MONDAY 25 JUNE 2007

Ms Verena Ross, Sir John Mogg and Mr Alex Blowers

  Q49  Chairman: Good afternoon. Thank you very much for coming. The first part of evidence-taking will be general issues with questions being put by all of us to all three of you concerning the current state of the single market. We then propose to ask individually specific questions to each of the three of you. If pressure of time means that you have to depart after you have given evidence, please do so. Unless there are any questions from our witnesses, I will ask the first question which is based on the fact that we are conducting an inquiry, which we hope to conclude some time in November, into what needs to be done to expand and improve the operation of the single market, and we have chosen three specific areas represented by your good selves to look at in particular, but we may change our minds and add other issues in our final report. We are going to Brussels to take evidence before the recess and then when we return in October we are going to talk to some commissioners about the work that has been going on and we intend to report after the Commission has come up with its proposals for improvements of the single market. With that background, the key question is what has been achieved so far within the fields that you wish to comment upon and what are the remaining significant barriers to achieving the single market? In other words, what should the Committee be looking at and pursuing?

  Ms Ross: In the financial services field quite a lot has been achieved when it comes to the European single market. We have seen the carrying through of the Financial Services Action Plan over the last five or six years as it was agreed in Lisbon in 2000. That has certainly involved a lot of measures—all together 42 of them—which has meant that there has been a lot of activity which has been trying to harmonise legislation within the European Union. The purpose of the Financial Services Action Plan is in three areas. One is to create a single wholesale market, to improve the retail market, across Europe and also to achieve a state-of-the-art prudential regime. What we have seen is quite a lot of activity, particularly in the first area where a lot has been achieved with all the measures, although it will have to be seen, given some of them are still going through the national implementation stage, what it will actually amount to when they have all been implemented and what the effects are on the relevant industries and consumers. The last point on a state-of-the-art prudential regime is that quite a lot has been achieved in the banking area and there is now an attempt to start doing similar things in the insurance area with Solvency 2. The middle point on the retail markets is probably one of the more difficult ones. Again, that has been tackled in some of the activities under the Financial Services Action Plan but it has to be seen exactly how much impact those current ones will have. The Commission itself has issued a Green Paper on Retail Financial Services which is going to look particularly at what the current market failures through the single European market in this area are and what more should be done.

  Sir John Mogg: The timing of this inquiry is absolutely perfect from the point of view of energy. We are at a pivotal moment. There are some good things but quite a lot of bad things to specifically answer the question. On the good side we have the emergence in embryonic form of a co-operative co-ordinating role for energy regulators with varying degrees of independent powers emerging in the last few years. We have a recognition of the profound integration between three aspects of the energy policies, namely sustainability, competitiveness and the future of security of supply. We have major changes in co-operative and non-binding legislation and finally, but here a note of criticism emerges, we had a second package of legislation around the turn of the century which has not been implemented. The Commission issued 17 infraction proceedings about a year ago which primarily dealt with a subset of cross-border issues rather than the totality of the energy market, which is weak at national level; for example, legal unbundling, which we will probably talk about later, rather inefficient, little at EU level and generally an overall picture of concern with legislation. That is why a third package of measures will be necessary. As to what the problems are, I think I speak with real authority here because the Commission has done our work for us in a very impressive 200-page competition report extensively consulted upon in a sector review under the new modernised European competition powers. It concluded: "No energy market integration at European level; a lack of transparency; a serious market concentration at national level; collusion between incumbents in the share markets and excessive vertical integration with implications in terms of third-party access to the infrastructures which are so crucial in energy". This had a very detrimental effect on attracting investment which was much needed at the particular time. The catalogue which I have done rather formally—I recommend the summary rather than reading 200 pages—will give you why we should be doing something about this. The regulators have also identified both self-critically what is wrong with regulation which is not independent, not effective at national level, generally speaking—I hope there are exceptions and I represent them—and also at European level there was none, so there were serious regulatory gaps in terms of assessing how to achieve a linking of infrastructures between Member States. There was an overall lack of security, both a sense of security of the regime into which investments could be made, and security in terms of security of supplies from rather dubious suppliers.. I think you will see that there are serious concerns although the Commission in its reports does highlight the fact that progress has been made. The reality is that progress has been made but that there is an enormous distance to travel.

