OFCOM'S INTEREST IN THIS ISSUE

  Ofcom is the communications regulator for the United Kingdom. We are the appointed National Regulatory Authority (NRA) for the purpose of implementing the current EU Regulatory Framework for communications. We are also the UK's spectrum management authority (interacting with other authorities and the European Commission on cross-border spectrum issues). Therefore Ofcom is exposed to the "sharp end" of the operation of existing rules in these sectors designed to promote the development of the Single Market in communications services.[1]

THE SINGLE MARKET IN COMMUNICATIONS SERVICES: AN OVERVIEW

  The markets that Ofcom has regulatory responsibility for sit within the overall "ICT" (Information and Communications Technology) sector which is regarded as strategically highly significant for Europe. In particular ICT is seen as a high-growth sector and one in which Europe can realistically expect to retain a strong comparative advantage. Telecommunications is regarded as both important in its own right and also an important input market to the wider ICT sector—the availability of high quality telecoms networks improves attractiveness of regions for inward investment, stimulates ICT diffusion and hence contributes to productivity improvements.

  For these reasons, the ICT sector as a whole and telecoms in particular have been the focus of considerable attention at EU as well as national level over the last thirty years. At present, the European Commission articulates its ICT policy under the heading "i2010", a work programme which is linked to the achievement of the Lisbon goals on improving EU's productivity and competitiveness vis-a"-vis the rest of the world.

  Throughout most of the 20th century, the operation of telecoms networks and services was a monopoly reserved to state-owned enterprises, and the challenge in recent years has been to bring these monopolies to an end and introduce competition. An EU dimension to policy started first in the telecommunications equipment market (with efforts to secure a single market in telecommunications terminal equipment in the late 1980s) and subsequently extended to telecommunications networks and services in the early 1990s.

  Spectrum management has traditionally been dominated by public sector use of spectrum for a variety of purposes including defence and national security, which again fall into the sphere of national competence. A Community dimension to spectrum policy has therefore emerged only gradually, but the EU has sought to extend its influence progressively in this area, in particular, by seeking to create harmonised standards and uses of spectrum bands to facilitate pan-European services. The most notable and successful example of this approach was the agreement of a common standard for 2nd generation mobile telephony, GSM. However, historically the Member States have remained responsible for management of spectrum in their own territories and for co-ordination between themselves on cross-border interference issues.

  An important point to note is the effect on policy now being exerted by the phenomenon known as "convergence". The digitisation of underlying technologies in telecoms, broadcasting and IT is rendering existing distinctions between these categories increasingly meaningless. In recent years, European legislation has sought to recognise this by removing artificial regulatory distinctions and moving to a more coherent overall regulatory posture. It is fair to say this remains a work in progress.

  Two other important changes are also now affecting policy. First, the advent of the internet has made cross-border trading a far more significant element of the communications market. It is possible to imagine a world in which content and services can be created anywhere and consumed anywhere. This is a major impetus to the creation of a single market in services.

  Second, radio spectrum is becoming a more important and valuable input for both telecommunications and broadcasting. There is enormous scope to deliver new services using the radio spectrum, for instance High Definition Television, mobile television and wireless broadband. This in turn is placing more of a premium on finding ways to use spectrum efficiently and to find accurate ways to value spectrum in accordance with the actual needs of society.

THE DEVELOPMENT OF THE TELECOMMUNICATIONS FRAMEWORK

  As noted above, the process of liberalisation of European telecoms markets dates back to the early 1990s. The European Commission introduced measures abolishing "special and exclusive rights" (ie national monopolies) and gradually opening up some telecoms market segments (for example, business data services) to competition. However, full competition was not mandated until 1997. The UK was in a sense a pathfinder for this process, introducing limited competition in 1984 and full competition in 1991.

  The 1997 package had the following elements:

—  It mandated the removal of remaining restrictions on competition in telecoms markets.

—  It introduced a template for licensing of telecommunications services, including a list of conditions which could be included in licences.

—  It included obligations on network providers to permit third parties to access their network, but only where the network provider was found to have "Significant Market Power" (SMP).

—  It set out rules governing the scope of universal service obligations, and on whom they could be imposed.

—  It included consumer protection measures, including obligations on service providers to publish prices.

  Almost as soon as the ink was dry on the 1997 regulatory package the Commission began a major policy review (the "1999 Review") which involved an in-depth analysis of the effects of "convergence". This review fed into the current EU Communications Framework, the negotiation of which was concluded in 2003.

