Regulatory forbearance: why did Oftel find it so hard?

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Telecommunications Policy 28 (2004) 273–294

Regulatory forbearance: why did Oftel find it so hard? Jon Stern* London Business School, Regent’s Park, London NW1 4SA, UK Received 1 May 2003; received in revised form 1 July 2003; accepted 1 November 2003

Abstract This paper considers the contrast between Oftel’s statements on the importance of regulatory forbearance and withdrawal and its considerable difficulties in implementing them. The record of Oftel is contrasted with the regulatory withdrawal achieved by Ofgem in UK electricity and gas regulation and the paper discusses whether and how far structural unbundling might alleviate the need for conduct regulation in the telecom industries. The Oftel experience suggests the need for a clear strategy, including structural options, to implement regulatory withdrawal with some mechanism in place that forces regulators to review regularly and systematically whether or not continued conduct regulation is necessary. Such a mechanism has been proposed for Ofcom in the UK Communications Act 2003. r 2004 Elsevier Ltd. All rights reserved. JEL classification: L51; L96 Keywords: Oftel; Ofcom; Regulation; Forbearance; Communications

1. Introduction In the UK, Oftel—the Office of Telecommunications—has been the UK agency for the economic regulation of telecommunication services, including broadcasting transmission services and e-commerce network services as well as telephony. The Communications Act 2003 replaces Oftel with Ofcom—the Office of Communications—which will be responsible for all aspects of the regulation of telephony and broadcasting (i.e., broadcasting content regulation as well as network services) plus radio spectrum issues. Oftel’s formal responsibilities are transferred to Ofcom in November 2003.

*Tel.: +44-20-7262-5050; fax: +44-20-7402-0718. E-mail address: [email protected] (J. Stern). 0308-5961/$ - see front matter r 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.telpol.2003.11.004

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As Oftel has been in existence since 1983 but, as it is now to be replaced, this is an appropriate time to consider its regulatory practice. This paper considers Oftel and regulatory forbearance. In 1999, Oftel made some high profile statements on how it intended to use regulatory forbearance as a way of reducing the burden of regulation1 and this paper considers its record in this area. The term regulatory forbearance is often used in the sense of the withdrawal of regulation from some activity, e.g., the decision by Ofgem2 that there is sufficient competition in the electricity and gas supply markets for them no longer to need to regulate retail sales prices. However, following US regulatory practice, Oftel promoted the more specific concept of regulatory forbearance under which it can refrain from applying certain regulatory conditions (or parts of conditions). Oftel proposed that this more limited concept of forbearance in circumstances was appropriate where ‘‘the objectives of the conditions are being achieved by market forces or other means, or it is felt that the condition imposes an obligation on the Regulated Supplier that is disproportionate’’.3 In 2000, Oftel issued Guidelines on the use of regulatory forbearance in this latter sense to cover regulated suppliers in the access control services market (i.e., digiboxes of various kinds).4 However, the concept of forbearance is clearly applicable in other areas covered by Oftel, including both fixed-line and mobile telephony. This paper discusses both the narrower and the wider concept of forbearance. The paper concentrates on Oftel and forbearance because: (i) In principle, withdrawal of regulation should be easier in telecommunications given growing network and platform competition, than for industries with unavoidable monopoly network elements (electricity and gas transmission and distribution, water and sewage, railways). This higher potential for withdrawal of detailed conduct regulation applies particularly to services where there is effective competition between networks or platforms (e.g., mobile telephony, access control services and similar). (ii) In spite of the above, Oftel has not withdrawn from the regulation of any of the activities in its portfolio and has not accepted any case for activating its forbearance principle. The combination of these two factors means that Oftel makes an interesting case study for exploring regulatory forbearance and its application. (Note that, unless otherwise specified, the term ‘‘services’’ is used to denote the products purchased by wholesale or retail consumers—e.g., minutes of voice, e-mail, internet, etc. This is in distinction to network transmission products. This distinction is common in electricity and gas and also clearer given the natural monopoly characteristics of electricity transmission networks. See Appendix A for further discussion). The Oftel experience is also highly relevant for what we might expect from Ofcom not least because the Communications Act imposes duties on Ofcom not just to avoid unnecessary regulatory burdens; but also to remove regulatory burdens that have become unnecessary. On the 1

See David Edmonds speech to IIC Telecommunications Forum 25 January 1999 and Anne Lambert’s speech to EU 1999 Review Workshop 1 February 1999. Both available from Oftel Website. 2 Ofgem is the Office of Gas and Electricity Markets—the UK agency for the economic regulation of electricity and natural gas. 3 See OFTEL (2000, para 4.4). 4 See the document OFTEL (2000) for a full description. This has since been updated but retaining the original focus.

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latter, Section 6(4) of the Act includes an obligation on Ofcom to publish a regular statement indicating how unnecessary burdens are to be removed or avoided.5 This should impose strong pressures on Ofcom to make regulatory forbearance into much more of a reality than Oftel has been able to do. How far they will be able to do so is an interesting question.6 Oftel was originally established in 1984 when BT was privatised. It was thus the first of the UK regulatory agencies. The seminal paper on the economic regulation of telecommunications was the Littlechild report of 1983, which introduced the concept of RPI–X price cap regulation. In addition, the 1983 report argued that regulatory agencies for the telecommunications industry were temporarily necessary until there was sufficient competition for the industries to be subject to conventional competition policy rules and no more. (Recall that in 1983, telecoms were still only fixed-line voice telephony services.) The world has moved on and we have learnt much more about the theory and practice of regulation over the last 20 years. In particular, we have come to recognise the long-term (and probably permanent) need for continued economic regulation at least for core monopoly networks such as electricity transmission and distribution networks. Nevertheless, particularly given the technical and commercial revolution in telecom services and the dramatic growth of competition in telecom markets, it is worth examining why Oftel has neither withdrawn from nor exercised forbearance on regulation as well as whether (and how) more might be done in the future. This issue is addressed by taking a comparative perspective with other UK utility service industries and regulatory agencies. The plan of the paper is as follows. Section 2 discusses the spectrum of degrees of economic regulation across UK industry; Section 3 discusses the concepts of regulatory forbearance in more detail including their application across regulated utility service industries; Section 4 discusses regulatory forbearance in the context of telecoms, including Oftel guidelines and decisions; and Section 5 presents some concluding comments. Finally, Appendix A to the paper compares the structural similarities and differences between (a) telecommunications and (b) electricity and gas in terms of the likely advantages and disadvantages of vertically separating network from service elements.

2. Degrees of economic regulation In discussing economic regulation, the standard picture is that there is: (i) a set of industries—the vast majority—which may be subject to regulation on the grounds of health and safety, labour and technical standards, environmental standards, etc.; but which, in economic terms, have no ex ante regulation and are only subject to ex post competition policy; and (ii) a small set of—mainly privatised or private—utility service industries which operate under 5 The wording in Section 6.4 of the Communications Act is: ‘‘OFCOM must, from time to time, publish a statement setting out how they propose, during the period for which the statement is made, to secure that regulation by OFCOM does not involve the imposition or maintenance of unnecessary burdens.’’ 6 See Cave (2002) for a cautious view of how far OFCOM is likely to be to avoid a continuing need for complex regulatory interventions.