  Mr Blowers: Many of the headline points I would like to make echo particularly what Sir John has just said. In the communications sector we have had a lot of effort and focus on promoting liberalisation and competition for a sustained period of time. We have had notionally full competition in telecommunications since 1997 and there is broad intellectual recognition throughout Europe that liberalisation and competition are intimately connected with success in terms of delivering innovation, lower prices, choice and quality of telecommunication networks. I say "intellectually" because emotionally there may be some differences in the way that people think about how that applies in practice. Your timing is similarly good from our point of view in that the Commission is now launching into a review of the current EU regulatory framework for telecommunications and will be bringing forward legislative proposals for at least some amendments of the current package later this year, probably slightly behind the energy package. The key question is the report card for Europe is probably round about a seven-out-of-ten, and is there a way to improve that significantly from where we are? I would characterise that as being a different problem to that being experienced in energy. I do not think the problems are as fundamental but some of the components are probably quite similar and therefore some of the potential solutions may be quite similar. When we look at overall performance we see that, for instance, Europe is now leading the pack in the world in the adoption of broadband. There are one or two countries who have even more impressive broadband penetration—Korea is one—but if you look at the current OECD top ten for broadband, you will find that six out of ten of the leading countries, including the UK, are from Europe. We have also seen prices consistently come down in Europe for the last five years for a whole basket of telecommunication services. We have seen very high levels of interpenetration of markets, including reciprocal inward investment by the biggest players in Europe and indeed by significant players from outside of Europe. All those things are to the good but there are some problems that the Commission has identified. We can talk about these in more detail, but in headline terms there are problems with consistency of regulation. National regulators such as Ofcom approach the same problems but with different regulatory solutions. Some of those are now clearly already visibly second best. How can we close that consistency gap and make the regulation overall in the system more effective? There are also issues about the advent of new cross-border services. The regulatory structure and the market structure that have evolved are very much about a network of national markets. The next phase of competition in this market may take the form, at least in part, in genuinely pan European services. The Commission is asking the question whether the current framework is really equipped to deal with those kinds of pan European services and that to my mind is a very good question. I think the Commission will want to explore some of the same issues that we have heard about in other sectors: "Are regulators independent? Do they have the right powers? Are they independent both from market actors but also from governments? Do we need to strengthen the regulatory toolkit? Do we need to think about the institutional balance of forces between the regulators, the national governments, the European institutions and particularly the European Commission?" Those are the issues which will probably come to the fore when the Commission brings forward its reform package.

  Q50  Chairman: In respect of the competence of the Commission, the capacity of the Commission and the interests of the relevant commissioner for these areas which you have just given evidence on, to what extent will the relevant commissioners—because in some cases there are more than one—take up the cudgel with energy to propose rectifications to an imperfect single market?

  Ms Ross: It has to be said that the Commission in the financial services area has been so preoccupied with drafting more and more new legislation that it has not had enough time to then look beyond that and see what has actually happened with that legislation. Has it been implemented properly in the various Member States, how is it working on the ground and is it delivering the benefits which they are looking for? Commissioner McCreevy has written that on his worksheet and has very clearly said that it is not just about drafting new legislation but it is about taking that next step and has very clearly said that in going forward he will carefully look at new legislative measures where it is clear that there is a market failure and that new legislation would resolve that market failure. This is very much in the spirit which we here in the UK work in terms of evidence-based policy making, if there is a problem where the cost of legislation would be greater than the benefits, then we should not go forward with further rules or legislation in that area. There is recognition at the Commission at the financial services level that they need to now move on and that they need to look at the effectiveness of the legislation they have created. They have in one or two instances actually moved away from proposing new directives, for example, in the clearing and settlement area which you have identified in your questions earlier which, from the FSA's perspective, is the right thing to do. It will now come down to seeing what they do on the ground in terms of checking how Member States have implemented and whether they will then be willing to enforce against those which are either being slow or not effective in implementation and carrying through. The other thing which will be important is the whole issue of moving on to looking at competition vehicles to deal with some of the issues that are there rather than writing new legislation which increases the cost of regulation further, but looking at other measures which help to reduce some of the barriers which are clearly still there in certain areas.

