UK telecoms self-harms by grinding down the regulator

Hard to believe it now, but telecoms regulators were originally established mostly to protect incumbent PTTs (Post, Telephone, Telegraph) from over-vigorous competition from challengers. Today it’s somewhat the other way about.

The UK was the European liberalisation and privatisation pioneer in the 1980s and early 1990s, but there was a reasonable worry: it was thought that voracious profit-driven companies - if left to their own devices - would ‘cream-skim’. In other words, would only compete for the most lucrative customers and services, leaving the PTT spiralling downward financially, encumbered by universal service obligations. A regulator was needed to ensure an orderly transition to full competition.

So in the beginning all sorts of limitations were placed on those who wanted to enter the telecoms or online information space.

The concept of VANS for instance - that’s 'value added network services' - is a classic case. Competitve players couldn’t just buy bandwidth off the incumbent and resell it. They had to add value and sell it for way more than they purchased it for.

But despite this it wasn’t long before the incumbent, BT, was beginniing to see that regulation swung both ways. As well as curtailing the activities of the ‘cowboys’ as telecoms stalwarts cheerfully called their upstart competitors, the UK’s Oftel (as it was called in those days) was starting to order BT about too, over issues such as open access and rebalancing its tariffs. This was not always appreciated.

In the late 1980s or early 1990s, I remember interviewing the then chairman of BT, Iain Vallance (he was knighted a bit later on) who made it clear he had a real beef with the way regulation was being executed. Essentially, BT was now a privatised company and responsible to shareholders, he explained. This meant that he (and his board) had to establish a high level of certainty to put behind their significant investment decisions.

But because the regulator could (and apparently did, according to Vallance) make arbitrary decisions it could all get a bit unfortunate. Vallance was very measured - almost patrician - in manner (although he had risen through the ranks at The Post Office) so the ground had been calmly and carefully established before we got to the nub of the argument he wanted ‘out there’.

“What we want,” he said, “is ‘certainty and due process’.”

This was not a telecoms term that I had ever heard at that point - it needed some explaining. Essentially it was that regulatory decisions should be determined in a process that ensured fairness and ‘certainty’ for investment purposes.

But who or what decided fairness in the last resort? The courts of course.

Vallance was pushing - or at least asking acceptance for - a more legalistic approach to telecoms regulation. The usual ‘process’ at that time was for the regulator to announce that he was going to have a close look at something or other for x, y and z reasons and was minded to do a, b and c. Interested parties were invited to give a formal submission and a timetable was laid down.

Then the regulator would give all the submissions a bit of a look to make sure he wasn’t getting it all completely wrong, and issue the determination which he probably had in mind from the outset.

Then, of course, on an ongoing basis the regulator must have offered quiet suggestions and made requests that x and y be done and z not so much.

This seemed reasonable to me. I thought that the ‘certainty’ that Vallance was agitating for simply wasn’t available in a fast-changing, technology-driven market… or at least shouldn’t be available. If instituted it would mean, in practice, that the regulator would soon become trapped in earlier decisions and regulations, like Brer Rabbit tackling the Tar Baby. Attempts at change would be bogged in the courts as BT (and other companies) pursued ‘due process’.

In effect, I suppose I idealistically saw the regulator as standing in for the discipline of the full and fair competition which had yet to develop. As a proxy for that competition he or she should be allowed to be capricious and change his/her mind on ocassions, just as customers in well-functioning markets do. Other private companies couldn’t demand ‘certainty’ from their customers, they had to take their chances and watch out for the threats and opportunities as they arose. So should telecoms incumbents.

Of course Vallance won.

Over the years the lawyers and their fair due processes have steadily taken over and the result today is delay and stalemate in too many instances.

But Ofcom, as it’s now called, is at last fighting back with the help of public interest groups and smaller telcos. The Guardian newspaper in the UK has reported that the challenger operators (TalkTalk and Hutchison 3) and a group of consumer organisations have lined up to push the culture secretary (the government minister responsible for Ofcom - it regulates broadcasting as well) into tightening up the appeals process (that old ‘due process’ thing again).

What’s finally turned the worm is the degree of ‘hold-up’ incumbent players (BT and the big mobile operators) are able to inject into that good old due process. Attempts by Ofcom to cut mobile termination charges, for instance, have been blocked by for over a year because of legal appeals, points out The Guardian, as has Ofcom’s attempts to enable customers to switch more easily between operators.

In fact it’s alleged that armies of lawyers acting on behalf of the big telcos almost automatically challenge everything, picking out technicalities to try and delay implementation through Ofcom’s own appeals process. It says Ofcom has faced 61 appeals to the UK’s Competition Appeals Tribunal in the last five years, costing it millions.

But perhaps the worst case of squabbling and regulatory non-control (the threat of litigation tends to slow everything down anyway) ocurred a couple of years back over the introduction of LTE and the necessary spectrum auctions which never came until Ofcom let EE refarm its existing 1800 spectrum. Due process indeed.

So are we seeing the start of a claw-back? Can we expect an end to automatic litigation as part of a change of behaviour? I guess we'd love to think so, but it's unlikely. Name an environment (any environment) where rampant legalism has been rolled back....

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