Connected Research

Union policy research in the 21st century

Posts Tagged ‘Ofcom

The politics of fibre

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Alongside its annual results, BT announced its plans for an expansion of its investment in fibre earlier today. The clear link between the two is that the cost reductions and greater efficiencies identified in the company’s financial reporting have freed sufficient resources for an acceleration of the investment programme so as to allow a further £1bn to be put into fibre projects, extending the reach to two-thirds of UK homes by 2015.

Current investment plans had envisaged 40% of UK homes being fibred up by 2012: thus, an expansion of 67% in the investment budget brings about the same percentage expansion in the number of homes within the reach of a fibre network at the local level. This is interesting in itself, since cost models predict that fibre investment should become more expensive on a per home basis the further investment travels, although this seems to apply largely only once fibre roll-out has been extended into rural areas, i.e. above about 58% of homes (Figure 1.5).

(Incidentally, the Analysys Mason model looks to remain fairly accurate at this point: it seems to predict that, with an investment of £1.5bn in fibre to the cabinet solutions, BT ought to reach about 46% of homes (compared to the 40% in the company’s plans); while a total investment of £2.5bn ought to see it through to about 72% (compared to ‘around two-thirds’). Either the model is slightly out, and the costs associated with roll-out to particular stages are slightly higher than envisaged; or else BT’s mix of fibre to the cabinet and fibre to the home solutions has raised the cost slightly, since the model is based only on the former. The BBC news report of today’s story identifies that around one in four of all homes envisaged as being covered by fibre by 2015 will have fibre to the home – and, therefore, much faster connection speeds. This would seem to suggest that the Analysys Mason model actually slightly under-estimates the cost of fibre roll-out.)

The announcement of BT’s roll-out plans has clearly been well-timed, given the events of the last seven days; and appears to put BT on the front foot.

Firstly, this takes BT to what we might call the ‘Digital Britain’ point – i.e. the two-thirds of homes that ‘the market’ would identify as being suitable for fibre investment. Taking fibre installation beyond this was intended to be the purpose of the ‘Final Third’ fund, raised by the landline duty, which of course has now been scrapped – and without actual plans for its replacement which are more than mere suggestions.

Secondly, the plans will achieve download speeds of (up to) 40 Mbps. The Tories’ manifesto commitment was to getting ‘a majority’ of UK homes wired to (up to) 100 Mbps connections by 2017. BT’s current plans seem to indicate that, by 2015, only around 17% of UK homes will have download speeds at this level. If the manifesto commitment is to be realisable – though today’s reporting seems to indicate that Digital Britain may well not be a priority for the new government – then plans need to be made for how this is going to be achieved. This is not the same as what also needs to be done to roll-out broadband in rural areas (into the ‘final third’) – which mission also needs to be accomplished – since this 17% seems to leave plenty more homes in urban areas with download speeds of much less than 100 Mbps.

Thirdly, Ian Livingston’s announcement contains a strong caveat: that the plans assume ‘an acceptable environment for investment’. This is clearly critical and is an evident acknowledgement not only that the regulatory environment plays an important role in investment decisions, but also that the change in government brings uncertainties in this area which will need to be settled. Inevitably so. But what matters here is that the announcement of the plans now indicates that the existing environment, both known and in the pipeline, is acceptable in terms of the plans – what is unknown is whether that will change and, if so, what impact that will have on the investment. The caveat is a clear indication that the plans are predicated on at least the continuation of the current regulatory environment (if not its further improvement) and that any deterioration may well lead to a reconsideration of them.

How the government responds will be interesting.

In terms of BT – well, it’s clear that more needs to be done to get Britain faster online so as to realise the benefits of Digital Britain, though the importance in this of a healthy, financially strong BT needs not to be forgotten (as well as that the company is still rebuilding its profitability). It should also be remembered that the expansion of the investment in fibre will be ‘managed within current levels of capital expenditure’ – something which implies cut-backs in expenditure on investment in other areas.