  Sir John Mogg: Some of the concerns that Mr McCreevy has about financial services in the past has some affinity with energy policy—a hesitancy to move towards new legislation and a wish to see present legislation implemented. The first answer to your question in terms of the relevant commissioners is strongly yes. Energy is seen as one of the five "big ticket" issues for the President of the Commission. There is a positive scramble of commissioners to be actively involved with the Energy Commissioner, Mr Piebalgs, but also the Competition Commissioner, Ms Kroes, the Environment Commissioner, Mr Dimas, and other commissioners. These include Mr Verheugen, who chairs a high level group from the industry perspective (of which I am a member). We do not suffer from benign neglect! As to competence, I am happy to be able to say on the record that I believe there is a significant competence. The Commissioner wisely chose to establish a moratorium of 12 months before any new legislation was being proposed. There was however a clear pressure for legislation to demonstrate the Union's political commitment. This was resisted by the Commission, partly to allow the sector review that I mentioned earlier to run to its full term and partly to allow the pressure from the launch of the infringements procedure I mentioned earlier. It was also in part to allow full understanding of the issues which are very complicated. They certainly match the complexity of the interrelationships of policies that I experienced in other internal market issues. As to the prospects, this is the interesting issue. I think the prospects are good in the sense of preparation. The present legislative programme, is as we speak, being elaborated will emerge late September, probably around the time of your reporting. We shall see whether all the concerns—I think we will come back to this when you ask us more specific questions on the regulatory framework—but I think they will be well researched. The key issue is whether individual Member States will accept the shift of power that is implicit from national to European level, especially in relation to the European internal market. Will they accept the erosion of some of the fundamental principles held at national level (including the unbundling issue) but also in relation to regulation and the power of the regulator to decide those issues? As to delivery, one of the key issues is the vital area of the security of supply and sustainable development together with the competitiveness in the revised Lisbon agenda. These demand urgency but, of course, the laboriously slow process of what we would call primary legislation through the Community institutions is against that. Some of the issues, particularly the creation of a regulatory approach at European level, also pose very serious constitutional and institutional issues relating to the balance of power. The will is there. I am not sure if the political will is there and I am not sure whether the institutional ability to meet those problems within a reasonable time will be there. The next six months will give some answers to that.

  Mr Blowers: No-one who has had any dealings with the Information Society Commissioner, Mrs Reding, could be in any doubt about the personal vigour, energy and commitment that she brings to her part of the "acquis". When we look at the successes that she has had in the last two or three years with the Audiovisual Media Services Directive, which everybody assumed would be a long, painful and protracted process, but was actually introduced and agreed surprisingly quickly; the Roaming Regulation, which we have previously discussed in this Committee, was again a very complicated issue. As you know, we have serious doubts about the detail of what was proposed in some areas, but again we have to give Mrs Reding credit for having spotted that this was a first order problem that needed a swift and decisive solution—which is what happened. The least of our problems is a lack of energy or commitment from the Commission in this area, at least from our Commissioner. We have a slightly different problem in a sense, which is the "so what" problem that for many people involved in the debate the sense is that the telecommunications market is already deregulated, it is liberalised, competition is emerging, why do we need to now go back to the well and have a further round of legislative discussion? Surely the existing framework, which only dates back to 2003, should be given time to work and to prove its worth? At the start of the review process we were pretty much on that page ourselves that it was a bit too early to be engaging in a fundamental rethink of the rules. Our market moves very fast and I think the scope for new pan European services which are enabled now by changes in the underlying technology—and that change is happening very fast—do necessitate a rethink. We need to at least comfort ourselves that we have the power, the remit and responsibilities to deal with those new emerging problems. From that point of view I think there will be an appetite to at least run the rule over the existing system to make sure that it is functioning properly.

  Q51  Lord St John of Bletso: If I could touch on the whole issue of the scope for legal unbundling, Commissioner McCreevy has drawn reference to the fact that there is no less than 1,634 directives. We have heard about the problems of consistency of regulations. My question pertains to what is the scope for greater co-operation between the national regulatory authorities and the whole quest for the scope of legal unbundling?

  Ms Ross: From our perspective it is absolutely essential, particularly in this area where some of the legislative bases have been created that now it is about good regulatory co-operation across Europe. We are very involved in making sure that that is given a very high priority because really it is only when you deal with other national regulators and you talk amongst each other about how you actually do the day-to-day regulation that you find out that actually even though you have the same legal basis, you do things so differently that the effect of what is being done through the legislation is a completely different one. What we do at the moment in the three different so-called Lamfalussy Committees, which are basically at the level below the legislative Ministry of Finance negotiations, is to work both on better day-to-day de facto co-operation between regulators, particularly when it comes to delivery of regulation for internationally active groups, where we need to make sure that we do not just duplicate regulation for each country, but that we build on each other and rely on each other through mutual recognition, but also in developing guidelines underneath the directives about how detailed practical regulation works in each case. We are also doing quite a lot with the other national regulators across the European Union to work on training initiatives and other things which are trying to bring the practices of the different national regulators closer together to make sure that we are not just looking at the same black on white legislation but what then happens and how we implement and deal with that is more commonly aligned.

