THE UK TELECOMMUNICATIONS INDUSTRY · PDF fileThe CRI is pleased to publish The UK Telecommunications Industry 2001 in its ... 52 56 5 Convergence ... THE UK TELECOMMUNICATIONS INDUSTRY

INDUSTRY BRIEF

THE UK TELECOMMUNICATIONS INDUSTRY 2001

Constantina Bichta

THE UK TELECOMMUNICATIONS

INDUSTRY 2001

Constantina Bichta

Desktop published by Jan Marchant

© The University of Bath All rights reserved ISBN

Preface The CRI is pleased to publish The UK Telecommunications Industry 2001 in its Industry Brief Series. The author is Constantina Bichta, a Research Officer at the CRI. The brief is the first we have published on the telecommunications sector and, importantly, completes a set of CRI industry briefs for utilities and network industries, covering water, energy, transport and communications. It is also timely because we have reached a point of change in the economic regulation of the industry, which to date has been overseen by the Director General of Telecommunications and Oftel, from when BT was privatised in 1984. The future will be the new ‘telecommunications commission’, or authority, and its associated office, Ofcom. The CRI would welcome comments on the Brief, which can be taken into account as CRI Industry Briefs have to be updated from time to time in line with developments in the Industry, and will be published as a ‘revised’ or subsequent ‘edition’. Comments should be addressed to: Peter Vass Director – CRI School of Management University of Bath Bath, BA2 7AY The CRI publishes work on regulation by a wide variety of authors, covering a range of regulatory topics and disciplines, in its International, Occasional and Technical Paper series. The purpose is to promote debate and better understanding about the regulatory framework and the processes of decision making and accountability. Enquiries or manuscripts to be considered for publication should be addressed as above. The views of authors are their own, and do not necessarily represent those of the CRI. Peter Vass Director, CRI November 2001

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CONTENTS

Preface

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1 Introduction [Including the details of the brief’s subsection headings]

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2 Telecommunications

Telecommunication services Telecommunications systems Types of networks

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31118

3 Regulatory objectives and structure - overview

Why regulation? Who are the key regulators? Key legislative milestones The UK licensing regime

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25253348

4 Regulatory policy - development and current status

Introduction Social policy issues Economic regulation

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515256

5 Convergence - future policy and strategies

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References

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Appendix General statistics on the telecoms industry Basic provisions of the duopoly review

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1 INTRODUCTION The objective of this brief is to describe the telecommunications sector. The sector is one of the most dynamic sectors of the world economy since it engages a large number of operators involved in the supply of various products and services. Technology has been at the heart of the development of the sector and its services. ‘Fixed’ traditional telephony has been challenged by ‘wireless’ mobile telephony. The traditional cable television can be used to serve telephony and entertainment needs of a household. The launch of Information Technology (IT) has brought an extra dimension in the sector. It promises improved communications world-wide at high speeds and low costs. It promises electronic communications in which people can interact with their machines, whether these are home or office computer, mobile telephones or televisions. Information technology promises to provide people with the ability to talk, do their business, shop and play on line. In communications terms, this is called the ‘convergence’ of telephony, broadcasting and IT that will allow operators to offer ‘enhanced services’ to customers, and society to move towards the ‘Information Age’.1 At the political level, since the mid eighties a high level of activity can be observed at both the European Union (EU) and the UK level regarding the regulation of the sector. While the European telecommunications sector has historically been characterised by a strong public service monopoly tradition together with an industrial policy of creating ‘national champions’, the UK government and the EU have adopted policies over the years towards ending this monopoly tradition and introducing competition in the telecoms market. Competition policy at the UK and the EU level has favoured market entry of new operators, deregulation in certain areas of the market and economic regulation. The telecommunications sector is about to enter a new era with the convergence of telephony, broadcasting and IT. Both the UK and the EU are designing new policies to serve the interests of the newly created sector and the consumers. In the UK, the government has announced its positions in the white paper ‘A New Future for Communications’. This paper favours the creation of a communications environment and proposes a new regulator, Office of Communications (Ofcom), responsible for regulating the convergence of telecommunications, broadcasting and IT. In a similar vein, the EU has drafted six new directives to regulate the new sector. These directives will come in effect anytime within the next two years. This brief aims to provide a description of the UK telecommunications sector in terms of key technological and regulatory milestones. The structure of this brief is as follows:

Constantina Bichta is a Research Officer, Centre for the study of Regulated

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1 ‘Enhanced services’ are services that include interactive applications as well as audio and video. The USA definition of ‘enhanced services’ refers to any telecommunications service that involves, as an integral part of the service, the provision of features or capabilities that are additional to the conveyance (including switching) of the information transmitted. ‘Information Age’ is used to describe the conveyance of technologies in the delivering of information and new services.

Industries (CRI), University of Bath School of Management

THE UK TELECOMMUNICATIONS INDUSTRY

Chapter 2 describes the telecommunications systems and services and the types of telecommunications networks under the influence of vast technological change. The chapter includes the following sub-sections:

Communication medium Service providers Types of services Supply chain of a telecommunication system Characteristics of fixed and wireless systems Overview of fixed and wireless systems Fixed network Wireless network Integrated services digital network (ISDN) Digital subscriber loop (DSL) Cable television

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•

•

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Chapter 3 explains the key regulators of the telecoms sector at the UK and European level. The reader can find in the chapter the following sub-sections:

The UK regulators The EU International groups and organisations The transition from state ownership to state corporation The duopoly review and the liberalisation of the telecoms market The current structure of the industry and policy affairs The EU policy development

Chapter 4 describes in detail the development and current status of UK regulatory policy, refers to specific policy provisions, and includes the following sub-sections:

Quality control Other social and environmental policy issues Consumer and interests groups Price controls Supply of telecoms apparatus Interconnection of networks The service provider regime Indirect access and carrier pre selection (CPS) Number portability Local loop unbundling (LLU)

Chapter 5 concludes with an overview of the future UK and EU government strategies for the communications sector. The chapter contains the following sub-sections:

Oftel strategy EU strategy UK government Final remarks

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2 TELECOMMUNICATIONS The term ‘telecommunications’ describes the communication of voice, data, and images over long distance. In scientific terms, telecommunications is the transmission of information from one point to another (by electrical or radio means).2 The communication process allows information to pass between a sender (transmitter) and a receiver over some medium. Telegraphy, telephony, television, broadcast radio, and recently electronic mediums are all basic methods of telecommunications. But before we consider the details of these methods, a definition of what is a telecommunications system and service is important. In the Telecommunications Act 1984, ‘telecommunications system’ is defined as “a system for the conveyance, through the agency of electric, magnetic, electro-magnetic, electro-chemical or electro-mechanical energy of: • • •

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•

• •

speech, music and other sounds; visual images; signals serving for the impartation (whether as between persons and persons, things and things or persons and things) of any matter otherwise than in the form of sounds or visual images; signals serving for the actuation or control of machinery or apparatus” (Section 4(1)).

In turn, ‘telecommunications service’ means any of the following:

a service consisting in the conveyance by means of a telecommunication system of anything falling within paragraphs a to d of subsection above; a directory information service [..]; a service consisting in the installation, maintenance, adjustment, repair, alteration, moving, removal, or replacement of apparatus which is or is to be connected to a telecommunications system (Section 4 (3)).

The discussion now turns to telecommunications services exclusively (part of the family of communications services). The type of communication medium, the types of service providers, and specific services, which are currently available are discussed. Telecommunication services Communications medium What is it that a sender wants to send out and a receiver to receive in a communications process? Traditionally, the sender will originate a message such as human voice (speech, music), picture, or data. The world, however, has become so diverse that we no longer have one common medium of communications.

2 Brown J and Glazier E V D (1966), Telecommunications, Chapman and Hall Ltd, Great Britain.

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Person to person communication is the traditional way of communication. It can take place verbally or by telephone. Alexander Graham Bell invented the telephone in 1875. In a telephone communications, a pair of wires is used to connect two telephones to each other, and one device is used for both the transmitter and receiver. Radio is another medium of communications. It is a mass medium, because it provides communications from the few (the programmers) to the many (the listeners). Visual communications through television are also very common. In scientific terms, a television is a system for reproducing on screen visual images transmitted by radio signals. Broadcast television reaches almost every home bringing through networks and satellites programs from all parts in the world. Cable television began as an alternative way for getting local television into areas where the broadcast signal could not be received satisfactory. It is also known as community antenna television and it is likely to become a popular way to interact with new forms of entertainment services. In recent years, the impact of electronic technology on traditional forms of communications is great and growing. To begin with, the internet is a worldwide system of computer networks (a network of networks) in which users at any one computer, can, if they have permission, get information from any other computer. Electronic mail is the most widely used application on the internet. Users can also carry on live ‘conversations’ with other computer users, using internet relay chat (IRC). The most widely used part of the internet is the world wide web, which allows users through the feature of ‘hypertext’ to be transferred to sites or pages of interest. Using the web, users have access to millions of pages of information. Other new forms of electronic communications are the interactive and web television. In interactive television, a special ‘set top unit’ can be added to the existing television set, allowing the viewer to interact with the television by playing games, selecting movies, voting or providing immediate feedback through the television connection (banking, shopping from home) other than simply controlling the channel and the volume. Web television is one of the first examples of the convergence of the world wide web with the television. The users buy a set-top box similar to a cable television box, and they sign up with the web television access service and browse web pages using a web television’s browser and a hand-held control.3 Service providers There are three types of operators currently providing communications services to customers: the telecommunications operators, the cable operators and the internet service providers.

3 http://whatis.techtarget.com.

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- Telecommunications operators or Public Telecommunications Operators (PTOs) Telecommunications operators control the physical network of telecommunication lines and run them to customer’s premises. Major telecommunications operators may control two types of networks: •

•

the public switched telephone network (PSTN) on which calls can be made to all customers of all PSTNs; private circuits, which are point-to-point circuits for customers’ exclusive use covering speech, data and image communications.

Telecommunications operators provide services to the public under licences granted to them either by the government or independent regulatory bodies. Conditions on their licences allow telecommunications operators to install their systems on public and private land. - Cable operators Cable operators are companies licenced to provide telephony and broadcast television services. Cable operators are now able to offer cable internet access via cable TV through a cable modem or an enhanced cable box. Similarly to the PTOs, the government or an independent regulatory body licences the use of telecommunications systems for delivering television services to viewers’ homes.4 - Internet service providers Internet service providers (ISPs) is an organisation that provides access to the internet and internet services. We can distinguish between two types of ISPs: the small and the large. Large service providers offer internet access to smaller providers, and services like proprietary databases, forums, etc. Small internet service providers tend to provide services via modem and ISDN. Business and residential customers all require access to the internet services. Customers are generally billed a fixed rate per month, but other charges may also apply. Types of services Having described the communications medium, and the main providers of communications, the following sub sections present some typical examples of telecommunications services, which have been available over the years. Amongst

4 The systems used may include broadband or narrowband cable networks, broadband fixed wireless access (such as microwave video delivery services in the 28GHz or 40GHz bands) or the use of digital subscriber loop (DSL) technology over upgraded telephone networks.

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these, traditional, mobile telephony and enhanced services are the focus of the discussion. - Traditional telephony The telephone is perhaps the most well known and popular technological product we use to communicate in our lives. Graham Bell invented the telephone to transmit speech. Initially the telephone was complimentary to the telegraph. Technological advances, however, established telephone as a competitor to the telegraph. The commercialisation of the telephone started when the Bell Group leased telephone instruments to customers who would be responsible for laying their own wires to those with whom they wished to communicate. This progression represented the foundation of telephone network and service.5 In traditional telephony, a pair of wires is used to connect two telephones to each other, and one device is used for both the transmitter and receiver. The device can convert sound waves into low current electrical waves. It can also covert the electrical energy received from the distant phone back into sound waves at the receiving phone. Copper wires have been originally used as the medium of transmitting signals, whereas radio is also used for signal transmission.6 Local telephone companies use two wires to connect one telephone directly to another telephone, and each telephone to their switching office or ‘central’ wire centre. Each set of two wires is referred to as a ‘pair’. The telephone company refers to wires serving a local telephone as the ‘local loop’. The interconnection of three or more communication entities form a network, which is known as the public switched telephone network (PSTN). Telephone calls through the PSTN use circuit switching which establishes a call path and keeps it open for the duration of the call. Over the years, advances in technology allowed the shift from traditional types of telephony to mobile telephony and electronic communications, like the internet. These are discussed below. - Mobile telephony Whilst traditional telephony uses copper wires as a medium for signal transmission, mobile telephony uses radio. Mobile telephony is characterised by four different types of mobile generations: • •

the analogue (1G); the digital - the Global System for Mobile (GSM) (2G);

5 Turnbull P and Hug F (1984), The Telecommunications Industry: Technology, Supply and Market Structures, Occasional Paper No. 8408, UMIST. 6 For more information about the technology of traditional telephone see Cole M (1999), Telecommunications, Prentice Hall, USA.

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•

•

• • • • •

•

the General Packet Radio Service (GPRS) and Wireless Application Protocol (WAP) (21/2G); the Universal Mobile Telephone Service (UMTS) (3G).7

Each generation relies on different technology to deliver calls and relevant mobile services. The first generation of mobile cellular systems was introduced for commercial use in the 1980s. During that time analogue cellular telephone systems grew rapidly in Europe, particularly in Scandinavia and the UK. This mobile generation offered a limited number of services like radiopaging, videotext, and electronic mail services. The second mobile generation was developed in 1982 by the Group Special Mobile (GSM) in order to provide a pan-European cellular network. The GSM system used solely digital technology in order to deliver:

spectrum efficiency; international roaming; low mobile and base stations costs; good subjective voice quality; compatibility with other systems such as integrated services digital network (ISDN); the ability to support new services.8

Since its launch, the GSM technology has enlarged the provision of mobile services, including international roaming, data transmission (SMS), fax capabilities, calling line identification and calling line display, etc. Customers can also benefit from tariff charges. The range of tariffs on digital has been far greater than on analogue, notable group saver and other volume tariffs (Borthwick, 2000).9 The launch of the third generation mobiles, UMTS (3G) is expected within the next two years. 3G is a combination of the internet with the mobile phone. 3G combines high-speed mobile access with internet protocol (IP) based services. The existing digital networks have been evolved to carry 3G services. Currently, operators in the UK are building new digital networks developed from second generation technology, adding to it an IP core. 3G relies on GPRS and wireless application protocol WAP technologies. GPRS is a means of making efficient use of the available radio spectrum assigned to GSM networks to enable the transmission of data pockets. It is ideal for e-mail type services. WAP allows users to access online services as they would do from a laptop. WAP devices are beginning to be offered for accessing web-based services such as news, entertainment and sports results, information services as well as e-banking and e-shopping services.

7 1G, 2G, 2 ½G, 3G translates to 1 Generation, 2 Generation of mobiles etc. 8 http://www.comms.eee.strath.ac.uk/~gozalvez/gsm/gsm.html. 9 Borthwick R (2000), Farewell to analogue, Infocus, Autumn 2000, Issue 22, p.3.

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Another technology that will play a key role in 3G is Bluetooth. This is an initiative between telecoms equipment, computer and chip manufacturers to develop a two way digital radio standard for short range connections between devices, in office or homes. For example, a photograph taken on a Bluetooth enabled camera could be transmitted to any nearby Bluetooth enabled mobile phone, from which it could be send anywhere in the world over the mobile network (Bergendahl, 2000).10 In terms of tariff charges, the user will be charged only for the amount of information sent and received not, as it is today, for the duration of a connected call. 3G is all about converging all types of services such as communications, information, media and entertainment. At present, the General Packet Radio Service (GPRS) and Wireless Application Protocol (WAP) technologies (2½G) have been rolled out and used by telecommunications operators. It is believed that 2.5G will deliver some of the same services as 3G but at lower speed than the 3G. - Enhanced services This final category of telecommunications services, is called enhanced because they involve as an integral part of the service the provision of features or capabilities that are additional to the conveyance (including switching) of the information transmitted.11 A typical example would be ‘enhanced’ television services, which include interactive applications as well as audio and video. •

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Basic and value added services cover a wide range of enhanced telecommunications services developed during the 1980’s. Among these, the value-added network services (VANs) and value added data services (VADs) are the most popular. Basic and value added services developed mostly due to the need for computer systems to communicate with each other via telecommunications networks. These services include voicemail, personal numbering, messaging services (ie, e-mail, voicemail), videoconferencing and information services.

Private circuits are point to point circuits for customers exclusive use. They can be analogue, voiceband, digital, satellite and switched private services circuits. Depending on the type of circuit, different services might be made available to customers. Analogue circuits are suitable for telegraphy and data transmission. The voiceband circuits are mostly suitable for speech transmission, voice and data transmission, and for communications traffic between private branch exchanges (PBXs). Generally speaking private circuits cover speech, data or image communications.

Premium rate services: ‘chatlines’, recorded messages and message services represent premium rate services. Chatlines allow a number of telephone users to be linked together on the phone and ‘chat’ to each other. Recorded message services provide information on weather, sports, travel, and medical inquires. Other recorded messages offer jokes and stories. Message services can now offer

10 Bergendahl L (2000), Moving towards multimedia third generation communications, Infocus, Spring, Issue 20, pp.3-4. 11 See Oftel glossary at www.oftel.gov.uk/publications/glossary/index.htm.

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live commentaries and interactive games. A number of problems have been associated over the years with the above services, especially parent complaints receiving large telephone bills from excessive use by young family members. The industry uses codes of practice and committees to assess both the content and the advertising of these services, and to inform customers about the size of the bills.12 13

•

•

•

Telex and videotext: telex is a communication service involving teletypewriters connected through automatic exchanges. By the early nineties most telex networks were digitised. Telex allows for the storage and forwarding of incoming calls, store and forward messaging and simultaneous multiple broadcast. Telex services are available for inland, long distance and international calls. Videotext services allow tele-shopping activities, ie, on-line insurance packages etc.

Telepoint is based upon second generation cordless telephone technology (CT2). The service consists of a pocket sized cordless handset which can connect via a radio link to publicly sited base stations. Through these stations, calls are connected to the main trunk network. Calls on telepoint handsets are usually made within approximately 200 metres of a base station. Although originally telepoint did not have the capacity to receive incoming calls, attempts have been made since to allow for two-way communication.14

Interactive multimedia service: the term ‘interactive multimedia services’ is used to describe two forms of interactivity: The first is where viewers use the remote control to click applications, which are included in the broadcast stream. The second form of interactivity is where the modem is used to communicate with a remote server.15

Some of the basic interactive multimedia services currently available are summarised in Table 1.

Interactive television, which links a telephone line with a special set-top box on the television, allows customers to buy goods and services, carry out banking transactions and access information from their own homes. Video on demand refers to “a point to point service where a customer requests an item from a menu which is then transmitted over the telecommunications network to the customer’s home and which will start when the customer chooses and can

12 For instance, in the UK, the Independent Committee for the Supervision of Standards of Telephone Information Services (ICSTIS) operates since 1986 to access both the content and the advertising of the recorded message services. 13 Since 1988, Mercury, Kingston Communications, Cellnet and Racal Vodafone have agreed a code of practice for chatlines which allows them to introduce call-barring, itemised bills, and warning procedures to customers when bills reach a certain pre-determined size. 14 In the UK, four consortia were licensed in 1989 to provide the service but the service was finally withdrawn due to the low numbers of subscribers attracted. 15 ‘Multimedia’ also refers to the use of computers to present text, graphics, video, animation, and sound in an integrated way.

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be controlled by the customer (eg, paused rewound) in the same way as with a video tape played on a video recorder” (Oftel, 1993).16 Interactive services offer home shopping, home banking, travel, holidays services, games, and movies on demand.

Table 1: Interactive multimedia services

APPLICATION DESCRIPTION

Movies-on-Demand Customers can select and play movies with full VCR capabilities

Interactive video games Customers can play downloadable computer games without having to buy a physical copy of the game.

Interactive news television

Newscasts tailored to customer tastes with the ability to see more detail on selected stories. Interactive selection and retrieval.

Catalogue browsing Customer examines and purchases commercial products.

Distance learning Customers subscribe to courses being taught at remote sites. Students tailor courses to individual preferences and time constraints.

Interactive advertising Customers respond to advertiser surveys and are rewarded with free services and samples.

Video conferencing Customers can negotiate with each other. This service can integrate audio, video, text, and graphics.

•

The internet is a worldwide system of computer networks. It was originally developed by the US Advanced Research Projects Agency (ARPA) to create a network that would allow users of a research computer at one university to talk to research computers at other universities.

While physically the internet uses a portion of the total resources of the currently existing public telecommunication networks, technically it is different. What distinguishes the internet from the PSTN is its use of a set of protocols called TCP/IP (for Transmission Control Protocol/Internet Protocol). As mentioned earlier, traditional voice calls over the PSTN are ‘circuit switched’. This implies that a dedicated end-to-end transmission path (or circuit) is opened through the network for each call. The internet however is a ‘packet switched’ network. No dedicated circuit is created for the transmission of each data message. Long messages are divided into short packets, each containing the destination address. The packets are transmitted through intermediate nodes (routers), where they are stored briefly before being transmitted to the next node. Upon arrival, the packets are reassembled into the original message. As the most efficient route

16 Video-one demand services require a multimedia server to operate. End users request for a service over a network and receive the service through three processes: the data is retrieved from a multimedia server; then data is transmitted over a communication network to the end users system; and, finally data is received on the end users system at a constant rate.

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over the internet may vary from second to second, each packet may take a different route to get to the destination address.17

The structure of the packets is defined using the ‘internet protocol’ (IP). The routing and transmission of the packets is controlled by the ‘transmission control protocol’ (TCP). The ‘TCP/IP’ protocol allows the internet to run over almost any type of facility which can transmit data, including the PSTN. Electronic mail, live conversations, access to and ‘browsing of’ on-line information, shopping, entertainment and commercial exchanges are a few of the internet applications.

Telecommunications systems Having outlined so far, the communications medium, the service providers and the services that are available to facilitate communication between people, this section focuses on the telecommunications systems themselves. The section begins with an overview of the components of a telecommunications system, and it proceeds with a description of the main characteristics of telecommunications systems, ie, transmission medium, signal conveyance, nature of signal, bandwidth. The final part of the discussion is around the main types of telecommunications networks. Supply chain of a telecommunications system Figure 1 represents the supply chain of a typical telecommunications system. The system assumes communications by electrical signals. If an electromagnetic signal is produced by the motion of electric charges, for example, electrons oscillating in a wire, then this signal will propagate from its origin. In order to communicate, electromagnetic signals containing information must be transmitted, which may then be detected.18 Thus, the supply chain of a telecommunications system is as follows. The source originates the message, ie, human voice, a television picture, message, data. If the data is non-electrical, it must be converted into an electrical wave form, known as the ‘baseband signal’ or the ‘message signal’ through an input transducer. The transmitter modifies the baseband signal for efficient transmission. The channel is the medium, like a wire, coaxial cable, optical fibre, radio link, through which the transmitter output is sent. The communication channel acts a filter, to attenuate the signal and distort its waveform. The length of the channel increases

17 Gilbert and Tobin (1997), Internet Telephony: The Sharp Edge of Convergence, available on line at http://www.gtlaw.com.au/templates/publications/default.jsp?pubid=142. 18 Turnbull P and Hug F (1984), The Telecommunications Industry: Technology, Supply and Market Structures, Occasional Paper No. 8408, UMIST.

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attenuation, varying from a few percent for short distances to orders of magnitude for interplanetary communication. The receiver reprocesses the signal from the channel by undoing the signal modifications made at the transmitter and the channel. The receiver output is then fed to the output transducer, which converts the electrical signal to its original form, the message. The destination is the unit to which the message is finally communicated.19

Figure 1: Supply chain of a telecommunications system

Transmitter Channel Receiver OutputTransducer

Distortionand

noise

Inputmessage

Outputmessage

Outputsignal

Transmittedsignal

Inputsignal Received

signalInput

Transducer

Source: Lathi B P (1989), p.3. Telecommunications networks have been constructed to transfer information between a number of information sources. In the assembly of a network, three types of equipment are required to link information sources with receivers. The transmission equipment, which carry the signal between emitting and receiving centres; the switching equipment that link the terminals in the network and connect them as required; and, the terminal equipment into which the original signal is introduced and through which the final signal is received. There are two types of networks to make connections for the duration of a telephone call, the fixed and the wireless network. Each network has different physical structure and uses different systems to transport traffic originated from communication sources. Depending on the type of the system, fixed or wireless, which is used to transport traffic, the network will be either fixed or wireless. Characteristics of fixed and wireless systems This section discusses the main characteristics of fixed and wireless telecommunications systems. The distinction between the two systems is important, as their individual characteristics affect the way ‘signals’ are transmitted and conveyed through the communications channel. The characteristics of a telecommunications system also determine the speed of signal delivery, and the type of the final product, the telecommunications service, ie, fixed versus mobile telephony etc.