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licences (or equivalent)7 issued by a sector or industry specific regulator and which are price regulated. In fact, there is much more of a continuum with (a) some companies/industries being price/ profit regulated but not under licences issued by a regulatory agency; and (b) some companies which operate under licences issued by regulatory agencies but which are not subject to ex ante economic regulation. In what follows, the institutional references refer to UK competition and regulatory agencies. In the UK, the Office of Fair Trading (OFT) is responsible for enforcing competition and consumer protection laws including action against anti-competitive behaviour (cartels, etc.) and the first-level consideration of mergers. On competition-related issues affecting regulated companies such as telecom companies, the OFT has concurrent powers with industry- or sector-specific regulators such as Oftel. The Competition Commission (CC) conducts in-depth enquiries into mergers, markets and the regulation of regulated activities—but only in response to a reference from the OFT, or from the relevant Minister or regulator. The CC also investigates where the regulator cannot impose changes (e.g., licence changes) on regulated companies and provides a final determination, i.e. it acts as an ‘‘appeals’’ agency, but on the basis of its own investigation rather than from a reconsideration of the regulator’s investigation. The recently concluded report on mobile phone termination calls and whether they should be price capped is an example where mobile telephone operators were unwilling to accept Oftel’s decision and the issue was referred to the CC. The main points on the competition policy-sectoral regulation continuum can be set out as follows: (1) Normal market (most private sector manufacturing and service sector activity) Remedy Ex post competition policy, plus health and safety, environmental, etc. regulation, plus competition policy (restrictive practices, merger supervision) (2) Industries/markets with limited competition Remedy Behavioural restraints often agreed as merger conditions via undertakings to the OFT and monitored by them (e.g., OFT negotiated conditions with CC oversight/appeal) Example: Brewers’ contracts with tied public houses (3) Industries/markets with very limited competition Remedy OFT imposed price controls with requirements for price increase consent or price/ profits formula Past examples: Yellow Pages Telephone Directories; Condoms

7 Licence equivalents include limited or indefinite duration franchises and concessions with conditions similar to licence conditions and any other legal forms that provide for ex ante economic regulation. The latter include the arrangements in the 2002 EU Electronic Communications Services Directive where ex ante regulation is a remedy only permitted in circumstances of considerable market dominance (e.g., local loop access terms and prices, some wholesale products).

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(4) Industries/markets with high degree of individual or joint market power Remedy Economic regulation with price/profits control but without licences or an independent regulator—i.e., regulated by OFT or Government Department Examples (i) Research-based pharmaceuticals (regulated under Pharmaceutical Price Regulation Scheme (PPRS) administered by Department of Health) (ii) Bank payment networks (OFT—notification of prices on automatic teller machines (ATMs) of retail financial service companies) (5) Competitive segments of industries with monopoly (network) elements Remedy Licensed and regulated conditions of service without ex ante price/profits regulation Licences issued by independent regulatory agency giving conditions on certain activities but not ex ante price/profit or competition-based regulation (except mergers) Examples include (i) Electricity generation and electricity and gas sales (wholesale and retail) (ii) Cable and satellite retail broadcasting services (6) Bottleneck elements of competitive segments of industries with monopoly (network) elements Remedy Licensed and regulated conditions of service with element of ex ante price/profits regulation Examples include (i) Mobile telecom services (price regulation of call termination) (ii) Satellite broadcasting (wholesale platform access) (7) Monopoly network and related elements of infrastructure industries Remedy Licensed and regulated conditions of service with regular ex ante price/profits regulation Examples include (i) Electricity and gas transmission and distribution networks (ii) Fixed-line telecom services (BT network and other wholesale services, e.g., wholesale ADSL broadband) (iii) Designated airports, railways (track and train) This picture is thus rather more complicated than the standard binary picture set out at the beginning of this section. Nevertheless, there are similarities between categories. For instance, UK research-based pharmaceuticals companies make very similar arguments to telecom companies concerning the potential for replacing Department of Health administered profits regulation by standard ex post OFT competition policy oversight. The position outlined above indicates two major potential barriers to regulatory withdrawal: (a) There may be a bias against removing regulation because regulatory agencies are more aware of—and concerned about—potential anti-competitive behaviour than the OFT would be for a previously unregulated area. In addition, up to now there has been no automatic review

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procedure or sunset clause to offset this potential bias for existing areas where regulation operates.8 (b) Many of the markets that have emerged from utility service industries are highly concentrated and/or have other impediments to normal competitive operation. As there is no half-way house under which a standstill can be imposed on prima facie anti-competitive behaviour, withdrawal of regulation means that the only legally available remedy to a perceived abuse is an ex post competition investigation. This takes some time and may result in significant economic damage in the interim, e.g., to consumers and industry entry. The example of Californian electricity generation has been cited as an example showing how companies were able to earn enormous profits in the months before price regulation was introduced and therefore why ‘step-in’ powers might be necessary for such markets.9 In the UK, Ofgem has twice tried to obtain the right to impose a ‘good behaviour’ clause (a Market Abuse Licence Condition—MALC) in generation licences. The first attempt was over-ruled by the CC and a second attempt was rejected by the Department of Trade and Industry. In view of the above, one can understand why regulators may be very (over?) cautious about regulatory withdrawal or forbearance, particularly regarding vertically integrated companies. However, whether this caution is justified is another matter. There was very considerable criticism of Ofgem for pursuing the MALC as there also was for Oftel in its attempt—and decision—to continue the price regulation of mobile termination charges. However, the latter was a decision that was supported, indeed toughened, by the CC.10 In both cases, underlying much of the criticism is the view that the net benefits of the regulation would not be sufficient to justify introducing such regulation. This leads to the view that economic regulation of these activities would not happen if the activity were not already subject to active scrutiny and action by a specialist regulatory agency.

3. Concepts of regulatory forbearance and their application 3.1. Regulatory withdrawal The first concept of regulatory forbearance is that of withdrawing from the regulation of certain, previously regulated activities. The classic UK example is the withdrawal by Ofgem from regulating retail sales prices for gas and electricity. Ofgem maintains certain licence conditions on suppliers (e.g., on contract rules, information disclosure and customer sales techniques) but has withdrawn from price regulation. In addition, with the failure of the second attempt to introduce the MALC, Ofgem seems now to have withdrawn (or been withdrawn from) any ex ante economic regulation of generation. 8

The regular review of regulation to eliminate regulatory interventions that have become unnecessary in the 2003 Communications Act is the closest the UK has moved towards a formal sunset clause. 9 See Joskow (2001) for an excellent and full discussion of this and other aspects of the California electricity reform debacle. 10 See the Competition Commission, UK (2003). This report can be found at http://www.competitioncommission.org.uk/rep pub/reports/2003/475mobilephones.htm#full.