  Sir John Mogg: The Commission's Interim Report on the Internal Market which I thought advisable to read before I saw your Lordships, did get a few of the areas right. This was one of them—you need to have different instruments to tackle a different range of problems. In the specific case of energy we have seen quite a few new developments which responds in that way. We have seen the emergence of the Council of European Energy Regulators (CEER) in the late 1990s, interestingly from the Iberian peninsula. There has been the transmogrification of the CEER into ERGEG (it is purely coincidental that my name is in the middle of that process). This was established by Commission decision and is now at a stage of developing towards some potentially legislative-based approach. We can see that each of these stages brings something to the party. Co-ordination, very much as in CESR, you meet people for the first time, you talk about it, you understand, you collaborate and possibly even do some business. For energy I think less is done, at least since I was involved with CESR, but it is developing and that is essential. The move next to a legislative-based form at European level, which is the major absence, is a central issue. I will follow my Lord Chair as to whether I should pursue that, but I will leave the use of an EU regulatory agency on the table. There are many other areas that we are developing in collaboration guidelines which can be converted into legislation by the Commission. All of these different factors contribute towards a more effective, more informed, regulatory approach at European level, but—and it is a big but—how effective this will be as the market becomes more integrated; how effective the powers that currently exist or do not exist at national level are made compatible with the powers that could be established at European level; and how effectively the interests of the European dimension will override the interests at national level are issues which as the GB energy regulator are particularly concerned about. We must not see any intrusion at EU into national level activity when no such intrusion is necessary. However, for an integrated market there is a great deal of work to do—in relation to the interconnections between countries and the necessary improvements where there are congestion management.

  Mr Blowers: From our perspective it is very much the same story that consistency is best achieved by exchange of best practice between regulators. To illustrate by example, in the telecoms sector we have this thing called local loop unbundling—the rules that allow you to place your apparatus in the local exchange of the incumbent provider and effectively take over the line to the customer. It is the most powerful form of regulated access. It gives the company wholesaling that service more scope to deliver. It is a very powerful thing. When we did it for the first time in the UK we made a complete mess of it; it was an abject failure. When we in Ofcom decided to revisit local loop unbundling we looked at the way the French had done it very successfully. The idea of UK regulators learning best practice from the French is something that many people have struggled with, including probably some people within Ofcom, but the fact is that Arcep, our equivalent regulator in France, did a superb job of acting as pathfinder in that area and we learnt from their experience and from some other European regulators. I think that exchange of best practice, if you can have the humility to actually engage with it in the correct way, is an incredibly powerful technique. Whether it will go far enough and fast enough to meet the Commission's requirements is another matter, but I do think that a college of regulators acting in a collegiate way is a very powerful body.

  Chairman: Lord Haskel may have a general question but I am going to ask him to lead by focusing some questions on energy and then I will ask Lords Whitty and Mitchell to focus on telecommunications and Lord St John of Bletso on financial services.

  Q52  Lord Haskel: I would like to put a general question, first of all. The interim paper which Sir John Mogg referred to, if it is the same paper that I am thinking of, is the one about the new vision for the European Union. I just wonder whether we ought to pursue that a little further. The vision for the single market was thought up some 20 odd years ago for the free movement of goods, people, capital, etc, and over the years we have tried to achieve that through legislation and through regulation and to a greater or lesser degree, depending on the industry, quite a lot has been achieved. Do you think that we have gone as far as we can with that vision? Do we need a new way of looking at the single market? The European Commission tries to look at it from the point of view of the consumer citizen. Do you think the idea of the single market through the four freedoms has already been discounted by most people in business and industry? We now have to get on and have a new vision and a new way of doing it if we are going to move forward.