19 Lathi B P (1989), Modern Digital and Analog Communication Systems, (2nd edn), Holt, Rinehart and Winston, Inc, USA.

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- Transmission medium and signal conveyance The term ‘signal’ is often used loosely to cover various types of information sent over a communications channel. In this brief, the term ‘message’ is used to describe information before it has been modified and subjected to errors and distortion of the channel; subsequently, the term ‘signal’ refers to the message after it has been modified for transmission (Brown, Glazier, 1966). Thus, the signal, has to be conveyed to a remote point. The most usual methods are by cables and radio. The invention of laser however has attracted considerable interest in the possibility of using a beam of light for this purpose. Nowadays, the telecommunications systems use copper wire, optical fibre, coaxial cables, masts, antennas, and laser technology for signal transmission. Initially, the principle upon which (telephone) transmission operated was by oscillating electrons in copper wire. The first telecommunications systems were therefore developed as electro-acoustic (analogue) networks and were designed to carry speech only. Copper wires convert sound into electrical waves, so that the current continuously varies in proportion to the human voice. With advances in technology, coaxial and fibre optic cables have been introduced leading to a more sophisticated transmission medium, ie, the capability of handling the increasing telecommunications load. The coaxial cable operates on the same basis as the copper wire but its physical assembly has undergone refinement. Coaxial cable consists of a small copper tube or wire surrounded by an insulating material and another conductor with a larger diameter, usually in the form of a tube or copper braid. In an optical fibre glass cable, signal information is transmitted over the hair thin glass threads in the form of light pulses. This allows for the delivery of the signal at higher speed and the delivery of higher volumes of signals than the traditional copper wire cable. There are systems today that combine both optical-fibre and coaxial cables to optimise the fibre’s reliability and speed of information delivery at lower costs than the use of a pure fibre network. The use of a coaxial cable and optical fibre cable allow for the transmission of electrical and optical signals. A telecommunication system can also use radio links to transfer information between information sources. Radio signals are transmitted through antennas and satellites. An antenna is a specialised transducer that converts radio-frequency fields into alternating current and vice versa. There are two basic types: the receiving antenna, which intercepts radio-frequency energy and delivers alternating current to electronic equipment, and the transmitting antenna, which is fed with alternating current from electronic equipment and generates a radio-frequency field.20 In computer and internet wireless applications, the most common type of antenna is the ‘dish’. Dish antennas are generally satellite communications, practical, only at microwave frequencies (above approximately 3 GHz). The dish consists of a spherical reflector with an active element at its focus. When used for receiving, the dish collects radio-frequency from a distant source and focuses it at the active element. When used

20 http://searchnetworking.techtarget.com/sDefinition/0,,sid7_gci211571,00.html.

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for transmitting, the active element radiates radio-frequency that is collimated by the reflector for delivery in a specific direction. Systems using free space (laser) optics (airfibre) are also under development. The acronym laser stands for ‘light amplification by stimulated emission of radiation’. Lasers work as a result of resonant effects. In a basic laser, a chamber called a ‘cavity’ is designed to internally reflect infrared (IR), visible-light, or ultraviolet (UV) waves so they reinforce each other. At each end of the cavity, there is a mirror. One mirror is totally reflective, allowing none of the energy to pass through; the other mirror is partially reflective, allowing approximately 5 percent of the energy to pass through. Energy is introduced into the cavity from an external source; this is called ‘pumping’. The output of a laser is a coherent electromagnetic field. In a coherent beam of electromagnetic energy, all the waves have the same frequency and phase. The advantage of free space optical systems at the moment is that there is no licensing of the spectrum.21 - Nature of signal The signals that transmission mediums convey are classified into two broad classes: analogue and digital. The name analogue arises because the transmitted electrical waveform is an analogue of the acoustic or light waveform, which forms the message. An analogue signal is a continuous function of time. At any instant, it may have any value between limits set by the maximum power that can be transmitted. Speech is an analogue signal. A digital signal can only have discrete values. The most common digital signal is a binary signal, which has only two values ‘1’ and ‘0’. Thus, a telegraph signal is a digital signal. A television waveform is a mixture of analogue and digital signals, since it transmits both the picture contents and synchronises pulses.22 In recent years, digital signals have been getting more common, while analogue have been used less and less. There are still plenty of analog signals around, however, and they will probably never become totally extinct. One of the reasons digital signals are more widely used is because they are less susceptible to electro-magnetic disturbance. To transmit an analogue signal without error the transmission channel must be a linear system. Any departure from linearity causes non-linear distortion of the analogue signal, ie, cable systems and radio systems equipped with linear amplifiers are examples of analogue channels. A digital channel does not require to be linear, since its outputs provide a number of discrete conditions corresponding to the input signal, ie, a telegraph circuit, whose output signal is provided by the operation of a relay. It is wrong to believe that analogue signals are always transmitted over analogue channels and digital signals over digital channels. Data communications and voice telegraphy (digital signals) can be transmitted over telephone lines (analogue channels). Analogue signals may be coded for transmission over digital channels by means of analogue-to-digital converters, ie, a modem is used to convert the digital 21 http://whatis.techtarget.com. 22 Flood J E (1975), Telecommunication Networks, Peter Peregrinus Ltd, Birmingham.

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information in a computer to analogue signals for the telephone line, and to convert analogue telephone signals to digital information for the computer. - Bandwidth The rate of signals transmitted over a communications medium is directly proportional to its bandwidth. Bandwidth of a transmission medium is the range of frequencies that it can transmit with reasonable precision.23 24 In technical terms, bandwidth is the width of the range of frequencies that an electronic signal occupies on a given transmission medium. Bandwidth can be better understood in the context of increasing the speed of information transmission by time compression of the signal. If a signal is compressed in time by a factor of two, it can be transmitted in half the time, and the speed of transmission is doubled. To transmit this compressed signal without distortion, the transmission medium (or channel) bandwidth must be also doubled. Bandwidth is directly proportional to the amount of information or data transmitted and received per unit time (Lathi, 1989). In analog systems, bandwidth is expressed in terms of the difference between the highest-frequency signal component and the lowest-frequency signal component. In digital systems, bandwidth is expressed as data speed in bits per second (bps). A modem that works at 57,600 bps has twice the bandwidth of a modem that works at 28,800 bps. In hard-wired systems, available bandwidth can literally be constructed without limit by installing more and more cables, whereas in the electromagnetic spectrum there is only so much available bandwidth to go around. In qualitative terms, bandwidth is proportional to the complexity of the data for a given level of system performance. For example, it takes more bandwidth to download a photograph in one second than it takes to download a page of text in one second. Large sound files, computer programs, and animated videos require still more bandwidth for acceptable system performance. Virtual reality and full-length three-dimensional audio/visual presentations require the most bandwidth of all. In telecommunications, the bandwidth of the communications medium/channel is important for carrying signals at high speed and increasing the amount of data-information the channel can carry at a time. If a wide band of frequencies is available to transmit information, the communications channel is called broadband. If the channel can carry voice information in a narrow band of frequencies, usually from 50 cps to 64 kbps, then the channel is a narrowband. A broadband channel is assigned a minimum data rate, including, at least 20 KHz, at least 256 Kbps, 6 MHz. In a broadband channel, a wide band of frequencies is available, and hence information can be multiplexed and sent on many different frequencies or channels within the band concurrently, allowing more information to be transmitted in a given

23 For example, if a transmission medium can transmit with precision a signal whose frequency components occupy a range from 0 (dc) up to a maximum of 5000 Hz (5 kHz), the transmission medium bandwidth is 5 kHz. 24 Frequency is measured in the number of cycles of change per second, or hertz. A typical voice signal has a bandwidth of approximately three kilohertz (3 kHz); an analog television (TV) broadcast video signal has a bandwidth of six megahertz (6 MHz), some 2,000 times as wide as the voice signal.

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amount of time (much as more lanes on a highway allow more cars to travel on it at the same time). Cable television is a broadband service whereas, mobile, radio and paging services are narrowband. New types of technology like the digital subscriber loop (DSL) technology, and networks like the ISDN have been developed to increase the bandwidth and the capacity of existing telecommunications systems. Overview of fixed and wireless systems The discussion around the main characteristics of fixed and wireless systems has prompted the schematic representation of them and their main characteristics in Table 2. The reader can also find a glossary of the key terms appeared in the table. The concluding part of Chapter 2 deals with the types of networks that are currently used to make connections for telephone calls. Special mention is also given to the DSL and ISDN, as both play a key role in the delivery of new types of services over the traditional telephone networks.

Table 2: Telecommunications systems

Nature of signal

Types of access

ie, types of

networks

Physical structure of network

Signal conveyance

Analogue Digital

Bandwidth Applicationsand their

‘Convergence’through IT

Copper wire

Electrical

√ √ Narrowband/ Broadband with ISDN/

DSL Fibre optic

‘new technology’

Optical × √ Broadband

Fully wired ‘Traditional’

trunk and local networks

Hybrid fibrecoax (HFC)

Optical/electrical × √ Broadband

Masts, aerials Electromagnetic(radio waves)

√ √ Narrowband/ Broadband

Laser transmissionTechnology

Optical (airfibre)

√ √ Broadband

Fixed Fixed Wireless Access

(‘Nodal’∗ wireless with

wired local loop)

Copper wirelocal loop

Electrical √ √ Narrowband/ Broadband

with ISDN/DSL

Fibre optic local loop

Optical × √ Broadband

Mobile

Wireless (‘Nodal’)∗

Masts, aerials

Electromagnetic(radio waves)

√ √ Narrowband/ Broadband

Voice telephony,

data, images either at low

or higher speeds

∗ Fixed Wireless Access also known as ‘Nodal’ allows customers to connect to the public switched network through radio and not wires. The term node refers to a terminal of the Fixed Wireless Access part of the network. In the mobile network, ‘wireless/nodal’ access is provided by radio base stations, each with a certain coverage area (cell). A base station is a facility that provides transmission and reception for radio systems.

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- Glossary of key terms and definitions

Physical structures •

•

•

Aerial is a metal rod, wire or other structure by which signals are transmitted or received as part of a radio or optical transmission or receiving system. Fixed network operates through cable connections (copper wire or optical fibre) and radio signals transmitted through line of sight antennas or satellites. Local loop is the access network connection between the customer’s premises and the local exchange or head end. Mast is a post or lattice-work upright for supporting a radio or television aerial. Mobile (cellular) networks consist of cellular base stations, mobile telephone switching offices, and mobile communication devices. Network is an interconnection of three or more communicating entities. Optical fibre glass cable is a wire-line transmission medium. Information is transmitted over the hair thin glass threads often in the form of light pulses.

Signal conveyance and nature of signal Analogue describes signal transmission over wires or through the air in which information is conveyed through the variation of some combination of signal amplitude, frequency, and phase. Digital is the representation of information in the language used by computers, as a series of 0s and 1s, or binary digits. Digital technology is key to development of advanced information infrastructures and services. Electromagnetic spectrum refers to forms of electromagnetic radiation including radio waves, light, microwaves, infrared radiation, ultraviolet rays, X-rays, and gamma rays. Radio waves are used to transmit and receive calls and they are part of a group of waves called the electromagnetic spectrum.

Bandwidth Bandwidth is the capacity of a telecommunications network measured in terms of the amount of information it can carry in analog ‘hertz’ or digital ‘bits’ per second. Broadband is often used to describe services with data transmission rates in excess of 2 Mbit/s, however this term is often used imprecisely and is sometimes applied to lower speeds. Broadband network is a network that enables the transmission of a large amount of information (including voice, data, and video) over the same link. Often used to refer to access network capabilities. Digital subscriber loop (DSL) is a network technology that delivers high bandwidth over conventional copper wiring at limited distances. The four most common variants of this technology are: ADSL, HDSL, SDSL, and VDSL. All are provisioned via modem pairs, with one modem located at a central office or exchange and the other at the customer site. Integrated services digital network (ISDN) is a high-speed broadband digital connections that can transmit data, voice, image, and facsimile either separately or simultaneously on the same network that carries regular telephone calls. ISDN technology provides digital service in increments of 64Kb/s channels.

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Narrowband describe digital communication at the 64kbit/s or lower rate. It is also known as ‘baseband’. Types of networks Fixed network (or public switched telephone network – PSTN) A fixed network is a network that uses cables to make the connection for the duration of a telephone call. In a fixed network, voice is carried out through copper and optical fibre glass cables. Telephone voice calls over the fixed network are ‘circuit switched’. A dedicated end-to-end transmission path (or circuit) is opened through the network for each call. This dedicated circuit includes a single physical line from the user’s handset to the operator’s switch. Beyond that point, much of the network, especially for long distance traffic, now uses digital multiplexing to increase transmission capacity. The dedicated circuit for each call takes the form of a set of time slices or frequency assignments for that call, which is then transmitted together with many other calls over the same wires or fibre optic circuits. All the first trunk networks created were fixed. A trunk network also known as the public switched telephone network – PSTN, is the world’s collection of interconnected voice-oriented public telephone networks of the major operators, on which calls can be made to all customers of all PSTNs.25 The PSTN connects callers through two basic networks: the local exchange, and inter-exchange networks. When a caller picks up the phone to make a long distance call over the PSTN, the caller uses the local loop which are the lines connecting the home to the local exchange. The switch then determines over which communication path the message should travel. Long distance calls are directed toward the point of interconnection with the inter-exchange networks. The call is then routed through various networks to make the connection.26 Until the early eighties a typical national telephone network used copper wires and relied on analogue technology to make connections for the duration of a telephone call. Analogue technology codifies voice into sound and transmits voice over the phone lines in sonic waves. There are however certain disadvantages to using analogue technology: •

•

analogue technology is prone to electromagnetic disturbance, which can distort or corrupt the signals; analogue data is generally stored on the surface of magnetic tape or vinyl disk, which is easily damaged through misuse or general wear and tear.

25 Oftel, glossary, www.oftel.gov.uk/publications/glossary/index.htm. 26 Carver L and Waters P (1996), The Impact of Uncontrollable Technology on Traditional Telephony Regulation, available on line at http://www.gtlaw.com.au.

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Optical fibre glass cable came to replace traditional copper wires, and introduced the use of digital technology in telecommunications. Optical fibre cable is a tiny hair-thin strand of ultra-pure glass which can carry voice, data, and pictures (BT, 1994).27 Some of the advantages of optical fibre cables include: • • • • •

maintaining quality over distance; immunity to electromagnetic interference; security of information; efficient use of duct space; multi-channel capacity.

Optical fibre cables carry digital signals. Since a digital signal has only one of two values, the binary values of ‘1’ and ‘0’, this makes it much less susceptible to interference than the wide stream of analogue signals. Digital technology is less susceptible to electro-magnetic disturbance, eliminating thus error rates, is capable of carrying a higher volume of traffic and is almost faultless. Furthermore, optical fibre cables have allowed telecommunications operators to carry more than one and different services at the same time such as voice, computer, data, vision, ie, an optical fibre link can carry 30 television channels. They also made it possible for telecommunications operators to offer new services such as automatically forwarding calls, barring calls to certain destinations, and itemised bills. At the customers premises however, analogue devices that are usually used for voice, can also carry data between facsimile machines and computers via a special device known as modem (MODulator-DEModulator). The trunk network may also use fixed radio links together with the underground or above ground cables to make connections for the duration of a telephone call. These radio links require the provision of radio relay stations. A station usually consists of a building to accommodate the radio equipment and a tower to support a number of antennas. Antennas are also located on buildings. Radio fixed link antennas are normally round ‘dishes’, with typical diameters of 0.3, 0.6 and 1.2 metres, although reflectors may be of other shapes and sizes. Radio fixed links operate at frequencies which require direct line of site, with range diminishing as frequency increases. The radio links must be free from obstruction, such as hills, buildings, trees or large moving objects. To cover long distances, or to circumvent obstacles, intermediate repeater radio stations are often necessary. They require at least two antennas, one to receive and the other to relay the signal. Radio links via satellites are also a form of fixed-link communication. A single antenna points towards a satellite in orbit over the earth, or, in the case of a ‘satellite earth station’, a number of antennas point at a number of satellites. However, a distinction needs to be made between the antennas used for transmitting and receiving radio signals via satellite and satellite television antennas. Whilst these

27 British Telecom (1994), Reports and Accounts.

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use the same principles for receiving radio signals from satellites, and look similar, they provide a different function. Television broadcasters use fixed links to distribute programmes and to link to studios and some businesses also use them for private commercial networks. Another example of a fixed-link system is the local cable network, which can supply subscribers with a multi-channel service of national and local television material, films, information, inter-active data and voice telephony. The cable is installed underground and requires the erection of usually small junction boxes at intervals, while a large satellite dish is used for television reception for cable ‘head-ends’.28

Finally in a trunk network, fixed wireless access (FWA) (also known as radio-fixed access (RFA) or nodal) provides a different type of wireless distribution, the point to multipoint distribution of information. In fixed wireless access, instead of connecting residential and commercial premises to the PSTN by wires, like copper cable, it is possible to use radio. Fixed Wireless Access operators need to have line of sight to the served premises. A typical pattern is to have a multipoint antenna on a central tall point with a circle of point radios antennas facing the central point. Such transmitters/receivers do not need large antennas and most are likely to be very discreet. Broadband FWA networks are deployed with the aim to convey large volumes of information (eg, high data rate services) over short distances. Narrowband FWA services are used for local telephony and other services. Wireless network The term ‘wireless’ is descriptive of a network in which electromagnetic waves rather than some form of wire conductors carry the signal over part of the entire communication path. A wireless network will consist of radio base station, aerials and satellites. In a wireless network, the radio is the medium to transmit voice and music. A radio system converts sound waves and data into radio waves, and transmits them into the air. Radio waves are part of a group of waves called the electromagnetic spectrum. A radio base station is the facility that provides transmission and reception for radio systems. In a radio system, ‘macrocells’ provide the main structure for the base station. ‘Microcells’ are used to improve the network when the volume of calls is high. ‘Picocell’ have a lower output than the macrocells and are generally sited inside buildings. Radio masts are communications towers built to provide structure for the equipment used to transmit radio waves, ie, antennas. The use of radio spectrum in telecommunications has the advantage of allowing access to customers due to its flexibility in building the access infrastructure, radio masts. On the other hand, it brings some practical problems with it like interference and costs of terminal equipment which may be higher than for equivalent fixed alternatives (Oftel, 1998). 28 http://www.planning.dtrl.gov.uk.

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In telecommunications, radio spectrum is used for the running of mobile telephony. Radio spectrum in 2GHz is used for telephony services. Radio spectrum in 10GHz is for advanced digital services. Radio spectrum in the 10GHz could be usable for higher bandwidth fixed radio access. With the convergence of telecommunications and internet, higher frequency radio allocations are being considered (in the 28 and 40 GHz bands) which could support higher bandwidth data up to 155 Mbit/s. A satellite is an artificial device designed to orbit about the earth or some other celestial body (AP Dictionary of Science and Technology). A communication satellite is often perceived as a big microwave repeater in the sky.29 A satellite dish contains one or more transponders each of which listens to some portion of the spectrum, amplifies the incoming signal and then rebroadcasts at another frequency to avoid interference with the incoming signal. The downward beam can be broad, covering large areas or narrow, focusing on a small geographic area.30 In communications, satellite is used in direct broadcasting, mobile communications and advanced communications (eg, to link business centres, communications parks etc). Eutelsat, Intelsat and Inmarsat are international satellite organisations, which supply global, European regional and maritime satellite services, respectively (BT, 1990, Mercury, 1992). It is believed that satellite will play a decisive role in the market of higher bandwidth services. While satellite is commonly used at present to provide one-way higher bandwidth capability (eg, for television broadcasts), provision of two-way higher bandwidth capability over satellite is not common in the residential and SME markets (due to the economics of the return path) (Oftel, 1998). A solution to this problem would require the delivery of a higher bandwidth capability via satellite with a return path to a service provider using conventional narrow band PSTN technology. This is already being used to provide interactive TV services and could be used in future to provide fast internet access. Integrated services digital network (ISDN) While in most countries, telecommunications services are evolving rapidly from a collection of separate, and largely incompatible systems (telephone, telex, public and private data networks), attempts are made to build a universal network, in which a wide variety of services are integrated using a common (digital) form of transmission. This network is known as the integrated services digital network (ISDN). In concept, integrated services digital network is the integration of both analogue or voice data together with digital data over the same network. In practice, ISDN is a technology that provides digital services typically in increments of 64kb/s channels. ISDN requires adapters at both ends of the transmission. The ISDN can transmit voice, data, image, and facsimile either separately or simultaneously over digital links, which may include optical fibre, metallic cables, terrestrial or satellite microwave channels. A universal network should eventually prove a more flexible and cheaper option than the PSTN that allows for a narrow 29 ‘Microwave’ is a short range, line-of sight signal distribution technology. 30 http://www.poptel.org.uk/mante/glossary/g142.htm.

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number of services. Evolution towards a universal network (ISDN) has been gradual. ISDN has been available since the 1980s, but until recently there had been very little demand outside the corporate world for what was relative to the PSTN an expensive high-capacity digital link. The benefits of ISDN relative to the traditional telephone network arise from the fact that it is digital from end-to-end, has a higher information-carrying capacity and has the ability to transmit different types of communication media. Due to the high costs of ISDN and low acceptance rates by consumers, DSL technology has in many cases vault over the ISDN market.31 The ISDN network offers selected customers and business users with a range of new services, such as: • •

• •

•

videoconferencing: direct ISDN connection provides high quality pictures; direct dialling in: the ability to route incoming calls direct to members of staff or individual departments without having to go through the main switchboard; calling line identity: the callers number appears on the recipients telephone; network connections: it issues basic rate ISDN to connect computers or local area networks (LANs) through a router that dials a connection automatically when there is data to send; rapid information transfer: it allows the sending of large file ie, design and graphic files where the speed of delivery can be critical (Flinter, 1998).32

Digital subscriber loop (DSL) Digital subscriber loop (DSL) is technology to provide high bandwidth services to home and business users using the existing telephone cabling infrastructure. DSL utilises more of the bandwidth on copper phone lines than what is currently used for plain telephone services. By utilising frequencies above the telephone bandwidth (300 Hz to 3,2000hz), DSL can encode more data to achieve higher data rates than would otherwise be possible in the restricted frequency range of a PTO’s network. In order to utilise the frequencies above the voice audio spectrum, DSL equipment must be installed at both ends and the copper wire in between must be able to sustain the higher frequencies for the entire route. This means that bandwidth-limiting devices such as loading coils must be removed or avoided.33 They are various types of DSL, categorised by the modulation methods used to encode data. The four most common variants of this technology are asymmetric digital subscriber line (ADSL), high-bit rate DSL (HDSL), symmetric DSL (SDSL) and very high data rate DSL (VDSL). This new technology is to allow customers to use higher bandwidth services such as high speed internet access and video-on-demand, via standard copper telephone lines the loop), and to bring businesses and residential customers to the information age.34

31 Bisell C C and Chapman D A (1992), Digital Signal Transmission, Cambridge University Press, UK. 32 Flinter D (1998), Why smaller businesses should go digital?, Infocus, Issue 12, April, pp.8-9. 33 http://homepage.interaccess.com. 34 ‘Video-on-demand’ is a programme or film sent independently to a customer in response to his individual request. Customers place their orders via a simple handset from their home.

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At present, the local loop can only deliver narrowband services such as basic telephony and data services.35 The local loop unbundling has been introduced in the UK and Europe to allow operators to access the national operators local copper loops and provide services directly to consumers. Having access to the copper loop, operators will be able to install their own equipment at local exchanges and in the customer’s premises to upgrade the loop to provide higher bandwidth access. DSL opens the possibility of new pricing structures such as a one-off monthly charge, which provides consumers unmetered internet access. Cable television In recent years there is an increased interest among telecommunications operators and government for cable networks, as the network’s higher bandwidth capability could be exploited for two-way services. At present the cable networks have the capability to offer one way higher bandwidth access, and the main emphasis of the cable operators has been the provision of cable television and telephony services. Cable modems however promise to provide 2-way capability. Cable TV slowly converts into a popular way to interact with the Web. Cable modems promise to deliver low cost, high speed, and widely available internet access. Cable modems nullify cost by using the existing cable TV feed that a house has. They allow data to be sent at very high speeds on the existing line. An obstacle to overcome is that cable networks were designed for one way broadcasts, from the cable company to the house. Data transmissions need to be two way communications. The coaxial cable that cable TV is transmitted on can already support two way communications, but the problem is that these signals pick up interference from other devices like radios and cellular phones. To overcome this problem the cable network itself has to be upgraded. Most cable providers are choosing the hybrid fibre-coax option.36 The cable company leases a fast digital line, which is then connected to the hybrid fibre-coax cable network (HFC). The data is then broadcast over the network on an unused channel. The cable that comes into our houses has enough bandwidth to carry the TV signal and data at the same time. A splitter divides the line into two, one going to a TV and another to the cable modem. The modem converts the data channel into standard computer data, which is sent to a standard ethernet card in the computer. Sending data back, the upstream, works the same way, except in reverse. All cable subscribers serviced by the same laser receiver share the upstream channel, so network performance depends on how many users are using it at one time. The cable networks offer a potential supply route for higher bandwidth services to the residential and small medium enterprises (SMEs) market.