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Other UK utility regulatory agencies have not withdrawn in the same way, but introducing competition in the market rather than for the market is much harder for most of them (e.g., water, rail, etc.). However, the Financial Services Agency (FSA) seems to be developing a similar strategy to that of Ofgem—e.g., withdrawing from ex ante regulation of many financial services, particularly wholesale services, where competition is sufficiently established. The paradox about telecoms and Oftel is that considerable competition has developed in many areas—most obviously in mobile telephony but to a lesser extent in fixed-line network services—and yet Oftel has been unable to withdraw fully from ex ante economic regulation. It has not even totally withdrawn from the regulation of international call prices. The critical point to note about Ofgem is that, unlike Oftel, it has developed strategies by which it has actively promoted withdrawal. In particular, in the past, Ofgas (the UK natural gas regulatory agency), Offer (the UK electricity regulatory agency) and now Ofgem have: (i) actively promoted structural remedies that would promote regulatory withdrawal and made the structural options and preferences clear to the regulated incumbents; and (ii) promoted retail supply competition (and the separation of distribution from supply). In both cases, this was done in the face of considerable hostility; in the first case, from British Gas; and, in the second case, from commentators who argued that the change was unlikely to yield net economic benefits. The key point to note is that the energy regulators (in conjunction with the competition authorities) made it very clear to the companies what were the conditions that they would have to meet for ex ante regulation to be relaxed and ended. Not only was the strategy made clear, but, in addition, the regulated companies were given clear targets that they would have to meet for regulatory withdrawal to take place. This combination minimised regulatory risk, both for the existing regulated companies and for potential new entrants. Oftel did not develop a comparable and defined strategy in spite of its many clear statements of how it only wishes to regulate where absolutely necessary. This may, at least in part, be because appropriate structural remedies are more difficult to find in telecoms than in the energy sector. In the latter, unique one-way networks are unavoidable for transmission and distribution. This is very different from telecoms where effective facilities competition is clearly feasible if often hard to achieve in practice. If it were the case that structural remedies are harder to find in telecoms then one would not be surprised to see conduct regulation increase as competition expands, particularly (a) in the early stages of the development of competition and (b) in highly oligopolistic markets. But, such markets are difficult to regulate via conduct—particularly with rapid technical progress. In addition, Oftel officials can (and do) refer to: (i) a legal duty under the 1984 Telecommunications Act to promote effective competition (i.e., something rather more than maintaining it); and (ii) pressures from new entrants, companies benefiting from regulation (regulatory arbitrageurs), consumer groups and others whenever they discuss the removal of regulation. Indeed, Oftel, like other regulators, is always—and always will be—subject to more pressure to increase and expand regulation than to reduce and contract it. This is because the losers from the

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changes have an incentive to shout louder than the gainers—particularly if there are a number, however small, of large losers. However, that increases the importance of having a clear strategy on withdrawal so that the losers can be faced down as and when justified. The paper will return to the discussion of structural and other options in more detail in Section 4 below.11

3.2. Regulatory forbearance: refraining from applying regulatory conditions in access control services As stated in the introduction, Oftel has gone so far as to develop guidelines for regulatory forbearance in the sense of refraining from applying regulatory conditions, e.g., ex ante price regulation. The guidelines have been primarily developed for digital television access provision and other access digital services. No such guidelines have been issued by Oftel for telecoms. In September 2000, Oftel issued guidelines on access digital services. The activities potentially coming under this remit were defined as access digital services provided on a wholesale basis to providers of digital products to final customers (e.g., digital television, home banking, etc. to households). Wholesale access digital services include the provision of the wholesale facility to a company’s own downstream retail provider. Oftel stated that its main concern in this area was to prevent vertically integrated service providers from behaving in an anti-competitive manner to third-parties who wish to supply endusers. In other words, they were concerned to prevent dominance or market influence from being used to the detriment of final consumers. Hence, the key question it identified was whether market influence in intermediate access control service markets could be used to limit competition in the closely related markets for final services. This issue is at the heart of the dispute between BSkyB and others in the pay-television market which has been considered at length by the OFT. The key question was whether BSkyB, with its dominant position in channel provision and distribution and ownership of much prime content programming was behaving anti-competitively with respect to the sales of content to other distributors. In December 2001, OFT issued a proposed decision that BSkyB had behaved in an anti-competitive manner in the pay-TV market. However, in December 2002, the OFT concluded that BSkyB had not acted in breach of competition law either in terms of (a) margin squeezes, (b) mixed bundling or (c) discounts to distributors. However, for margin squeezes—the key concern where companies own networks and provide services to themselves and others—the OFT conclusion was extremely guarded.12 Similar margin squeeze concerns have been a major element of contention in telecoms, e.g., over BT’s pricing of its wholesale and retail broadband services and its network access prices. Oftel identified the key issues concerning the necessity for regulation in access digital service markets as: 11 See Appendix A for a discussion of how far electricity and gas structural unbundling models can be applied in telecoms. 12 The OFT conclusion was ‘‘a borderline result [that] there are insufficient grounds for finding that BSkyB had abused a dominant position by exerting an anti-competitive margin squeeze against rival distributors of pay TV’’. OFT December 2002, BSkyB: The Outcome of the OFT’s Competition Act Investigation, Section 5, p. 9.

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the potential for substitutes in supplying the access service; alternatives for consumers in obtaining the final digital service.

3.2.1. Potential reasons for Oftel forbearance In 2000, Oftel listed the following reasons for exercising forbearance in applying regulatory forbearance to access digital services. These can be described as follows:13 1. market influence and/or dominance likely to be transitory, e.g., from foreseeable market developments (presumably new competitors in provision of access service, technical progress, etc.); 2. market forces would act in same way as regulation (including countervailing power); 3. providers might become dependent on original terms of access even with new entrants; 4. other legislation could provide a similar result as regulation (e.g., competition policy?); 5. undesirable side-effects from imposing conditions, e.g., tacit collusion from price publication; 6. excessive costs of compliance; and 7. discouragement from investing in networks or services arising from the imposition of the full range of available conditions. Oftel attached particular importance to (7) in the context of access digital services as ‘‘the markets in which [they] are used are likely to be rapidly developing and characterised by high levels of innovation and investment’’. The same can be said of many other telecom markets, e.g., mobile, fixed-line internet access, etc. 3.2.2. Application of the forbearance guidelines So far, the only case in which a licensed company has been identified by Oftel as having significant market power (SMP) but where forbearance might be appropriate is Sky Subscribers Services Ltd. (SSSL), the supplier of access control services (e.g., interactive services) to BSkyB and Open. It is a member of the Sky group of companies. However, in spite of a consideration of future entrants and potential technical developments, Oftel found no reason for forbearance in its draft recommendation of November 1999 on SSSL. SSSL was designated as being in a dominant market position and with a high degree of market power. This decision (and the non-use of forbearance) was confirmed in the Draft Decision of April 2000 and the Final Decision of June 2000.14 3.2.3. Implications Oftel developed a concept and a set of guidelines for regulatory forbearance, but has not used it. Given the very strong market position of BSkyB in wholesale and retail television service markets, it is perhaps not surprising that Oftel chose not to use its forbearance option in this case. It remains to be seen whether Ofcom will behave differently both in this market and in telecom markets. Nevertheless, there are some points worth making that arise from the SSSL determination: 13 14

See OFTEL (2000). See, in particular, para 4.5. See OFTEL (1999) for the interim decision and the discussion why the use of forbearance was inappropriate.