  The new Framework sought to both recognise convergence and put right what it regarded as significant defects already apparent in the 1997 package.

  "Convergence" was recognised by adopting a new "technologically neutral" approach to the definition of networks and services, so that a broadcast transmission network, for instance, was now classified in regulatory terms as an Electronic Communications Network, the same as a telecommunications network.

  The defects of the existing Framework which the new Framework sought to rectify were:

—  Problems around the time taken to issue licences and the imposition of "unfair" licence fees: This was addressed by removing individual licensing of networks and requiring all networks to be covered by a "General Authorisation".

—  Problems of inconsistent economic regulation: As noted above, a key element of the 1997 package was that network operators with Significant Market Power could be required to open their networks to third party service providers. There were concerns that this provision was being incorrectly applied: ie, it was failing to be rigorously applied to incumbents, and conversely in some cases was being too liberally applied to new entrant mobile and cable companies. This was addressed by linking SMP explicitly to the concept of dominance as defined in EU competition law, and requiring Member States to conduct a series of reviews of "Relevant Markets" listed by the Commission in an accompanying Recommendation. The Commission took a power to scrutinise these market reviews and to veto market definitions and findings of Significant Market Power which it considered were incorrect. The new Framework also stated that this control regime of sector-specific regulation was a transitional measure, and that the end goal was an effectively-competitive market subject only to the rule of competition law.

—  Continued problems with universal service obligations: It was felt that the cost of universal service was not being properly assessed and the burden of paying for USO was being unfairly loaded in some Member States onto new entrants. The Commission's response was to introduce a tightly-defined process for identifying costs of USO and establishing funding mechanisms to recover the costs. (The Commission also rejected calls to extend USO beyond fixed voice telephony and narrowband internet access to include mobile and broadband services).

—  Problems in the management and licensing of radio spectrum: Because spectrum was now recognised as a key input to mobile telecommunications services, the way in which it was managed in individual Member States was coming under increasing scrutiny. The 2003 package introduced conditions governing the terms on which wireless licences could be issued by individual Member States, seeking to prevent unreasonable restriction of licensing and to limit the range of conditions which could be included in licences. In addition, a Decision of March 2002 created a regulatory framework for radio spectrum policy in the EU. This included the establishment of a procedure where the Commission could develop technical implementation measures relating to harmonised use of spectrum in the EU, which would be submitted to a committee of national spectrum experts (the Radio Spectrum Committee) for scrutiny.

ASSESSMENT OF PROGRESS UNDER THE CURRENT PACKAGE

  Measured by market outcomes, EU policy appears to have achieved significant success. Prices for traditional residential and business telecommunications services have tumbled across Europe. For instance an average 10-minute call in the EU cost 133 eurocents in 2001 and just 73 eurocents by 2005. (The UK figure was 44 eurocents in 2005). New markets like mobile and broadband have grown rapidly. European penetration rates for mobile telephony compare favourably with anywhere in the world. For instance, in the UK, penetration is considered to be above 114%, though of course this is partly accounted for by some people having more than one mobile account. Broadband, seen by many as a market of key strategic importance, is also an area where Europe performs very well in comparison with other countries and territories. Six of the top 10 countries in the OECD ranked by broadband penetration are in the EU, including the UK.

  Of course, these headline outcomes cannot be attributed solely to the success of the regulatory framework. But there is evidence that a policy of promoting open markets and effective competition is having a clear effect. We already see considerable inter-penetration of EU markets by operators, with the incumbent telcos of Spain, France and Germany all have a significant presence in the UK and conversely BT and Vodafone both having extensive business footprints across the EU.

  There is also some evidence to suggest that the markets which perform best are those which do have the strongest pro-competitive structures. The European Competitive Telecommunications Association, in conjunction with the economics consultancy SPC Networks, produces a "Regulatory Scorecard"[2] which ranks regulatory activity across the EU across a broad range of criteria. This has then been correlated with the market outcomes in terms of prices and availability in each market. It shows a very strong (albeit circumstantial) link between strong regulatory processes and market outcomes. The UK stood at the top of the scorecard in last year's ranking.

COMMISSION CONCERNS

  The Commission is now conducting a review which will lead to new legislative proposals in autumn. It might be asked why the Commission is conducting this review and bringing forward legislation at what is clearly an early stage in the life of the current Framework. The answer is that a review was explicitly required under the Framework after it had been in place for two years. Nonetheless, it is clear that the Commission is using this opportunity to develop some fairly radical reform proposals which may go considerably further than the existing Framework.

