Convergence and Telecommunications Regulation Changes in the UK 1

Richard Eccles, CMS Cameron McKenna, London, discusses changes in telecoms regulation in the UK

Introduction

The regulatory framework for telecommunications in the UK is contained in the Telecommunications Act 1984, which provided for a system of licence-based regulation focusing very much on the running of telecommunication systems. It regulates the provision of services only to the extent that they must be provided over licensed systems. By contrast, the EC directives in the sector, which were adopted only some years later, are based primarily on the concept of providing telecommunication services, and have in turn resulted in subsequent UK statutory instruments.[1] There is a contrast between the basic approach in the 1984 Act of seeking increased network competition, with the dual approaches in the EC legislation of facilitating access for service providers to existing networks (the concept of open network provision) and of facilitating interconnection between existing networks.

As convergence continues to evolve, it is likely that substantial reform of the Telecommunications Act 1984 will be required, and also that we will see competition regulation in the telecommunications sector moving away from ex-ante sector-specific licence regulation, to ex-post competition law regulation of the sector, based on the application of Articles 81 and 82 (ex 85 and 86) of the EC Treaty and chapters I and II of the Competition Act 1998.

Convergence

The telecommunications environment has developed considerably since the Telecommunications Act 1984 came into force. At that time, the emphasis was very much on hard-wired means of supply. As digitisation and multiplexing results in different types of information being transmitted by the same means, and with the blurring of the distinguishing between mobile and fixed networks, it becomes more likely that the 1984 Act will be replaced in the foreseeable future by a more modern framework. Meanwhile, both European Commission and the UK Government have published green papers on convergence in the telecommunications and information technology sectors. This has resulted at EC level in common positions on five proposed directives to replace the current portfolio of over 20 directives. The government reported in 1999 on the results of its consultation on its green paper, to the effect that the existing regulatory structure is considered sufficiently flexible for the current environment, but that it would require modification as convergence accelerates. Considerable support was noted for a single regulator for the sector. As a result of this, an Office of Communications Bill[2] has been put forward which provides a framework for the establishment of the Office of Communications (“Ofcom) and the transfer to it of regulatory functions relating to telecommunications, wireless telegraphy, broadcasting, radio and television services and to facilitate the implementation of future legislation on the subject matter of these proposals. The existing communications industry regulators the Director General of Telecommunications (“DGT) the Broadcasting Standards Commission, the Independent Television Commission and the Radio Authority, would therefore all be replaced by Ofcom. Therefore significant change is on the horizon.

The development of digital technology and ATM (asynchronous transfer mode) as a converged network technology, has already had an impact on the incumbent, British Telecommunications plc (“BT), through its revised and consolidated licence which took effect in 1999. The effect is seen in the new distinction between network services (BT’s “Systems Business) and value-added services (BT’s Supplemental Services Business (“SSB)). Whereas BT’s Systems Business was previously defined as the installation, running and maintenance of BT’s network and the conveyance of voice and telex messages, with data services being treated as part of the SSB, basic data services with no enhanced functions (such as contents manipulation or protocol conversion), for example internet access services, are now treated as basic conveyance services or network services. Whilst voice and basic data services are therefore now treated as part of the expanded definition of BT’s network services or Systems Business, the SSB (value-added services) comprises any service other than network services. Since BT’s Systems Business is regulated, in particular through interconnection and related obligations, this new distinction results in BT being required to make individual network services available separately rather than only in a package, so as to enable independent service providers to be able to access the basic platform they require so as to be able to provide competitive, value-added services using BT’s network.

Convergence of voice and data services is also seen in the network now being rolled out for third generation mobile telephony, which will carry both voice and data and in due course, video. Mobile telephony operators need a licence under the Wireless Telegraphy Act 1949 to use radio spectrum, which is managed by the Radiocommunication Agency. Spectrum is a scarce resource, and as a result only five such mobile telephony licences could be awarded, and these have been auctioned and allocated pursuant to the Wireless Telegraphy Act 1998, which allows licence fees to reflect the market value of the spectrum.