A new statutory duty for Ofcom to promote investment in the communications infrastructure in its approach to regulatory decisions would help enormously right now…

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Written by Calvin

13/05/2010 at 5:02 pm

Britain’s Digital Future II

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I’ve now had a chance to listen to The Guardian‘s Tech Weekly podcast I blogged about last week. Unlike some of the comments on the podcast page, which mostly seem to reflect continuing disappointment over the copyright and file sharing aspects of the Digital Economy Act, I thought this was an interesting and reasonably open discussion on the policies of the three main parties towards Digital Britain, underpinned by some thoughtful and articulate comments on the issues and the policies.

The bits on broadband, specifically on how to fund broadband access in rural areas, occur from the 39.17-minute mark and wrap up around 48.50. I learned the following:

– an acknowledgment from Jeremy Hunt, shadow secretary for culture, media and sport, that the market won’t provide for all and that an element of subsidy would be necessary to extend broadband to rural areas. This is not new by itself, but the Tories’ vehicle for this, i.e. using the £200m surplus in the digital switchover portion of the BBC licence fee, was, according to Hunt, supported by the BBC on the grounds that the hungriest consumers of bandwidth were iPlayer users and that the BBC wanted to extend access to iPlayer further. This BBC support for the use in this way of the digital switchover surplus was news to me.

– Stephen Timms, minister for Digital Britain, argued that the switchover money would not be available until 2013 and that doing nothing until then was simply not good enough, while making progress in rural areas demanded investment of £150m per year (i.e. the sums being spoken as being raised by the landline duty). At the same time, conceding the switchover surplus for rural broadband would leave little left for the universal service commitment. Hunt’s reply was that he would rather use the sums which Labour had spoken of to subsidise regional news programmes from ITV for rural broadband instead. So, here we have a Tory spokesman unsympathetic to the notion of the need to subsidise independent sources of regional news – while I also remain unconvinced that the Tories in office would do much towards a universal broadband service at all: having a policy for rural broadband is not the same thing as ensuring that all households in the UK can get access to a minimum broadband service.

– Hunt commented that next generation investment could cost £29bn [apparently, for fibre to the premises solutions right across the UK] and that this was not something that one company [BT] could afford on its own.  He lamented the failure of the Digital Economy Act to do more about encouraging other private sector operators to step forward and said that he wanted ‘Virgin Media to do more; Sky to do more; Carphone Warehouse to use our pilons, telegraph poles, ducts and sewers’ as a way of stimulating a lot more investment in fibre. Of course, there’s nothing to stop any other operator from building out a fibre network and then connecting that with the networks of others to extend coverage. (Except, of course, the need for investment finance and then the obligation to offer that network on a wholesale basis, just like BT has to do. That ‘our’ is an interesting and revealing word, too!)

– Hunt’s reference to Virgin Media having a fibre network which reaches the major towns and cities, and half UK households, whereas BT was the only operator which had the infrastructure to reach rural areas, and that it was ‘madness’ to wait for BT to make that investment as it simply could not afford to do it, seems to me symptomatic of a Tory desire to see BT only as a provider of last resort – that competition will provide in the major areas and that, where it doesn’t, BT will have to provide. So, other operators would be allowed to cherry pick the best areas for their investment, i.e. those which offer the best returns, while leaving to BT alone the prospect of investing in low return areas (and then having to do so on a wholesale basis). I’m extremely unconvinced that this is a sensible, rational approach to getting fibre rolled out across the UK: it leaves far too little in terms of returns for the operator relied upon to undertake the most costly investments (and the only one with sufficient scale to generate the necessary finance). In a situation in which the costs of fibre investment have already been identified as too high for one operator to deal with, it seems completely contrary then to ask that same operator to fund all the unattractive, low return investments. The UK deserves much better joined-up thinking than that.