  The Commission is still concerned that the current Framework is not delivering sufficiently consistent economic regulation. There are significant disparities within the EU. In broadband, for instance, Greece's penetration rate is just 3% compared with 20% in the UK.[3] There are also some substantial pricing differences between services within the EU.

  Also, the competitiveness of markets, as measured by the number of market players and the amount of market share retained by the incumbent telecoms operator, varies significantly. For instance, in the retail broadband market in the UK, BT has a 25% market share and the market is diverse, with over 400 ISPs in total, whereas in some other Member States the incumbent retains a much higher share of the retail broadband market.[4]

  The Commission has said that it believes these different outcomes stem from a lack of consistency—and perhaps consistent quality—in individual NRAs' economic regulation of their incumbents.

  The Commission has also raised concerns about the progress towards a "genuine" single market in telecoms in the EU. On this, some care is needed to interpret the concern. The market which has developed in the EU since 1997 is one of a series of interconnected, but essentially national telecoms markets. It is not, and probably never will be, homogeneous in character because the "facts on the ground" differ. For instance, there will be differences in the number and physical capabilities of the networks constructed in each Member State. Necessarily, this means that regulatory priorities will also vary. For instance, in Western Europe, fixed networks are normally rolled out to more than 90% of the population. On the other hand, in the Eastern European accession states, this figure may be as low as 35%, and the growth in connections is therefore being driven by wireless technologies. Similarly, a number of Member States have an extensively rolled out cable TV network which can also offer broadband and telephony. In both cases, these factors may reduce the importance of mandatory access to the incumbent telecoms operator's fixed network.

  There are areas however, where greater harmonisation would appear to provide scope for increased economic benefits. At the large corporate end of the market, there are many companies who wish to purchase telecoms networks and services to connect multiple office locations across Europe. Companies like BT who wish to serve this market segment argue that the absence of consistent regulatory rules, in particular as regards rights of access to incumbents' networks, is restricting their ability to offer services to such customers seamlessly and efficiently.

  Developments in technology are also altering the relationship between infrastructure and services. Telecoms operators are rebuilding their networks on the basis of Internet Protocol (IP) technology. There are a number of reasons for this, not least cost reduction, but an important consequence of the change is that there is much greater scope to offer services at a physical distance from the consumer. This means that new offerings such as Voice over IP (VoIP) could now, in theory, be offered from anywhere in the EU to anywhere else, without their being any need for the service provider to have a physical presence in the country where the service is being used. This offers the possibility of a genuinely new, pan-European telecoms service market developing.

COMMISSION PROPOSALS FOR TACKLING THE "CONSISTENCY" PROBLEM

  We believe that the Commission's response to the "inconsistency" problem will include measures in the following areas:

—  Tightening the rules on regulators' political independence. The existence of independent regulators is recognised to be key to the promotion of effective competition. The current Framework requires that regulators are independent from market actors, but does not specify the nature of the relationship with government. Concerns have been expressed that, unless there is a suitable degree of separation between the regulator and the government, there can still be scope for unwarranted interference in the activities of the regulator, perhaps particularly where the state retains a significant ownership position in the incumbent provider as it does in a number of Member States.

—  A Commission veto over "regulatory remedies": We have noted that the Commission can already veto NRAs' market reviews on the basis of the market analysis or the finding of Significant Market Power. The Commission now proposes to extend that veto to also cover the design of specific regulatory remedies resulting from a finding of SMP. This is not a new proposal: it was in fact in the original Commission draft of the 2003 package but was rejected by Member States.

—  A possible "European Communications Agency": This has been erroneously described as a "European super-regulator", implying an Agency with the kind of decision-making powers currently reserved to either the Commission or NRAs. In fact what appears to be envisioned would be a body with an advisory role only, in effect reporting to the Commission.

"FUNCTIONAL SEPARATION"

  The Commission is also proposing that regulators should have their toolkit of powers extended to include a power to impose so-called "Functional Separation" where incumbent telcos have been found to have Significant Market Power. The Commission's proposals are closely modelled on the changes to BT's internal structure—including the creation of a new access business, "Openreach"—agreed by BT and Ofcom in 2005. (It should perhaps be explained that Ofcom pursued these changes under the Enterprise Act rather than the EU regulatory framework).

  The principle underpinning Functional Separation is that the natural monopoly parts of the incumbent business should be placed in an organisationally separate entity subject to its own governance arrangements. This then reduces both the incentive and ability of the incumbent to discriminate in favour of its own downstream business. On the Ofcom model, it does not require either legal or full ownership separation and the Commission proposal also stops short of requiring these.