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The consideration by Oftel of both future market and technological developments in the provision of the platform service in this case was relatively narrow and short-term oriented. The determination was also very imprecise, particularly in the sense that it was very difficult to judge what market and/or technological developments would be sufficient for Oftel to exercise forbearance. There has been no suggestion by Oftel in published documents of any possible structural remedies that would enable the use of forbearance and reduce the market power between network/platform provision and the market for retail services in any of the markets for which they have responsibility.

A good case can be made that a number of the issues affecting the potential use of forbearance would apply to other telecom markets. However, Oftel seems only to have applied its forbearance concept in wholesale markets where it sees the potential for cross-market anti-competitive behaviour. In addition, it is not clear whether and how far it intended to use it beyond access digital services. It is not clear why Oftel should wish to restrict the scope of the concept in this way. A more thoroughgoing use of forbearance to other services, including fixed-line telephony and related services, might help promote ideas for how conduct regulation might be reduced in those areas. 3.3. Regulatory forbearance and bank network services An interesting gloss on the discussion of when regulatory forbearance may be appropriate is provided by the retail-banking sector. Retail banking depends heavily on payment networks, e.g., for cheque clearing, credit card and cash machine networks. Similar ‘‘essential facility’’ issues arise with these networks over ownership, new entrant access, pricing of cash machine facilities to customers of other banks, etc. as with telecom networks. In the UK, the Government commissioned a review of retail-banking services by Don Cruikshank, ex-Director-General of Oftel. He recommended a new regulatory agency (Paycom) to regulate payments networks under a licensing system. However, in August 2001, the Government rejected his proposals in favour of assigning the regulatory task to the OFT. It was decided that a set of competition–oriented rules would be preferable to a licence-based system. The system chosen was primarily to rely on general competition guidelines but with specific additional sector-specific rules (e.g., on retail price transparency) where the OFT judged it necessary in the light of government policy objectives for money transmission systems.15 From the consultations, it is clear that there was widespread opposition to Paycom from the industry participants—and indeed to any sector-specific regulation. Nevertheless, the decision is in interesting contrast to Oftel’s declared need to maintain an active regulatory involvement over what are, at first sight, not dissimilar network access and pricing issues and wholesale–retail market leverage issues in telecom and access control services. 15

For further details see HM Treasury (2001).

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4. Regulatory forbearance and the telecom industry 4.1. Economic regulation in industries with rapidly developing technologies Technological developments have transformed—and are continuing to transform—the telecom industry. Among other things, they have: * * *

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enabled the commercial supply of a wide range of new products and services; enabled the commercial development of a wide range of new networks and platforms; enabled the development of competition in wholesale and retail markets, including competition between networks and platforms; brought growing convergence between telephony and broadcasting networks and services; and brought convergence between fixed and mobile services.

The development of the mobile sector from the 1980s duopoly with a small number of ‘‘Yuppies’’ wielding heavyweight analogue phones to a position where over two-thirds of the UK population operate an efficient, very lightweight, digital phone is one of the most obvious manifestations in this transformation—and that is before the arrival of 3G with its wide range of new services. But, these technological developments have required large volumes of capital investment in circumstances of considerable risk and uncertainty about: * *

*

the the the the

likely demand for new products; development of competition and the potential cost advantages of later entrants as against ‘first mover’ advantage of incumbents and early entrants; and potential that investments could be made redundant by new platforms and technologies.

Under these circumstances, it is far from surprising that some companies can earn a substantial ex post rate of return on capital for a number of years. But, in markets with the characteristics as outlined above, this does not necessarily indicate a low degree of competition. It is perfectly consistent with effective competition in a market for which technological developments have introduced a high and rapidly growing demand for new services. The UK mobile market is often thought of in the terms above. In fact, Oftel’s 2001 review of competition in the mobile market showed that only Vodafone was earning an ex post rate of return in excess of its cost of capital. In general, continued ex ante regulation of industries with rapid technological growth brings a number of additional problems relative to industries (like electricity and gas) where technological developments are relatively slow and predictable. Some of the main additional problems include: (1) The much higher potential economic costs from regulation slowing down the roll-out of new technological and commercial developments. The economic costs from over-regulating relative to under-regulating are much higher in an industry with rapid technological change than in a slow technological change industry. For instance, Crandall (2001) cites Hausman’s, 1997 estimate that regulatory delays in licensing US cellular systems and approving Bell-company voice-messaging services imposed costs on consumers of $51 billion per year. This strongly supports the

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presumption that the case for maintaining ex ante regulation in high technology growth industries such as telecoms should be more stringent than in slow technology growth industries. (2) Increased difficulties in defining markets. Oftel has itself pointed out the increased difficulty of defining markets in the context of Pay-TV, telephony, higher bandwidth and interactive TV services. Nevertheless, both in mobile telephone services and digital television, Oftel has continued to maintain a relatively narrow definition of markets, for instance separating wholesale from retail activities and identifying specific market service elements as individual markets. Oftel has applied such an approach both in their consideration of access control services and of mobile services. Thus, it has continued to argue that call termination constitutes a separate market rather than one of a number of bundled services in a single market for mobile services. This view, which is in contrast to the position adopted by the German telecom regulator, RegTP, was strongly challenged by the mobile telecom companies but upheld by the CC on appeal.16 (3) Greater difficulties in defining economic costs and reasonable prices. The standard basis for economic regulation in most regulated industries is that efficient licensed suppliers have a right to recover their full economic costs, including the expectation of a reasonable rate of return on their investments, as defined by a regulatory asset base (RAB). The RAB is the value of assets used in the regulated business, as defined by regulatory rules and agreed between the regulator and the regulated company. In the US, the latter is bolstered by strong legal protection for stranded assets (i.e., assets whose value for future operations is reduced by policy and/or regulatory decisions, e.g., on mandatory liberalisation or unbundling). In the UK, telecom regulation is not based on this and neither BT nor any other UK licensed telecom supplier has a RAB. This is in contrast to other regulated utilities, such as electricity, natural gas, water and rail where there is an explicit RAB. Instead, and following agreed EU methodology, Oftel regularly takes LRIC (long-run incremental cost) based prices as a benchmark cost for telecoms. However, price regulation using LRIC can imply significant risk of non-cost recovery in circumstances of rapid and unpredictable technological change. The most obvious problem (as pointed out by Mason & Valletti, 2001) is when only straight-line depreciation is allowed. To provide proper remuneration of mean equivalent asset (MEA) valued assets in telecoms may require some degree of accelerated, non-straight-line depreciation which neither Oftel nor other telecom regulators have so far allowed. The risks from over-regulation grow if some of these effects are combined. From the outside, it appears that Oftel operates a narrow definition of markets AND a tight application of LRIC. This combination appears to weight static welfare losses highly relative to dynamic costs and benefits. When this is combined with an absence of any built-in requirements on Oftel to justify continued regulation, it is easy to see why there is major concern among regulated companies and claims that they are being unnecessarily and overly exposed to regulatory risk. These issues are highly relevant in the arguments over call termination prices in the retail mobile sector. In general, Oftel has exercised forbearance in the retail mobile market and it has refrained from explicit regulation of retail mobile prices. But, in 1998, it identified call termination prices (a) as a separate market in which the mobile companies have market power; and (b) as a market in which prices are significantly in excess of LRIC. In 1998, they successfully argued at the 16