  Sir John Mogg: That is a fascinating set of questions. Give me 40 minutes and I will give you a complete answer, but I will confine myself to a few. First, I would immediately pick up one area. The one freedom that you did not quote is a reason to continue our pursuit of the Internal Market. That is freedom of services where the disastrous experience that the Commission had in terms of initial French intransigence over the Services Directive led to an unravelling of an overambitious services proposal into the present, rather neutral proposal. Services, unlike goods, are still the Cinderella of the Single Market. There is complete freedom of capital. In relation to goods, you have cross border exchanges accounting for some 68%, (my figures may be out of date). But with services there is a considerable drop. The basic necessity of the internal market programme as first conceived in the mid 1980s, and then broadly delivered in 1992. In that area one could argue that you still need legislation sometimes. My own view is that future legislation will tend to take the form of regulations rather than directives, particularly in the well-developed areas including those of my two colleagues, although they may not like me to comment. I think there are other areas and energy falls very properly into that. Not that legislation is the only route, and that is why I think the Interim Report was somewhat a breath of fresh air to include self-regulation. There can be co-regulation with consultation and impact assessments. In the UK this is very old hat, but for some continental countries it is really quite a recent development. If I may now turn to energy, we need new legislation. It is quite clear that we cannot achieve even moving to first base at European level. If I spell more for the record than for anything else, we need legislation to give independence to regulators at national level and to bring regulation at a European level with appropriate independence too. We need legislation to breathe life into the powers of regulators at national and at European level. We need unbundling. Here we have come to the heart of the current debate. We already have legal unbundling at EU level which really has been demonstrably ineffective. We must have an effective unbundling. We regulators argue that ownership unbundling is the most effective but the Independent System Operator approach could be also. The point is that it must be genuine and independent. We need Transmission System Operators who will increasingly be key in integrating the EU Market. It is they who plan networks, they link networks and they invest in networks. We have to find a way of making that happen, both forcing the pace and ensuring that their approach meets European interests. We need market transparency and the transparency with regulators. That is coming very slowly and I think in this ERGEG has been very important, but we need to force the pace of "primary" legislation as a booster is necessary. We also need powers to make the rules more quickly and in the more technical sense. We will not get that because of the EU institutional difficulties. Most of all, to reinforce a point made very early on in relation to financial services, we need continued pressure from the competition side. We are nowhere near the point when we could see a falling away of regulation and shifting into general competition powers, but we need competition to deliver the structure of the industry and to eliminate some of the abuses in the European market. So we need both regulatory powers and competition powers. The internal market in energy desperately needs third generation legislation. But not only that.

  Ms Ross: I share a lot of what Sir John Mogg has just said. In financial services we are probably slightly further down the route because of the massive legislative programme which has happened. In our minds, certainly from a UK perspective, we do not see the need for significant further legislative measures. There are a couple of further measures which are currently underway which we see a benefit in: one is the solvency legislation to bring the prudential standards for insurance companies up to a higher standard which we think is quite important; the other one is the UCITS Directive which needs updating to make sure that that works across the European Union. In general terms, our view is that new and additional legislation is probably not necessarily the best route to go forward. What is more important is that proper implementation takes place, as I said earlier, but also that competition law is properly made use of. When you look at what the vision of the single market was, in financial services in particular, there is a big divide between the wholesale market and the retail markets. In the wholesale market generally one can say that many of the players are very internationally-minded, they actually make use of these single market directives and actually provide services cross-border and they find there are significant benefits from a greater integrated market. In these areas the regulation is already reasonably aligned across Europe. In the retail markets that is a lot more difficult, partly because of the natural difference in terms of retail consumers naturally tending to want to take financial services from their national market, whether it is buying a mortgage or going to a bank and wanting to open a bank account, the natural inclination is to stick with the national providers whose names you know, you know where to complain, and who the regulator is who is responsible and so on. In those markets clearly the challenges are much harder, but because of that different approach it is also going to be much harder to justify significant legislation in those areas, because the benefits which can arise from greater harmonisation on the legislative field are probably more questionable because the question is whether the retail consumers will ever be quite as internationally-minded in their approach to consuming financial services as the wholesale markets are.