– ‘Anyone who laid fibre would have an obligation to wholesale the fibre they laid to anyone who wants it’. I’m quoting here because I was quite astounded by what I heard and replayed several times to make sure I got it right. This goes well beyond BT, for which wholesaling obligations as regards fibre investment will inevitably be mandated by Ofcom, while that ‘anyone’ seems on the face of it to encompass, for example, Virgin Media, as well as any other operator which currently does not have SMP (significant market power – only BT and Kingston Communications currently have SMP). On the other hand, it might be argued that there is a strong whiff of ‘in future’ to the quote and, bearing in mind that Virgin Media is expecting to have completed its delivery of superfast broadband right across its network by next year, it may well on this basis be held not to have been caught by the need to respond to such wholesale obligations.

By the way, the programme ended with a comment on the impact on fibre investment of valuation office decisions. This has been well summarised by Computer Weekly and is based on a court case brought by Vtesse, and lost, earlier this year. It had been Tory policy to ‘realign’ business rates charged on fibre networks, although this seemed to lead to a bit of a spat with the Valuation Office Agency and this policy seemed eventually not to make it into the Tories’ Technology Manifesto. Making the cost of fibre essentially cheaper is likely to have some impact on investment decisions since it will increase returns: but, where that investment wouldn’t otherwise be made at all – i.e. in the rural areas – it’s unlikely to have any impact.

[5 May edit: Today’s The Guardian has a summary of all the manifesto commitments to technology, broadband and digital issues.]

Written by Calvin

04/05/2010 at 5:51 pm

IASB puts up new Exposure Draft on pensions accounting

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The International Accounting Standards Board has put up a new Exposure Draft proposing amendments to the accounting regime for defined benefit pension schemes.

The Exposure Draft is, essentially, the accounting profession’s way of publicly consulting on changes to the accounting standards which govern financial reporting regimes. Like everything else, accountancy is governed by global standards which seek to harmonise how accountants report company accounts; unfortunately, IAS19, which governs how defined benefit pension schemes are accounted for, is subject to the same short-termist approach as the rest of the corporate world, implying that it is inimical to the long-term nature of defined benefit pension schemes. Both it and its predecessor in the UK (FRS17) have been blamed, at least partly fairly, for contributing to the rush to close DB schemes.

The IASB has already been through a lengthy consultation process on its preliminary views on refining how defined benefit schemes are financially accounted for; this new consultation runs until early September this year. The Draft is available for public comment and the IASB aims to finalise its plans by mid-2011, with a view to the new standard becoming effective in 2012 or 2013.

The new Exposure Draft seeks to ‘improve’ (in the context, a word full of dread!) pension scheme accounting by requiring companies:

– to account immediately for all estimated changes in the cost of providing pension benefits and all changes in the value of plan assets

– to use a new presentation approach that would clearly distinguish between different components of the cost of these benefits

– to disclose clearer information about the risks arising from defined benefit plans.

Some of this inevitably needs decoding. According to KPMG, what this means in practice is that companies will henceforth have to stop booking a ‘profit’ in their accounts equivalent to the gap between expected investment returns and the interest cost paid on pensions liabilities. This ‘pensions credit’ is, essentially, a way of recording a paper profit from the pension scheme where schemes’ investment returns are higher – as they usually are, where schemes are investing in equities – than the AA corporate bond yield used to discount liabilities. The introduction of the amendments to IAS19, which will require the assessment of investment returns to be based on the same yield on AA corporate bonds, thus effectively ending the credit, will, clearly, lead to greater transparency in accounts – and, at the same time, to a further reduction in the attractiveness of running DB pension schemes.

KPMG’s press release quotes that this will ‘cost’ UK businesses £10bn in lost earnings, with the largest schemes facing a ‘loss’ of £50m per annum, while the ubiquitous John Ralfe believes that this will ‘cost’ BT £750m (turning a £500m ‘profit’ from the scheme on the existing basis into a £250m ‘loss’ under the new one). Ralfe has a long-standing antipathy to schemes investing in equities – as this blog has previously observed. In terms of the actual cost in individual cases, much would seem to depend on how much schemes have invested in equities – though (perhaps to disappoint Ralfe) this is unlikely to result in schemes adopting more cautious investment profiles in the interim.