Licences

The system of licensing provided for in the 1984 Act comprises individual licences and class licences. Class licences apply to specific types of operation and remove the need for an individual licence where their criteria apply.

The current individual licences under the 1984 Act are the result of the UK’s implementation of EC Directive 97/13, the Licensing Directive, initially by an enabling regulation, the Telecommunication (Licensing) Regulations 1997[3] pursuant to which there are now four types of PTO licences brought into effect by five statutory instruments, as follows:

· a standard public telecommunication operator (“PTO) licence for operators of a fixed voice telephony system[4]

· a standard licence for mobile public telephone system operators[5]

· a PTO licence for each of British Telecommunications plc (“BT) and Kingston Communications (Hull) plc (the universal service provider for the area of Kingston upon Hull, whose operations, unlike those of other operators in the rest of the country, where never consolidated into BT)[6]

· a PTO licence for operators of cable systems[7].

The 1984 Act provides that all PTO licences must contain specific obligations to provide telecommunications services specified in the licence, to connect to any telecommunication system or permit the connection to the PTO’s telecommunication system (as specified in the licence), to permit the provision of licensed services by means of the PTO’s system, not to show undue preference to, or to exercise undue discrimination against any persons (including in respect of charges and terms and conditions) and to publish notices of applicable charges, terms and conditions from time to time.

These obligations are particularly important in relation to universal service providers, i.e. BT (and, as regards the Hull area, Kingston Communications (Hull) plc). BT’s licence obligation not to exercise undue discrimination or show undue preference in respect of the provision of access to or interconnection to its network, applies not just as between other operators, but also as between its own businesses, for example the SSB, and other operators (Condition 8.2). Therefore BT is required to provide network services to other operators on the same unbundled basis as it provides them to its own SSB. BT’s licence also requires it not to cross-subsidise its apparatus supply business or its SSB, and to maintain separate accounts for these respective businesses. Kingston Communications is under similar licence obligations.

Pursuant to the EC Licensing Directive (Directive 97/33) , and the forthcoming new EC Authorisations Directive, telecommunications authorisations can be expected to be increasingly provided for in the form of class licences, avoiding the need for prospective licensees to apply for an individual licence. In the UK, such licences are issued under section 7(3) of the 1984 Act and there are over 23 types of such licence, but most are for a specific service or network and at this stage only the following are of common application:

(a) a licence for the-self provision of telecommunication services;

(b) a licence authorising the provision of telecommunication services which do not fall under other licences.

(c) a licence for international simple voice resale (subject to fulfilment of a prior registration requirement);

(d) a conditional access and access control licence regarding the provision of digital television and associated interactive services, whether on a pay TV or other basis;

(e) a licence for private mobile radio;

(f) a licence for satellite services (authorising the running of satellite transmission or receive terminals which are not connected to the public network);

(g) a licence permitting the running of cordless mobile services; and

(h) a licence for broadcasters’ satellite downlinks (enabling the use of equipment to receive messages from earth orbiting apparatus for conveyance to another telecommunication system for retransmission).

Price Control Regulation

Price cap regulation has been applied to BT since its privatisation in 1984, as a means of consumer protection against BT’s quasi-monopoly power or dominance, and on the basis of the RPI - X formula. This limits price increases to the annual change in the retail price index minus the X factor which is determined by the regulator by reference to the presumed movement of prices and costs within the industry, thus allowing the regulatored company to retain the benefit of any increase in efficiency over and above market expectations. Separate price caps are imposed for BT’s retail and network (Systems Business) charges. The application of this price cap at least to retail telecommunications services has been criticised as distorting the effective operation of competitive forces. During periods of severe price cuts imposed on BT by the Office of Telecommunications (“Oftel), the development of competition has been hampered through distortion of the entry signals given by unconstrained pricing policies of a dominant operator, competitors such as Mercury being forced to follow any BT price cuts in order to gain entry to and penetrate the market. As a result of a review of the effect of price caps, Oftel decided in 1997 that retail price control should in future only be implemented where consumer protection was required, and raised the retail price cap from RPI - 7.5% to its present level of RPI - 4.5%.