35 ‘Local loop’ is the access network connection between the customer’s premises and the local PSTN exchange, usually a loop comprised of two copper wires. 36 Hybrid fibre-coax cable network (HFC) combines both optical-fibre and coaxial cable lines. Optical fiber runs from the cable head end to neighborhoods of subscribers. Coaxial cable runs from the optical-fiber feeders to each subscriber. Hybrid networks provide many of fiber’s reliability and bandwidth benefits at a lower cost than a pure fibre network, http://www.eco.utexas.edu/faculty/Norman/long.extra/Student.F98/modem/ThirdRight.html.

23


Cable TV is also known as ‘CATV’ (community antenna television). In addition to bringing television programmes to those millions of people throughout the world who are connected to a community antenna, cable TV slowly becomes a popular way to interact with the world wide web and other new forms of multimedia information and entertainment services, through a special ‘set top unit’ added to the television.

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3 REGULATORY OBJECTIVES AND STRUCTURE - OVERVIEW Why regulation? Before the mid eighties, the industries of water, gas, electricity, rail and telecoms were owned and managed by the public sector. The case for state ownership was based on the existence of a monopolistic distribution network. In the early eighties all these sectors were restructured and privatised. Privatisation was driven by the belief that state involvement in the economy should be reduced and that regulation should be the preferred means to avoid abuse of monopoly power. Regulation should introduce competition in order to encourage competitors to enter the market and protect the consumers. When these industrial sectors were privatised a regulator was established in each sector to ensure that the services provided and the prices charged were in the public interest. In the early stages of privatisation, the understanding was that in return for the private sector accepting the responsibility of investment, the government would not intervene in the regulation of the privatised industries. At a second stage, competition was introduced in order to reduce the role of the regulator and promote the interests of consumers. In this vein, regulation was imposed in the telecommunication sector because of the monopoly history of the sector. Competitors needed to be encouraged to enter the market in order for customers to be protected. Entry assistance to telecommunications operators was important due to the large investments, long development periods and large economies of scale of the sector. Despite the fact that the preferred method of regulation in telecoms is competition, it has taken some time for competition to develop. In specific, during the eighties regulation favoured a duopoly competition policy between two PTOs, BT and Mercury, and two mobile operators, BT Cellnet and Vodafone. In the early nineties a more liberalised approach was adopted by the regulator by allowing more PTOs and mobile operators to enter the market. Currently, the regulator examines the options of self-regulation and co-regulation of the industry in market areas where competition is efficient. Situations of natural monopoly are still predominant in the sector, like the local loop, which is still owned by BT. Who are the key regulators? The key regulators in the telecommunications sector can be distinguished at the national, European and international level. This section presents the British key regulators in the telecommunications industry, and identifies the key regulatory bodies at the European and international level.

25


UK The Department of Trade and Industry (DTI), the Office of Telecommunications (Oftel) and the Competition Commission (CC) comprise the main regulators of the British telecoms sector. In July 2001, the Office of Communications Bill proposed Ofcom as the new regulator of the communications sector. The Department of Trade and Industry (DTI) is a Government department with the task to increase competitiveness in the industrial sector. In the telecommunications sector, a major activity of the DTI concerns the publication of white papers regarding the future perspectives of the sector. The Department is responsible for the granting of a telecommunications licence. Once the licence is granted, the Office of Telecommunications is responsible for its enforcement. The Office of Telecommunications (Oftel) is the regulator for the British telecommunications industry. The Telecommunications Act 1984 established an officer to be known as the ‘Director General of Telecommunications’ (Section 1). The Director General runs Oftel. Oftel has three directorates, Regulatory Policy, Compliance and Business Support. Regulatory Policy Directorate is responsible for developing policies on telecommunications. Compliance Directorate ensures telecommunications companies meet their obligations under telecoms and competition laws and regulations. Business Support Directorate supports the entire organisation (www. oftel.gov.uk). Figure 2 illustrates the organisational and management structure of Oftel.

Director General

Figure 2: Organisational andmanagement structure of Oftel

Director of Operations

Regulatory PolicyDirectorate

ComplianceDirectorate

Business SupportDirectorate

Director of Business

Communications Director

Director of ComplianceDirectorRegulatory Policy

DirectorStrategy &Forecasting

DirectorTechnology

ource: http://www.oftel.gov.uk.

The Telecommunications Act 1984 specified the duties of the Director General and those of the Secretary of State for Trade and Industry in relation to the telecoms sector to be as follows:

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• •

• • • •

•

to promote the interests of consumers, purchasers and other users in the UK; to maintain and promote effective competition between persons engaged in commercial activities connected with telecommunications in the UK; to promote efficiency and economy on the part of such persons; to promote research and development; to encourage investment in the UK by foreign operators; to allow for UK telecommunications operators to compete at the international level; to enable persons producing telecommunication apparatus in the UK to compete effectively in the supply of such apparatus both in and outside the UK (Section 3).

Under the Telecommunications Act 1984, a licence is generally required for the running of a telecommunication system (Section 5). Whilst, licensing responsibility rests with the Secretary of the State after consultation with the Director General (Section 7 (a) (b)), the Director General is responsible for enforcing licence conditions and for taking action against those who are breaking parts of their licences.37 The Director General may modify licence conditions with the licensee’s agreement, if following a reference by the Director General to the CC the latter advises the Director General that the licencee operates against the public interest. As part of his responsibilities, the Director General can enforce the price control provisions on the licences of telecoms operators. He can propose price changes, and set new controls at the end of a price control period (Oftel, 1985). He is also responsible for making available to the public any information related to quality service of telecommunications operators.38 The Competition Act 1998 had implications for Oftel, the Director General and the regulation of the telecommunications sector. The Competition and Service (Utilities) Act 1992 amended the Telecommunications Act 1984 and strengthened the powers of the Director General. The Electronic Communications Bill 1999 which was introduced to facilitate the government’s policy to promote electronic commerce, provided Oftel with the power of being the initial licensing authority for trust service providers.39

The Competition Act 1998 gave Oftel greater powers to prevent anti-competitive behaviour. Oftel was offered concurrent powers with the Office of Fair Trading for the regulation of the telecommunications sector.40 The Act strengthened the powers of the Director General to monitor the telecommunications market, investigate complaints about telecommunications related matters and refer any anti-competitive practices in telecommunications activities and

37 In July 1990 Oftel took action against four cable TV franchisees over delays in building their networks. This was the first such action. 38 Oftel published its first report on quality service in October 1987, forcing BT to respond with its own. 39 ‘Trust services providers’ are organisations that issue encryption key pairs either for the purpose of providing a service or an electronic signature service. 40 Oftel (2000), The Competition Act 1998: The Application in the Telecommunications Sector, March.

27


proposed mergers to the CC. The Director General was given the same powers to intervene as the Director General of the Office of Fair Trading and could fine companies for breaches of the Competition Act. Currently, Oftel has powers to impose a financial penalty of up to 10% of UK turnover on a company that has intentionally or negligently committed an infringement of the Competition Act (Oftel, 1999). The Director General of Telecommunications and of Fair Trading should consult each other before a decision is made as to who would deal with a case in respect of which there was concurrent jurisdiction. Prior to 1992 the Director General had no statutory powers relating to quality of service. The Competition and Service (Utilities) Act 1992 gave him new duties and powers to set and monitor the achievement of individual and overall standards of performance for designated companies, and especially those who provide at least 25% of the voice telephony services within their licenced area (Section 49 (46A)). Only BT, and Kingston Upon Hull were qualified to do so up to 1993. The Act empowered the Director General to set standards of service to be achieved in individual cases and to determine compensation where those standards had not been met, and to set standards of overall performance (Section 27A, B). The Director General was obliged to collect and publish levels of performance achieved in relation to those standards (Section 27C). The Director General was given powers to obligate a designated operator to inform customers of the overall standards set by the Director General (Section 27D) and ask a designated operator to establish and publicise a procedure for dealing with customers complaints (Section 27D(4)). The Director General had powers to determine disputes arising from the setting of charges, from accuracy of bills, and from requirements to pay deposits before receiving services (Sections 27E, F, G, H, I). Finally, a designated operator had no powers to disconnect a customer for failing to pay charges where there was a genuine dispute concerning the amount of those charges (Section 27J). In June 1992, the first Director General Professor Bryan Carsberg left Oftel to become Director General of Fair Trading. The Deputy Director General, Bill Wigglesworth took his post while the search for a new Director General was taking place. In April 1993, Don Cruickshank took over as the new Director General. His era was all about transition from a managed to a more open competition policy with the prevailing view to serve the best interests of consumers.41 The transitional character of his era became even more predominant towards the end of it with changes in the price regime, in accounting methodology and in competition law (Souter, 1998/9).42 In April 1998, David Edmonds took over as the Director General of Oftel and he still serves at this post. Whilst continuing the work of his predecessor, the new Director General has introduced new competition provisions like the local loop unbundling, he has prepared the telecoms sector to enter the age of multimedia and enhanced services, and he is in the process of establishing the Telecoms Ombudsman. This will be an independent body to represent consumers’ interests. Under his directorship Oftel has

41 Under his directorship, Oftel adopted the strategy of relying on the feedback from business and domestic customers regarding accomplishment of Oftel’s targets and progress made on customer service. 42 Souter D (1998/9), Telecommunications Regulation 1997-98, in Vass P (ed), Regulatory Review 1998/9, CRI, University of Bath, pp.83-96.

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adopted the strategy of ‘competition plus’, which means a primary focus on promoting competition, ‘plus’ a wider role of encouraging better information for consumers, managing access to key scarce resources and tackling areas where the market fails to deliver and consumers need additional protection (see Chapter 5). Throughout the nineties and up-to-date Oftel has been actively involved in the international scene to establish links with overseas operators and influence policy on global liberalisation. Oftel represents the interests of the British operators and customers through participation in international organisations including the Independent Regulators’ Group, the High-Level Committee of Telecommunications Regulatory Authorities, the European Telecommunications Standards Institute and many more others. Oftel also offers its expertise on licensing and liberalisation of the telecoms market in central and eastern Europe. The Competition Commission (CC) was established under the Competition Act 1998 to monitor and investigate complaints about anti-competitive market behaviour. It took over the responsibilities of the Mergers and Monopoly Commission (MMC), established under the Fair Trading Act 1973. The CC may receive referrals either from the Secretary of State or the Director General of Oftel regarding interconnection agreements between operators and anti-competitive behaviour of the market operators. Under the Competition Act 1998, the CC has the role of an appealing body and a role in disputes over proposed licence conditions. Any party to an agreement in respect of which the Director has made a decision may appeal to the CC, against, or with respect to, the decision (Section 46). The Office of Communications (Ofcom) will be the new regulator for the communications sector as proposed by the Communications Bill 2001. Ofcom will be a statutory corporation with no more than 6 and no less than 3 members. The Bill confers powers upon the Secretary of State to make appointments. Appointments will be made by the Secretary of State for Trade and Industry and the Secretary of State for Culture Media and Sport acting together. The Secretary of State has power to make and to increase the size of the board when its preparatory function is supplemented by regulatory functions under the Communications Bill. The Secretary of State will appoint the Chairman and the non-staff members. The Chairman and non-staff members will appoint a Chief Executive, with the approval of the Secretary of State, and the Chief Executive will be a member of Ofcom. It would be for the Chairman and the non-staff members to decide on appointing staff members to the Ofcom board, after consulting the Chief Executive. The EU The European Union (EU) is a political structure, established to join the political structures of its member states. 43 The main role of the EU is to initiate legislation and to serve the interests of its member states. At the same time the EU is charged with the responsibility of being guardian to the treaties. The treaty base of the European Union is a binding legal order, a constitutional framework, which sets out the role of the EU institutions. The principal institutions of the EU are the European Commission, the 43 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the UK.

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Council of the European Union, The European Parliament, the Court of Justice and the Court of Auditors. These institutions are the EU’s executive, legislative, and judicial arms of governance (Bichta, 2000).44 Policy-making falls mainly under the jurisdiction of the European Commission. The EC is the executive arm of the EU, and its central administrative and policymaking body. It initiates legislation and submits proposals to the Parliament and to the Council. It is based in Brussels and headed by 29 Commissioners nominated by the 15 governments of the member states. Each commissioner is allocated at least one area of responsibility and he is assumed political responsibility for the relevant department, the Directorate General. The Directorate General for Information Society deals with telecommunications. The Council of the EU is composed of ministers from each member state. It is the main decision-making body of the EU where interests of the member states are directly represented. The European Parliament has 625 members who are directly elected by the citizens of the member states. The Parliament has legislative, budgetary and supervisory roles. The Court of Justice provides judicial safeguards in order to ensure that the law is observed in the interpretation and application of the Treaties in all member states. The Court of Auditors is the auditor of the budget and accounts of the Union and its institutions. EU decisions are made under the principle of ‘subsidiarity’ which requires action to be taken at the lowest appropriate level. The Treaty of the European Union (the Maastricht Treaty) generalised the subsidiarity provision so that it covers decision making in all areas where the European Community did not have exclusive control (Butt Philip, 1998).45 Articles 85 and 86 of the Treaty establishing the European Community (EC) gave to the Commission powers to require the removal of special or exclusive rights granted to undertakings by member states when other Treaty rules were broken as a result. In telecommunications, the Commission has adopted directives based on Article 86 of the Treaty regarding liberalisation and competition of voice telephony and networks in the EU. Alongside the Article 86 directives, a series of Council and European Parliament directives, adopted under Articles 95 (internal market) and 47 and 55 (freedom to provide services), have also put in place detailed harmonised regulation to ensure that the aims and principles set out in the Article 86 directives are upheld (EC, 2000). In order to prevent firms with economic power from exploiting weaker firms, the European Commission has developed a competition policy with the objective to defend and develop competition in the common market. Article 82 of the EC Treaty prohibits the abuse of a dominant position as it could affect trade between member states and is incompatible with the objectives of the common market. Article 81 of the

44 Bichta C (2000), The Key Determinants of Environmental Performance in Greece and Britain: Case Studies of the Chemical/Fertiliser and Metal Sectors, PhD Thesis, Unpublished, University of Bath School of Management. 45 Butt Philip A (1998), The European Union: environmental policy and the prospects for sustainable development, in Hanf K and Jansen A I (eds), Governance and Environment in Western Europe: Politics, Policy and Administration, USA, Longman, pp.253-276.

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EC Treaty prohibits agreements between firms that could affect trade and restrict competition. International groups and organisations Since the telecommunications sector is one of the most dynamic sectors of the world economy, a number of groups and organisations have been established worldwide in order to pursue the interests of the industry, promote agreements between companies at global level and improve the welfare of customers.46 The World Trade Organisation (WTO) is the only global international organisation dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the world’s trading nations and ratified in their parliaments. The goal of the organisation is to help producers of goods and services, exporters, and importers conduct their business. The WTO has more than 130 members accounting for over 90% of world trade. The ‘General Agreement on Trade in Services’ is one of the Acts of the 1986–1994 Uruguay Round of trade negotiations. The agreement set the rules for members when dealing with trade in telecommunications, banking, insurance, hotels and transport services. It recognises the growing importance of trade in services for the growth and development of the world economy. It strives to deliver higher levels of liberalisation of trade in services through multilateral negotiations and acknowledges the increasingly participatory role of developing countries in trade in services.47 In respect of the telecommunications sector, the agreement has passed measures for access to and use of PTO networks and services, including: •

•

•

the principle of transparency: each member should ensure that relevant information on conditions affecting access to and use of PTOs networks and services should be publicly available, including tariffs, network technical interfaces, conditions applying to attachment of terminal or other equipment, licensing requirements etc; each member should ensure that any service supplier of any other member is accorded access to and use of PTO networks and services on reasonable and non-discriminatory terms; members should share technical information and encourage the participation of developing countries in the development programs of international and regional organisations. This will lead to the development of telecoms infrastructure and expansion of trade in services in developing countries;48

46The European telecommunications industry employs almost 1,000,000 million people. In 1998, the industry had a combined turnover of US$220bn, and accounted for 3% of Europe’s GDP. See Dabler T, Parker D and Saal D (2001), Economic Performance in European Telecommunications, 1978-98: A Comparative Study, Aston University. 47 The World Trade Organisation Secretariat has the role to supply technical support to the councils and committees of the member states. It provides technical assistance for developing countries, analyses world trade, and explains the WTO affairs to the public and media. The Secretariat does not have a decision-making role since decisions are taken by the members themselves. It is based in Geneva and has 500 employees. It is headed by a Director General. 48 Development programmes are offered by the International Telecommunications Union, the United Nations Development Programme, the International Bank for Reconstruction and Development.

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•

intergovernmental and non-governmental organisations should work together to ensure the global compatibility and inter-operability of telecommunications networks and services;49

The International Telecommunication Union (ITU) is an international organisation, founded on the principle of international cooperation between government and the private sector. The ITU represents a global forum through which government and industry work to achieve a consensus on a wide range of issues affecting the future direction of the telecommunications sector. The ITU has 189 member and 650 sector members. Members of the ITU represent a cross-section of the telecommunications and information technology sectors. The Organisation for Economic Co-operation and Development (OECD) undertakes work on telecommunication policy and information services. The Committee for Information, Computer and Communications Policy (ICCP) through its working party on Telecommunication and Information Services Policy (TISP) is the executive body of OECD on telecommunications policy. The TISP sets out to achieve specific and broad policy objectives, such as to analyse the economic and social implications of changing telecommunication market structures and information and computer services; to analyse trade-related issues in telecommunications and information services, and promote international co-operation in this field; to promote the objectives of the OECD Declaration on ‘Transborder Data Flows’.50 The broad objectives of the TISP are to promote exchanges of experience among member countries and review developments in the field of information infrastructure. The work of TISP focuses on the convergence of telecommunication, internet, cable television and broadcasting networks, the liberalisation of telecommunication market, accounting rates, performance indicators, and the publication of associated statistics. The European Telecommunications Standards Institute (ETSI) produces the technical standards for the European member states to use in telecommunications. At the international level, the ETSI contributes to the production and the promotion of new harmonised world-wide standards and the development of world-wide standards in telecommunications, broadcasting and information technology. ETSI has 889 members from 54 countries inside and outside Europe, representing administrations, network operators, manufacturers, service providers, research bodies and users. ETSI’s work programme is determined by its members, who are also responsible for approving the institute’s proposals. As a result, ETSI’s activities are maintained in close alignment with the market needs expressed by its members.

49 http://www.wto.org/english/docs_e/legal_e/final_e.htm. 50 ‘Transborder Data Flows’ refers to the growing economic interdependence of OECD countries resulting from technological advances and internet communications.

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Key legislative milestones It is argued that since 1965 Britain has had wide experience of constitutional arrangements in the telecommunications sector (Harper, 1997). These arrangements have acted ‘as a test bed for the replacement of direct government control by ownership by a state corporation and of that in turn by privatisation; and of monopoly by competition’ (Harper, 1997, p.1). Table 3 summarises the UK legislation on the telecommunications sector. The following sections discuss how government policy has determined the ownership and performance of the sector.

Table 3: UK legislation on the telecommunications sector

Year Act Outcome for telecommunications

1949 The Wireless Act Gave the Postmaster General power to issue licences for the use and establishment of wireless telegraphy; and established the advisory committee and the appeal tribunal

1969 The Post Office Act Established the General Post Office as a statutory corporation and the main provider of telecoms and postal services; removed direct governmental control

1973 The Fair Trading Act Appointed an officer to be known as the Director General of Fair Trading to keep under review commercial activities in the UK; and established the MMC to investigate monopoly and merger situations

1981 The British Telecommunications Act

Separated post office and telecoms; and created the national provider BT

1984 The Telecommunications Act

Abolished BT’s exclusive privilege of running telecommunications systems; and established the Director General of Telecommunications

1990 The Broadcasting Act Established ITC as the independent regulator of commercial TV; and assigned the Radio Authority with the same duties regarding broadcasting services

1992 The Competition and Service (Utilities) Act

Gave duties to the Director General of Telecommunications of setting individual standards of performance for telephone companies; and placed new obligations upon telephone companies about their services to particular customers

1996 The Broadcasting Act Provided measures related to digital television and services

1997 The Telecommunications (Fraud) Act

Amended the Telecommunications Act 1984 by providing measures for the prevention of fraud in the use of a telecommunications system

1998 The Wireless Telegraphy Act

Made provisions about the sums payable in respect of licences under the Wireless Act 1949 other than television licences, and about the promotion of the efficient use and management of the electro-magnetic spectrum of wireless telegraphy

1998 The Competition Act Introduced the prevention of anti-competitive agreements in the market and the abuse of a dominant market position

2000 The Electronic Communications Act

Provided measures related to the legal recognition of cryptography services such as electronic signatures and confidentiality services

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The transition from state ownership to state corporation Prior to 1969, the General Post Office (GPO) held the monopoly in UK telecommunications and postal services. Being a government department the GPO was headed by a government minister, the Postmaster General. Investment in telecommunications was not determined by network or customer needs of the UK telecommunications market itself. It was rather constrained by the public sector borrowing requirement (PSBR), which was linked to the level of proposed government expenditure. The GPO had the monopoly in the operation of public telecommunication network and in the supply of equipment for connection to this network. However, due to the political control over investment, the range of GPO products did not keep up with the increasing demand for specialised equipment resulting from the rapid technological development. With Labour in government the decision was made to proceed with the reorganisation of the GPO. In August 1966 the Postmaster General (PMG) announced in the House of Commons the government’s plan for the GPO, which was welcomed by the Conservative Party. It was decided ‘instead of being a department of state, with a minister at its head, the Post Office should become a public Corporation, the members of which would be appointed and responsible to a minister’ (Short, 1966, in Harper, 1977). The government also took the view that within the new corporation the management of various services would have the opportunity to develop on more independent lines and five distinct nationalised corporations should be formed out of the GPO: posts, telecommunications, savings, Giro and data processing. The view of the postal unions was different than the government view. The idea of having to face five different management structures and five different philosophies was unwelcome. To most of the union members, ‘management’ was an unexplored territory (Harper, 1997). Representatives of the unions supported the view of one corporation, governed by a small executive board, which should be responsible for tariff, investment, expenditure, procurement, management staffing, research and development policies. The 1969 Post Office Act established the GPO as a statutory corporation headed by a Chairman appointed by the government. The Act signaled the removal of the GPO from direct governmental control, whilst remaining the main provider of the UK telecommunications and postal services. The Act provided for a single statutory board with a maximum of twelve members plus the Chairman, which would take over the PMG’s responsibilities for the telecommunications services. The Act brought changes in the GPO financing. The GPO could now borrow money for investment either from the government or, with Treasury approval, from any other body. The corporation’s general duty was to make the books balance. The ministers were responsible for dismissing or appointing members of the board and approving the capital programme. Privatisation and duopoly competition policy The British Telecommunications Act 1981 split telecommunications from the Post Office, created British Telecom (BT) as the telecommunications provider, and paved the way for competition. The Act established new responsibilities for the British Standards Institution (BSI) and set up a subsidiary of the British Electrotechnical

34

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Approvals Board, the British Approvals Board for Telecommunications (BABT) from which manufacturers should seek approval of telecommunications apparatus (Oftel, 1993).51 52 In 1982, the Secretary of State licensed the Mercury Consortium to run its own telecommunications network in competition with BT.53 In July 1982 the publication of the white paper ‘The Future of Telecommunications in Britain’ (Cmnd.8610) confirmed the government’s intention to liberalise BT from government control.54 The Government’s plan was to convert BT to a public company, the ‘British Telecommunications plc’. The Telecommunications Act 1984 removed BT’s national monopoly and created a new regulatory body, the Office of Telecommunications, Oftel to act as the independent regulator of the sector. In November 1984, 51% of BT shares were made available to the public. With the licensing of Mercury as a Telecommunications Operator (TO) a ‘duopoly policy’ for long-distance fixed link operators was established.55 This duopoly policy was also supported by the granting of cellular licences to Cellnet and Racal-Vodafone to provide a national network of mobile services. Kingston upon Hull City Council would continue to supply the service in the Hull area, whereas further liberalisation in equipment supply and maintenance would follow by the government. Thus, from 1982 until 1990 there was a duopoly for basic or reserved services, whilst a multitude of consortia was licenced to provide mobile services (including cellular, telepoint, personal communications network, trunk private mobile radio services and mobile data networks) and specialised point-to-multipoint satellite services. During the duopoly competition period Mercury was able to choose the services that it would provide with more pricing flexibility. BT was required to provide a universal service at a uniform tariff. Competition originally developed on the basis of price and network quality and both BT and Mercury put emphasis in the modernisation of network technology. BT faced competition in all major products and services from Mercury in the provision of voice telephony and data services to businesses. Mercury launched its competitive national and international telephone service in May 1986. Mercury built its network employing solely digital technology. By the end of 1998 Mercury’s fibre optic network was linked to 70 British cities and the company had gained 16,000 customers. BT responded to this competition by continued investment in new technology, including digital transmission and switching equipment in order to enhance the quality and

51 ‘Telecommunication apparatus’ refers to a telecommunication system and any person who controls the apparatus is regarded as running the system, Telecommunications Act 1984, Section 4 (2). 52 Oftel (1993), Liberalisation of the British Telecommunications Industry, A Chronology of Events, March, Oftel Library. 53 The Mercury Consortium consisted of Cable and Wireless, British Petroleum and Barclays Merchant Bank, Department of Industry, 1982, Cmnd 8610. 54 Department of Industry (1982), The Future of Telecommunications in Britain, London: Her Majesty’s Stationery Office, Cmnd 8610. 55 Introduced by the Minister for Information Technology Kenneth Baker in November 1983.