SPECTRUM MANAGEMENT

  The other area where the Commission is proposing radical changes to the Framework is in relation to spectrum management. There are essentially two limbs to the Commission's interest here.

  First, the Commission believes that there is considerable scope to increase the economic value of spectrum by liberalising the way in which spectrum is allocated—in particular by removing service and technology restrictions and permitting secondary trading. This aligns closely with the UK approach.

  Second, the Commission wants to identify mechanisms to permit greater co-ordination of approaches to spectrum at EU level. It appears to have in mind a strengthened role for the Commission in authorising and co-ordinating pan-European allocations of spectrum for new services, possibly assisted by the European Communications Agency, mentioned above.

OFCOM'S INITIAL VIEWS ON THE FRAMEWORK REVIEW

  Ofcom's view is that the current Framework has been a considerable success and is already playing a part in driving competition and liberalisation of communications markets. Nonetheless, we also recognise the importance in a fast-moving market environment of ensuring that the Framework is genuinely fit for purpose.

  We recognise the need for greater consistency of application of economic regulation to telecoms networks and services. Ofcom is a member of the European Regulators' Group, a "college" of national regulators formed under the current Framework to advise the Commission on the application of the Framework and on harmonisation of regulation. The ERG is developing into an effective forum for the exchange of best practice on economic regulation, raising the overall quality of regulation within the EU.

  The ERG has recognised the importance of greater alignment of regulatory approach in the markets segments which are strategically important to companies seeking to enter a particular national market, and has committed to produce common positions on regulation in these candidate markets, which include wholesale broadband access.

  The Commission clearly believes that these developments of the ERG's role, whilst welcome, will not go far enough and hence is proposing a greater role for itself in supervising regulators' remedies. We are not convinced that this is the logical response to the "inconsistency" problem. There is no obvious reason why the Commission should be more competent in the design of remedies than NRAs, for whom this is, after all, their core task. Equally, it will remain important that remedies are properly tailored to particular national circumstances. In our view it would remain preferable to continue to develop the role of the ERG as a forum for best practice, evaluation and peer review of NRA remedies. If remedies are in effect determined through the exercise of a Commission veto, this runs the risk of a "one size fits all" approach and may reduce scope for regulatory experimentation and innovation.

  Pan-European services do present a new challenge. Ofcom agrees that mechanisms may need to be found to provide coherent cross-border regulation to such services, perhaps including scope for a single EU-wide authorisation for some services. Where it continues to make more sense to authorise services at national level, there may still need to be greater alignment of regulatory conditions. For instance, the ERG is currently working on producing a unified common position on the regulatory treatment of VoIP. But it could be most efficient in certain circumstances for the Commission to use its existing powers to issue binding Decisions to promulgate such regulatory conditions for pan-European services.

  Where Member States retain a stake in their incumbent operator, the complicated triangular relationship between government, NRA and incumbent can undoubtedly diminish confidence that the regulation regime will be applied even-handedly, even where there is no actual evidence of political interference. For that reason, we agree with the Commission that the Review offers an opportunity to put beyond doubt the independent status of NRAs both from incumbents and national governments.

  We do of course welcome the proposal to extend regulators' toolkit of remedies to include the Functional Separation already in place here in the UK.

  We also strongly support the Commission's intentions to introduce greater liberalisation of spectrum management. We are unclear at present what proposals the Commission has in mind to improve co-ordination. Here the devil will be in the detail, as co-ordination needs to both respect national competence in relation to usage such as defence, and also interleave sensibly with the wider international co-ordination of spectrum achieved through the International Telecommunications Union (ITU) at regional and global level.

  Finally, we note that the case for a European Communications Agency needs to be assessed on the basis of what tasks such an Agency could usefully perform. If the role of such an Agency will be merely to advise the Commission on the application of new Commission powers in relation to consistent telecoms regulation or spectrum co-ordination, our view is that an Agency would add little value over and above the existing advisory structures, the ERG on the one hand and the RSC on the other.

July 2007

2   http://www.ectaportal.com/en/basic651.html Back

3   Measured in terms of broadband per 100 households. Source: Commission 12th Implementation Report staff working document volume 1 Back

4   Source: Commission's 12th implementation report-
http://ec.europa.eu/information_society/policy/ecomm/implementation_enforcement/annualreports/12threport/index_en.htm Back