  Mr Blowers: That is absolutely right from our perspective as well. There are probably some natural limitations to the single market as a completely seamless retail market. If we look at an area like e-commerce, for instance, where there is a directive in place which sets a very rigorous standard of openness on national markets, we still find that people quite often choose to purchase e-commerce from either their own country or own linguistic group when given a free choice with no other factors limiting that choice. There are probably still some restrictions to the way in which consumers will behave. One of the important changes in our sector has been the focus on openness in Europe as a precondition for competitiveness in the world. In order to achieve the kind of adhesion with new services that we need in Europe, to prevent those services simply off-shoring—I am talking here particularly about Internet delivered services—which could be delivered from anywhere in the world. If you want to have an adhesion in Europe for those services you need an open, transparent and competitive market landscape. It is unavoidable that we have that if we want to be in that part of the value chain. That has affected the way that we think about single market challenges. It is not just about creating complete consistency; it has to be consistency of the right kind. It has to be a baseline regulatory activity which is conducive to people doing business.

  Chairman: Let us move on to some specifics and, Lord Haskel, if you would like to begin with energy and other colleagues may come in. We will try and allocate roughly about ten minutes to each of the specific areas.

  Q53  Lord Haskel: We have already dealt with the first point about support for a comprehensive regulatory framework. Sir John mentioned about the need for unbundling. You spoke about ways of making it happen. Would you like to tell us about the ways of making it happen?

  Sir John Mogg: We need legislation that is agreed,implemented and enforced. Politically the preferred route for most regulators is ownership unbundling where it is quite clear that if the transmission system operator is separate from the people who use the infrastructure, then none of the disadvantages—that is restriction of access, favourable management of the process towards the affiliates in the company of ownership split, the investment orientation that tends to favour the affiliates inside the group—none of those issues comes to the fore. There are almost doctrinal debates at present with not only Germany many smaller countries and one or two of the bigger ones, claiming that ownership unbundling infringes some inalienable fundamental right and is pernicious. The alternative that has been developed is something called Independent System Operator (ISO). Without going into great complexity, this approach can be deep or shallow, the idea is to differentiate between those who run the transmission system and those people who use that infrastructure. There could be further separation down into distribution but in the UK, Germany and in other countries that is not a necessary requirement in our view. The Competition Commissioner is adamant from the exploration she has done in her Sector Review that you must have ownership unbundling. The Parliament also favours ownership unbundling, but it is to be negotiated. The big issue here is to secure the benefits of genuine competition without market abuse. In terms of third party access we need to have something that works. That brings me rather conveniently to the second point. The more you get away from ownership unbundling, the more greater regulatory supervision is needed. In GB we have both ownership unbundling, covering the vast majority—99%—of our transmission system together with the two Scottish independent system operators agreed at the time of privatisation. .There must be deep intrusion by the regulator for such ISO arrangements to make sure that the rules are followed. That means that if the Community goes towards Independent System Operators then, prima facie, you must have a strong regulatory presence at the European level. I do not believe that link has yet been made by some of our EU partners (including Germany),, but to my mind you cannot have a wishy-washy system of supervision in relation to that aspect or to any other aspects too. Unbundling, is key in making competition work clearly and effectively. A deeper regulatory oversight is needed the further you move away from ownership unbundling that it demands strong regulatory intervention.

  Q54  Lord Haskel: One of the other concerns about energy is security of supply. Is unbundling a significant aid or is it a disadvantage as far as security of supply is concerned?

  Sir John Mogg: There is an argument that it could be a disadvantage for smaller countries which are wholly dependent on a single major supplier. Forcing their compliance to become still smaller in terms of their organisational arrangements to achieve a full ownership unbundling could result. In the case of larger countries, security of supply is a political concern about potential instability (for example, the dreadful experience in the Ukraine a couple of years ago) which could threaten an interruption of supply, or provoke anxiety over longer periods. That is an angle where solidarity of the Union—which I saw the Prime Minister referring to in the other House just a few moments ago,—could strengthen our power of negotiation. There is that aspect but also the real answer to security of supply is to secure a solid energy mix of different forms of suppliers thereby reducing your dependency on other countries. Ownership unbundling will only make clear how effective our companies' operations are—it should not adversely affect the security of supply issue.

  Q55  Lord Haskel: This is yet more complicated by the need for carbon reduction and renewables. There are targets for this. Do you think that these need to be supported by legislation and further regulation to be successful or will the market take care of this?

