by david.nunes
Dr. Peter BouldingIssue:Latin America I 1998
Article no.:12
Author:Dr. Peter Boulding
Title:Development Manager
Organisation:CRI UK
PDF size:20KB

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Article abstract

The practical implications of the UK regulator’s new fair trading powers will be closely scrutinised by other regulators and observers, particularly in indicating the general importance of competition law and policy to telecommunications regulation. The future of regulation may well lie in the utilisation of general competition powers rather than minute attention to specific licence conditions. Regulatory structures at national and supra-national levels will have to be adept at reacting to or anticipating new developments or face the economic consequences of inaction.

Full Article

Telecommunications was the first major regulated industry privatisation, dating from 1984. For 7 years the duopoly of British Telecom (BT) and Mercury existed in the provision of infrastructure and services. In 1991 the limit on the number of telecommunications licenses was lifted and the market moved towards complete liberalisation. Many new licenses have now been granted and more than 90 cable franchises are authorised to provide voice telephony. There are now over 350 telecommunications licences valid in the UK. Licences are issued by the Department of Trade and Industry (DTI) and monitored by the regulator, the Director General of Telecommunications, Don Cruickshank (who retires at the end of March 1998) and heads OFTEL, the Office of Telecommunications. The main players in the UK are as follows: · BT, formerly the state-owned monopoly provider of telecommunications services at local, national and international levels; · Long-distance operators, including Mercury, which began competing with BT in 1985 and now controls a large share of long distance/international traffic. In April 1994 a further six companies were licensed to produce long-distance services including Ionica (a radio telecommunications company) and Energis (part of the National Grid Group) which has built a digital network using power transmission lines, and · Cable companies offering television and telecoms services. They are the main competition to BT at the local level. BT remains the principal fully-integrated supplier of telecommunications services in the UK. Its activities include the provision of basic telephony from local and national to international calls, the provision of value added network services (VANS) such as videotext, certain specialised services such as satellite and cellular radio, and the sale of equipment. Currently BT is excluded from providing television services. In 1997 Mercury Communications (80% owned by Cable & Wireless) merged with three of the cable companies, Nynex, Bell Cablemania and Videotron, to form Cable & Wireless communications. It is too early to say whether this group is substantial enough to make a significant impact in the domestic market. 1997 was also notable for the failed merger between BT and MCI (to form Concert) of the United States. Many larger operators are actively seeking alliances with local players as liberalisation accelerates international call competition in opening more and more markets, including the European Union where, notionally at least, liberalisation is now a reality. The Current State of Regulation In July 1995 the regulator issued the major policy statement, Effective Competition: Framework for Action. This abolished the complex and poorly understood access deficit charges (ADCs), paid by a few operators using BT’s international network. The concept of universal service was also defined as affordable access to basic voice telephony services for all those reasonably requesting it regardless of where they live (but was also to be reviewed in future). OFTEL also estimated that the cost of universal service to BT lay in the range £0-50 million per annum. OFTEL proposed establishing a universal service fund to which all operators would contribute and claim from on a pay or play basis if they offer special tariffs. The increasing competition which has developed in the telecoms markets has been the product of a combination of rapid technological change and a supportive regulatory environment. The Director General of Telecommunications, Don Cruickshank has been the first of the regulators to begin the process of regulatory withdrawal. The proportion of BT’s turnover which is subject to price caps is expected to fall from a peak of 70% (50% at privatisation) to 25% in the future (the focus is now on the 80% of residential customers with relatively low bills). If competition develops sufficiently, price caps for the whole of the retail market will be removed in 2001. There are no plans to lift regulatory controls on access prices for other suppliers wishing to use BT’s network. Access pricing is always a contentious issue for telecommunications regulation, given the dominance of the network owner and the eagerness of new entrants. The Director General’s addition of a general fair trading condition (along the lines of Articles 85 and 86 of the Treaty of Rome) to BT’s licence has been validated by a legal decision in December 1996. BT opposed the extension of the regulator’s powers to that of competition authority, arguing that these powers should remain with the Office of Fair Trading. OFTEL stated that the fair trading condition was inextricably linked with the price cap proposals and that BT could not have one without the other. The compromise reached was that of time-limiting the fair trading condition until 2001. The price cap proposals are also technically interesting because they allow for the first relaxation since privatisation (from RPI-7.5 to RPI-4.5). This is a function of the maturity of telecommunications regulation. The danger in perpetually tightening price caps is that once a company is operating near its efficiency frontier, any radical cutting could result in prices falling below the long-run marginal cost of supply, an economically unsustainable situation. The difficulty is in deciding when the efficiency frontier is being approached, particularly when technological change and innovation continue to push it further forward. The other main area of regulatory dispute between BT and the regulator has been over number portability (the ability of a customer to keep their telephone number when they change network supplier). A disagreement over the allocation of the costs of number portability led to a reference to the Monopolies and Mergers Commission. The report, published in December 1995, found that number portability was in the public interest and that BT should bear the majority of costs. Future Policy Issues Telecommunications regulation continues to lead the other sectors by virtue of its maturity and the potential for competition allowed by the pace of technological change. The practical implications of the regulator’s new fair trading powers will doubtless be closely scrutinised by other regulators and observers. The future of regulation may well lie in the utilisation of general competition powers rather than minute attention to specific licence conditions. The general competition powers are currently being debated in Parliament with the passage of the Competition Bill which is designed to incorporate Articles 85 and 86 of the Treaty of Rome directly into UK law. The Bill further strengthens the hand of the telecommunications regulator (and other regulators) in dealing with competition matters. The Bill allows regulators’ much more intrusive powers (including forced entry to business premises), but imposes more profound rights of companies to challenge decisions on matters of substance rather than procedure. The former Monopolies and Mergers Commission will be replaced by a new Competition Authority which will be supported by the Office of Fair Trading, which will have enhanced investigatory powers. It remains to be seen how far the Bill will be amended in its passage through both Houses of Parliament. Number portability has only been introduced on a geographically limited basis. Customers may only retain numbers if they remain at the same location or move within the same exchange area. There is no portability for mobile and freephone numbers or for customers moving out of exchange areas. When this is resolved individual customers may retain telephone numbers for life. Number portability is vital for the development of competition, particularly for the business sector where changes of telephone number can materially affect trading success. In this, his last month of office, Don Cruickshank, Director General of Telecommunications, surprised the finance markets and industry by announcing a new enquiry into the price of calling from fixed phones to mobile phones. He has asked the Monopolies and Mergers Commission to investigate why the main mobile operators (Vodaphone and Cellnet) were charging BT too much for terminating calls on their networks with BT adding too much on top of that. Prices have fallen since OFTEL began its investigation but not, in the view of the regulator, far enough. The regulator went so far as to use the term rip off as he announced the enquiry. It has been reported that the regulator has made this move because voluntary agreements with the mobile operators and BT were looking increasingly unlikely. This is only the third MMC reference in the history of UK telecoms regulation and the first for the mobile part of the sector. The MMC enquiry could cost up to £1 million for each company involved because these enquiries are very demanding in terms of senior management and consultancy time. These issues are also under review by the European Union where the Competition Commissioner Karel Van Miert is also investigating mobile phone charges. The experience of this reference is indicative of the general importance of competition law and policy to telecommunications regulation. Of all the regulated network industries, telecommunications has seen the most active and dynamic competitive situations emerge, driven primarily by technological advances. Conclusion As miniaturisation continues to drive forward computer technology, further advances are highly likely to offer more opportunities for increased competition and better deals for customers of all types. Regulatory structures at national and supra-national levels will have to be adept at reacting to or anticipating new developments, or face the economic consequences of inaction.

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