See Competition Commission (2003), op cit.

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Monopolies and Mergers Commission17 that this justified an RPI–X cap on Vodafone and Cellnet termination charges. These arguments were re-iterated in 2001 and Oftel ruled for a continuation of an RPI–X formula together with an extension of it to One-to-One and Orange. Not surprisingly, the companies have consistently argued that it makes little economic sense to define markets so narrowly. They have also argued that, for an industry like mobile telecoms with rapid technological growth and high investment requirements, the combination of (a) a narrow definition of market with (b) LRIC price benchmarking imposes serious question marks as to the companies’ potential to earn reasonable rates of return on their investments. This, they argue, is because of the risks of over-regulation on individual elements which causes over-tight regulation on the overall mobile service package to final consumers. Hence, from their perspective, this appears to be a classic case where the exercise of regulatory forbearance by Oftel would have been more appropriate.18 There are also the fears that this approach could be applied to other specific elements of mobile service, both currently and potentially on future (3G and other) services. In its defence, Oftel might well argue, among other things, that its narrow market definition approach stems directly from (and is constrained by) European Union Competition Law and Telecom Directives and the 1998 UK Competition Act. It might also argue that consumers should not have to suffer apparent but clearly measurable static welfare losses so that they can reap future dynamic benefits that are uncertain both in magnitude and timing. The Oftel view was supported by the CC and at subsequent judicial review.19 The German telecom regulator, RegTP has so far taken a different view on whether mobile call termination is a separate market. It remains to be seen which view is adopted by the Commission of the European Union in rulings deriving from the 2003 EU Telecom Directive. 4.2. What more could Oftel have done to promote regulatory forbearance? Oftel documents regularly and consistently point to the need only to impose regulation where absolutely necessary and its desire to withdraw from regulation. In addition, as we noted above, regulatory forbearance (in the sense of refraining from applying regulatory conditions) was strongly promoted as a powerful new Oftel tool in speeches in early 1999 by the Director-General and by the Director of Operations. We still await both a significant withdrawal and a positive forbearance decision. It would be incorrect and grossly unfair to accuse Oftel of insincerity as to their intentions. They do, however, seem to be caught in some kind of a perceptual trap from which they find it very difficult to escape. In contrast, Ofgem has found a way of withdrawing from regulation in electricity generation and from price regulation in electricity and natural gas wholesale and retail sales—counter to almost all the predictions that would have been made 10 if not 5 years ago. 17

The predecessor of the Competition Commission. Mason and Valletti (2001) point out nicely the arguments for defining telecom markets less narrowly and applying global price caps rather than separate regulation of wholesale and retail baskets. They also present a neat unbundling option for the mobile call termination problem that would allow customers to choose between operators over originating and terminating calls via incorporating two SIM cards in each mobile phone, thereby allowing different carriers to be used for call origination from call termination and removing the need for conduct regulation. 19 LexisNexis—Administrative Court (2003) all ER (D) 377 (June). 18

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In this section, some suggestions are made as to what more Oftel could have done (and what Ofcom might do) to reduce explicit and implicit economic regulation. 4.2.1. Structural remedies It is somewhat curious that Oftel has not made more use of proposed structural remedies. Ever since the initial privatisation of BT in a vertically integrated form, there has been discussion of whether this was optimal or whether welfare would be increased by separating out trunk from local network, or network from consumer services (see, for instance, Vickers & Yarrow, 1988). During 2000–2001, there were repeated press reports that BT was considering unbundling itself to have separate companies for network and consumer services. This issue has now surfaced in digital television where the BBC and Channel 4 have called for a legally enforced split between platform service provision and TV content both for BSkyB and for the cable companies. Not surprisingly, BSkyB is strongly resisting this suggestion.20 Enforcing structural separation has been a major theme in the electricity and gas industries with Ofgas, Offer and now Ofgem taking a pro-active role.21 In gas, this was originally to enforce much more competition in gas industrial supply market and then to separate network from supply (sales); and this is now being extended to a degree of separation of low-pressure distribution pipelines from high-pressure transmission lines. In electricity, full separation of transmission and distribution networks has been present throughout but Offer and Ofgem have intervened proactively to introduce effective competition in generation and retail as well as wholesale supply and in meter installation, as well as enforcing full separation of distribution from supply (sales). However, they have also in recent years allowed a degree of re-integration, with generating companies allowed to own either distribution or supply businesses—but this was only permitted after the generation market became much less concentrated. In view of the above, it is very curious that Oftel has not publicly discussed the possibility of structural unbundling as a way of reducing the necessity for conduct regulation and perhaps put forward some suggestions. In particular, Oftel could have made public a ‘‘regulatory menu’’ offer to BT under which more far-reaching unbundling was explicitly traded off into less stringent regulation of product prices. It is, of course, possible that there has been private discussion of this, but there is nothing on the public record. The most obvious examples for BT are the implications for the regulation of retail telephone prices and of internet service prices. In particular, there have been continuing disputes on the price of the BT wholesale internet service relative to the price of their retail service and the price at which they transmit competitors’ wholesale internet services. As of mid-2003, BT has a massive (98%) share of the wholesale DSL broadband market. Oftel regulates the price of wholesale broadband, but on a ‘‘retail price minus’’ basis rather than on an LRIC or other cost basis. BT’s wholesale broadband competitors claim that this allows BT to impose a double margin squeeze and thereby dominate the market with the result that competition is very largely between retailers supplying the same BT wholesale broadband product. Oftel argue that allowing BT to sell a wholesale and a retail product on a ‘‘retail price 20

See ‘The Independent’ 31 January 2002. Ofgas was the UK regulatory agency for downstream natural gas, Offer was the regulatory agency for electricity until both were amalgamated into Ofgem in 1999. 21

