Oftel slated for dragging its feet on local loop unbundling as BT continues to reign

As new super-regulator Ofcom is set up to regulate the market from 2002, Jon Robins asks whether it will fare any better?

There has been little solace for those ever-hopeful telcos hanging in for a slice of Broadband Britain of late. Not least when the Oftel director-general was recently asked whether the unbundling of the local loop would have been any quicker under the new super-regulator Ofcom.
“I suspect not,” director-general David Edmonds bluntly told a Parliamentary committee in June. “We're dealing with the private sector, which has duties and responsibilities towards shareholders. I suspect there's little we could – or should – have done differently.”
“Things could be different under Ofcom if there was – dare I say it – a more aggressive approach to competition,” commented Colin Long, joint head of Olswang's telecoms group. “It very much depends on how Ofcom operates, what it sees as its political imperative and how driven it is.” This week Long appears at the European Commission (EC) on the local loop sectoral inquiry.
Edmonds said that Oftel last week “strengthened its commitment to using the Competition Act”. He believes “appropriate regulation is at the heart of Oftel's work. And where competition is effective, I'm committed to reducing regulatory intervention.
“However, where a company's behaviour threatens competition, tough measures are necessary to protect the interests of consumers.”
It is a message that will be taken with more than a pinch of salt by industry commentators who have watched the progress of the deregulation of the local loop.
“He's had two years to translate theory into practice and hasn't taken many opportunities so far,” Long said.
Other telecoms lawyers are more direct. “He's not prepared to beat up BT the way they need to be beaten up,” commented one. “He's just been a paper-pusher.”
The local loop unbundling (LLU) was aimed at introducing competition on the telephone lines linking BT's local exchanges to homes and businesses. The process was intended to open the broadband dam. That was the theory at any rate, and now only a fraction of the 40 operators who originally signed up for LLU are left in the picture.
“Clearly, BT had no interest in just opening up its house and giving everything away,” said Vincent Pickering, a lawyer at Bulldog Communications, one of three remaining operators still involved. Last week his company announced an agreement to supply BT Wholesale Markets with symmetric digital subscriber line (SDSL) services. It comes as something of a surprise, as the company has been one of BT's most vociferous critics.
“We're not Bulldog, we're underdog,” commented Bulldog chairman and CEO Richard Greco last February, when he feared that BT would drive him out of business.
Clearly, Pickering is delighted to have signed on the dotted line, but acknowledges that it has been a “messy, long and complicated process”. It is one that Bulldog has had to fight every inch of the way.
Pickering cited, by way of example, the company's fight to gain access to telephone exchanges that it sought as part of the unbundling deal. BT argued that operators would have to put equipment outside its buildings for safety reasons. Eventually, Oftel intervened and ruled that Bulldog could have, subject to some caveats, unescorted access.
“But the toing and froing just went on for months and never came up with any concise answers,” Pickering noted. “Oftel hasn't distinguished itself in this arena and they've shied away from taking the tough decisions.”
Oftel did give a rare break to two alternative high-speed operators – Freeserve and Thus (formerly Scottish Power) – when it ordered BT last month to connect its rivals to its broadband network at a fair price. It marked the end of a year-long stand-off, including threats of legal action by Thus against the regulator, which came in the same week as the recent Oftel determination. Thus wanted to reopen an investigation into BT's pricing of broadband services under the Competition Act 1998, which would allow the company to sue BT for loss of revenue.
Thus is not elaborating, but Steven Baldwin, an associate in CMS Cameron McKenna's commercial IT/intellectual property (IP) group said: “The only action [Thus] might be contemplating is a judicial review to argue that the decision to investigate under the Telecommunications Act 1984, and not the Competition Act 1998, is unreasonable, irrational or procedurally improper.”
Under the new legislation, the regulator could have availed itself of the powers to, for example, fine companies up to 10 per cent of their turnover, and any decision could have been appealed to the Competition Commission. But, as Baldwin pointed out, the regulator has discretion to choose the legislative route that it takes, and so talk of a challenge might have been part of the “bluff and bluster of a litigious industry”.
In April, BT finally slashed its wholesale prices ahead of Oftel's investigation. Thus has been critical that the watchdog was too slow off the mark. The basis of such a challenge would be that “the differential in price between what BT charges for wholesale access to its DSL [digital subscriber line] network and the retail price is too low, and that there's a margin squeeze”, which leaves it hard for the likes of Thus to survive, Baldwin notes.
Chris Watson, a corporate partner in Allen & Overy's communications and technology group, believes that the industry took “a wrong turning” when it tackled broadband as a regulatory, and not a competition, issue.
“There's no incentive for BT to conclude things quickly; it's simply a question of the longer they stall, the more money they make,” he said.
The powers under the new Competition Act would have prompted a speedier response. “I think the regulator has reaped the harvest he's sowed in consequence from that decision, and we're now being told that the broadband access market, according to the European Commission, is characterised by market failure and dominance,” added Watson.
A new report from analysts at Investec concludes: “BT is set to dominate the UK's broadband landscape. The majority of unbundlers have disappeared and, with all operators relying on BT Wholesale for access, BT has almost complete control over the type and specification of products that are introduced to the market.”
“It wasn't a case of too little too late, but too much too soon,” commented Long. “I don't think the regulators or industry were prepared for unbundling and so they were all struggling to catch up; and meanwhile the incumbents were rolling out DSL and able to pre-empt the competition.” The unbundling story is not dead, he adds, but there are few signs of interest in the market.
“But you can't lay all the blame at the door of the regulator, because to some extent the industry deserves the regulator it gets,” continued Long. “If all the problems were not fully anticipated and brought to his attention in advance, he's always reacting rather than controlling events. And that's been the problem all the way through, in that it's been a reactive process rather than a proactive one.”
The spectre of the draft Communications Bill, and in particular Ofcom, looms over the industry. Ofcom will be the all-powerful media regulator, supplanting five existing watchdogs to reflect the converging industry.
“If you look at what's happening in the marketplace, the incumbent is consolidating its market position and the other players are simply dropping away,” said Colin Douglas, head of Wragge & Co's telecoms team. “While the bill is intended to implement the new framework, all that is predicated on the basis of a vigorous and vibrant marketplace, and I'm not sure we're not rushing things at the moment.”
Pickering at Bulldog hopes the new super-regulator will address the anomaly that is Oftel (“it wasn't set up to be a telcoms regulator, but a BT regulator”) and its “bizarre relationship” with the former state monopoly.
“The hope is that Ofcom, which is being set up to regulate the market as opposed to individual players, should be able to redress that imbalance,” he added.
But Pickering fears that the old Oftel function will become lost on the new watchdog's broad remit and that the calls for “light touch” regulation in particular will be extended to telcos. “It's very far-sighted to have a converged regulator; but without resources, knowledge and teeth, it could potentially be just as bad,” he notes.