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range of services (BT, 1988).56 In this period, competition between BT and Mercury was also expected to be greatest on long distance telephone calls. At the local level, competition was intensified as Mercury was permitted to provide local telephone services, including direct exchange lines to business and domestic premises and long distance telephone calls. Another possibility for the introduction of competition at the local level was provided by cable television. In the early eighties, cable companies were allowed to provide voice telephony in association with BT and Mercury. In 1987, the Director General allowed a cable company to provide telephone services. The Director General, however, saw the potential of cable companies for providing telephony independently because of the ‘stimulus it may bring to the development of broadband networks’, guarding the future of both entertainment and information technology. By the end of 1989, three cable companies were able to provide television and telecommunications services. In the field of mobile telephony, competition developed through the cellular radio telephone systems. These developments of competition, in the market for mobile communications using radio, were seen as very important as could allow the provision of telecoms services in rural areas and in making the personal portable telephone a reality. By the end of 1987, the two mobile operators had together 260,000 customers. At the end of 1989, the number of customers on the two networks was about 900,000 and the mobile networks were becoming highly profitable. Competition was also to be promoted through the licensing of two national private mobile radio (PMR) systems in 1986, and several other licenses for running radiopaging services. BT saw this new environment as being novel for the regulator, the regulated and the consumer itself; From BT’s point of view this new environment was continuously evolving and the company was committed to assist in the development of this environment through adequate technology and staff training (BT, 1985). By 1987, BT acknowledged full competition in the supply of telephones and other customer premises equipment, in value added services, in mobile communications and in network (BT, 1987). As competition intensified in all major product and service areas from Mercury, BT announced that increasing competition would inevitably result in BT losing market share, particularly in some of its more profitable areas of operation (BT, 1988). All in all, in the eighties, competition intensified through the duopoly competition policy between PTOs, mobile and cable operators in the provision of telephone services. The licensing regime of the eighties and regulatory provisions of the supply of telecoms apparatus, networks interconnection-call routing apparatus, international accounting arrangements, and price controls, played a significant role in developing competition among the market players.57 The regulatory provisions are discussed in detail in Chapter 4. Table 4 summarises the number of PTOs and Non-PTOs granted during the eighties.

56 British Telecom (1988), Form 20-F, Annual Report. 57 A ‘telecommunication apparatus’ which is situated in the United Kingdom […] shall be regarded as a telecommunications system and any person who controls the apparatus shall be regarded as running the system, Telecommunications Act 1984 Section 4 (2).

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Table 4: PTOs and Non-PTOs licences (1985-1990) PTOs

PUBLIC TELECOMMUNICATIONS

OPERATORS

MOBILE OPERATORS BROADBAND CABLE OPERATORS

1985 3 2 8 1986 3 2 1 1987 3 2 1 1988 3 2 2 1989 3 2 14 1990 3 2 54

Non-PTOs

1985 57 for private circuits (bsgl), value added networks, land mobile radio services 1986 101 for private telecoms systems, valued added data services, nationwide radiopaging

networks, non-PTO cable systems 1987 83 for private telecoms systems, valued added data services, nationwide radiopaging

networks, non-PTO cable systems and private mobile radio services 1988 154 for private telecoms systems, valued added data services, nationwide radiopaging

networks, non-PTO cable systems, private mobile radio services, satellite services and telepoint

1989 160 for private telecoms systems, valued added data services, nationwide radiopaging networks, non-PTO cable systems, private mobile radio services, satellite services and telepoint

1990 337 for private telecoms systems, valued added data services, nationwide radiopaging networks, non-PTO cable systems, private mobile radio services, satellite services and telepoint

The duopoly review and the liberalisation of the telecommunications market The period of duopoly competition policy, often called the period of ‘managed competition’ was ended at the beginning of the nineties. The duopoly review, ‘Competition and Choice: Telecommunications Policy for the 1990’s’, set a number of regulatory provisions that liberalised the UK telecoms market and established the UK as a leader in competition policy among its European counterparts.58 At the end of 1991 a further 26.2% of BT shares was floated to the public, leaving the UK government owing only 22.7% of the national carrier. During this period legislation did not decline. Oftel adopted a critical role in enforcing legislation and granting new licences. Competition was fostered by new licensing arrangements, interconnection and interoperability of systems, price controls and new numbering provisions. Since new licences were granted to PTOs for local, national and/or international services the telecommunications market experienced the development of strong competition. Cable operators were able to provide telephony services in their own right and not under agreements with the national PTOs. The duopoly review set the role of regulation to assist with ‘more open competition’. This form of competition was vital to serve the interests of consumers. More open

58 A detailed overview of the duopoly review provisions is given in the Appendix.

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competition was seen as the best means for opening the market to new PTOs, giving them the incentive to develop new technologies, and offering new kinds of services. The government took the view that greater network competition could be achieved through the licensing of new Public Telecommunications Operators. A large number of PTO licences was granted between 1993 and 1999 allowing for higher capacity digital networks, for switched services, for optical fibre and radio trunk networks in UK cities, for building on new telecommunications networks in London and for the provision of both fixed and mobile services.59 With regard to the development of competition at the local level, the provision of telephone services from cable companies was expected to boost competition between cable franchises and PTOs. Competition was strengthened with the introduction of new network operators whilst cellular operators also consolidated their presence in the market. The personal communication networks (PCN) services and the broadband cable network operators, played their role in the new competitive environment by providing both telecommunications services and cable television programme services. The number of PTO licences to cable operators increased steadily every year after the duopoly review.60 The number of licences increased in 1991 from 79 to 118 and during 1992 cable companies had installed 107,000 telephone exchange lines. By 1994, 125 licences had been granted to cable franchises and a total of 909, 000 homes had subscribed to cable television. By the end of 1998, 50% of households in the UK had the option to choose a cable operator to provide telecommunications services and the take-up of cable telephone lines by residential customers was 3.4 million. Cable companies are estimated to have passed 60% of households by the end of 2001. 59 The first licence was granted to Ionica Ltd in 1993 for a national radio-based system to compete with BT in the local loop. Six more licences were granted within the same year to City of London Telecommunications Ltd (COLT), Energis Communications Ltd, Scottish Hydro-Electric plc, MFS Communications Ltd, Scottish Power Telecommunications Ltd and Torch Communications Ltd. These licences provided for building of new telecommunications networks in the London area, for higher capacity digital networks, for switched services and for optical fibre and radio trunk networks in Scotland, Yorkshire and Humberside. A new PTO licence was granted to Vodafone allowing the company to provide both fixed and mobile services and to deal directly with end users as well as through service providers (Oftel, 1993). In 1994, PTOs were granted to Norweb plc, Videotron City and Westminster Ltd, Sprint Holding (UK) Ltd, Telstra (UK) Ltd, WorldCom International Inc, Racal Network Services Ltd, AT &T. Cellnet was granted a PTO license to run a mobile network using fixed links (Oftel, 1994). A smaller number of companies granted PTOs in 1995. These were Liberty Communications Ltd, Mercury Personal Communications Ltd, COLT Telecommunications, Atlantic Telecommunications Ltd, Orange Personal Communications Ltd and Sweb Telecom Ltd. These PTOs provided for replacing earlier regional licences with national ones, and allowing operators to offer mobile and fixed services (Oftel, 1995). The number licences that was granted in 1996 and 1998 was relatively low compared to the previous years. Three licences were granted in 1996 to Torch Communications Ltd, National Communications Ltd and Eastern Group Telecommunications Ltd, and two in 1998 to International Computers Limited and MLL Telecom Limited. The number of PTOs increased significantly in 1997 and 1999 reflecting the licensing of 9 new operators in 1997 and 18 more in 1999. 60 The key areas of the cable operators licences on which Oftel concentrated were: a) monitoring progress against network obligations b) ensuring that operators had made sufficient provision for funds for meeting their liabilities c) checking that operators lodge with Oftel copies of their charges, and d) making sure these were consistent with the conditions in the licences. See Oftel, Annual Report, 1993, p.40.

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Competition among the operators of mobile networks has been very successful and customers of mobile services have increased every year. By 1994 there were four main operators in the mobile services Vodafone, Cellnet, Mercury One 2 One and Hutchison Orange, all of which had invested heavily on the construction of new networks. In 1998 these networks had around 13 million customers, an increase of 50% compared to 1997. Towards the end of 1999, Virgin mobile also entered the market and within the first two months of operation it claimed 100,000 customers. At the end of 2000, there were over 40 million subscribers in the UK, representing an increase of 67% on the year.61 Dolphin is another mobile operator targeting closer user groups rather than the mass market. Dolphin is currently the only operator providing TETRA services. With the view that market entry of new operators was important to increase the efficiency of the sector and to offer better value for money to the customers, the government continued offering entry assistance to new operators. Entry assistance took the form of some contributions including favourable prices for interconnection, for exchange lines rentals and for connection charges that could be waived for competitors. These types of arrangements became known as ‘access deficit contributions’ (ADC). The Director General decided to waive access deficit contributions for competitors with a market share less than 10% until the operator had gained a market share of 25%. After that a full access deficit contribution would be payable on all business and BT would receive full access deficit contributions on interconnected tariffs which fell outside the first 15% of market share taken by competitors (Oftel, 1991). Entry assistance was also examined in relation to the balance of BT’s prices as the possibility of entry assistance through the interconnection agreements depended on BT making a contribution to the costs of meeting social objectives out of call prices. The more BT would reduce call prices, the less the possibility of the Director General to offer access contribution waivers. The Director General established rules that required BT to change its prices over a period of five years, to apply new tariffs to a broad class of customers and to justify the new tariffs (Oftel, 1991). As competition intensified between PTOs, cable and mobile operators the access deficit contributions was lifted in 1997 and it was replaced by long run incremental costs (LRIC). Since then interconnection prices between telecommunications operators are set on the basis of LRIC. Two more issues were also relevant to the new competitive environment: indirect access and new numbering provisions. Indirect access would facilitate long-distance competition.62 Numbering provision was to play a significant role in allowing for entry of new operators, making room for the provision of new services and allowing businesses to retain their customers when they changed their telephone number(s). (Oftel, 1991).63 These provisions are discussed in Chapter 4. 61 Virgin Mobile is a ‘virtual mobile network operator’. It does not have its own network but uses the One 2 One network. 62 ‘Indirect access’ describes a situation where a customer’s call is routed and billed through operator A’s network even though the call originated from the network of operator B. It is a generic term for both easy and equal access. See Oftel, glossary, www.oftel.gov.uk. 63 Oftel (1991), Competition and Choice: Telecommunications Policy for the 1990s, Statement, 5 March.

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The Competition Act 1998 played a significant role towards the development of competition. It argued for the importance to protect consumers and support the development of effective competition. It introduced principles of European competition law regarding the prevention of anti-competitive agreements in the market and the abuse of a dominant market position. The Act introduced changes in the administration of competition policy by replacing the MMC with the CC and by assigning the CC with the role of an appealing body that the MMC did not previously have. The Act gave to the Director General of Fair Trading (DGFT) new powers to tackle ant-competitive behaviour, which were similar to the powers that the DGFT had when investigating breaches on behalf on the European Commission (Parker, 2000).64 The prohibitions contained in the Act came into force in March 2000. Other regulation that was passed during this period concerned the Broadcasting Act 1990 and 1996. The Broadcasting Act 1990 established the Independent Television Commission (ITC) to issue licenses and regulate commercial television in the UK, and assigned the Radio Authority with the same duties regarding broadcasting services in the UK. The Broadcasting Act 1996 amended the 1990 in light of digital terrestrial television and digital services. European policy increased significantly in the 1990s. Although the UK regime was broadly compatible, if not ahead of the EU policy, the UK government and Oftel actively sought to incorporate the EU directives into national law, ie competition law. The current structure of the industry and policy affairs At beginning of the 21st Century the UK telecommunications sector is structured as outlined in Figure 3. This structure, however, is due to change. In light of evolution in technology and particularly the convergence between telecommunications, broadcasting and IT, the UK government and the EU have prioritised the drafting of new legislation for electronic communications and services. The European Parliament and the Council have already drafted six proposals that should come into force by 2002-3. The Department of Trade and Industry and the Department for Culture, Media and Sport published jointly in December 2000 the white paper ‘A New Future for Communications’ to set out the UK response to the newly created communications environment. A unified regulatory body, Ofcom, will be created to regulate the merged functions and applications of telecommunications, television, radio and IT. In terms of policy strategy, Oftel and the European Union have started examining alternative approaches to the traditional regulatory approach. Oftel for instance, has announced its strategy for the 21st Century which comprises a careful review of the level of competitiveness in the market and application of regulation at an appropriate level.65 In this vein, whilst the level of competition in the market of number translation services (NTS) seems to be effective, Oftel has sought consultation to lift

64 Parker D (2000), Reforming Competition Law in the UK: The Competition Act 1998, Occasional Paper 14, CRI, University of Bath. 65 Oftel (2000), Oftel Strategy Statement: Achieving the Best deal for Telecoms Consumers, January.

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the restrictions on BT regarding the provision of these services.66 Oftel (2001) also acknowledges that the increased competition between direct and indirect access operators and mobile operators have resulted in the falling of the prices of basic telephony services. In the light of these developments, BT argues for the removal of retail price control.67

Both Oftel and the EU examine the possibility of using co-regulation and self-regulation as a future policy strategy in telecommunications. The practice of these approaches will require proactive actions to be taken by the industry and collaboration between industry’s stakeholders. Chapter 5 deals exclusively with the new policy strategies examined by Oftel and the EU.

Government

RadiocommunicationsAgency

Independent TelevisonCommision

Office ofTelecommunications

Objectives

Radio spectrummanagement Licensing of

commercial, cableand satellite TV

Network OperatorsFixed, mobile, cable

ObjectivesEconomic regulationLicensing,Retail pricing,Universal service,Interconnection,LLU

NetworkAnalogue, digital, satellite,

radio, wireless

Customer premises

Network OperatorsRadio, mobile, wireless

Content ProvidersCommercial, cable, satellite TV

Competition Commission

NetworkRadio

Figure 3: Current structure of theUK telecoms industry

(Receives referrals fromOftel and the Secretary of

State)

NetworkAnalogue, digital, terrestrial

transmissions

Secretary of State supportedby the DTI

Licensing ofradio spectrummanagement

Economic regulation

Objectives

66 Condition 43 of BT’s licence requires BT to supply telecommunications services to any person who reasonably requests them. The review will consider if these conditions should still apply in relation to NTS. See Oftel (2001), Effective Competition Review of Number Translation Services, 13 September. 67 Oftel (2001), Proposals for Network Charge and Retail Price Controls from 2001, February.

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The EU policy development The European telecommunications sector has historically been characterised by a strong public service monopoly tradition together with an industrial policy of creating ‘national champions’. This environment led to the creation of nationalised industries (EC, 1999). The telecommunications regulatory process in the EU started with the economic integration initiated by the Treaty of Rome. This process was further accelerated through the European Community’s internal market programme which since the mid-eighties has provided a firm basis inter alia for the development of a common regulatory framework for the European telecommunications sector. The Treaty on European Union (the Maastricht Treaty of 1992) added an important element to the legal basis for European Integration in the area of telecommunications by means of its Title XII in Trans-European networks. The Amsterdam Treaty of 1997 did not have specific implications for the telecoms policy sector but renumbered that section as Title XV (EC, 1999). EU action between 1979 and 1987 was very modest with little binding legislation. The Commission passed some non-legally binding recommendations in November 1984 (Thatcher, 2001). The Community’s policy regarding the telecoms sector can be divided into two decisive phases for the eighties: In the first phase, which started at 1984, policy was focused on standards development, common research under the form of shared programmes between operators and industry, special development programmes for the least developed regions of the European Union in the form of structural funds and steps towards common European positions in the international telecommunications arena. The second phase started in 1987 with the publication of the green paper on the development of the common market for telecommunications services and equipment. This paper brought major changes in the European telecommunications market as the Commission proposed the introduction of more competition in the telecommunications market combined with a higher degree of harmonisation in order to enjoy the opportunities offered by a Single European market, in particular in terms of economies of scale. Specifically, the green paper set out to achieve the following objectives: to liberalise access to the network, to provide a wide range of services to the European consumers, to ensure coherence of development between the member states, to create an open and competitive telecoms market and maintain the socially desirable telecoms services (NERA). The green paper however proposed that the telecommunications operators should retain monopoly power in the provision of networks and some reserved services in the recognition that they will have to meet certain public service obligations. The Commission’s green paper was welcomed by Oftel in the view that ‘the spirit of the ensuing discussions have been most encouraging’ (Oftel, 1987, Annual Report, p.13). Key directives emerged from the 1987 green paper preparing the ground for liberalisation of telecommunications. In July 1987, EC directive 86/361 for the mutual

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acceptance of test results came into force. The directive set out that apparatus tested against European standards by any suitably accredited laboratory in Europe may not be tested again against that standard in any other EU country. The 1991 terminal directive (mutual recognition) repealed directive 86/361/EEC. It set out ‘essential requirements’ that terminal equipment should meet and allowed the EU to set community-wide standards. According to the directive, if a type of equipment was certified in one member state as meeting the requirements, all other member states should allow the use of equipment in their country. The 1988 terminal directive obliged member states to end special or exclusive rights over the supply of terminal equipment. The 1990 service directive introduced competition in value added service provision, allowed telecommunications operators to retain their monopoly over voice telephony and prohibited simple resale of leased lines in the sort term. The 1990 open network provision (ONP) directive provided the rules for access to telecommunication operators networks. The aim of the ONP directive was to allow for “the harmonisation of conditions for open and efficient access to and use of public telecoms networks, and where applicable public telecommunications services” (Foster, undated, p.7). The directive had an effect on technical interfaces, supply and usage conditions and tariffs. The 1990 public procurement directive introduced that supply contracts in telecommunications and other utilities be open to public competitive tender (Thatcher, 2001). Committees composed of national representatives were also established under the directives, ie, the ONP Committee and the Approvals Committee for Terminal equipment. The Commission was obliged to consult these committees in terms of developing standards and obtain their voting if standards were to be mandatory. The European Telecommunications Standards Institute was also established in 1988 and Oftel applied for membership at the end of the same year. The Commission developed regulation for other areas of telecommunications including satellites. In November 1990, the European Commission published its green paper on satellite communications. The paper was designed to ensure that the European regulatory environment would allow satellite communications to develop to its full potential. With regard to the earth segment, the paper proposed competition in two-way satellite communications for data and voice but systems carrying voice traffic were not allowed to connect to the PSTN. The paper set out that there should be direct access by all service providers to space segment capacity. The EU also proposed that EUTELSAT should be free to offer capacity throughout EU and that member states should work towards a review of the EUTELSAT convention and its operating agreement. The UK response was supportive of the new European provisions regarding the earth and space segment (Oftel, 1990). In addition to competition provisions, the Competition Directorate examined telephone tariffs. International call charges were seen to be far in excess of costs and a full-scale investigation into international call charges was commenced. The investigation looked at both collection charges and accounting rates. telecommunications operators were to be fined up to 10% of their turnover if evidence was found of anti-competitive behaviour.

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To summarise, during the eighties the EC extended its role in regulating the telecommunications sector by passing liberalised provisions to introduce competition. Thatcher (2001) argues that the Commission and national governments acted in partnership and national governments accepted the expansion of the EU role in the telecommunications industry. The reaction of the member states to the EU regulation varied. Britain and later West Germany wanted faster and more extensive EU liberalisation whereas France and southern member states were keen to extend European regulation, make standards compulsory and regulate competition (Thatcher, 2001). The EU however was seeking consensus on the content of its ideas before moving to legislation, and left space for the member states to exceed the EC provisions if they so wished. Most importantly, European provisions in the late eighties allowed space for reform of governments and their PTOs, by giving them time to prepare and cope with future European liberalisation and competition requirements. Liberalisation and general competition law became the essential part of the European regulation of the telecommunications sector during the 1990s. Seven liberalisation measures and fourteen harmonisation directives came into force and currently apply. Liberalisation directives were passed for satellite services, mobile communications, voice telephony and infrastructure. The full competition directive set the deadline of the 1st January 1998 for full liberalisation of voice telephony and networks. The legislation on universal service, interconnection, licensing and numbering provisions was amended with the objective to be more ‘transparent, objective proportional and non-discriminatory’ (EC, 2000). The general regulatory framework of the Commission has been based on the concepts of open network provision, significant market power (SMP), pricing, the issue of subsidiarity and the strengthening of the competitive position of the European telecoms sector in the international sphere (EC, 2000). The open network provision established the need for harmonised conditions of access to public networks and services according to the principles of objectivity, transparency and non-discrimination. These principles apply to the actions of both regulators and market players. Three directives were passed for operators with significant market power: the voice telephony, the interconnection and the leased lines directives. Fixed and mobile operators with SMP are subject to additional regulatory restrictions, ie, to offer cost-oriented interconnection rates and meet all reasonable requests for access to their network.68 In terms of pricing, the requirement for cost-oriented tariffs should apply to operators notified by the Commission as having SMP together with a requirement for affordability as resulting from the voice telephony directive.69 The new regulatory framework has been fully consistent with the principle of subsidiary, allowing member states to apply the new regulation at country level. Under the general competition law, internationalisation, alliances and joint ventures by national 68 The ONP framework introduced the concept of SMP due to the fact the European telecommunications sector was dominated by one incumbent operator in each member state. Operators with SMP are subject to heavier regulation than other operators, because of their market power. If an organisation providing telecommunications services has 25% of the national market, it is seen as having SMP. National Regulatory Authorities have flexibility to determine this percentage otherwise depending on the national market situation. See EC, 2000. 69 Affordability for each member state is defined in line of the different priorities which exist for consumers in the member states and the different standards of living.

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champions, like BT, France Telecom and Deutsche Telekom were also highly approved. In 1993, the Commission proposed the full liberalisation of the telecoms services commencing on the 1st of January 1998. Satellite services and satellite equipment were liberalised in 1994 (Commission directive of 13 October 1994 amending directive 88/301/EEC and directive 90/338/EEC). The first steps to liberalise networks was taken with the Cable directive in 1995, which required member states to allow cable TV networks to be used to offer telecommunications services which were open to competition (Commission directive of 18 October 1995 amending directive 90/388/EEC). The mobile directive of 1996 allowed operators to build their own infrastructures or microwave links rather than having to rely on the networks provided by the national fixed operators. It allowed operators to interconnect directly with mobile or fixed networks in other member states, rather than having to interconnect via the incumbent operator in the own country, and it allowed the licensing of DCS 1800 systems in every member state from 1998 (Commission directive of 16 January 1996 amending directive 90/338/EEC).70 In 1996 the full competition directive came into force providing for the early liberalisation of the telecoms networks from July 1996. The directive set up the 1st January 1998 as the final day for full liberalisation and opened the market for directory information to full competition (Commission directive of 13 March 1996 amending Commission directive 90/338/EEC regarding the implementation of full competition in the telecoms market). The cable ownership directive of 1999 dealt with the joint ownership of cable and terrestrial networks by incumbent operators, requiring member states to ensure the structural separation of the cable business.71 The licensing directive 1997 (97/13/EC) envisaged the use of general authorisations from the National Regulatory Authorities (NRAs) (eg, statutory provisions, class licences) and the use of an individual licensing procedure in certain cases. These provisions aimed at the harmonisation of the licensing conditions across the EU. The interconnection directive 1997 (97/33/EC) provided that all operators had a right to negotiate interconnection, operators with SMP were obliged to meet all reasonable requests for access to the network and treat requests in a non-discriminatory manner, and mobile and fixed operators with SMP offered cost-oriented interconnection. The importance of ensuring a defined level of service at an affordable price for all users was established with the voice telephony directive 1998 (98/10/EC). The directive required each member state to ensure the provision of the public fixed telephone network, the fixed public telephone service, operator and directory services, public pay phones, and special services for people with disabilities or special needs.

