite promises from both Oftel and the Government that
widespread access was likely before the end of the English summer
and would enable competing suppliers to offer high-speed broadband
services such as digital subscriber lines (DSL), just 361 BT
exchanges have been listed.
The European Commission has reacted strongly, saying the UK has
been "far slower" in introducing competition at the local loop
level than other European Community member states. Other critics
say that the listed exchanges are in lower traffic areas, thus
leaving the plumpest sites to BT's on-going monopoly.
We are witnessing a sad example of regulatory failure. This
fundamentally calls into question the continued relevance of
current independent arrangements for regulation of
telecommunications in the UK. At best, Oftel is revealed as an
organisation basically powerless to push BT into opening up the
local loop. At worst, Oftel will be cited in history as a stunning
example of the captured regulator - a variation on the Stockholm
syndrome, where hostages become converted to the cause of their
captors.
Of greater concern, Government ministers at the recent Labour
Conference reverted to BT data to refute OECD criticism, implying
they may also be in the same position.
On top of this, research firm Ovum recently stated that, because
of its dominant ownership of the local loop, only BT will be able
to afford to roll out broadband services such as ADSL (faster DSL,
for Internet access)to consumers and small businesses.
Unfortunately, BT will be constrained as to the rate at which it
makes these services available by the limits of its own resources,
not to mention the absence of any significant incentive to
cannibalise existing services such as ISDN.
The result of all this? Britain will be much slower at rolling
out broadband services than the US. More seriously, right now our
European neighbours look set to overtake us.
The Government's response so far has been to lobby the European
Commission to weaken the original EC proposal, which called for EU
member states to offer third parties access to the local loops by
31 December 2000, at the latest. The UK proposed this deadline be
extended where member states faced "technical problems" in meeting
the timetable, and this will be accepted.
But the reality in the UK is not a technical problem, but
regulatory failure. This will naturally affect how the UK is viewed
as a location for investment in, and development of, broadband
content and related services.
There is already evidence of this, with reports that major
suppliers are withdrawing from supplying broadband services at the
local level.
All this is in marked contrast with the promise Oftel made when
it was set up in its ground-breaking, independent regulation role
back in the mid-1980s: then, Brian Carsberg spoke of "patrolling
the boundaries" of BT's monopoly to ensure competition was not
stifled.
Perhaps now is the time to consider if there is another way to
promote competition and re-establish the UK's reputation as a
priority location for communication services.
In economics, when discussing regulation and competition, it is
critical to survey characteristics such as market structures and
identify the incentives that drive the market - and which likewise
might be harnessed to produce change.
In the case of the local loop, there is now significant evidence
of demand by consumers for a wider choice of services that can be
delivered using their existing telephone connection - especially
broadband, or "always on" Internet connection.
Equally, many competing suppliers are willing to offer such
services; one of the alleged reasons for the failure of BT and
Oftel to open up the loop on schedule was because of the large
number of suppliers wanting to locate equipment in local exchanges,
apparently causing concerns about physical space, power supplies,
cooling and static electricity risks. The list - compiled by BT -
goes on.
In these circumstances, one must favour a market mechanism to
deliver to consumers the services they demand. But this immediately
raises the question of ownership of the resources and assets that
can be exploited to deliver the services. These are the local loop
and the exchanges which switch them.
In the UK, the first approach to this was to encourage the
development and deployment of alternative cable networks, based
initially on meeting demand for subscription TV services. Some of
these also carry telecommunications but penetration has not been as
high as was hoped by policy-makers. In any case, pay-on-demand TV
can be, and has been, equally well met by terrestrial and satellite
services. Likewise, communications services can also be provided by
alternative services such as wireless local loop technologies, and
these should be encouraged.
However, the fact remains that the vast majority of consumers
are served by BT's local loop and, under current arrangements, BT
is likely to be limited (or to limit) in the speed with which
broadband services are deployed.
One solution to this might be to separate, structurally and
commercially, ownership and control of local loop assets into a
separate company.
Unlike the current position, this new company would have a clear
incentive to meet consumer demand in a timely fashion, and respond
to suppliers by investing in capacity to meet their service needs.
That is how it would make money, rather than by offering competing
services as is presently the case.
There are plenty of precedents for this. In the US, local
telephone companies effectively play this role: the idea of
separate local or regional local loop companies ought not be ruled
out in the UK.
In modern electricity and gas supply arrangements, there is a
clear differentiation between firms providing infrastructure and
supply, enabling contestability and competition.
Finally, of course, there is Railtrack - mention of which may be
the kiss of death - but the circumstances between railways and
telecommunications are markedly different.
It is time for debate to begin on these types of reforms. The UK
is clearly falling behind and that will affect the competitiveness
of knowledge based industries.
As to the future of Oftel, if the right market structure can be
established, one must question the ongoing relevance of independent
regulation of competition. General competition rules, as
administered by the Office of Fair Training, might work best.
Tim Conway is policy director, at the Computer Software and
Services Association