  Sir John Mogg: I will give you an Ofgem position, if I may. I will not speak from the point of view of my colleagues who negotiated these things. We have always taken the view that the market will normally organise things fairly well but there are market failures. There are times when the market is rather slow to pick up and it is quite clear that in the renewable area this has been the case, which is why the Government several years ago introduced various schemes, including the Renewables Obligation Scheme. At a European level it is useful to know what governments are doing because countries are doing very different things to support their usually indigenous supply lines, be it wind, bio-fuels or whatever, so it is useful to have such information. There is also a benefit in terms of making sure that some of the competition rules are applied because energy is key input costs and affects the relative strengths of different industries inside the Union. The point of view we are trying to get across to both Government and in the Union is that what you are looking for is the most cost-effective route towards achieving the desired objective. Like the NAO Ofgem has pointed to the very high costs of this market mechanism (ROCs) and the resultant, high input costs. In the case of the EU ETS scheme, Ofgem are very supportive, as is the Government, in terms of bringing the benefit of the way the market mechanism allows for various disparities and encourages the drive towards lower carbon. In the case of the energy portfolio the Union increasingly needs to look at sustainability. Ofgem has had statutory guidance for several years now which we use to the maximum extent of our guidance. In the Union it is my guess that there will be further developments to ensure that sustainable development is not used as an excuse to subsidise. Potentially the Union could, through the Competition Commission or through some other mechanism, secure some real benefits from such analysis. Finally, regulators can help achieve a comprehensive understanding of the way the rules should be applied by issuing formal guidelines. We can also explore best practice throughout the Union or potentially as the basis for future legislation.

  Chairman: Turning to telecommunications, Lord Whitty?

  Q56  Lord Whitty: This probably applies wide of telecommunications but it seems to us to be an issue in general that the liberalisation of the markets has created very competitive national markets, but it has not really created a European market, although the same companies operate in different ways in each of the national markets. As far as the consumer is concerned, generally speaking, they operate within their national market. Is there anything that the regulatory regime can do to change that situation so that genuinely the choice to the consumer or small business would be to look across borders as well as the rather successful efforts to create more liberal national ones?

  Mr Blowers: There will always be some limitations on the movement in this direction and this is simply because telecommunications networks are in a time and place and inevitably there will always be a market for connections in the place where you live or work and that will be dictated by who has infrastructure in that particular location. When we look at possible pan European applications I think we could really focus on two areas: one is services which are delivered over networks which are increasingly—and I am very conscious that this has been a very jargon-heavy session already but I am going to introduce yet more jargon—now delivered over IP protocol networks, so Internet type standards rather than the old standards of the telecoms companies. As all networks go to IP protocol, we call it "the death of distance" because distance from the place where the service is created or offered becomes increasingly unimportant. On one model, for instance, video-on-demand services could be offered to UK consumers from anywhere in Europe. They could actually be offered from anywhere in the world over an Internet based network. In that area you do have the prospect and the possibility of genuinely pan European services. That is why, as I said earlier, I think the Commission is right to be investigating that area. What would we need to do to move to that kind of model? There is some work already being done on this in relation to voice over IP. Skype, if I can mention a particular company, already has an offering in the market, as do a number of other providers, where you can effectively make voice telephony calls over a broadband connection. These services could be offered quite seamlessly across national borders but when voice over IP first became a feature of the market two or three years ago, there was no coherent European regulatory response to that. There were a number of national regulators thinking about how they would deal with the problems of voiceover IP and in a non-trivial way; for instance, they had to think through what the rules should be with regard to 999 access from voice over IP services. This is an area where there could be some quite fruitful activity to look at greater consistency and coherence in relation to these pan European services. The second area which is also potentially fruitful in this regard is spectrum based services. There are some forms of radio spectrum based services, for instance, mobile satellite services, which probably can only sensibly be authorised at a pan European level because they are pan European in nature. They are served off a satellite which has as its footprint the entirety of Western and Northern Europe. These kinds of services can usefully be looked at as requiring a new regulatory approach and that is one of the things that we are going to be working on in this review.

  Q57  Lord Whitty: In that particular example what, in your view, is the pan European mechanism for authorising such services? It presumably does not exist at the moment?

  Mr Blowers: The proposal at the moment is that we will have an EU-based authorisation system. There will be a single authorisation and that authorisation will allow somebody to use mobile satellite services throughout the EU. That is probably the way forward on a service like that. Whether it should be the Commission that is the authorising authority or a new agency, the indications are that you have picked up this proposal that there might be an agency in the telecoms area as well and this is one of the functions that it has been suggested that a new agency could conduct is authorising these kinds of pan European services.