70 According to the decision N 128/1999/EC on the coordinated introduction of a third generation mobile and wireless communication system (UMTS) in the EU, all member states should ensure that UMTS services are introduced in their country by January 2002 and an authorisation system is at place by January 2000. See EC, 2000. 71 Commission directive 1999/64/EC amending directive 90/388/EC to ensure that telecommunications networks and cable TV networks owned by a single operator are separate legal entities. See EC, 2000.

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The directive required member states to ensure that at least one company should be responsible for providing universal services at a give location but allowed space for the state to decide which operator should be responsible for the provision of universal service in its country. The services directive (as amended by the full competition directive 1996) required all member states to ensure that adequate numbers were available for all telecoms services, and the interconnection directive authorised the NRAs as being responsible for the numbering plans in their country. As of January 2000 all member states had to introduce number portability. Under the post 1990’s regulatory framework, the national regulatory authorities (NRA) are primarily responsible for implementing and enforcing the Community’s legislation. With regard to consumers’ complaints, if not resolved between the consumer and the operator, the matter should be taken into a consumer body. The regulatory framework led to the creation of new committees such as the ONP and the licensing committee, established to deal with issues arising from the respective directives. Notwithstanding that, a key part of the telecoms liberalisation and the creation of a single European market has been European standardisation. To promote this goal, a number of extra committees and forums has been established, ie, the European telecommunications standards institute (ETSI), established to develop standards which permit a particular class of equipment to circulate freely within the Community; the UMTS Forum, was set up to deal with the development and implementation of the universal mobile telecommunications system, combining personal communications with multimedia services by building on the existing fixed and mobile network infrastructures; the European numbering forum, set up to provide a forum for exchange of information, co-ordination and consultation on European numbering; the European telecommunications platform, created to provide the ONP committee with the views from the market players regarding regulatory policy; the Satellite Action Plan Regulatory Working Group, which provides the Commission with information about market barriers and regulatory regimes in EU member states and third countries (EC, 2000). By 2000, European regulation had expanded across the entire telecommunications sector in the form of liberalisation and general competition law. The reaction of the member states to the new regulatory framework was positive (Thatcher, 2001). Member states were not so much concerned with the extended regulation coming from the EU but with the timing of liberalisation and the degree of discretion left to the NRAs to pursue market and social objectives. Britain and Germany were pressing for earlier deadlines for liberalisation whereas, France, Italy and southern member states were pressurising the Commission for longer transitional periods. After a long period of negotiations the member states agreed on competition in voice telephony and the infrastructure in 1993 and 1994, but the final deadline for both was agreed to be 1 January 1998. Table 5 summarises the European green papers and directives passed on the telecommunications sector.

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Table 5: European papers and directives on the telecommunications sector

1987 ‘Towards a Dynamic European Economy’ Commission green paper on the development of the common market for telecommunications services and equipment

1988 Terminal equipment liberalisation directive - Commission directive on competition in the markets in telecommunications terminal equipment (88/301/EEC)

1990 Services directive - Commission directive on competition in the markets for telecommunications services (90/388/EEC amended and supplemented by the satellite, cable, mobile, full competition and cable ownership directives)

1990 Open network provision directive – Council directive on the establishment of the internal market for telecommunications services through the implementation of open network provision (90/387/EEC)

1990 Council directive on the procurement procedures of entities operating in the water, energy, transport and telecommunications sectors (90/531/EEC)

1990 ‘Towards Europe-Wide Systems and Services’ green paper on a common approach in the field of satellite communications in the European Community

1991 Terminal directive (mutual recognition) - Council directive on mutual recognition of type approvals (Repealed directive 86/361/EEC)

1994 Two green papers on ‘The Liberalisation of Telecommunications Infrastructure and Cable Table Networks’

1994 Green paper on ‘A common approach in the field of mobile and personal Communications in the European Union’

1994 Satellite directive - Commission directive amending directive 90/388/EEC with regard to satellite communications

1995 Cable directive - Commission directive amending directive 90/388/EEC with regard to the abolition of the restrictions on the use of cable television networks for the provision of already liberalised telecoms services

1996 Green paper on ‘ A numbering policy for telecommunications services’ 1996 Mobile directive - Commission directive amending directive 90/388/EEC with

regard to mobile and personal communications 1996 Full competition directive - Commission directive amending directive 90/388/EEC

regarding the implementation of full competition in telecommunications market 1997 Green paper on ‘the Convergence of the Telecommunications, Media and

Information Technology Sectors, and the Implications for Regulation Towards an Information Society Approach’

1997 ONP framework directive - Parliament and Council directive (97/51/EC) amending Directive 90/387/EEC for the purpose of adaptation to a competitive environment in telecommunications

1997 Leased lines directives - Parliament and Council directive (97/51/EC) amending Directive 92/44/EEC for the purpose of adaptation to a competitive environment in telecommunications

1997 Licensing directive - Parliament and Council directive (97/13/EC) on a common framework for general authorisations and individual licences in the field of telecommunications services

1997 Interconnection directive - Parliament and Council directive (97/33/EC) on Interconnection in Telecommunications regarding to ensure universal service and interoperability through application of the ONP principles

1997 Telecoms data protection directive - Parliament and Council directive (97/66/EC) concerning the processing of personal data and the protection of privacy in the telecoms sector

1998 Green paper on ‘radio spectrum policy in the context of European Community polices such as telecommunications, broadcasting, transport and R&D’

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1998 Voice telephony directive - Parliament and Council directive (98/10/EC) on the application of open network provision to voice telephony an on universal service

1999 VAT Directive - Council directive (99/59/EEC) amending directive 77/388/EEC regarding the value added tax arrangements for telecoms

2000 Regulation of the European Parliament and the Council on Unbundled Access to the Local Loop (Com(2000)394)

2000 Proposal for a directive of the European Parliament and the Council on a common regulatory framework for electronic communications networks and services (Com(2000)393)

2000 Proposal for a directive of the European Parliament and the Council on a universal services and users’ rights relating to electronic communications networks and services (Com(2000)392)

2000 Proposal for a directive of the European Parliament and the Council on access to, and interconnection of, electronic communications networks and associated facilities (Com(2000)384)

2000 Proposal for a directive of the European Parliament and the Council concerning the processing of personal data and the protection of privacy in the electronic communications sector (Com(2000)385)

2000 Proposal for a directive of the European Parliament and the Council on the authorisation of electronic communications networks and services (Com(2000)386)

2000 Proposal for a directive of the European Parliament and the Council on a regulatory framework for radio spectrum policy in the European Community (Com(2000)407)

The UK licensing regime The licensing regime, which was operated by the UK government during the eighties and the nineties, was a regulatory instrument to allow for introduction and development of competition in the telecommunications sector. According to the Telecommunications Act 1984, ‘a person who runs a telecommunications system within the United Kingdom shall be guilty of an offence unless he is authorised to run the system by a licence granted under section 7’ (Section 5 (1)). During the eighties, licences were granted to PTOs and to non-PTOs in order to allow for the ending of the exclusive provision of services by BT and the entry of new market operators. Each two type of licence confers special rights for the operator that runs a telecommunications system. A PTO licence provided a PTO to install apparatus in the public highway, carry out works on, and run lines across private property, and to demand rights of access (Oftel, 1994). Once a licencee had reached a 25% market share, the licence required him not to exercise undue discrimination or undue preference for or against certain customers. Up to 1992, PTO licences were granted to three types of operators: • Fixed link operators including BT, Mercury, the cable PTOs (who provided

broadband cable television and telephone services in each of the 135 cable franchises in the UK up to 1990) and Kinston upon Hull City Council.

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• Communication Cellular Operators: Licences granted to Vodafone and Cellnet in 1985, and

• Personal Communication Network (PCN): The original licensees were Mercury

PCN, Microtel and Unitel (all consortia). They were granted the licences in 1988. With the Merger of Mercury PCN and Unitel, the PCN licensees reduced to two in March 1992.

The non-PTO licences contained less obligations and privileges than a PTO licence. Non PTO licences included: a) several value added data services (VADS) licences; b) licences allowing international simple resale; c) licences for radio paging operators, d) private mobile radio operators e) certain broadcasters; f) certain cable operators; G) satellite licences (most of which were granted in 1998) and h) mobile data licences (Oftel, 1994). The government also introduced two types of Class Licences for private circuits and value-added networks in 1984 and 1986 respectively.72 The branch telecommunications systems and general licence (BSGL) allowed private business networks to connect to the public networks. The value added data services (VADS) licence authorised the provision of valued added services to any customer, both in the UK and abroad, and data services within the UK. In November 1989, a new class licence replaced the BSGL and offered licensees the ability to share exchange lines, to offer spare capacity on private circuits to other companies, and to undertake resale within the UK. The issue of the revised BSGL also marked the beginning of the end of the VADS licence, as private telecoms operators could now provide VADS without any need to register or pay a fee (Oftel, 1989, 1990). The liberalisation of the telecoms market in the UK brought significant changes in the licensing regime of the non-PTOs. Two class licences were granted by the Secretary of State after the duopoly review and are the licences under which most systems run today. The self-provision licence (SPL) was issued on August 1991 allowing the ‘self-provision of telecommunication systems irrespective of the distance between separate premises linked within the system and for separate maintenance of serially connected equipment’ (Oftel, 1991). The new SPL does not allow the sharing of such systems with third parties, the resale of spare circuit capacity in the system, or the provision of services for a consideration. In other words, the SPL is the main licence under which operators run all private networks, such as domestic installations, organisations’ internal systems based on private automatic branch exchanges (PABXs). The licence provides no restrictions on the extent of self-provided equipment between premises but it provides the restriction that systems run under the SPL only for the licensee’s own purposes (Oftel, 1997). The introduction of the self-provision licence allowed private mobile radio operators to run their systems under the new class licence.

72 A class licence means that an operator doesn’t need to make an application or notification and doesn’t have to pay fee. The operator must, however, run the system in such a way as to conform to the terms of the relevant licence.

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The telecommunications services licence (TSL) which came into force on September 1992 replaced the branch systems general licence (BSGL) and the value added and data services (VADS) class licence. The TSL is a class licence under which licensees of private networks offering services to third parties could run their systems, ie, private systems on which value added and data services are provided. Under the TSL the length of links between premises which may be provided by the licensee is restricted to 200 metres or less. Longer links must be leased from a PTO. Resale services are allowed under the TSL, but not international simple resale services (ISRS). For operators applying for international simple resale services the Secretary of the State grants individual licences (Oftel, 1994). Both the TSL and SPL are compliant with the EC licensing and interconnection directive. In August 1991 a new class licence was issued for satellite services. This licence allowed anyone in the UK except the BBC, to operate a satellite earth station for the reception and transmission of messages, such as voice, video and data via satellite provided that the messages were not conveyed over the public network. The Broadcast Act 1990 introduced a new licensing regime for satellite master antenna television (SMATV) cable systems. According to this, cable operators are authorised to provide services under a class licence, and multi-premise SMATV systems should be registered with Oftel. Cable systems, which cover less than 1,000 homes could now run under a Telecommunications Act licence and not a licence issued by the Independent Television Commission (ITC). A new class licence ‘the access control’ was issued in 1997 covering the provision of conditional access services in respect of non-broadcast services and digital non-television broadcasts. Given that the existing licences, both individual and class cover services involving switching, the access control class licence came to protect the access control functions of future networks that will use conditional access.73

The current licensing regime also provides for ‘systemless service providers’. The term refers to a person who provides publicly available telephone services but who does not run a telecommunications system with the meaning of Section 4 of the Telecommunications Act 1984 by means of which such services are provided (Oftel, 1999).74 Systemless service providers are regulated via statutory instruments rather than conditions on their licences. Since the European licensing directive became UK law in 1997, Oftel has been working to modify all the PTO’s licences and bring them into line with the directive which contains the obligation that all licences should be non-discriminatory and licence conditions should be objectively justified. The text of all the standard PTO licences, including BT, Kingston, the mobile and cable licences, was finally agreed in summer 1999. 73 ‘Conditional access system’ is a telecommunications system by means of which access to digital television services may be controlled so that only those viewers who are authorised to receive such services do so. Mobile telephone networks use conditional access technology in handsets and base stations to ensure that the right call is delivered to the right handset. Switching is the conventional way of delivering a telephone calls on traditional telephone networks. 74 Oftel (1999), Proposed New Dispute Resolution Procedures for Fixed Telecommunications, September.

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4 REGULATORY POLICY - DEVELOPMENT AND CURRENT STATUS Introduction The discussion so far has concentrated on the policy objectives of the privatisation and liberalisation of the telecommunications sector in the UK. It has been argued that the regulatory policy of the telecoms sector during the eighties and nineties has focused on:

ending the monopoly in telephony services by BT; • • •

increasing economic efficiency of the sector by economic regulation; and, protecting the interests of consumers by increased competition between competitors.

Peter Vass (1998/9) has developed a generic regulatory framework to explain the objectives of regulation under privatisation in the UK utility sectors. This framework is represented in Figure 4.

Figure 4: The regulatory frameworkTwo-way, Tri-partite model

Feedback Government(policy)

Audit(NAO and SelectCommittees)

Executive regulation ( Implementation)

Environment Economic Social equity

Consumerrepresentation

Appeals(CompetitionCommission andJudicial Review)

Regulated companies(providers)

Consumers

Complaints

Source: P Vass (1998/9), Regulatory Review, p.2.

According to this framework, regulatory policy has the task of promoting the economic efficiency of the sector, supporting the interests of industry players and

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consumers and facilitating social and environmental policy objectives. This framework is used in the following paragraphs to explain the development and currents status of economic and social policy regulation in the telecommunications. Environmental policy issues are also part of the discussion, as their importance is emerging in the governmental agenda. Social policy issues Quality control Under the Telecommunications Act 1984, the Director General is responsible for promoting the interests of consumers with regard to price, quality and variety of services. BT used to publish its own information about quality of service before it was privatised but stopped after it was privatised. It became the Director General’s duty to collect and publish information for the consumers independently of the telecommunications operators. Quality of service in the eighties was very much concerned with tariffs and charges, delays in providing new services, contractual liability and delivering improved services through a modernised network, ie, directory enquiries. The regulator with his advisory committee conducted a number of surveys and publicised documents regarding the quality of service in the telecoms sector. Soon after the telecommunication operators responded with their own publications and signing of codes of conducts either on their own initiative or by invitation of Oftel, ie, during 1986, both Cellnet and Racal-Vodafone published their codes of practice for consumers affairs after consultation with Oftel. Oftel received a number of complaints about the size of domestic telephone bills during 1986. This issue was overcome with the provision of itemised bills. In 1986, a number of people complained about recorded message services and the ‘Talkabout’ chat line service. BT moved to meet these complaints by establishing a Code of Practice for service providers including arrangements for complaints to be referred to an independent panel and for service to be discontinued to providers who failed to accept the verdict of the panel (Oftel, Annual Report, 1986). In September 1986, the Independent Committee for the Supervision of Standards of Telephone Services (ICSTIS) was established to supervise the standards of telephone information and entertainment services provided by telecommunications operators. The role of ICTIS was to provide safeguards for the telephone user regarding the content of recorded message services, to monitor services regularly and to respond to complaints. A survey conducted by the Director General in 1986 showed that there was no deterioration of quality of service since privatisation began. The Director General attributed most of the complaints Oftel had received during this year to the modernisation of the network. Improvement in performance was expected to improve when the network was fully modernised. Oftel published in 1987 the first quality of service indicators’ report. This showed that calls had mostly failed because of plant defect or lack of capacity, speed of operator response, incidence of faults and speed of fault repair. The same year BT responded with the publication of performance indicators for some of the key service areas.

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Quality of service was boosted in 1989 and the 1990’s. In the case of fault repairs in September 1989, 86% of faults were repaired within one working day, compared to 65% the previous year. BT also introduced its compensation plan regarding fault repairs and new exchange lines. Customers were given a firm date for the supply of new exchange lines and for fault repairs. When these targets had not been met, a minimum of £5 per working day was paid in compensation, whereas higher amounts could be claimed where financial loss was demonstrated, up to £1000 in the case of residential customers and £5000 in the case of business. During 1990 BT had reached its target of offering itemised bills on 90% of exchange lines in London and 50% of exchange lines in the rest of the country. Itemised bills helped to reduce the number of billing disputes and increased customer’s confidence in bills (Oftel, 1990). Oftel retained quality controls at the forefront of its agenda during the nineties. The regional Advisory Committees in Northern Ireland, Scotland, and Wales assisted Oftel with investigation of complaints and enquiries made by consumers in their regions. By the end of 1999, Oftel had received 85,451 complaints by consumers an increase of 60% since 1998. This figure reflected an increasingly aware and critical public regarding the services made available to them. Consumers were particularly concerned with mobile services and the difficulties in registering or topping up a pre-pay phone.75

Other social and environmental policy issues Regulation in the telecommunications sector has favoured not only economic but also social and environmental policy objectives. Over the years, regulation of the sector has attempted to strike the balance between the economic interests of the market players and social policy interests. Oftel and the Advisory Committees (see next section) which represent consumer interests have been actively involved in resolving disputes between consumers and operators, examining the accuracy of itemised bills, allowing for number portability and obliging telecoms operators to offer universal access to consumers. The universal service provision came to ensure that telecommunication services, which were used by the majority of people, would be made available to everybody upon reasonable request, and at an affordable price. BT and Kingston Communications, were bounded by their licences to provide a telephone line on reasonable request; to make available special tariff packages to assist those people with special social needs, particularly those on low incomes, in order to obtain basic telephony; and to establish disconnection procedures which provide people with adequate opportunities to pay bills. BT introduced different user schemes for

75 More information regarding consumer complaints can be found in Oftel (1999), Consumer Complaints made to Oftel, December.

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residential and business customers in order to ensure that low-income families could have access to a telephone.76 77

As regards the environmental policy of the telecommunications sector, the Department of Transport, Local Government and Regions (DTLR) is responsible for the planning policy of telecommunications. The Health and Safety Executive (HSE) is responsible for health and safety legislation and enforcement of it. The environmental impact of the telecommunications sector is mostly associated with the sector’s infrastructure such as radio masts, towers, antennas, radio equipment, poles and overhead wires. On the 21st August 2001, the government announced its planning policy, which aims to facilitate the growth of the telecommunications systems whilst keeping the environmental impact of the sector to the minimum. Accordingly, local authorities have been encouraged to approve proposals for telecommunications development, providing they were aware of the technical specifications and constraints of individual applications, and considered each proposed development as being part of a national network. Areas of high environmental importance should be safeguarded during the planning process. In order to limit visual intrusion, the sharing of masts and sites has been strongly encouraged by the planning policy as well as the use of existing building for the siting of new antennas (DTRL, 2001).78 The heavy use of mobile phones and the presence of base stations’ transmission centres close to residences are believed to have an adverse effect on human health. Mobile phones and their stations transmit and receive signals using electromagnetic waves often referred to as electromagnetic fields (EMFs). A growing concern is that exposure of humans to radio waves could cause the heating of tissues as well as side effects like headaches, depression, stress and long term effects such as cancer. The Independent Expert Group on Mobile Phones (IEGMP) conducted a study on government’s behalf of the effects of mobile phones, bases stations and transmitters on human health (IEGMP, 2000).79 The study recommends a precautionary principle with regard to the use of mobile phone technologies until more scientific evidence is available. Based on the study’s findings, the government requires that emissions from mobile phones base stations should comply with the International Commission on Non-Ionising Radiation Protection (ICNIRP) guidelines for public exposure.80

76 In August 1989, BT introduced a low user scheme, under which BT guaranteed to limit rentals to a minimum of 60% of normal rentals so that the low-income users could also afford to have a telephone, ie, in 1989 the quarterly rental for residential lines was £13.95, for business lines £22.55, and for residential customers with low telephone usage a quarterly rental of up to £4.32 was granted. See British Telecom (1989), Form 20-F, Annual Report. 77 In 1991, Oftel determined BT to replace its Lower User Scheme with a better one. Supportline was the new scheme introduced by BT in September 1991 to ensure that the rebalancing of prices did not create a burden on the poorest customers. BT also responded to the new price cap by restructuring its tariffs offering discounts of the standard unit fee for high volume users and by introducing optional tariff packages for business users. 78 DTLR (2001), Planning Policy Guidance Note 8: Telecommunications, August. 79 IEGMP (2000), Mobile Phones and Health, May. 80 As expressed in the EU Council Recommendation of 12 July 1999 on the limitation of exposure of the general public to electromagnetic fields (0 Hz to 300GHz). See Official Journal EC, L199, 59 (1999/519/EC).

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Consumer and industry interest groups A number of groups and committees have been established to represent the interests of consumers and industry in the telecommunications sector. These committees have been established under governmental or industry’s initiative and are discussed below. The Telecommunications Act 1984 established the Advisory Committees to represent the consumer interests in the telecommunications industry (Section 54). These committees are independent of the Office of Telecommunications but they report to the Director General on any matter covered by Oftel’s responsibilities. Currently, there are six Advisory Committees divided into country and special interests committees. The members of these Committees are appointed directly by the Secretary of State while the members of the special interests committees are appointed by the Director General. The Advisory Committees are as follows: The Country Committees:

Consumer Communications for England, the English Advisory Committee on Telecommunications (CGE)

•

• • •

•

•

Northern Ireland Advisory Committee on Telecommunications (NIACT) Scottish Advisory Committee on Telecommunications (SACOT) Welsh Advisory Committee on Telecommunications (WACT)

The Special Interest Committees:

Communications for Business, the Advisory Committee on Telecommunications for Business (CfB) Advisory Committee on Telecommunications for Disabled and Elderly People. (DIEL)

Oftel’s Consumer Panel was established in 1984 under the Telecommunications Act 1984 with the primary task to advise the Director General on the price control of BT. However, over the years, the panel has extended its role in ensuring that consumer interests are represented in every project undertaken by Oftel. During the nineties the panel has advised Oftel on the future numbering scheme in the UK, future price controls, universal services obligations of operators with significant market power (SMP), and the introduction of digital broadcasting and the converge of telecommunications. This year Oftel has announced the creation of a Telecommunications Ombudsman responsible for resolving disputes between consumers and telecommunications operators and raising consumer awareness of their rights. The scheme is expected to be place by April 2002, and is discussed further in Chapter 5. The Network Interoperability Consultative Committee (NICC) was established in 1992 to address the technical issues associated with network competition, to provide advice to Oftel and produce technical specifications and Codes of Practice for the industry, ie, interconnection standards. Members of the committee are network operators, public exchange manufacturers, private systems and terminal equipment suppliers, service providers and users.

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The Operator Policy Forum (OPF) was established in 1998 by Oftel to provide licenced operators with the opportunity to discuss developments in regulatory policy in the UK and European telecommunications sector. The forum deals with a variety of issues from carrier pre-selection and number portability to number translation services and personal number portability. Economic regulation Price controls Price controls have comprised the central part of economic regulation in telecommunications from early days of privatisation to date. The regulator took the view that price controls would be the economic measurement to support and increase the economic efficiency of the sector and at the same time protect the interests of consumers. Because BT’s network is the only fixed network universally available both for long distance services and local calls, most of the Oftel’s price control policy regulation has been targeted at BT. Price controls have been introduced in the form of a price cap whereby “the average price of a basket of BT’s services would be permitted to rise by no more than the increase in the Retail Prices Index (RPI), less a specified number of percentage points” (Oftel, 1994, p.5).81 In other words, the rule on prices requires the operator to limit average price increases to X per cent below the rate of inflation. The operator is bounded to the price control by conditions in its licence and must notify Oftel and the Director General 28 days in advance before changing the prices of its services. The system of ‘price capping’ was first introduced in 1984 for both wholesale and retail services and it was later introduced for private circuits and international calls. With the development of competition in mobile telephony and the increased number of complaints about the prices of mobile operators, price caps applied also for calls to mobiles in 1998. Table 6 summarises BT’s price caps for retail services from privatisation to date.

Table 6: Summary of BT’s main price caps since privatisation

NOVEMBER 1984-JULY 1989 AUGUST 1989-JULY 1991 AUGUST 1991-JULY 1993 AUGUST 1993-JULY 1997 AUGUST 1997-JULY 2001 JULY 2001-JULY 2002

RPI-3% RPI-4.5% RPI-6.25% RPI-7.5% RPI-4.5% RPI-4.5%

81 Oftel (1994), Competition in the UK Telecommunications Market, 4th August.

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Source: P Vass (1997/8) ‘Regulated Industries’, Public Services Yearbook, p.136.

