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Ofcom's
Strategic Telecommunications Review: No Surprises in Round Two
Today Ofcom published a consultation document on the second
phase of its Telecommunications Review, part of a three-phase
strategic review of the telecommunications sector announced
in December 2003. Enough information was already in the public
domain prior to the publication of the document and no surprises
followed the publication. No structural remedies are envisaged
at this stage and no "break-up" of BT. Rather, a gradual
approach towards developing equality of access to BT's hardware
network between BT Retail, the retailing arm of BT, and its
competitors is the preferred approach. Ofcom has invited comments
on the consultation document before 3 February 2005.
The Background
In Phase 1, Ofcom analysed the competitive situation in the
telecommunications sector. It considered BT's role and whether
this could be said to lead to "slow product development;
inferior sales quality; poor transactional processes; and a
general lack of transparency", echoing the views of BT's
competitors. The concern was that Ofcom might have been attempting
to resolve these issues with piecemeal regulation and a series
of Competition Act investigations, resulting in "a regulatory
mesh which … creates additional costs and often conflicting
incentives [for BT]".
Today's document marks the beginning of a consultation on Ofcom's
preferred approach. Phase 3 will be a clear statement from Ofcom
on regulation of the industry going forward.
The Proposals
Ofcom proposed three options: (i) deregulation of the market;
(ii) reference to the Competition Commission, who could impose
structural remedies; and (iii) equality of access to BT's infrastructure
(equivalence).
Ofcom considers deregulation to be impractical, also because
of the regulatory duties that arise from the European legislative
framework. Structural remedies would also be impractical: BT
Retail currently accounts for an estimated 60% of BT Wholesale's
sales and underwrites the financial risk involved in the maintenance
and improvement of infrastructure. Most respondents to the initial
consultation have indicated that they would prefer a less disruptive
approach and it is difficult to disagree with Ofcom's view that
the separation of BT's wholesale and retail operations would
be complex and difficult, would not eliminate the need for regulation
and would represent a "seismic change" to the industry.
The third option, equivalence, is therefore the favourite option.
to ensure equivalence between BT Retail and its competitors
through: (i) access to the same product range; (ii) at the same
prices; and (iii) through the same transactional processes.
Equivalence will not necessarily apply across the board. Ofcom
plans to insist on equivalence for new product markets and for
some established product markets only, to be assessed on a product
by product basis.
Ofcom has also invited BT to propose solutions in support of
equivalence. BT has recognised publicly the need to implement
effective Chinese Walls between its Wholesale and Retail businesses.
Ofcom does mention that "past experience in other sectors
shows that regulation designed to remove the scope for discrimination
may sometimes lead to voluntary structural separation"
(emphasis added). Whilst equivalence is its preferred option,
Ofcom states that it will only work if "BT can deliver
the necessary changes". For all the difficulties that imposing
it would create in the short term, structural separation "may
unlock value and improve customer service, innovation and competition
in the mid to long term". BT has been warned.
Ofcom originally intended to complete the Review by the end
of 2004. However, this proved too ambitious a plan and it is
now unlikely that the Phase Three conclusions will be published
before Spring 2005. Ofcom has requested comments on today's
consultation document before 3 February 2005.
For more information please e-mail the EU & Competition
Group at EU&Competition@charlesrussell.co.uk
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