Related issues were presented in the debate concerning tariff rebalancing. During BT’s statutory monopoly, it had been led for political reasons to maintain long distance call charges at a high level relative to costs, whilst maintaining local charges and line rental charges at a low level relative to costs. BT was unable to rebalance due to a RPI + 2% price cap on line rentals. As a result of this, and together with BT’s duty to provide interconnection and the related costs, its licence was amended to include an “access deficit charge in addition to its cost of conveyance, using the efficient component pricing rule (“ECPR) in order to cover BT’s losses on stand alone interconnection activities. However, the ECPR was criticised because it protects an incumbent operator against its own inefficiency and fails to take into account the dynamic gains that can result from competition. As a result, in 1996, BT’s licence was again modified so as to lift the RPI + 2% line rental constraint, resulting in the access deficit charge being cancelled, and thus enabling, but not obliging, tariff rebalancing by BT.

Network charges will be subject to a revised price cap regime commencing in October 2001 through to July 2005 under which a different approach will be taken to each of four groups of services: competitive, new, prospectively competitive and non-competitive services. No caps will apply to competitive services; Oftel will retain the power to apply a cap to new services, the value of X will be 0 for prospectively competitive services, and a range of values for X ranging from 7.5 to 13 will apply to non-competitive services.

It can be seen that price caps have to some extent been relaxed by Oftel. This is consistent with allowing market forces to operate, and with the use of general competition rules where necessary.

Competition Regulation

BT’s and other PTOs’ licences included a fair trading condition, which comprised provisions in similar terms to Articles 81 and 82 of the EC Treaty. These provisions were imposed with effect from 1st October 1996 for BT and 17th December 1997 for other PTOs as a result of the difficulty of applying specific ex-ante licence conditions in a changing technological environment and the perceived ineffectiveness of the UK’s general competition legislation prior to the Competition Act 1998. However, the fair trading condition has ceased to apply since the entry into force of the Competition Act 1998 on 1st March 2000. Apart from the fact that the condition itself had an expiry date of 31st July 2001, it was also expressed no longer to apply if new legislation enforceable by the Director General of Telecommunications would be enacted containing (inter alia) similar provisions to the condition. These criteria are fulfilled by the Competition Act 1998, which gives concurrent jurisdiction to the DGT in the telecommunications sector. The DGT therefore has the choice in any particular case of proceeding under the Competition Act, normally in consultation with the Director General of Fair Trading (“DGFT), or under any specific relevant licence conditions under the Telecommunications Act. Where the DGT considers it more appropriate to proceed under the Competition Act, he is relieved of his duty under the Telecommunications Act to enforce any specific relevant licence conditions.

So far, the DGT has applied the Competition Act in only case, BT SurfTogether and BT Talk&SurfTogether[8] which it investigated concurrently with the OFT, concluding that BT’s two new tariff packages offering both voice and unmetered off-peak internet access calls did not amount to an abuse of dominant position contrary to section 18.

The Competition Act provides for the Competition Commission to act as an appeals tribunal against decisions taken under the Act by the DGFT or DGT. As regards decisions taken by the DGT under the Telecommunications Act, the Telecommunications (Appeals) Regulations 1999[9] provides for a right of appeal to the High Court on grounds of material error of fact, material procedural error, error of law or other material illegality, including unreasonableness or lack of proportionality. However, the leave of the court is needed to bring such an appeal, and time limits apply (42 days for an appeal against a final or provisional order under the Telecommunications Act and three months for appeals against any other decision). Certain other differences apply between the Competition Act and Telecommunications Act regimes which can be regarded as showing the Competition Act to be a stronger measure. Under the Competition Act, third parties can take action against infringing agreements or conduct, whereas under the Telecommunications Act, an order would first have to be made by the DGT before enforcement action could be taken by a third party. Also, fines can be imposed for infringements of the Competition Act, whereas fines can only be imposed under the Telecommunications Act for a breach of a compliance order in respect of a previous contravention, i.e. for repetition of an infringement from which the licensee has previously been ordered to desist. Therefore it is possible that the Competition Act will in future increasingly be used to regulate the telecommunications sector.