The discussion now turns to a detailed description of price controls for BT’s retail, wholesale, private circuits and international services. During the eighties, price caps covered BT’s residential lines, business rentals, charges for direct-dialled inland calls, operator assisted calls, calls from public phones and private circuits prices. The prices of international calls were controlled after the duopoly review 1991. The duopoly review set out international simple resale and price control on international calls. The case of price control on international simple resale arises because of international accounting rates.82 83 Exchange line connection and rental charges for business customers were price-controlled until 1997 when Oftel lifted the price controls of these markets in order to allow BT with the flexibility of introducing its own tariffs and rentals.84 Price control took a more deregulatory approach after 1997. Interconnection charges were based on incremental costs rather than access deficit contributions. Another deregulatory provision was the introduction of the ‘safeguard cap’. This implied that services that were competitive over the price control period, should not longer be covered in the price cap baskets of network or retail but they should be subject to an individual RPI+0% safeguard cap. Oftel suggested that international direct dialled calls, high capacity leased circuits (greater than 64 kbit/s) and payphone charges should be considered as a service subject to a safeguard cap only. The fist price cap of RPI-3% on BT’s main prices run from 1984 to 31 July 1989 and covered residential, business rentals and charges for direct-dialled inland calls. This pricing rule allowed BT to alter different prices at different rates. The BT board was responsible for restricting increases in residential rentals to 2% above the rate of inflation (Oftel, 1985).85 During the first three years of the price control, prices for line rentals and local and short distance national calls had risen while prices for many long distance national calls and for some international had been reduced (BT, 1988). Oftel saw these increases as acceptable due to the high levels of investment that BT was undertaking in its network (Oftel, 1985). The prices of access lines and private

82 ‘Simple resale’ is the hiring of a private circuit from a telephone company and using it to set up a competing telephone service. More precisely, it is defined as what happens when a message passes over the switched public network, onto a private circuit and out to the switched public network again. Competition to the switched public network at both ends was necessary to make a competing telephone service a practical reality. See Oftel (1990), International Telephony: Simple Resale and Control of Prices, Advice, 1st October, p.1. 83 International accounting rates concern the prices paid by telephone companies in one country to those in another for delivery of international calls and they are relatively inflexible. Thus, if international simple resale was to become effective in the UK, the prices of international leased circuits had to be controlled. The duopoly review decided that international simple resale should be allowed in the UK for calls between the UK and another country if that country also allowed international simple resale for calls to and from the UK. See Oftel, 1990. 84 The shift from price cap policy to tariff rebalancing from the operators themselves was justified on the grounds that competition was developed well enough and the reliance on price caps could force a dominant player to drop prices in the market where it faced competition but to increase prices in non-competitive markets in order to make up for lost revenue. 85 Oftel (1985), British Telecom’s Price Changes, November 1985, Statement, 16 December.

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circuits also increased but were accepted by Oftel as the prices were distance related and changes had been made in the basis for measuring the distance covered by private circuits. A new price cap of RPI-4.5% to run from 1 August 1989 to 31 July 1993 was agreed between Oftel and BT. The price cap covered business and domestic exchange line rentals, direct dialled inland telephone calls including Linkline, operator calls, charges for directory enquiry services, and any other service previously provided ‘free’. International calls, callstream charges, priority fault repairs and public call boxes were still kept out of the basket (Oftel, 1988).86 BT introduced a low user scheme, under which it guaranteed to limit rentals to a minimum of 60% of normal rentals so that the low-income users could also afford to have a telephone after the rebalancing of BT’s prices (BT, 1989).87 BT saw the new price control as a ‘very demanding challenge’ given the substantial investment that it was putting on its network (BT, 1988). In 1989, the Director General introduced control on private circuit prices which were limited to the rate of inflation. The duopoly review brought price controls on international calls. After discussions held with BT, the Director General rebalanced the price cap of RPI-4.5% to RPI-6.25% to include the international services.88 The main price cap ran from August 1991 to 1993 to cover domestic and business exchange line rentals, direct dialled inland and international calls, the main operator services and calls to the directory enquiry. The prices of international private circuits were also included under the cap for domestic private circuits, with an uncharged cap of RPI-0. BT agreed to reduce its prices for international calls by 10 per cent. Despite the pressure that Mercury should also be subject to price controls, the Director General argued that competitive pressures would in practice be such that Mercury would need to keep its charges in line with those of BT (DTI, 1991). The pricing policy of the duopoly review allowed operators to revise their interconnection agreements and to introduce access charges. This was mainly due to the consideration that the introduction of access charges could spread the costs across the whole industry provided these costs were distributed equally between operators. The new price cap brought increases in residential exchange line rentals by 7.8% and in new residential connections by 7.7%. Oftel determined BT to replace its Low User Scheme with a better one in order to ensure that the rebalancing of prices did not create a burden on the poorest customers. To the new price cap, BT responded by restructuring its tariffs, offering discounts of the standard unit fee for high volume users, and introducing optional tariff packages for business users. During 1993 BT’s prices increased by 5.9% for business exchange lines and by 8.8% for rentals for wholesale lines. BT reduced by 5-10% the charges for international calls to European

86 Oftel (1988), The Control of British Telecom’s Prices, Statement, 7 July. 87 British Telecom (1989), Form 20-F, Annual Report. 88 Despite many people arguing that international prices should be dictated solely by market forces, BT’s accounting system showed that the profit for switched international services for the years 1986-1989 had increased by about 70% and the rate of return on capital employed was over four times that for the controlled services. This information led the Director General to introduce price controls on international prices.

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countries, Canada and the USA in accordance with the individual prices caps (BT, 1993). The price control on BT from 1 August 1993 to 31 July 1997 comprised the main RPI-7.5% cap on the basket of main prices, a cap of RPI+0% on each individual service, price caps on private circuits and a control on the volume of discounts BT should give.89 Connection charges for single residential lines were reduced to £99 and paid by instalments, and the limit of RPI+2 applied for exchange line rentals and RPI+5 on wholesale lines. The new price cap of RPI-7.5% required BT to reduce its main prices by under £400 million by the end of 1995. BT met the agreed target comfortably by reducing the cost calls to the USA and Canada by 21% at standard rate and 18.8% at cheap rate. In January 1995, business and residential exchange lines rentals went up by 4.6% and rentals for wholesale lines by 7.6% in consistency with the RPI+2 and RPI+5% caps respectively (Oftel, 1995). In terms of the prices of private circuits, in July 1995, BT reduced rentals on international circuits and introduced connection charges for commitments of less than twelve months. By the end of 1995, BT had increased the MegaStream rentals for short distance but had reduced the rental for medium and longer Mega Stream circuits (Oftel, 1995). By 1995 the market of exchange line rentals and business services had become competitive enough to allow the Director General to consider a more deregulatory approach of future price controls. Accordingly, the new pricing policy after 1997 would comprise of a network charge cap based on incremental costs rather than access deficit contributions.90 RPI+2 on BT’s exchange line rental charges was lifted to allow BT the flexibility to introduce new rental/call tariffs. Oftel also proposed the abandoning of access deficit contributions that competitors were asked to pay to BT when they used BT’s access network to carry their businesses. Incremental costs were introduced as the basis for setting interconnection charges. The new price cap of RPI-4.5% took effect in August 1997 to run until 2001 covering rental charges, and charges for local, national, international and operator assisted calls. The price cap did not include business services and high spending residential customers as it was felt that both had a greater choice of suppliers in the new competitive market. Directory enquiry services and payphones were not included in the basket either, as customers had in their availability other substitutes such as calling cards and mobile phones.

89 The regulator reviewed the price control of private circuits and a new price control rule was introduced in 1993. Accordingly, the new pricing control rule ‘limited increases in the aggregate prices of each of the three baskets of services (analogue, digital and international private circuits), in a particular year, to the rate of increase in the Retail Prices Index (RPI) in the year to the previous June’. In addition to the aggregate control on each basket, increases in each private circuit were limited as follows: RPI+2 for all analogue private circuits, whether inland or international; RPI+1 for all digital private circuits, whether inland or international. The new price control would run until 31 July 1997. See Oftel, Annual Report, 1993. 90 Oftel (1995), Effective Competition: Framework for Action, Statement, July, Oftel (1997), Pricing of Telecommunication Services from 1997, Statement.

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Price controls for calls to mobiles were first introduced in 1998 following the concern of customers about the high price of mobile phones. The matter was taken to the MMC, which concluded that the interconnection charges made by Cellnet and Vodafone were too high in relation to costs and that the practice of charging for unanswered calls should stop. The price cap of RPI-9% for mobile operators and RPI-7% for BT was introduced to run from 1998 to 31 July 2002, estimating that this will bring savings to customers of up to £1billion over the three years of price control. The control applies to BT’s weighted average retention from calls from its fixed network to BT Cellnet and Vodafone mobiles. With regard to the termination charges of One 2 One and Orange the Director announced that they should be reduced to the benchmark level specified by the CC, with an allowance to be made to take into account the differences in the running costs of their networks (Oftel, Annual Report, 1999). In the 21st century, competition to BT is expected to increase as full carrier-pre selection will be implemented and BT will make available its local loops to other competitors. The higher bandwidth services are also expected to drive competition even more forward. Notwithstanding that, the telecommunications market is becoming increasingly competitive due to the direct access and the use of mobile rather than fixed telephony. It is likely however that price controls will run for a few more years until the effect of this forthcoming competition is clear.91 Thus, the price cap of RPI-4.5% for retail services will apply until 2002, covering connection to the network, line rental, prices of local, national, international calls, and operator calls. If BT and Oftel fail to reach an agreement for the future price cap, the price cap of RPI-4.5% will roll for an extra year. Interconnection charge controls also applied from 1 October 2001 to 30 September 2005. Depending on the level of competitiveness in each interconnection market, price caps will vary from 7.5% to 11.5% for non-competitive services. In order to align the timetables for the retail price controls and the controls on BT’s retention for calls to mobiles, Oftel will retain the price control of RPI-7.5% on mobiles until July 2002. Oftel has now lifted the safeguard cap for the digital private circuits, but has retained the cap for the analogue private circuits until 2005. To this new price control, BT has responded that all retail price controls should be removed as competitive market forces will be sufficient to protect the consumers. BT will also voluntarily ensure that telephone bills will not increase above the current level. Supply of telecommunications apparatus In the early days of introducing competition, Oftel decided to liberalise the supply of telecommunications apparatus and related maintenance, wiring and connection services, allow the entrance of new competitors and balance any anti-competitive

91 Oftel (1999), Future Developments in the Competitiveness of the UK telecommunication markets, July. Oftel (2000), Price control review-possible approaches for future retail price and network charge controls, A Consultative Document, March. Oftel (2000), Price Control Review, A Consultative Document, October.

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practices in telecommunications activities (Oftel, 1985).92 In November 1984, Oftel published a consultative document ‘Effective Competition: Telecommunications Apparatus’ drawing attention to the importance of establishing effective competition in the market for telecommunications apparatus. Oftel ended BT’s monopoly on the supply and maintenance of the prime telephone in 1985 and on the supply and maintenance of extension wiring and sockets in the next year through special provisions on BT’s licence. BT was excluded from manufacturing equipment under a condition on its licence, and the company could only do so through a separate subsidiary. The Director General introduced conditions on the licences of BT and Mercury that required them to permit equipment, not manufactured or supplied by them, to be connected to their network and that they do not adopt discriminatory tactics in relation to such equipment. Under the new regulatory provisions, BT introduced new policies for providing maintenance services and for the sale of existing wiring in customers premises so that competitors PABXs (known collectively as call routing apparatus) could be attached to it. In December 1986, BT introduced and published a new scale of charges which ensured that there was no financial penalty for buying wiring rather than continuing to rent it (Oftel, 1987).93 Whilst at the beginning of 1986, the Secretary of State was responsible for the designation of standards for apparatus approval, and for the approval of apparatus and the approval of maintainers in the end of 1986, these duties were delegated to the Director General with the reservation to take into consideration the programme for the harmonisation of standards in the European Economic Community (EEC). The British Approvals Board for Telecommunications (BABT) was responsible for evaluation of apparatus. The applicants should contact the British Approvals Board for Telecommunications (BABT) for a preliminary evaluation and the testing was arranged by BABT. To speed up the procedure for apparatus approval, Oftel allowed the introduction of a scheme under which applicants for approval could make a direct arrangement with test laboratories for evaluation, dispensing with the preliminary evaluation. OFTEL allowed Mercury to provide its own public box in competition with BT in September 1987, after publishing a survey which showed only 77% of BT public boxes were in working order nationwide. The introduction of payphone standards in May 1998 also brought an end to BT’s monopoly on the supply of payphones to customers. With the publication of the white paper ‘Competition and Choice: Telecommunications Policy for the 1990s’ in March 1990, the Director ended BT’s unfair cross-subsidy of its apparatus supply business, which included the sale and rental of telephones and other equipment. Given that foreign companies were not under any restriction in the equipment manufacture or supply market, by 1994 several US equipment companies had manufacturing operations in the UK including Motorola, IBM Network Systems Division, Andrew Corporation, GM Hughes 92 Oftel (1985), Effective Competition (Telecommunications Apparatus): A Consultative Document, January. 93 Oftel (1987), Competition in Apparatus Supply, Report, June.

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Electronics and Northern Telecom (Oftel, 1994). However, compliance with technical standards was required in order to protect the interests of consumers and to prevent degradation of the quality of transmissions on public networks. Interconnection of networks The duopoly competition policy that took place in the UK until 1991 was justified on the grounds that if it was to be worthwhile, the benefits of competition, including improved efficiency, should be greater than increases in cost. Interconnection of network was introduced to facilitate this objective. Interconnection of BT and Mercury network was first introduced in 1984. Interconnection of Cellnet and Mercury network followed in September 1991. The licences of BT and Mercury provided for interconnection to take place on terms and conditions to be agreed between the two operators. If the two operators failed to reach an agreement then the terms and conditions of interconnection were to be determined by the Director General. The licence stated that interconnection should be provided so as to allow any customer on one network to telephone any customer on the other network, and allow customers to exercise choice of route (Oftel, 1985). BT was obligated to provide connections to the Mercury system at local exchanges and at trunk exchanges for use without limit. Mercury was permitted to transfer calls to BT for connections to other countries. Operators should also co-operate in the preparation of telephone directories on a cost-sharing basis (Oftel, 1985). With regard to the billing procedure it was established that each call would be included wholly in one bill to be presented by the main operator chosen. To the interconnection provision, BT responded by accelerating the investment plan in order to achieve more rapid conversion of its network to digital facilities. This regulatory framework helped Mercury by giving it lesser obligations than BT. Mercury had more freedom to pick and chose the routes on which it would provide services and the locations in which it would provide local service, while BT was under a degree of requirement to provide universal service at uniform prices. Moreover, BT’s billing system limited its practical ability to undertake tariff differentiation and this has been another factor that helped Mercury into the market place (Oftel, 1991). During the eighties, the interconnection provision allowed PTOs to retain the right of a pre-connection inspection. This meant their own personnel could carry out physical inspection of the equipment prior to making connection of call routing apparatus (CRA) under the provisions of the branch systems general licence (BSGL). Private business networks were also able to get connected to the public network under conditions contained in the BSGL. Through its licence BT was obliged to produce separate accounting information for the pricing of its apparatus supply business, namely network services, monopoly inspection and maintenance so that Oftel could police against possible price discrimination or cross subsidy. In August 1990, the Director General recommended to the Secretary of State that suitably qualified installers and maintainers should be able to connect call routing apparatus without the pre-connection inspection by the network operator. The introduction of the British Standards Institution (BSI) scheme for registration of

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installers of calling route was introduced in 1990. Registered installers could now undertake the necessary pre connection inspection without direct involvement of PTO personnel. A user who had engaged a BSI registered contractor to carry out installation could avoid the potential delay and expense of pre-connection inspection (PCI). Liberalisation of pre-connection inspection represented a significant change and conferred a significant status on a registered installer (Oftel, 1989).94

With regard to interconnection charges these were based on fully allocated costs and a return of capital determined by the Director General. In the early nineties however, it was decided that interconnect prices should also include an element for the recovery of the deficit access contributions, implying that any changes in BT’s tariff structure and BT’s funding of access deficit contribution should be reflected in interconnect charges. The regulator saw the need for detailed accounting separation between different BT businesses, given that BT remained the dominant provider of both telecommunications and network services. Accounting separation was important to allow for transparency and non-discriminatory behaviour against competitors. BT agreed to supply information on the costs related to each of its businesses, and it also agreed that services provided by one BT business to another would be offered on similar terms to non-BT businesses (Oftel, 1992).95 Therefore, for regulatory accounting purposes BT was separated into six businesses BT- Access, Network, Retail Systems, Apparatus Supply, Supplemental Systems and Residual. Despite accounting separation measurements, some extra measurements were implemented in order for the interconnection regime to be effective. These included the publication of information on BT’s network, arrangements that ensured that competing operators were not charged more for interconnection, including any access deficit charges, than BT would charge itself for supplying services to the same customers; publication of future interconnection agreements; and publication of information on BT’s cost allocation methodology (Oftel, 1992).96 Thus from 1993 to 1997 the interconnection arrangements of the UK telecoms sector involved an interim list of interconnection charges based on the BT/Mercury determination;97 a standard list of interconnection charges based on fully allocated costs using historical cost accounting conventions and transparent costs allocation procedures; Accounting separation of BT businesses;98 and, the investigation of alternative cost bases for interconnection charges including incremental costs (Oftel, 1994).99

94 Oftel (1989), Connection and Pre-connection Inspection of Call Routing Apparatus, A Consultative Document, March. 95 Oftel (1992), Policy on Separation and Interconnection, Statement, June. 96 In 1995 BT published for the first time regulatory accounts for its businesses. The company also published the Detailed Attributions Methodology Document which contained a detailed review of cost allocation rules and methodologies. 97 The BT/MCL determination based on BT’s 1991-92 cost covered a) connection charges; b) conveyance rates for local and sort and local calls (up to 56 km and over 65 km respectively) and a new rate for the use of the digital local exchange (DLE); c) access deficit contributions payable for local, national and international calls; d) waiver of ADCs for Mercury. See Oftel (1994), Interconnection and Accounting Separation: The Next Steps, Statement, March. 98 The Director General explained the purpose of accounting separation as follows: ‘to provide information on the cost base from which interconnection charges are derived and to provide the

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EU developments had a decisive impact on the UK interconnection agreements from 1997 onwards. The EU interconnection direction, when adopted in the UK in 1998, implied that any operator with interconnection rights should also have interconnection obligations and that some operators were entitled to rights and obligations to interconnect for the first time. This meant that UK interconnection rules should no longer rely on a requirement that interconnection rights should only be granted to those investing in alternative networks. Equally, from June 1999 when the licensing directive came into force in the UK, any operator who appeared on the Annex 2 list, a list which specified the operators to interconnect, was entitled to negotiate interconnection with any other operator in the list. With regard to the interconnection charges, these were based on incremental costs.100 While up to 1997, interconnection charges for use of BT’s network were set on the basis of fully allocated costs, Oftel saw the basis of long run incremental costs (LRIC) as the basis to calculate interconnection charges after 1997. LRIC are reflected by the use of current cost accounting (CCA) rather than historic cost accounting (HCA).101 Current cost accounting was seen as the appropriate basis for interconnection charges because it reflects resource costs. For economic efficiency, the prices of retail prices should be set in a way that ‘encourage consumers to take account of the resource costs of their purchasing decisions’ (Oftel, 1995). Operators would be encouraged to set efficient retail prices ‘if they could purchase a major input (interconnection) at a charge that was set by reference to the costs of the resources consumed by its provision’. Thus, if the incumbent’s interconnection charges were set on the basis of forward looking costs, efficient entry and exit of new operators could be encouraged. In recent years, the interconnection regime has extended to the internet providers. Oftel has issued two directions to BT in respect of flat rate internet access call origination (FRIACO).102 Oftel determined BT to provide an unmetered wholesale

reporting function to show that the derivation of those charges had not resulted in undue discrimination, as it will enable BT to demonstrate its access deficit and that the charging of ADCs have not been unduly discriminatory’. See Oftel (1994), Interconnection and Accounting Separation: The Next Steps, Statement, March, p.9. 99 Oftel (1993), Interconnection and Accounting Separation’ Consultative Document, June. 100 In July 1997, Oftel proposed the following controls on interconnection charges in effect from October 1997 to September 2001: No specific controls would apply on the charges for services that were competitive at the start of the charges control period. Individual caps were set at RPI-0% to apply to services which were not competitive at the beginning of the control period but they were expected to become competitive later on. The cap would ensure that BT would not increase charges for these services above the rate of inflation. Price control set at RPI-8% would apply to three groups of services which would not be competitive during the charge control period. 101 In the HCA approach the basis for the valuation of an asset is its cost at the time it was purchased. In the CCA approach the basis for valuation is the replacement of an asset, how much it would cost today if it were to be replaced. The current cost accounting was decided to be the appropriate basis for interconnection charges because it reflects resource costs. See Oftel, Pricing of Telecommunications Services From 1997, Annexes to the Consultative Document, December. 102 The Direction was the result of industry’s request after a dispute between BT and another operator. The operator claimed it was unable to compete with BT in the provision of unmetered internet access, since it was obliged to purchase call origination from BT on a pence per minute (metered) basis. The case was that if the end users used the Internet for long periods of time, ‘the ISP/terminating operator would incur greater costs, without an associated increase in revenue’. BT would be able to offset its

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service enabling other operators to supply unmetered internet access using BT’s network for call origination. Oftel argues (2001) that FRIACO is to reduce the likelihood of anti-competitive practices by BT in internet call termination and the retail market by making it more difficult for BT to leverage its dominance in call origination. According to the first direction in 26 May 2000, BT is required to provide digital local exchange flat rate internet access call origination (DLE FRIACO). This involves the conveyance of traffic from the customer to an operator’s point of connection at the local exchange. The second direction in 15 February 2001 was on the single tandem flat rate internet access call origination (ST FRIACO). The direction requires BT ‘to accept re-arrangement of its non-FRIACO traffic at any of its points of connection across the tandem network, providing this is reasonable to create capacity for ST FRIACO’ (Oftel, 2001). Oftel has taken the view that the ability to interconnect at tandem exchanges rather than local will reduce the entry costs and risks of providing unmetered internet call termination by reducing the number of interconnection points that are required. Together with interconnection of networks, interoperability of competing networks was another important aspect of delivering effective competition. Interoperability refers to the technical features of a group of interconnected systems which ensures end-to-end provision of a given service in a consistent and predictable way (Oftel, 1997). Interoperability of networks is important for allowing consumers to use new services whether or not they are customers of the operator which has launched the service, and despite the equipment customers use in their premises. In 1997 Oftel identified the services for which industry should co-operate in the launch of new services, ie, calling line identification.103 To ensure interoperability between networks the regulator determined the following: a) Technical specifications of interfaces between networks and customer premises equipment for network services should be published before launch so that operators and equipment manufacturers could prepare, b) Technical specifications of interfaces between competing networks for network services should also be published before launch; c) Operators with market power should make interconnection available for co-operative network services launched by other operators if their networks were compatible. 104

Industry responded to interoperability rules by agreeing a code of practice for new service launches and by establishing a new industry forum, the Interconnect Advisory Group (IAG). The code of practice, which was agreed between BT and all others PTOs, was formed to provide information for other operators to interconnect new services at the same time as the first mover retail launch, if they so wished. The IAG was formed to discuss generic interconnection and interoperability issues and co-ordinate industry actions on these issues.

greater costs at the retail level against a rise in revenues from wholesale call origination. See Oftel, 2001. 103 Oftel (1997), Interconnection and Interoperability, Statement. 104 Oftel (1998), Interconnection and Interoperability over Telephone Networks, Statement, April.

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The Network Interoperability Consultative Committee (NICC) also played a central role in the interconnection regime by developing an advisory role and publishing various studies on the technical aspects of interconnection and networks interface. The service provider regime A significant number of service providers and variety of services available over the fixed and wireless network could be observed in the UK telecoms market by 1996. Oftel considered this time appropriate to consult with industry and interested parties on the possibility of promoting competition in services provided over the telecoms networks, in particular by the independent service providers. Independent service providers do not own their network but use the network of others. In February 1997 Oftel announced its position on the promotion of competition of basic and enhanced services over the access network. The statement ‘Promoting competition in Services over Telecommunications Networks’ recognised the contribution made by independent service providers to the telecommunications industry as a whole, and announced measures for BT’s price charges to independent service providers, and the relationship between BT, other network operators, independent service providers and the end users.105 Specifically, with effect in April 1998 BT Services Business was classified between BT Systems Business (SB) and Supplemental Services Business (SSB). BT would provide enhanced services mainly out of its Supplemental Services Business, although in exceptional circumstances it was permitted to provide certain enhanced services from its Systems Business. BT Systems Business would provide network services, namely network interconnection and basic retail services.106 As a network operator with SMP, BT price charges to independent service providers should be non-discriminatory and cost oriented in line with EU legislation. Oftel expected BT to offer lower prices to independent service providers in order to promote competitively priced services at all levels in the value chain. These prices were not considered to be unduly discriminatory within the terms of conditions of BT’s licence. Prices should be published and targeted at a large rather than narrow group of independent service providers. A third measure provided for the enhancement of the information required to be published in the financial statements relating to the divide between BT’s Systems Business and its Supplemental Services Business. This was to allow for grater transparency in the relationship between BT and independent service providers. Finally, independent service providers were entitled to allocations of numbering capacity without the need for individual licences (Oftel, 1997). Figure 5 demonstrates the accounting separation between BT’s Systems Business and its Supplemental Services Business, and the relationship between BT, other network operators, independent service providers, and the end users.