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minus’’ basis is necessary to provide BT with the incentive to roll out DSL hardware across the country.22 Hence, we have reached a position where—apart from cable—there is considerable competition to BT in the retail market for small as well as for large customers (e.g., for internet services, including broadband with line rental imminent). However, the competition in the market for small consumers in ADSL broadband is almost entirely the resale of BT wholesale products—the price and terms of supply of which are carefully regulated by Oftel and this is very likely to be the case with fixed-line non-cable telephony. Local loop unbundling did not create the basis for competitors to BT in the broadband market. Hence, in the broadband market, as in fixed-line retail service to households, Oftel has found itself increasing regulatory oversight of BT’s wholesale services as the main way of providing competition at the retail level—a competition in the resale of BT wholesale broadband, line rental and other products. Given the difficulties of the necessary conduct regulation, it is at least worth asking whether greater structural separation of BT (e.g., between network and services) would have been a better policy. The counter-argument is that the interaction between network and service development is so important that there are major potential losses from separating them (e.g., in technological progress). In addition, that there would have been significant very disruption and transition costs from an enforced unbundling of BT—as well as loss of economies of scope and scale—particularly in recent years when the government had set ambitious broadband roll-out targets. The presence of rapid technical progress coupled with network-service synergies is the main reason why Cave (2002) and other telecom specialists have tended to argue that the electricity and gas vertical separation example does not—and should not—be applied to BT.23 But, as Cave points out, the implication is that regulatory withdrawal—and the use of forbearance—is more difficult. Similar problems are arising in digital TV and other services. BSkyB both owns and manages the dominant pay-TV platform and is also a major provider of programmes to the cable companies that are its main competitor in the pay-TV market as well as being a major carrier of free-to-air digital TV. But, technical progress could well rapidly erode its technical advantage in its network services. This is much less likely to occur in electricity and natural gas (let alone railways or water and sewage) where technical progress is relatively slow and predictable so that alternatives to current monopoly networks look highly unlikely for the foreseeable future. (See Appendix A for a discussion of how far the electricity and natural gas arguments apply to telecoms.) However, there are many intermediate steps in unbundling between accounting separation (which Oftel does require in some cases but which is a very weak form of separation) and full legal and corporate separation into entirely separate companies. Intermediate possibilities include: * * *

business separation; separate balance sheets; and separate companies with separate boards within a holding company. 22

See articles in Financial Times in 4 August 2003, 12 August 2003 and letter by John Pluthero of Energis on 15 August 2003. 23 See Cave (2002) for a good example.

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There are also others variants available short of full ownership separation. Within BT, unbundling the local loop into a separate company, which is only a small component of the business, might greatly reduce the need for conduct regulation of other aspects—but, even here, it is not straightforward to decide which parts of the local loop would be in a ‘‘Loopco’’ and which outside and the issue of network-service technical synergies remains. The incentives for network innovation, cost and quality improvements for a Loopco could well be weak.24 In the context of mobile telephony, Stephen Littlechild (the author of the 1983 Littlechild report on the regulation of BT and previously a UK Director-General of electricity regulation) has suggested the use of a strong non-discrimination principle as a way of avoiding the need for regulation of termination prices.25 Under this, each mobile network operator would be obliged to offer the same call termination charges to the operators of other networks and their customers as to its own network and customers. To make this effective would require a substantial degree of accounting and management unbundling within companies. The general requirement for a strong non-discrimination principle might also reduce the need for conduct regulation in other vertically integrated areas, e.g., for digital TV and services and for BT. One particular advantage of the non-discriminatory principle is that it requires less subjective judgement than many other tests, e.g., than whether prices are significantly higher than LRIC. Oftel has indicated that it will use general non-discrimination obligations and ‘retail minus’ pricing for access pricing to enforce the 2003 EU Telecommunications Directive in markets where companies have SMP but the amount market power is diminishing.26 One answer to the apparent absence of such structural initiatives might be that structural unbundling could be much more threatening in the telecom industry than in the energy sector. The development and viability of investment in new network technologies are intimately related to the growth in demand for better and novel services. Hence, the search for the ‘‘killer app’’ to make worthwhile investments in broadband and 3G. Similar issues arise on the relationship between the viability of more than one digital TV platform and the potential unsubsidised penetration rate of digital TV. These issues do not arise in electricity or gas where a single, established commodity is transported to final consumers in a one-way direction. The arguments above have some force. Nevertheless, maybe Ofcom will be more prepared than Oftel was to try and make more constructive use of standard and innovative structural remedies to reduce the need for conduct regulation. They are obliged under the 2003 Communications Act to pursue ‘‘light-handed’’ regulation, but exactly what that will mean in practice remains to be seen. As Cave (2002) suggests, Ofcom’s room for manoeuvre may well be limited. 4.2.2. Greater use of more fully specified options Oftel has rarely made use of alternative options in its proposals and its ‘minded’ recommendation has often been vague. This increases uncertainty for the regulated companies 24

See Cave (2002, p. 7). See Littlechild (2002, p. 57). 26 See Oftel: ‘‘Imposing Access Obligations under the New EU Directives’’ September 2002, para 3.24 and discussion in Cave (2002, pp. 5–6). 25

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and makes it more difficult to generate useful comments in consultations. It seems likely that more use of clearer, alternative options would focus discussion on regulatory trade-offs and allow more forbearance. A good example of this issue is the Oftel Consultation Document on the Fixed Telephony Market of 31 January 2001. Oftel have long put forward as an objective the end of price controls on retail fixed calls and the removal of the BT price cap regime. But, the new Consultation Document did not make any firm proposals on how or when this might take place. Instead it proposed: *

*

an interim safeguard RPI—RPI control—for an unstated period and with additional side conditions, including an RPI+0 control on total bills for deciles 3–5; and a non-discretionary trigger based on call prices to remove controls when ‘‘prices are competitively determined’’—but with discretion to re-introduce price cap regulation if the trigger price was exceeded.

Three options were given for the definition of the trigger: market share return on capital employed and price levels. Oftel recommended a trigger based on prices and provides an example in terms of a 50% reduction in BT call prices from their current level. It was not, however, suggested how long it might or should take to reach this figure, nor was there any analysis to support the 50% price reduction estimate as an indicator of competitively determined prices. Finally, no figures are suggested on the other options—nor was there any suggestion of any structural options or any potential trade-off between structural and conduct regulation alternatives.27 It is true that the Consultation Document promoted an incentive for BT to compete more aggressively in the calls market, through providing some kind of signal as to when price regulation might be removed initially and in amore sustained way. However, these proposals would only suspend price regulation under the existing structure and not remove it under this or any other structure.28 These comments might seem severe. In addition, underlying the proposals remains the ongoing issue of rebalancing rental and call charges in the fixed-line market. But, the Oftel proposals were still some way from actually removing retail price controls. In addition, given their imprecision, it is very hard to provide comments on their relative merit. Again, one notices the gap between the stated desire to withdraw from regulation and the concrete proposals. The eventual decision, which came into effect in August 2002, imposed a constant nominal price regime (RPI–RPI), subject to BT providing a new wholesale line rental product which would encourage consumer switching. If sufficiently taken up by other service providers, the retail price cap would become a constant real price (RPI 0) safeguard control. This is more far-reaching than the proposals in the earlier Consultation Document but is hardly radical.29 27