Interconnection and “Significant Market Power

Specific obligations apply to PTOs holding “significant market power. Under the UK Interconnection Regulations 1997 implementing the existing EC Interconnection Directives, operators having significant market power (“SMP operators) are required to meet all reasonable demands for interconnection services. An operator will be presumed to have significant market power if it has a market share of 25% or more, but the DGT must also take into account the operator’s ability to influence market conditions, its turnover relative to the size of the market, its control over the means of access to end users, its access to financial resources and its experience in providing products and services in the market. The relevant markets for these purposes are (a) fixed public telephone networks or services (b) leased line services, and (c) public mobile telephone networks or services. It should be noted that the concept of significant market power is to be aligned with the concept of dominance in EC competition law, under the common position for the forthcoming Directive on a common regulatory framework for electronic communications networks and services.

The interconnection obligations of SMP operators are onerous because they can be applied in respect of access to the relevant system other than at network termination points offered to the majority of end users. Further, SMP operators have an obligation to provide access to their system other than at network termination points, on the reasonable request of a telecommunications services provider, under the UK Voice Telephony Regulations 1998[10] implementing the EC Revised Voice Telephony Directive (Directive 98/10).

SMP operators are also required to provide unbundled access to the local loop under EC Regulation No. 2887/2000. The DGT has determined to include such a condition in BT’s licence (Condition 83). This requires BT to provide lines from subscribers’ premises to BT’s local exchanges. SMP operators in the market for fixed publicly available telephones services are also required to provide carrier pre-selection, pursuant to the UK Carrier Pre-Selection Regulations 1999[11] implementing the EC Interconnection Directives (Directive 98/61 amending Directive 97/33), in respect of both national and international calls. Carrier pre-selection is the ability for the caller to pre-select the operator over whose network a long distance call will be routed without having to dial any indirect access code on a call-by-call basis (unless the subscriber chooses to override the pre-selected operator by using such a code). By contrast, all PTOs operating fixed public telephone systems are required to provide number portability (i.e. the ability to continue using a telephone number irrespective of the operator), pursuant to the Telecommunications (Interconnection) (Number Portability) Regulations 1999[12]. Telephone numbers are not owned by operators, but are allocated by the DGT in accordance with numbering conventions, i.e. principles published from time to time by the DGT following consultation with interested parties.

Conclusion

The UK telecommunications regulatory regime comprises a web of statutory and licence obligations and guidelines and statements from Oftel. The legislative framework can be expected to evolve as the impact of convergence continues. In the foreseeable future, comprehensive change will be appropriate to reflect the rapidly changing environment as compared with that which existed at the time of the Telecommunications Act 1984. This process of change is already inaugurated by the Office of Communications Bill.

From the competition regulatory perspective, following entry into force of the forthcoming EC Directives, it can be expected that increased use will be made in the future of class licences, that general ex-post competition rules will be found to be more appropriate than specific ex-ante licence conditions, due to their greater flexibility in relation to changing technology and market conditions, and that the concept of “significant market power will be aligned with the concept of dominance under general competition law. The application of price caps by Oftel has already been loosened over the last few years (in relation to fixed networks), which is consistent with a move towards applying general competition rules to control market power. It will therefore be interesting to see to what extent the DGT will exercise his jurisdiction for the sector under the Competition Act 1998.

Richard Eccles

CMS Cameron McKenna

30th August 2001

[1] These are primarily the Regulations on Licensing (SI 1997 No. 2930), Interconnection (SI, 1997 No. 2931), Voice Telephony (SI 1998 No. 1580), and Interconnection (Carrier Pre-selection) and Interconnection (Number Portability) (SI 1999 Nos. 3448 and 3449).

[2] HL Bill 8

[3] SI 1997 No. 2930

[4] SI 1999 No. 2451

[5] SI 1999 No. 2452

[6] SI 1999 Nos. 2453 and 2455

[7] SI 1999 No. 2454

[8] Oftel press statement 38/01, 4 May 2001.

[9] SI 199 No. 3180

[10] SI 1998 No. 1580

[11] SI 1999 No. 3448

[12] SI 1999 No. 3449