  Q58  Lord Mitchell: As you know, we have just completed an investigation into mobile phone roaming and the taste certainly that I had, having gone through it all, was here was an industry which was always three steps ahead of regulation or competition and continues to be so. If you go onto the High Street competition is lethal, but when it came to roaming where clearly nobody had paid much attention to it, the mobile phone operators were getting away with murder. Then we get to the new area which I think you mentioned about data which is clearly just mushrooming, but this is an area which is not controlled by the new regulations. It just comes to whether there should be this European regulator who is, instead of three steps behind, perhaps three steps in front of all these technological changes which are occurring so quickly?

  Mr Blowers: There are pluses and minuses to any centralising approach. First of all, if the majority of the problems that we continue to face are about access, which is certainly I would say upwards of 90% of what Ofcom is concerned with in the telecoms area, it really relates to connections or access to customers and, reciprocally, customers' access to services. Most of that will continue to be dictated by those facts on the ground and who are the providers actually offering physical access to the consumers. That requires a regulator who is sensitive and attuned to the facts on the ground in that particular national market. There is a case though for saying in just the way we have described for these pan European services which we now see developing that there may well be a case for some new solutions and that could involve a number of actors playing a role in relation to creating that kind of coherence. The question mark that we have over an agency, and I want to be quite clear about this because the debate has been slightly misinformed in the way that some of the information has got out there, is this would not be a European "super regulator". That is not on the table because a European super regulator would require a treaty change and there is no appetite to make a treaty change to create a European super regulator. It would be an agency performing certain technocratic functions which could include issuing authorisations. It might have some other advisory functions but in terms of that swift and decisive legislative or regulatory response that you are calling for, if it is a European level problem it is probably the Commission who are best placed to deal with that, and if it is a national problem it is probably a national regulator, such as Ofcom, who is best placed to deal with it.

  Q59  Lord Whitty: You are dealing in a market which has been characterised by rapidly changing technology which sometimes leads to greater competition and at other times leads to somebody getting ahead of the game and dominating the market, but what would you say, given that we have got some liberalisation in the industry, was the biggest force? Would that be the regulatory intervention that has driven the liberalisation or the threat of competitive intervention, or is it simply the nature of the rapidly changing technology itself that has made telecommunications appear a relatively liberalised market? To tag on another question to that, is there still in some European countries the residue of a national incumbent in the perhaps more traditional parts of the telecom market which has not been completely tackled?

  Mr Blowers: Those are all very good questions. There is no doubt at all in my mind, and I do not say this just as a regulator, that regulation has been a critical success factor in driving not just competition but also innovation in new services such as broadband. We have a couple of laboratory experiments. It is very unusual in public policy that you have the scope to do a laboratory experiment, but New Zealand did a laboratory experiment in this area. They tried to liberalise their telecoms market in the 1980s without any sector regulator and without the kind of detailed sector-specific regulation that is the meat and drink of Ofcom and other EU telecoms regulators, and it simply did not work. Trying to force through very detailed rules, for instance, on the pricing of access to networks using general competition powers simply did not work. The New Zealand Government were very frank about this. They have spent the last five years reversing that direction of policy and moving to an EU style system, as it happens. I think regulation has been critical and really for that reason you need it to break open markets, there is no question about that. What technology is doing, however, is loosening the grip of incumbents on the entirety of the value chain in the area of the market that they are providing. What I mean by that is in the old days you had a single network and anything that you wanted to be offered over that network was kind of the property of the incumbent telco. Now that they are connecting to the Internet and the Internet is the primary means by which much of this service delivery is taking place, it is much more difficult for network operators to control the entirety of that. One of the tricks in regulation now is not to regulate incumbents as if they do control the entirety of the market chain, because actually they are no longer in that position of absolute power of everything that you are exposed to via their network. I think that is quite a profound change. In terms of the overall pattern of liberalisation across Europe, as I said at the outset, I think the position is not as parlous as it might be in some other strategic sectors, energy perhaps being an example of that. There has been more intellectual engagement with the idea that the best markets are the open markets and that actually trying to defend a national champion in this area is doomed to fail. Having said that, there are still concerns about state ownership of incumbents in some Member States and there are concerns that the relationship between that state ownership, the role of the industry department and the role of the regulator are insufficiently transparent and insufficiently separated. We would agree with that. You do not necessarily have to accept that it affects the facts on the grounds to believe that that lack of separation and lack of transparency affects the overall credibility of the system. We have been arguing for some time for an Ofcom style of political independence to be a prerequisite for other regulators in Europe as well.