105 Oftel (1997), Promoting Competition in Services over Telecommunications Networks, February. 106 Annex E in Oftel (1997), Promoting Competition in Services over Telecommunications Networks, February.

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IndependentService

Providers

BTSupplemental

ServicesBusiness

OtherNetwork

Operators

BTSystemsBusiness

networkinterconnectionservices

C13

PRICES

basicretail

services

RETAILPRICES

enhancedservices

basic retail& enhancedservices

ISP PRICES ISP PRICES

basic retail& enhancedservices

End Users

Figure 5: Relationship between BT, other network operators, ISP, and end-users

Source: Oftel (1997), Promoting Competition in Services Over Telecommunications Networks, p.6.

According to Figure 5, BT would offer network services in the form of basic retail services from its Systems Business to end users, independent service providers and its own Supplemental Services Business. End users would pay normal retail prices for basic retail services, but the new service provider regime expected BT to introduce lower prices for basic retail services supplied to independent service providers (which it would also charge to the Supplemental Services Business). BT would provide network services in the form of network interconnection services from its Systems Business to other network operators at charges in line with ‘Condition 13’ of its licence.107 Indirect access and carrier pre-selection (CPS) Carrier selection (CS) and carrier pre selection (CPS) refer to a system, which allows customers to choose to have their calls automatically routed to a phone company of their choice using their existing telephone line. Customers need no extra digits to dial and they can keep the same phone number. CS and CPS are both types of indirect access. As regards indirect access it refers to a situation where a customer contracts to 107 The cost based prices are set in accordance with Condition 13 of BT’s license, which requires BT to supply network services to operators with relevant connectable system status.

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buy a telecommunication service from an operator to which the customer is not directly connected and where the second operator pays the first operator for the use of that connection (Oftel, 1999). In the UK, BT and Mercury were bounded by their licences to provide competitors a facility that would enable their customers to access new operators networks either for long distance or international services. After the publication of the 1990’s white paper, the Director General examined the merits of indirect access since it could facilitate long-distance competition. In July 1996, Oftel announced that while indirect access arrangements over BT’s network were important, given BT’s dominant position in the access network, direct access to BT’s Network would adversely affect the development of competition as it would discourage competitors from building their own networks. With the publication of the EU green paper on numbering policy in November 1996, the EU announced the introduction of carrier pre selection (CPS) into two stages: •

•

from 1st January 1998, the implementation of carrier selection, ie, users are offered a simple, non-discriminatory mechanism enabling them to select the carrier of their choice on a call by call basis; from 1st January 2000, the implementation of carrier pre-selection, ie, allowing users a simple, non-discriminatory mechanism enabling them to pre-select the carrier of their choice on a permanent or default basis (CEC, 1996).108 Under the interconnection directive only operators with SMP had to offer carrier selection and carrier pre-selection.

Oftel responded to the EU provisions with the publication of its statement ‘Implementation of Carrier Pre-Selection in the UK’ in February 1999. The statement set out conclusions on the services to be offered through permanent CPS, the principles of cost recovery for CPS, and the timescales for the implementation. It was decided that CPS service should be available for all types of calls, national, international and local calls. With regard to the recovery of costs of CPS, operators with SMP should not bear all the costs of the introduction of the service but it would be a proportionate cost between the network operator, the CPS operator and the customer.109 Finally, with regard to the implementation of CPS, the UK submitted a request to the EC for a deferment in the implementation by BT of carrier pre selection for national and international calls by the end of 2000 and for all calls by 2001. The deferment was based on technical grounds since BT’s switches did not have inherent capacity for CPS and major software development was necessary by the switch manufacturers. The Interim CPS Implementation Group, which was formed in November 1997, examined alternative technical options for CPS like the deployment of autodiallers, which are equipment installed at customer premises that automatically

108 CEC (1996), Towards a European Numbering environment: Green Paper on a Numbering Policy for Telecommunications Service in Europe, Brussels, 20 November, COM(96)590. 109 It was decided that BT’s system set-up costs will be recovered through a surcharge on call origination for all relevant calls originating on BT’s network. In other words, BT and CPS operators and thereby their customers will both contribute to the cost of introducing CPS. More details on the recovering of the costs of CPS can be found in Oftel (1999), Implementation of Carrier Pre-Selection in the UK, Statement, pp. 7-13.

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routes calls to the customer’s pre-selected operator. Oftel conceded that Kingston Communications should be able to meet the obligation to offer CPS using autodiallers from 1 January 2000. CPS for national and international calls was commercially launched in respect of BT’s network in December 2000 through the use of autodiallers. This solution became known as ‘Interim CPS’ (ICPS). CPS for all calls (which means that international, national, local, mobile, special tariff, ie, freephone and local rate, premium rate and paging calls will be routed to the operator of choice) will be available from the end of 2001. Billing arrangements are an important element of the CPS system. Customers will get a bill from the network operator for line rental and any other services and calls not covered by CPS. Customers will also receive a separate bill from the other operator for calls made using CPS. In Oftel’s determination on 8th January 2001, some of the most important charges were: •

•

the charge to an alternative operator for setting up CPS on a simple residential line will be £4.46; the one-off charge for an alternative operator wishing to offer CPS would be approximately £22,700 (Oftel, 2001).110

Indirect access for mobile networks was introduced in 1998 after a dispute between Vodafone and Intelligent Network Management Services (INMS) and Vodafone’s refusal to allow indirect access to INMS. Oftel determined Vodafone to allow indirect access to INMS customers by 10th March 2000.111 The basis for the charge for the indirect access service to be supplied by Vodafone to INMS was ‘retail-minus’, ie, derived from the retail prices of the network and not on a ‘cost-plus’ basis as was the case for indirect access services provided by BT. Similarly, in July 1999, Oftel announced the obligation on Vodafone and BTCellnet to provide indirect services and the next year Oftel published the access charges to be paid by Indirect Access operators to Vodafone and BTCellnet for use of their networks. 112 It should be noted that Oftel is one of the first European regulators to mandate indirect access on mobile networks. Numbering and number portability Numbering arrangements were highly important for the creation of a competitive market. This was because the addition of any extra numbers to use the services of new competitors could inhibit competition. Numbering provisions were important for the quality of service as changes in telephone numbers could be costly, notwithstanding that some people preferred keeping the same number when they were switching operators. Due to the strong local network competition developed in the UK in the

110 Oftel (2001), Oftel Finalises Carrier Pre-Selection Charges, Press Release, 8th January. 111 Oftel (1999), Determination Under the Provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 of a Dispute between Intelligent Network Management Services (UK) Ltd (INMS) and Vodafone, December. 112 Oftel (2000), Oftel opens up BTCellnet and Vodafone Networks to New Call Service Providers, Press Release, 21 July.

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late eighties, new numbering arrangements were important at the beginning of the nineties. The Director General had the power under conditions in the operating licences of BT and Mercury to accept proposals for numbering or to determine any additions or changes.113 The duopoly review gave the Director General additional powers to determine the extent to which a PTO should develop, replace and add its numbering plan in order to meet the criteria specified in its licence. In the early nineties, Oftel adopted a critical role in administering the national numbering plan, in order to deliver consistency among the approaches of different operators.114 Oftel examined the possibility that future regulation should leave space for number portability at least to the extent a customer could change networks without changing telephone number (Oftel, 1991). In 1989, the Telecommunications Numbering and Addressing Board Limited (TNAB) was approved as the body through which PTOs should consult about proposed changes to their numbering plans. The TNAB was responsible for submitting to the Director General the results of any investigation undertaken regarding the UK numbering scheme so that the Director General could make the final determination. A report published by HMSO in March 1991 stated the future numbering scheme of the UK to be as follows: A ten-digit numbering scheme should be implemented in order to increase numbering capacity of the UK telecommunications services into the 21st century (Oftel, 1991); numbers for geographically significant termination points within the UK would adopt an extra ‘1’ to be inserted after the initial ‘0’ and before the remainder of the area code; existing codes for non-geographic services, ie mobiles, freephones, premium rates, would remain the same and reviewed in 1993. 115 Indeed, in 1993 it was decided that 05 range should be allocated directly to businesses, and all existing mobile and paging numbers should change to 07 range by 2001. Primary rate services would move to the 09 range by 1999. All the old numbers for mobile, special rate and premium rate codes have been working alongside the new numbers since September 1999. The Director General allowed three years for the shift from the old to the new numbers and after the 28th of April 2001 all calls were made only to the new phone numbers. The change to the new system took place in April 1995, the so-called PhONEday. The PhONEday changes in 1995 provided a pool of 9 billion numbers. Number changes took place in stages. When the callers called the ‘old’ number they received recorded announcements telling them that the number had changed. This was seen as important to reduce the amount of misdialled calls. A campaign called ‘Big Number’ took place in 2000. The new numbers were working alongside the old numbers for over 18 months and on the 28th of April all old codes were switched off. The area codes of designated cities changed on the 22nd of April, followed by the codes of mobiles and pagers on the 28th of April. 113 In 1989, the Director General approved BT’s proposal to change London’s code from 01 to 071/081 in effect in May 1990. In 1989, both BT and Mercury submitted proposals to the Director General for a modification of their existing numbering plans. BT wished to change the numbering of its fixed network to a ten-digit numbering plan. This would involve the insertion of the extra digit ‘1’ in each area code after the ‘0’. Mercury’s numbering plan was similar. 114 Oftel carried out a number of studies on the future numbering arrangements of the UK telecoms as part of this role. 115 Numbering for Telephone Services into the 21st Century-A report to Oftel by Ovum.

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With regard to the number portability, the results of a NERA study showed that the benefits to customers from number portability outweighed the costs. Number portability presented customers with real choice. It was decided that allocation of costs arising from number portability be distributed equally among the beneficiaries, the telephone users. Oftel appointed the Network Interfaces Co-ordination Committee with the role to advise operators of the technical arrangements required for number portability. In 1994, the Director General directed BT to allow number portability to a cable company, Videotron. Because BT and Videotron failed to reach an agreement on the commercial terms of number portability, the Director General referred the matter to the MMC suggesting that he should be responsible to determine BT’s allocation costs. The MMC concluded that the Director General could modify BT’s licence to reflect the costs of number portability (Oftel, Annual Report, 1995). The new licence condition on number portability provided the Director General with powers to direct BT to provide portability on reciprocal terms to any other operator, to determine the costs incurred by BT and to allocate these between the relevant parties. In 1997 Oftel took attempts to ensure that all fixed and mobile operators had similar obligations to provide number portability.116 By the end of 1998, the number of operators with portability increased significantly and the total of ported numbers exceed half a million. At the time of writing Oftel has published a consultative document on number portability suggesting the relaxation on the requirement on licenced operators to ensure that unlicenced service providers provide portability, and to relax the current mobility rule in order to offer companies greater flexibility to meet customers demands to keep their numbers when changing supplier and address. Of course, the UK numbering scheme was influenced by the European developments. In 1996, the EC green paper on numbering proposed that all member states should ensure the introduction of geographic, mobile and non-geographic number portability by 2000. The adoption of the two European directives, the revised voice telephony directive (98/10/EC) and the numbering directive (98/61/EC), also affected the future numbering scheme of the UK, ie, the adoption of numbering directive implied that in the future portability would be driven by the customer rather than the operator’s decision to offer portability. This directive came into force in the UK in January 2000, and it applies to all types of fixed telephone numbers except numbers for mobiles and paging services. In recent years, Oftel has been involved in the numbering scheme of freephone services. After the publication of its statement ‘Freephone Numbering’ in 1999, Oftel announced that users should retain their freephone numbers and operators should modify their systems to enable Oftel to recover substantial amounts of unused 0800 capacity. The recovered numbers would be used to create more freephone numbers (Oftel, 1999).

116 The Statement, Number Portability: Modifications to Fixed Operators’ Licences, announced new provisions requiring fixed operators to provide geographic and non-geographic numbers portability to other operators on a reciprocal basis. The Statement, Number Portability in the Mobile Telephony Market, required mobile operators to provide number portability by 1st January 1999.

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Local Loop Unbundling (LLU) and shared access to the local loop One of the key features of the telecommunications market has been that of fast change. As discussed in Chapter 2, advances in technology have transformed the telecommunications sector from one supplying simply telephony services to one delivering digital, multimedia and interactive services. Both fixed and mobile operators are presented with the problem of applying new technology to allow the provision of ‘higher bandwidth services’. Regulators are presented with the same problem too: how to regulate a market that is under vast change and maximise access of customers to the new services. The delivery of higher bandwidth services like higher-internet access, video-one demand and interactive services demands the use of new technologies. Currently DSL technology presents the best available option for delivering these services over the existing networks. Business users can already enjoy advanced services through rental of leased lines from PTOs but this option is not economical for the residential user or the SMEs. In 1998, Oftel started looking at the possibility of delivering advanced services over BT’s own direct lines, ‘the local loop’ as they serve about 85% of homes in the UK.117 The proposal since then has been that BT’s copper loops should be ‘unbundled’ and made available to other companies to provide services to customers by July 2001. Higher-bandwidth equipment, using DSL technology would be added to BT’s copper loops as part of the process of introducing competition in the delivery of advanced services over BT’s network or until other technologies would provide economically cheaper alternative options.118 119 The regulator would set out the requirements on BT

117 Oftel (1998), Access to Bandwidth: Bringing Higher Bandwidth Services to the Consumer, A Consultation Document, December, p.29. 118 At present, BT’s copper loop can carry narrowband services like basic telephony in a bandwidth of 4 kHz but with the use of the DSL technology bandwidth services can be delivered within the range of 384kbit/s up to 2 Mbit/s. Alternative options to the LLU for delivering bandwidths services are fibre to the customer’s premises, leased lines, cable modems, higher bandwidth radio, powerline, satellite, and DSL technologies but with exception the DSL technology all the others either are not developed yet, or they constitute an expensive option for residential users and SMEs. 119 Fibre to the customers premises: fibre installed directly to the customer’s premises could provide higher bandwidth access. Fibre is being used where there is a high density of demand from large volume users, but the installation of fibre to replace the local loop is considered as being a very expensive one. Leased lines: ie, BT’s Home Highway, for faster Internet access. Leased lines are used by large businesses but their prices tend to be higher than the local loop’s. Cable modems: they will provide 2 way capability as opposed to one higher bandwidth access offered currently by the cable operators. Higher bandwidth radio: radio spectrum in the region of 10GHz has been allocated to three operators in order to allow the provision of higher bandwidth fixed radio access. Despite the advantage of building easily access infrastructure, bandwidth radio brings problems of interference and costs of terminal equipment. Powerline: is a technology that delivers telecoms services via electricity distribution networks but is not commercially available at present. Satellite: whilst satellite is commonly used for the provision of one-way bandwidth capability the provision of two way higher bandwidth capability is costly due to the economies of the return path. DSL technologies: the range of DSL technologies that are available today is the only economic option for the delivery of higher bandwidth services.

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through a new condition in BT’s licence, and the loops would be made available at a cost-based price that would allow for a reasonable element of profit, ie, LRIC plus a mark up to cover common costs.120 Oftel would review the policy on LLU four years after the introduction of the scheme and every two years thereafter. Network operators welcomed the government’s intervention in the market for higher bandwidth services, but BT saw Oftel’s proposals of making local access lines available as leased lines to other operators, the pricing of those loops, and the use of the loops for telephony and to provide services to large businesses, as areas of concern for BT (Oftel, 1999). In August 2000, Oftel mandated full unbundling of BT’s local loops enabling telecoms operators to rent space in a local loop provider (LLP) exchanges, lease local access lines (the local loop) and upgrade them with DSL technology to provide a range of higher bandwidth services to end customers. The view of the British regulator has also been influenced by the European developments that proclaimed the local loop unbundling (LLU) rule to be high on the agenda of the European Commission after the 1999. The regulator had looked at the issue of LLU earlier in 1995 and 1996 in terms of basic telephony, direct and indirect access. Competitors at that time were not interested in it as the deployment of LLU would have required infrastructure investment from their behalf. Oftel’s support of LLU constitutes a major policy change for increased competition in the local access network, which is also reflected on the EU regulation on LLU. Shared access constitutes another regulatory provision targeted at accelerating competition in the provision of higher bandwidth services. Shared access allows analogue telephony and high-speed data services to run on the same metallic loop through different frequencies. It allows two different operators to offer services on the same loop, one providing voice telephony and the other data services. To avoid interference of the different frequencies the regulation requires that the loop is split into two portions: • •

one containing the frequencies necessary to provide analogue telephony; one containing all the higher frequencies which a competing operator can use (Oftel, 2000).121

With regard to the pricing of the shared loops, Oftel has determined that the price of the local loop will be cost-oriented and set on the basis of LRIC plus a mark up. The starting charge could be geographically averaged but BT is also entitled to ask for geographically de-averaged prices. Four industry groups were set up to deal with the issue of LLU. In order to deal with the potential surge of orders, industry and BT agreed on the ‘bow wave’ process which uses operators priorities to determine the order in which BT prepares sites for co-location and the allocation of spaces. The bow wave process was run in September

120 Operators taking an unbundled loop from BT will pay £122 per annum plus a connection charge of £88. The connection charges for the internal tie cables that connect the loops in exchanges to operators’ equipment are £21 per annum plus a connection charge of £863. The connection charge for distance location cables is £674, to which a pre-occasion charge of £142 maybe required to cover the set-up and costs of jointing the distant location internal tie cables to the external one. See Oftel (2001), Local Loop Unbundling Fact Sheet, May. 121 Oftel (2000), Access to Bandwidth: Shared Access to the Local Loop, Statement, December.

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and December 2000 when 381 sites and 360 were selected respectively. The process was suspended in 2001 so that operators can order co-location facilities on a business basis. Currently, trial sites have been set up at Battersea, Edinburgh, Belfast and Leeds and five distant location sites were completed by BT during April 2001 in Ardwick, Cosham, Heaton Moor, Havant and Urmston. A further 41 offers have been accepted by operators for distance location sites and the sites are expected to be completed by July 2001, with a further of 211 orders to be sent to operators by June 2001 (Oftel, 2001).122 Figure 6 offers a schematic view of the full unbundling of the local loop in the UK.

MDF

IncumbentAnalogueTelephony

PCP

PCP= Primary Connection PointMDF= Main Distribution Frame

Figure 6: Local Loop Unbundling

Local Exchange

BEFORE

IncumbentAnalogueTelephony

PCP

PCP= Primary Connection PointMDF= Main Distribution FrameOLO= Other Licenced Operator

OLO Equipment

AFTER

MDF HDF

122 Oftel (2001), Local Loop Unbundling Fact Sheet, April.

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Before Local Loop Unbundling, each pair of copper wires run from the customer’s home to the primary connection point (PCP). The PCP’s are the cabinets that are located at the side of the road. The PCP connects the wires from the customer’s home to a pair of wires from the exchange. Inside the exchange the wires in the external cable are terminated on the main distribution frame (MDF) and then are connected to the internal exchange equipment (Oftel, 2001, Fact Sheet, p.5). After Local Loop Unbundling, inside the exchange the wires are connected to the main distribution frame (MDF). They are then connected via an internal tie cable from the MDF to the handover distribution frame (HDF) which is adjacent to the other licensed operator’s (OLO) equipment. The handover distribution frame (HDF) is used to terminate the cable from the exchange and to make the pairs available to the operator (Oftel, 2001, Fact Sheet, p.5).

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5 Convergence – future policy and strategies We currently experience the development of knowledge driven economy. Telecommunications play a critical role in the development of the modern economy. The capacity of fixed and wireless networks has increased by rapid technological advances which allows networks to provide narrowband and broadband services. Typical communications’ medium like voice, images and broadcasting now converges with information technology. The internet plays a central role in the creation of a mass market. By using telecoms networks, the internet has the potential to change substantially the way in which businesses and ordinary citizens communicate, exchange information, learn, shop, make exchanges and participate in modern society. To this newly created and rapidly changing communications environment, the British and the EU governments have recognised the need for reform in policy strategy and regulation of the communications sector. Reform is important to support efficiency of the market, and protect the interests of consumers and market players. Oftel strategy At a time of rapid change, Oftel published its regulatory strategy in January 2000.123 In it, Oftel recognises that up to date regulation has focussed on managing the transition from a state-owned monopoly towards a competitive market. Despite that, competition has grown significantly in different market segments but not all market segments are effectively competitive yet. Accordingly, Oftel’s main goal is to offer the best deal for consumers in terms of choice, quality and value for money. The new strategy will ensure that regulation is only imposed where it is justified and that it is appropriate to the level of competition in the market. Oftel shall be clear where and why it needs to regulate as unjustifiable regulation can distort or undermine competition. Oftel sees competitive markets, which have incentives to innovate and invest, to be the best way of meeting consumer needs. This strategy is one of ‘competition plus’ where competition is the key driver to obtain the best deal for the consumer.124 Telecoms regulation will be progressively reduced and the telecoms market will be governed increasingly by the same legal requirements that are placed on other industries in the economy rather than through telecoms specific regulation (Oftel, 2000). To be able to implement this strategy and keep regulation to the minimum, Oftel will set up reviews of individual telecoms market segments to determine whether they are effectively competitive. Oftel will focus on market segments which it currently

123 Oftel (2000), Oftel Strategy Statement: Achieving the Best Deal for Telecoms Consumers, January. 124 ‘Competition plus’ recognises that, given the nature of telecoms networks and the critical role of telecoms services for users, there are circumstances where some formal or informal regulatory action is needed to protect consumers’ interests in addition to the achievement of effective competition. An example is the provision of universal telecommunications service.

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regulates, ie operators with SMP, operators who have control of networks or gateways. It will then carry out cost-benefits analyses of market segments based on the criteria of low price, high quality of service, reasonable choice and substantial innovation (Oftel 2001).125

Overall, Oftel will assess the effectiveness of competition based on two principles: • the extent to which effective competition in the market segment is feasible and

working; • assessment of the outcomes for consumers to establish whether they are getting

benefits consistent with an effectively competitive market (Oftel, 2000). An internal Oftel working group will be established to carry out the reviews, made up of different expertise. It initially will identify the market to be reviewed and the information which will be required for assessing competition. The time for the completion of the review will depend on the complexity of the review with a minimum period of 36 weeks. Oftel will issue a paper announcing the commencement of a market review, and it will then proceed with analysis of the market information to establish as to whether there is effective competition in the specified market. The assessment period will involve meetings with stakeholders. Oftel will issue a consultation document setting out its initial assessment of the effectiveness of competition in the market. Stakeholders will be required to respond within three months to the consultation document. Oftel will issue a statement setting out the result of the effective competition review and the policies which Oftel will follow as a result of the consultation period. A review of each market segment will be held every two years (Oftel, 2000).126 Another element of Oftel’s strategy of reducing regulation is the search for alternative approaches to formal regulation such as co-regulation or self-regulation. Self-regulation will be based on voluntary co-operative actions between stakeholders, and co-regulation will be based on stakeholders, like consumer groups, industry players and others with interests in telecoms, working with the sector regulator. The use of either approach will depend on whether stakeholders have a greater co-incidence of interests.127 EU strategy The EU started reviewing its regulatory framework during 2000 in order to ensure that new harmonised regulation will serve the fast market developments. Six proposals were drafted in 2000 by the European Parliament and the Council and are expected to come into force in 2002-2003. The new directives will include:

125 Oftel (2001), The Benefits of Self and Co-regulation to Consumers and Industry, Publication, July. 126 Oftel (2000), Implementing Oftel’s Strategy: Effective Competition Review Guidelines. 127 The co-regulation approach, already in place in the premium rate services, did not offer customers sufficient protection. Formal regulation was introduced in the shape of license conditions to safeguard the interests of consumers.

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• •

• •

•

• •

•

•

•

•

•

•

•

a common regulatory framework for electronic communications and services; the authorisation of electronic communications networks and services, access to, and interconnection of electronic communications networks; universal service and users rights relating to electronic communications; the processing of personal data and the protection of privacy in the electronic communications sector; regulation on unbundled access to the local loop (cf. Table 5).

