The UK regulatory authority Ofcom has this morning published its long-anticipated Phase 2 consultation document, forming part of the Strategic Review of Telecommunications.

The document (127 pages + annexes) sets out Ofcom's proposals for future telecommunications regulatory strategy.

Ofcom expresses general satisfaction about the development of the mobile communications market (although it does make reference to the possibility of radical change to mobile call termination arrangements), and focuses its attention on two areas: the state of affairs in the fixed-line market, and consumer protection more generally.

The Phase 2 consultation document strongly expresses the view that the situation of the fixed-line market is not satisfactory (continued domination by BT, and a decline of the sources of competitive advantage of alternative operators, which were for a large part created by regulation), and that the fixed telecommunications industry faces new fundamental challenges arising from the evolution from circuit-switched fixed networks to all-IP based 'Next Generation Networks'. In this regard, Ofcom states: "This transition has major consequences for all market participants including BT; but for BT’s competitors, it is bringing into sharp relief the unsustainability of the current situation."

T-REGS Note: Ofcom has announced its intention to issue a separate consultation on policy issues relating to BT's 21st Century Network plans, which involve the transformation of BT's network into an all-IP network.

Ofcom discusses 3 options: full deregulation, referral of BT to the Competition Commission, and 'real equivalence of access', and comes out in favour of the third. It expresses the point of view which can best be paraphrased as follows: 'the problem of equivalence of access needs to be tackled head-on, as an alternative that would avoid the disruption and costs associated with structural separation'.

'Real equivalence of access' is defined by Ofcom in the following way:

BT’s wholesale customers should have access to:

• the same or a similar set of regulated wholesale products as BT’s own retail activities;

• at the same prices as BT’s own retail activities; and

• using the same or similar transactional processes as BT’s own retail activities.

Ofcom goes on to state that achieving equality of access would require:

• a significant shift in BT’s behaviour at an organisational level in support of equivalence at the product level;

• changes in management structures, incentives and business processes, which today remain as a consequence of BT’s historic structure as a vertically-integrated operator;

• information flows within BT which mirror the information flows between BT and its wholesale customers, so that its customers are able to influence BT to the same extent that different parts of BT can influence each other; and

• that this level of equivalence within the organisation can be demonstrated through transparency.

Very importantly, Ofcom is not proposing to achieve all the above through intrusive regulation, but is explicitly inviting BT to voluntarily make the changes outlined above, and Ofcom is giving what it believes to be strong incentives to BT: (i) the withdrawal of regulation of many retail markets, (ii) the withdrawal of the number of wholesale markets currently subject to regulation (because regulation would be focused on enduring economic bottlenecks), and (iii) a thinly veiled threat that if BT does not voluntarily make the changes, referral to the Competition Commission remains a possibility (which may ultimately lead to enforced structural separation).

Ofcom proposes to reduce the list of wholesale-level interventions to the following areas:

- Local loop unbundling

- Bitstream access (DataStream)

- Wholesale leased lines (traditional interface); e.g. partial private circuits and Wholesale leased lines (alternative interface); e.g. wholesale LAN extension service, backhaul extension service

- Wholesale line rental

- Carrier pre-selection

- Interconnection (including interconnection circuits) and call termination

- Migration products

Ofcom's carrot and stick approach is well expressed by the following two citations: a statement of concept, and a calendar of actions:

"We believe there is a case for what would in effect be a new regulatory contract with BT; this is not a real contract but a settlement between Ofcom and the industry. Effective competition is in prospect in many parts of the core network. If BT delivers equality of access, and if the access and interconnection arrangements for its proposed 21st Century Network do not limit competition, there would be strong prospects for competition in these parts of the network. This would imply that regulation controlling the wholesale price of interconnection to BT’s core network, for example Network Charge Controls, could increasingly be relaxed; competition could be expected to achieve a similar objective. Conversely, there is much less prospect of effective competition to BT’s access network. Therefore for this part of the network, regulation of the returns that BT is permitted to make on its assets is the principal means of consumer protection. [...]

"We are proposing a staged withdrawal from such regulation, with each stage contingent on particular competitive outcomes being met by the market, tested by objective criteria."

The stages proposed are as follows: 

• Stage 1 (ongoing) is the development of a fit-for-purpose Wholesale Line Rental (WLR) product, reflecting the bottleneck asset of local access lines. Before we can commence deregulation, the basic building blocks necessary for competition in today’s voice market need to be in place;

• Stage 2 (2005) will commence once WLR has been introduced and is proven to be effective. It will then be possible to review the withdrawal from much regulation of fixed retail voice markets;

• Stage 3 (2005), which will take place in parallel to Stage 2, will review the withdrawal of regulation in certain wholesale markets, such as wholesale international direct dial markets, where competition is increasing;

• Stage 4 (2008-2010) will review the evolution of remaining fixed wholesale voice markets. As BT’s new 21st Century Network evolves, regulation will need to evolve in response. There is an opportunity for access products designed for data, such as LLU and DataStream, to provide the mechanism for wholesale competition in voice; and

• Stage 5 (on-going monitoring, review by 2008) we will assess whether there is a case for the definition of an inter-platform voice market, which includes both fixed and mobile. We do not believe that the conditions are yet close to being met for this to be defined today, but as 3G networks are rolled out and consumers’ behaviour continues to evolve, it may be appropriate to do so in the future. Effective competition could emerge as a result at both the retail and wholesale levels. If this does occur, it offers the prospect of the end of regulation in voice-specific services, save for continuing universal service provisions.

Ofcom's specific proposals in the area of consumer protection are focused on consumer information, advertising standards, contracts, limitation of the number of packages and specific actions to facilitate switching from one supplier to another. As regards large business customers, Ofcom proposes to reduce the level of regulation. The proposals related to end-users are not addressed in detail in this news item. For a discussion of those proposals, and the other Ofcom proposals, please contact Yves Blondeel.

The full text of the Ofcom Phase 2 Strategic Review Consultation, including its annexes, can be accessed by clicking here.

Interested parties are invited to comment on the Ofcom Phase 2 consultation by 3 February 2005.