See Oftel Consultation on Oftel’s Review of the Fixed Telephony Market 31 January 2002, paras 3.18–3.40. See Oftel Review of Fixed Telephony Market Para 3.25. 29 Cave (2002) is relatively sympathetic to Oftel in this area but still describes the decision as ‘‘cautious’’ (p. 4). 28

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4.2.3. Regulation without explicitly regulating One way of avoiding ‘regulatory creep’ is to make sure that that implicit regulation is avoided. This is not always easy to achieve and it can reasonably be argued that Oftel should have done more to avoid it. A recent example of potential implicit regulation is in the pricing of conditional access services where Oftel, in their Consultation Document of 31 October 2001, state that their preliminary conclusion is that there is no need for ex ante price controls of these services. But, not only does the document makes it clear that Oftel will have a role to decide appropriate prices where commercial negotiations fail but also to ensure that the prices are ‘‘fair, reasonable and non-discriminatory’’. It is well known that, in other services, Oftel has made its access pricing decisions on the basis of LRIC estimates plus equi-proportionate mark-up.30 This knowledge must heavily constrain any commercial negotiations, e.g., because both sides to the negotiations have considerable prior knowledge as to the likely appeal decision finding by Oftel which will become the explicit benchmark price for all subsequent negotiations. Indeed, it might be argued that Oftel is effectively regulating the price level without an explicit price cap. This may be over-stating the case but, again, it is far from clear that the Oftel approach has minimised regulatory involvement.

5. Concluding comments It is very difficult for any organisation, particularly a regulatory agency, seriously to question whether some of its core activities are really necessary. Oftel has undoubtedly been sincere in its repeated statements on its desire and intention to withdraw from regulation where possible and to exercise regulatory forbearance. The fact that it was not been able to do so in spite of this clear and often expressed desire is a testament to the various day-to-day pressures to maintain and extend regulation unless there is a countervailing external pressure. This is probably the single most important reason why Oftel found it hard to exercise regulatory forbearance in the narrower or wider sense. That raises the question as to why Ofgem and its predecessors have been able to overcome these pressures and Oftel was not. The most obvious difference between Ofgem (and its predecessors) and Oftel is that Ofgem: (i) publicly laid out a clear strategy that would support regulatory withdrawal; (ii) has established clear means, criteria and goals for achieving this strategy; and (iii) has systematically pursued the use of structural changes as a way of implementing withdrawal, including the use of structural unbundling/conduct regulation trade-offs. The combination of these allowed Ofgem to overcome the inertia to which regulatory agencies are prone. The first two points established a clear regulatory policy direction and the structural unbundling provided the means. 30

See Mason and Valletti (2001) and Cave and Prosperetti (2001) for trenchant comments of the application of LRIC plus standard mark-ups by Oftel and other EU telecom regulators.

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It may well be that structural unbundling is intrinsically more problematic in telecom services, not least because of network-service synergies—as suggested by the analysis in Appendix A to this paper. The Communications White Paper was cautious about banning vertical integration as are most telecom specialist commentators. Nevertheless, there does seem to be scope for more use of intermediate structural remedies to alleviate the problems of conduct regulation than Oftel has publicly pursued even, as Mason and Vallletti (2001) have suggested, over mobile termination calls. The critical point to enable regulatory withdrawal and forbearance actually to happen is to have some mechanism in place that forces the agency to review regularly and systematically, area by area whether or not continued regulation is necessary—preferably with an external element in carrying out or considering the analysis and conclusions of any review. In a regulatory agency with a commission structure or a board structure, that pressure may come from non-executive commission/board members. Alternatively, in the UK context, the OFT could be given that remit. Oftel have regularly done cost-benefit analyses of the introduction of new regulatory interventions, but not of existing ones—nor have they been required to do so. In this context, the requirements in the 2003 Communications Act for Ofcom to remove regulatory burdens that have become unnecessary—and a regular statement on how they propose to do so—should provide an opportunity for making a new push to increase regulatory forbearance and withdrawal. In addition, the EU Electronic Communications Services Directive of 2002 may give a further push in this direction. Together with more use of creative structural initiatives to reduce or remove the need for regulation, these obligations should help Ofcom overcome the difficulties that Oftel has had in actually fulfilling its desire to achieve a substantial amount of regulatory forbearance. Appendix A. Structural solutions to enable regulatory withdrawal A.1. Similarities and differences between (a) telecommunications and (b) electricity and gas During 2001–2002, a number of UK energy regulatory commentators have critically contrasted the regulatory approach of Oftel relative to Ofgem and its predecessors, Offer and Ofgem. Claire Spottiswoode, previously Director-General of Ofgas, has publicly argued strongly for the splitting-up of BT services from its network on the lines of UK electricity and gas unbundling. However, although the question of the relationship between market power in wholesale and retail markets is common to telephone services, digital TV and similar services and to energy markets, there are also significant differences. That is why, in this paper, I have argued for the use of structural remedies in telecom markets that fall some way short of the full separation between network and other services that has been the hallmark of UK electricity and gas restructuring. The main similarities are that market power at the wholesale network level may give power in retail markets to vertically integrated companies in both the energy and telecom markets. In electricity, this firstly gives rise to the issues of whether or not transmission and dispatch companies should be allowed to have any interests in generation as well as in distribution and sales—in the UK this is forbidden and the new Draft EU Electricity Directive would go a long way towards enforcing high levels of transmission and dispatch separation. However, in the UK, the main areas of concern have been over vertical integration between generating companies and distribution and retail sales companies. In 1996, the Secretary of State for Industry rejected the