This new EU regulatory framework strives to achieve the following objectives:

to cover all electronic communications networks and services; to ensure consistency of regulatory action across the EU through the employment of legal mechanisms and the development of a ‘European regulatory culture’. As such, the new provisions will require the NRAs to co-ordinate their actions with each other; NRAs will become independent and empowered to impose penalties for inadequate provision of information, conduct inspections and search premises; the concept of SMP will be applied by the NRAs based on the case law of the Court of Justice; the Commission approach to standardisation is to rely on voluntary standards developed by industry, but to maintain powers to make standards mandatory where justified; replacement of individual licences with a system of general authorisations.128

UK government The UK government response to the new communications environment was published in its white paper ‘A New Future for Communications’ on 12 December 2000 (Cm5010). The government’s proposals mainly considered:

the promotion of the internet and higher bandwidth services high in the governmental agenda; the creation of a new regulatory body, the Office of Communications (Ofcom) to regulate telecommunications, television and radio in the information age; and the transition from regulation to self- and co-regulation in the communications sector.

In the era of enhanced services, it is important that customers have access to them, and the white paper set out the objective of universal access of consumers to television, telephone, radio and the internet. Accordingly, public TV channels should be made available to the public even when they switch to digital television. BT will be obliged to provide a connection to the fixed network, a light user scheme, a limited service scheme and a text relay service for people with hearing impairments. All operators will be obliged to offer free emergency calls, and directory enquiry services. Access to the internet remains at the heart of the governmental agenda with a task to ensure universal internet access by 2005. The UK government will retain public service broadcasters’ independent productions obligations and it will develop a

128 COM (2001) 380.

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spectrum plan to take effect on digital switch-over with the intention of giving a clear indication of long term prospects for local television services. The BBC’s, S4C’s and ITV companies obligations will continue to apply but Channel 4’s and 5’s public service will be reviewed as to ensure innovative and digital programming in the future. The new broadcasting provisions illustrate the key role of public service broadcasting in the digital future. Spectrum management becomes a critical issue in the communications sector as many of the new services will be delivered over radio and television. Thus, the white paper provided for companies to trade spectrum and for the government to value the spectrum used by broadcasters. A new unified regulator emerged out of the white paper. The new regulator will combine the existing functions of the Broadcasting Standards Commission, Independent Television Commission, Oftel, the Radio Authority, the Radiocommunications Agency and possibly the video classification function carried out by the BBFC. Table 7 summarises the regulatory bodies in the UK after the white paper proposals have been implemented.

Table 7: The new regulatory bodies for the communications sector

CURRENT REGULATORS OF ELECTRONIC

COMMUNICATIONS SECTOR

REGULATORY BODIES AFTER WHITE PAPER PROPOSALS ARE

IMPLEMENTED Broadcasting Standards Commission Independent Television Commission

Oftel Radio Authority

Radiocommunications Agency

OFCOM

BBC Board of Governors British Board of Film Classification

Office of Fair Trading Sianel Pedwar Cymru (S4C)

BBC Board of Governors∗ British Board of Film Classification

Office of Fair Trading Sianel Pedwar Cymru (S4C)

∗but with modified responsibilities

Source: A New Future for Communications (2000), (Cm5010) p.78. Ofcom would have concurrent powers with the Office of Fair Trade (OFT) to exercise general competition powers but it would also exercise sector specific economic regulation, and would be responsible for spectrum management. Ofcom will have the duty to roll back regulation in sectoral areas with increased competition. The sector specific powers which were assigned to the new regulatory body were seen important in light of the EU regulatory framework which introduced consistency in regulation of broadcasting and telecommunications. Ofcom would be responsible for establishing interconnection issues, protecting consumer rights, take action against unfair cross-subsidies and prohibit undue discrimination against competitors. With regard to consumer interests, Ofcom will have the principal duty to protect them and to take action against the industry if it does not develop an efficient consumer protection regime. Ofcom should ensure that there is an effective and accessible machinery for consumer redress, in the form of an ombudsman or something similar,

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if action by industry does not meet this need. A consumer panel will also be established to make the role of the new regulator more transparent. The panel will advise the regulator, seek research on consumers’ views, represent them to Ofcom and publish results from research. A telecommunications ombudsman is already under its way. The body will act as the mediator of arising disputes between consumers and operators. It will have the power to award compensation and at present Oftel has proposed a maximum value of £5000 for residential customers.129 The telecoms ombudsman will be established as a separate company and governed by a governing board comprised of ‘public interests’ members’. The development of this body in the UK has been very much determined by European regulation as the revised voice telephony directive (directive 98/10/EC) provided members states to appoint a third party to resolve disputes between customers and operators.130 Regulators and industry have responded positively to the white paper proposals. The Radiocommunications Agency welcomed the creation of a new independent statutory regulatory body and the provisions related to radio spectrum management. A single body with a broad range of expertise and vision will provide more effective, coherent and flexible regulation across the whole range of the new sector. Effective management of radio spectrum will deliver consumer benefits and increase the competitiveness of the UK economy. In support of the government’s white paper, the ITC launched two public consultations on public and regional service broadcasting. The results, which were strongly in favour of continuing support for both public service broadcasting and regional programmes, had been endorsed by the government and later reflected in the white paper. Industry groups and committees have welcomed the creation of a single regulatory body, but they have expressed differing opinions about the main responsibilities of the new regulator. For instance, the Spectrum Management Advisory Committee has welcomed the prospect of one regulator which controls the total supply of the UK spectrum, has full responsibilities for ‘transport’ and ‘content’ regulation, and practices spectrum policy subject to international benchmarking activity.131 The British Radio & Electronic Equipment Manufacturers Association (BREMA) saw in the new regulator the potential of increasing competition and protecting the interests of consumers by economic regulation that maximises interoperability and platform access for services providers. BREMA has argued against content regulation for independent broadcasters as opposed to the public broadcasters and has claimed that the current multi-headed approach of regulators should be replaced with a strong management from the centre that will manage the transition from analogue to digital television during this decade. On the 28 March 2001, the five communications regulators agreed to work closely together towards the development of Ofcom by sharing information and developing together policy related issues. 129 Oftel (2001), Developing a Telecommunications Ombudsman, Consultation Document, March. 130 The revised voice telephony directive also says that it must be possible to bring disputes before the national regulatory authority or another independent body – in other words, it is not mandatory to have an ombudsman. 131 ‘Transport’ regulation refers to infrastructure regulation and ‘content’ regulation to the laws of privacy and copyright.

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At the time of writing, the Office of Communications Bill has been introduced in the House of Lords as result of the government’s decision to: • • •

establish the Office of Communications; give Ofcom a preparatory function; place the existing regulators under a duty to assist towards the preparation of Ofcom.

The Bill proposes the establishment of Ofcom as a statutory corporation. It sets out the functions of Ofcom, the functions of existing regulators, and the finances and organisation of Ofcom. It does not give Ofcom powers to exercise any regulatory functions in relation to the communications sector. These functions will be set out in the Communications Bill. The single function of Ofcom will be to prepare to assume functions at a later stage. Ofcom will be involved in making transitional arrangements, ie, transfers of staff, property and other rights and liabilities when the Communications Bill will come into force. Meanwhile, all the regulatory functions will be exercised by the existing regulators. The Bill imposes a duty upon existing regulators to comply with directions by the Secretary of State to prepare schemes for transfer to Ofcom of their property, rights and liabilities when the regulatory functions are ready to be transferred to Ofcom. The Secretary of State may provide for the dissolution of Ofcom if the Secretary of State considers that it is no longer necessary for Ofcom to continue to exist because of the abandonment or modification of proposals about the regulation of communications. The Government would expect the costs of Ofcom to be met almost entirely from the sector it regulates. The Government will share with industry the cost of initial establishment, in the form of an advance or an initial grant in aid. Final remarks Following the above discussion it is apparent that the UK government and the EU examine different policy approaches (ie, co-regulation, self-regulation) to regulate telecommunications than the traditional form of regulation. In this vein, the Better Regulation Task Force group was established to advise the UK government on action which improves the effectiveness and credibility of government regulation. A primary objective of the group has been to assess whether economic regulators are as effective as they are expected to be and to what extent the level of regulation could be reduced.132 Figure 7 sums up how regulation in the telecommunications sector is likely to change as competition intensifies.

132 Better Regulation Task Force (2001), Economic Regulators, July.

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CONSTANTINA BICHTA

Formal Regulation*

Market Forces

Self-regulation*Co-regulation*

* Note that newregulation maybegin at any ofthese levels

Figure 7: How regulation changes ascompetition develops

Source: Oftel (2001), The benefits of self and co-regulation to consumers and industry, July, p.4.

Clearly, the telecommunications sector moves dynamically into the new century with provisions allowing for selling of spectrum to competitors, equal access to local loops leased by national operator, and increased presence in the international market through alliances of the European national champions. At the beginning of the century, however, the industry suffered not only nationally but internationally. Many market and industry analysts attribute the falling of industry sales to the recession in the American market, and the decline of consumer preference for technology related products. The telecoms industry was weak and exhausted already well before the market entered into recession as a result of the high bids that took place among the telecoms operators for the third generation mobile licences (3G). In the UK, the bid was estimated to cost a total of US$5 billion and the final sum which was paid amounted to US$32.26 billion. 5 licences were granted to Hutchison 3G TIW, Orange, Vodafone Airtouch, One 2 One, BT3G. This bid left BT with a huge debt and its profit fallen from £2,942m in 2000 to -£1,031m in 2001. To these financial difficulties, BT responded by restructuring of its business, management, and separation of wholesale and retail businesses in order to elevate the regulatory burden from its retail operations. The company has also proceeded with the selling of some of its most profitable businesses: In May 2001, BT sold its directory business Yell, to a US consortium led by Apex Partners. At present, BT is considering selling its 26 per cent stake in French telecoms company Cegetel, which is worth £2.5 billion. Despite a few earlier announcements, it seems that BT will keep BT Cellnet’s 6,000 mobile mast sites, with the hope that their value will increase as demand grows for new generation mast sites (Utility Week, 2001).133 BT has also announced the demerger of BT wireless, the international mobile business, towards the end of 2001, which is to be renamed ‘O2’. Financial difficulties have also hit other fixed and mobile market operators. In March 2001, Cable & Wireless announced that it will cut 4,000 jobs by the end of 2002 as

133 ‘Sales flurry at BT, but share price still falls’, Utility Week, Friday 8 June 2001, p.10.

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the profit projections for the year 2001 had not been fulfilled. Ericksson predicted losses of up to 543 million (Euro) for this year and Motorola announced the laying-off of 7,000 employees (Utility Europe, 2001).134 Hoping to reduce the investment needed to set up the 3G mobiles, telecoms companies are currently in discussion with each other to share investment in masts and base stations. BT Wireless’s Cellnet will co-operate with Deutsche Telekom’s One 2 One in masts and base stations investment in Britain, while in Germany BT’s Viag Intercom unit and Deutsche Telecom’s T-Mobil will also work together. Market analysts predict that for the 3G mobile generation to happen, network sharing will be a key issue (The Guardian, 2001).135

Figure 8 shows how the shares of the utility sectors moved during May and June 2001.

30 31 129

102

101

100

99

95

98

97

96

94

May June

TelecomsAll ShareWaterElectricityGas

%

Figure 8: Weighted Utility Indices and FT-SE-A All-Share

Source: Utility Week, Friday 8 June 2001, p.24.

It is a fast changing world, and it is fascinating that consumers are able to explore the new products made available to them by advances in technology. The critical question and main challenge for the government is how fast can it respond to and regulate technology so that it provides a fair playing field for both its citizens and the industry. 134 ‘No end of woes for telecoms’, Utility Europe, April 2001, p.10. 135 The Guardian (2001), ‘BT ponders going Dutch on 3G costs’, July 24, p.24.

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REFERENCES Legislation and statutory instruments Broadcasting Act 1990, Chapter 42. Broadcasting Act 1996, Chapter 55. Competition Act 1998, Chapter 41. Competition and Service (Utilities) Act 1992, Chapter 43, London: HMSO. Competition and Service (Utilities) Bill, 1991. Electronic Communications Act 2000, Chapter 7. Telecommunications (Fraud) Act 1997, Chapter 4. Telecommunications Act 1984, Chapter 12, London: HMSO. Government publications Department of Trade and Industry (1990), Competition and Choice: Telecommunications Policy for the 1990s, A Consultative Document, London: HMSO, Cm1303. Department of Trade and Industry (1991), Competition and Choice: Telecommunications Policy for the 1990s, London, HMSO, Cm1461. Department of Trade and Industry (1999), Communications Liberalisation in the UK: Key Elements, History & Benefits. Department of Trade and Industry and Department of Culture, Media and Sport (2000), A New Future for Communications Cm5010. Littlechild S C (1982), Regulation of British Telecommunications’ Profitability, London, Department of Industry. EC documents Some of the following documents are available on line at http://europa.eu.int/information_society.

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http://europa.eu.int/information_society


CEC (1996), Towards a European Numbering Environment: Green Paper on A Numbering Policy for Telecommunications Services in Europe, Brussels, 20 November, COM (96) 590. CEC (2000), Proposal for a Directive of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services, Brussels, 12 July, COM (2000) 393. CEC (2000), Sixth Report on the Implementation of the Telecommunications Regulatory Package, Communication from the Commission to the Council, the European Parliament, The Economic and Social Committee and the Committee of the Regions, Brussels, 7 December, COM (2001) 814. CEC (2000), Unbundled Access to the Local Loop: Enabling the competitive provision of a full range of electronic communication services including broadband multimedia and high speed internet, Communication from the Commission, Brussels, 26 April, COM (2000) 237. CEC (2001), The introduction of Third Generation Mobile Communications in the European Union: State of Play and Way Forward, Communication from the Commission to the Council, the European Parliament, The Economic and Social Committee and the Committee of the Regions, Brussels, 20 March, COM (2001) 141. EC (1999), Status Report on European Union Electronic Communications Policy, Brussels, 22 December. EC (2000), Europe’s Liberalised Telecommunications Market – A Guide to the Rules of the Game, 18 October. British Telecom British Telecom (1985), Reports and Accounts. British Telecom (1986), Reports and Accounts. British Telecom (1987), Reports and Accounts. British Telecom (1988), Form 20-F, Annual Report. British Telecom (1988), Reports and Accounts. British Telecom (1989), Reports and Accounts. British Telecom (1990), Annual Report on Form 20-F. British Telecom (1990), Annual Review. British Telecom (1993), Annual Review and Summary Financial Statement.

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British Telecom (1997), Annual Reports and Accounts. British Telecom (1999), Annual Report and Form 20-F. British Telecom (2000), Annual Report and Form 20-F (also available online at http://www.groupbt.com/investorcentre/reports.htm). Mercury Communications Ltd Mercury (1992), Financial Statements. Mercury (1992/3), The Annual Reports and Accounts. Mercury (1993/4), Annual Reports and Accounts. Mercury (1994/5), Business Review. Oftel publications Some of Oftel’s publications are available online at http://www.oftel.gov.uk. Oftel (1985), Annual Report. Oftel (1986), Annual Report. Oftel (1986), Prices of Accesslines and Private Circuits (Leased Lines), A Consultative Document, 9. Oftel (1987), Annual Report. Oftel (1987), Competition in the Supply of PABx Enhancements, Report, 24. Oftel (1987), PTO Contract Terms and Conditions, A Consultative Document, 16. Oftel (1988), Annual Report. Oftel (1988), Responses to Oftel’s Consultative Document on the Future Regulation of British Telecom’s Prices, Working Paper, September, No.3. Oftel (1990), Annual Report. Oftel (1990), Liberalisation of the British Telecommunications Industry, A Chronology of Events, July, Oftel Library. Oftel (1991), Annual Report.

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Oftel (1991), Proposed Modifications to the Licences of British Telecommunications Plc and Mercury Communications Ltd, Statement, 10 May. Oftel (1991), The UK Duopoly Review-What it means for Business Users, 10 July. Oftel (1992), Annual Report. Oftel (1992), Liberalisation of the British Telecommunications Industry, A Chronology of Events, July, Oftel Library. Oftel (1992), Telephone Numbering: The National Code Change, Statement, July. Oftel (1993), Annual Report. Oftel (1993), Future Controls on BT’s Private Circuit Prices, Statement, 17 February. Oftel (1993), Interconnection and Accounting Separation, Consultative Document, June. Oftel (1994), Annual Report. Oftel (1994), Competition in the UK Telecommunications Market, 4th August. Oftel (1995), Annual Report. Oftel (1995), Effective Competition: Framework for Action: A Statement on the Future of Interconnection, Competition and Related Issues, July. Oftel (1996), The Methodology to Calculate Long run Incremental Costs, March. Oftel (1996), Network Charges from 1997, A Consultative Document, December. Oftel (1996), Network Charges from 1997, Annexes, A Consultative Document, December. Oftel (1996), Oftel’s Policy on indirect access, equal access and direct connection to the access network, Statement, July. Oftel (1996), Pricing of Telecommunications Services from 1997, Second Consultative Document on BT Price Controls and Interconnection Charging, March. Oftel (1996), Promoting Competition in Services over Telecommunication Networks, A Consultative Document, February. Oftel (1996), Promoting Competition in Services over Telecommunication Networks, Statement, June. Oftel (1996), Reconciliation of the Top Down and Bottom Up Incremental Costs Models, Final Report, December.

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Oftel (1997), Annual Report. Oftel (1997), Joint Oftel and DTI Notice and Consultation, July. Oftel (1997), Promoting Competition in Services over Telecommunications Networks, Statement, February. Oftel (1998), Access to Bandwidth: Bringing higher bandwidth services to the consumer, A Consultation Document, December. Oftel (1998), Interconnection and Interoperability: A Framework for Competing Networks, April. Oftel (1998), Rights and Obligations to Interconnect Under the EU Interconnection Directive, A Consultation Document, March. Oftel (1999), Annual Report. Oftel (1999), Access to Bandwidth: Delivering Competition for the Information Age, Statement, November. Oftel (1999), Customer Choice: Oftel’s review of indirect access for mobile networks, A consultative Document, February. Oftel (1999), Guidelines on Interconnection and Interoperability, July. Oftel (1999), Implementation of Carrier Pre-Selection in the UK, Statement, February. Oftel (1999), Rights and Obligations to Interconnect Under the EU Interconnection Directive, Statement, April. Oftel (1999), Statement on Responses to the Oftel Statement on Provision of Directory Information Services and Products published on 25 September 1998, May. Oftel (2000), ‘More competition and choice with carrier pre-selection’, Oftel News, Issue No.50, December, p.13. Oftel (2000), Consultation on Modified Functional Specifications for Carrier Pre-Selection, 23 October. Oftel (2000), Determination under Condition 50A.7 of the licence of British Telecommunications PLC relating to ‘Interim’ Carrier Pre-Selection, November. Oftel (2000), Determination Under Provisions of Regulation 6(6) of the Telecommunications (Interconnection) Regulations 1997 To Determine Final Charges The Provision of Indirect Access (“IA”) Services by Vodafone Ltd (“Vodafone”) to Intelligent Network Management Services (UK) Ltd (“INMS”), July.

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Oftel (2000), Price Control Review, A consultative document issued by the Director General of Telecommunications on possible approaches for future retail price and network charge controls, March. Oftel (2001), Revisions to the Number Portability Functional Specification, A Consultative Document, June. Oftel (2001), Final Determination on Costs and Charges for Permanent Carrier Pre-Selection, 8 January. Oftel (2001), Local Loop Unbundling Fact sheet, May.

Oftel (2001), Notice of a Proposed Determination Under Condition 50A of BT’s Telecommunications Act Licence, 4 May. Oftel (2001), Proposals for Network Charge and Retail Price Controls from 2001, Statement, February. Oftel (2001), Big Number Campaign ends as Old Codes Switch off, Press Release, 24 April. Oftel (2001), Oftel’s 2001/01 Effective Competition Review of dial-up Internet Access, 30 July.

General publications Foster R (undated), Telecommunications liberalisation in the EC: the Next Steps? NERA, Topics, Issue 5. Fox M (2001), Telecommunications Regulation, in Vass P (ed), Regulatory Review 2000/1: Millennium edition, CRI, University of Bath, pp.111-127. Harper J (1997), Monopoly and Competition in British Telecommunications: The Past, the Present and the Future, Pinter: London. Intelidata (1992), Telecommunications Source Book, UK. Telecoms (2001), ‘BT high speed mobile web set back’, Utility Week, Friday 25 May, p.5. Thatcher M (2001), The EU Commission and National Governments as Partners: EC Regulatory Expansion in Telecommunications 1979-2000, LSE, UK. Press notices Available online at http://news.bbc.co.uk and http://www.independent.co.uk.

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http://news.bbc.co.uk/

http://www.independent.co.uk/

CONSTANTINA BICHTA

BBC News online, ‘Telecom hit by 3G costs’, 23 January 2001. BBC News online, ‘Orange share price cut’, 7 February 2001. BBC News online, ‘The rise and fall of BT’, 20 March 2001. The Independent, ‘BT Chief steps down’, 26 April 2001. The Independent, ‘Telecity shares lose 53% as demand falls’, 5 May 2001. The Independent, ‘BT makes history with £6bn deeply discounted rights issues’, 10 May 2001.

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APPENDIX General statistics on the telecommunications industry Figure A1: Penetration of technologies by ‘have’ and ‘use’ at home in W. Europe

0 10 20 30 40 50 60

Mobile phone

Desktop PC

Cable TV

CD-ROM drive

Game console

Satellite dish

Internet connection

Fax (stand-alone)

Digital TV

ISDN line

Laptop computer

DVD player

Personal organiser

Personally use athome

Have at home

Figure A2: Mobile and Internet Penetration in EU and USA

0

10

20

30

40

50

60

0 20 40 60 80 10

Mobile penetration %

Inte

rnet

pen

etra

tion

%

0

USA

Greece Portugal

Spain

FinlandSwedenNorway

UKDenmark Switzerland

Netherlands

IrelandBelgiumJapan

France Germany AustriaLuxembourg

Italy

Source: European Information Technology Observatory 2001, Financial Times, 27 June.

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CONSTANTINA BICHTA

Basic provisions of the duopoly review •

•

•

•

•

•

•

•

•

•

•

•

The ending of the duopoly competition policy between the two fixed trunk network operators, BT and Mercury. The government would consider any new application for a licence to offer telecommunications services. In respect of international operators the government was inclined to consider applications from new licensees willing to provide a full range of international telecommunications services. In light of satellite services, a new class licence allowed for the provision of satellite services, both domestically and internationally, via systems which were not connected to the public switched network at either end. The Radiocommunications Agency was assigned with the role of granting the licences for these systems. Restrictions on the services provided via international leased circuits were lifted and international simple resale services were permitted only between the UK and other countries with similar regulatory regimes. A new class licence for self- provided circuits allowed operators to connect to the public switched network, to private circuits rented from other operators and to any other self-provided circuits. The duopoly review liberalised maritime services. New operators could compete with BT in maritime services provided they had the equipment and trained personnel to handle Morse telegraphy. In terms of licensing new operators, an applicant for a licence in one area which was referred to in the duopoly review was not precluded from applying for a licence in more other areas. Cable operators could provide telephone services at their own choice and not under arrangements with the PTOs. Mobile operators were allowed to offer fixed services using their radio networks.136 The Telepoint operators were allowed to provide neighbourhood Telepoint services within radio frequency parameters to be determined by the Radiocommunications Agency.137 The duopoly review retained the prohibition on fixed operators to offer mobile services on their own right despite the liberalisation of mobile operators to provide fixed services. Broadcasters including the BBC were allowed to convey services to closer user groups (ie, independent radio stations) through the granting of an additional services licence issued by the Independent Television Committee (ITC) or the Radio Authority. The government did not remove the restriction on BT, Mercury, Kingston Communications and other national PTOs from conveying entertainment services in their own right until the 2000. From 1 April 1994, the national PTOs were able to tender in their own right for a local delivery service licence for any part of the country not at that time covered by a cable or local delivery licence.

136 These services included telemetry, temporary communication services for events and conferences, transmission of travel information to bus stops or motorway gantries. 137 Neighborhood Telepoint services refer to direct radio links from a basestation to an office using CT2 technology.

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The price control arrangements for BT’s residential, single line business, exchange line rentals and connection charges remained at RPI-6.25%. The price cap for multi-line business and wholesale exchange line rentals and connection charges increased from RPI+2 to RPI+5.

•

•

•

•

•

The price cap was rebalanced from PRI-4 ½ to RPI-6 ¼ to include the international services. The price cap for multi-line business and wholesale exchange line rentals and connection charges increased from RPI+2 to RPI+5. The pricing policy of the duopoly review allowed operators to revise their interconnection agreements or to introduce access charges so that access charges could spread the costs across the whole industry provided these costs were distributed equally between operators. The provisions of interconnection of systems, equal access in both the trunk and local markets were introduced. The duopoly review saw a competitive environment as being better served with the further development of the assets of the public-sector utilities for telecommunications purposes.

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