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majority MMC decision to allow National Power and Powergen to undertake mergers with distribution and/or supply companies. Such mergers were only allowed once the degree of competition within the generation market was greatly increased. Similar concerns have been consistently raised over BT and BSkyB over the problems where a single company has a dominant network position as well as selling service products, wholesale and retail. The main differences are: (i) Competition between networks: In electricity, in any country there is a single transmission network and there is only one distribution network. In the very long term, this may change, e.g., with the spread of distributed generation, mini-CHP (combined heat and power), giant batteries, etc. This, though, is all still highly speculative. For the foreseeable future, the technology effectively dictates that transmission, dispatch and distribution will be monopoly activities conducted over single networks. Telecoms are clearly different in this respect. We already have competition between fixed and mobile telephones, telephony via cable has grown, internet telephony is developing. In television, we have competition between analogue and digital television, but where the Government wishes to end by moving all consumers to digital to free up the analogue spectrum for other uses. Within digital television, there is competition between land-based and satellite digital TV. Similar competition opportunities arise for the delivery of internet services. It is the hope that competition between networks (or platforms) that drives the view that telecom regulation may one day be completely abolished—although nowhere has this yet been done and nowhere does it yet seem likely. New Zealand, having previously done without a telecom regulator is now introducing one. For electricity, it does not seem likely or possible that economic conduct regulation of monopoly transmission, dispatch and distribution could be abolished. Natural gas is in an intermediate position. It is difficult to imagine competing gas distribution networks (although they did exist for a period in 19th century London) and gas transportation networks are usually single monopolies. Germany is an exception, where Wintershall has built pipelines to compete with those of Ruhrgas and there are also competing pipelines on point-to-point, non-intermeshed systems. But, this last begins to look more like telecoms where the fixed-line local loop is the only unavoidable monopoly element—at least until wireless technologies become more widespread. (ii) Technology and new products. Both electricity and gas are supplying a single product (electrons and gas molecules, respectively) to customers and there is no reverse or interactive process. Further, the transport and distribution networks use well-established, if very capital intensive, technologies. This is vastly different from telecoms where telephony is a two-way (or more) process and where interactive services are growing rapidly. In electricity and gas, the economic viability of network expansion and investment does depend on the demand from customers and the price they are willing to pay. But, that is vastly different from trying to estimate the potential demand for services that do not yet have a market and where both the costs of providing and marketing the services and the costs of constructing the networks are not properly known and highly uncertain. The key difference between telecoms and the other industries is that telecoms provides a much wider range of services across networks (which causes great difficulty in allocating costs) and that the inter-relationship between services and network performance seems to be much greater.

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(iii) Monopoly versus oligopoly. Telecom services are primarily supplied by large, powerful firms. Sometimes, as in UK fixed-line telephony and digital television, there is a dominant supplier with some smaller companies who may compete in some rather than all aspects of the business. The supply of network services may be largely met by BT and BSkyB, but, with the possible exception of the local loop, they are dominant in these markets but without the monopoly exercised in electricity transmission and distribution networks or in the equivalent gas pipelines. For the UK, this is a key difference between energy and telecom markets. However, as discussed below, this UK difference is less clear-cut than in other EU countries (or the US). The position is very different in UK mobile markets (where we now have four GSM players each with 20–30% of the market, each with their own network and a new entrant recently arrived and offering 3G services). There is no question that having dominant but non-monopoly firms owning and managing the fixed-line telephony and digital television networks causes more problems for economic regulation than having a single monopoly supplier. However, although there is a clear contrast in the UK between the types of industry, the difference is not intrinsic to telecoms. Not all countries have separate electricity transmission companies (or natural gas equivalents). In Germany, there is no national grid company; transmission is owned and managed by the major regional electricity utilities and the regional utilities supply electricity (and gas) on a concession basis to local (e.g., municipal) companies or authorities. Standalone electricity transmission companies are also unusual in the US. However, in Germany and throughout the EU, a high degree of separation between generation and transmission businesses is now mandatory under the 2003 EU Electricity Directive (and similarly for gas); while in the US, the Federal Energy Regulatory Commission (FERC) is actively promoting Regional Transmission Organisations (RTOs). Many of the oligopoly problems discussed in UK telecoms appear very similar to those of European (particularly German) energy markets. Helm (2001) argues that ‘‘The result [of trends in the 1990’s] in electricity is that around seven companies now dominate a market of some 350 m customers and that further competition will probably be confined largely to a game between a small number of dominant (regional) monopolists or oligopolists. In an important sense, this will be a competition with not enough playersy’’31 This suggests a picture of electricity and gas industries in continental Europe that is more similar to the UK telecom market than the simple contrast between BT and NGT32 might suggest. A.2. Implications To argue that structural remedies appropriate to (UK) electricity and gas industries can or should be applied to telecoms is almost certainly incorrect. The points about technology and new markets in (ii) above show the most important differences. There are, however, more similarities than one might expect, particularly if one includes non-UK examples, and hence there are lessons that one can draw. The implications that I draw from this discussion are: 31

Helm (2001, p. 306). NGT is the UK private company that owns and operates electricity and gas transmission networks and (currently) local gas distribution networks. 32

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The increasing difficulty of using conduct regulation for large, powerful companies involved in both network services and non-network wholesale and retail services. But, this applies to German and some other EU countries’ electricity and gas industries as well as to UK telecoms. The potential for more consideration of intermediate unbundling options in telecoms (separate business and/or corporate units, trading between businesses on a non-discriminatory and open basis); The need to involve companies more and to provide incentives for them to offer structural options in return for reduced conduct regulation.

It is not surprising that, within the current structures, increased conduct regulation has accompanied growing competition in UK telecoms. The same thing happened in UK electricity and gas as shown by the number of staff in Offer, Ofgas and Ofgem. However, to break this in energy required the use of structural trade-offs and remedies—and the same may well be true for telecoms. For telecoms, there seems to be much greater synergies between networks and services, e.g., in the effect of network developments on the range and quality of services that can be offered to consumers and it is much less clear whether the benefits would outweigh the costs, aside from the transitional costs of making the changes. A particular issue is that the potential welfare losses from over-regulation in telecoms are almost certainly greater than in electricity or gas, given the contrasting technologies and their contrasting speed of development. Hence, the acute need for reduced and simpler conduct regulation conduct regulation which intelligent structural choices (e.g., on the local loop), agreed with but not dictated to licensed companies. If this could be achieved, it should help achieve regulatory withdrawal. References Cave, M. (2002). OFCOM: How light can the regulatory touch be? Beesley Lecture, 22 October. Cave, M., & Prosperetti, L. (2001). European telecommunications infrastructures. Oxford Review of Economic Policy, 17(3), 416–432. Competition Commission, UK. (2003). Vodafone, O2, Orange and T-Mobile: Reports on references under Section 13 of the Telecommunications Act 1984 on the charges made by Vodafone, O2, Orange and T-Mobile for terminating calls from fixed and mobile networks. Competition Commission, UK, February. Crandall, R. W. (2001). A time to end regulation? Beesley Lecture, 6 November. Helm, D. (2001). European networks—competition, interconnection and regulation. Oxford Review of Economic Policy, 17(3), 306. HM Treasury. (2001). Competition in payment systems: A response to consultation. HMSO, August 2001 (website: http:// www.hm-treasury.gov.uk). Joskow, P. L. (2001). California’s electricity crisis. Oxford Review of Economic Policy, 17(3), 365–388. Littlechild, S. C. (2002). Regulators, competition and transitional price controls: A critique of price restarints in electricity supply and mobile telephones. London: Institute of Economic Affairs, January. Mason, R., & Valletti, T. M. (2001). Competition in communications networks. Oxford Review of Economic Policy, 17(3), 389–415. OFTEL. (1999). SSSL as a regulated supplier. Oftel, London, UK (website: http://www.oftel.gov.uk) November 1999. OFTEL. (2000). Guidelines on regulated supplier determinations. Oftel, London, UK (website: http://www.oftel.gov.uk) September 2000. Vickers, J., & Yarrow, G. (1988). Privatisation: An economic analysis. Cambridge, USA: MIT Press.