Will it make much difference? Yes, clearly, to those schemes which remain open to future accrual (the BTPS among them): changes in accounting rules which take money away from the profit and loss account – however much such money was paper only, and regardless of whether pension schemes should have been used in this way to boost earnings – will have an impact on ordinary workers since that ‘profit’ will have to be found from elsewhere so as to retain the level of earnings. Whether it will lead to more schemes being closed, given the numbers of schemes which have already come crashing down and the weight of other arguments against running DB provision which already exist, is a moot point.

Certainly, however, it – together with the requirement for further ‘clarity’ on the risks associated with defined benefit provision – can’t help; I’m almost of the view that it’s the latter that is the most damaging feature of all this: regardless of the ‘losses’ which need to be made up, having to write (or read) even more stuff in company accounts about just how much risk is posed by running a defined benefit scheme may well end up wearing down even the most resilient of corporate defenders of DB provision.

Clearly, these remain tough, and worrying, times for DB schemes, and most of all for the members of them.

Written by Calvin

30/04/2010 at 6:19 pm

Posted in Pensions

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Britain’s digital future

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The Guardian‘s Tech Weekly podcast this week focuses on the parties’ views and attitudes towards Britain’s digital future, featuring discussion and comment from the three leading parties’ main representatives (Stephen Timms, Jeremy Hunt and Lord Razzall) on the following issues:

– curbing piracy and file sharing

– intellectual property copyright reforms

– how to fund rural broadband penetration

– dealing with the library of government data.

I haven’t yet listened to this in full but will be doing so with some interest, blogging any issues that arise. In the meantime, you can pick up the podcast, or listen online, here.

Written by Calvin

29/04/2010 at 11:55 am

New powers for Ofcom also dropped

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The government is also proposing to drop Clause 1 of the Digital Economy Bill (see also The Guardian). This would have given Ofcom new powers to have ‘particular regard’ in carrying out its statutory duties on behalf of consumers to the need ‘to promote investment in electronic communications networks’. The dead hand of the Tories on the tiller is all too visible here, too.

The Connect Sector had supported this Clause right from the publication of the final report of the Digital Britain initiative since it would have commanded Ofcom to focus in its promotion of the interests of consumers on the need for investment, alongside the existing duty to promote competition. It would have overturned a singular reliance on promoting competition, which had been how both Ofcom and Oftel before it had interpreted the interests of consumers. It is the promotion of competition, to the exclusion of all other concerns, that has allowed us to reach the stage of falling real prices for telecoms services to the point where it is likely to endanger investment. In an intensely competitive situation, falling prices can only inhibit levels of investment since it both undermines and makes more uncertain the rates of return that can be made. When investment is expensive – not least given the need to boost investment in fibre towards fibre to the premises solutions, rather than just fibre to the cabinet – such levels of uncertainty will simply lead to it not being made. And that’s not in the interests of consumers either.

Yet we’re now back in the situation of Ofcom interpreting its regulatory remit on looking at the interests of consumers solely through the telescope of competition. A one-club, narrowly focused and ultimately irrational approach to regulatory policy.

The new duties for Ofcom, by recognising the central role of investment in developing the UK’s communications infrastructure and in insisting that Ofcom supported that in its approach to regulatory decision-making, would have helped to support the case for that investment. Their likely withdrawal – voting on the Digital Economy Bill is tonight – only undermines that case and, in the process, undermines a significant portion of the Digital Britain initiative.

Written by Calvin

07/04/2010 at 3:51 pm

Ofcom lowers the rate

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As if needing to prove what good value for money it represents, Ofcom followed up yesterday’s announcement of its annual plan and budget with its long-awaited proposals on mobile termination rates. These will see termination rates – the costs levied on other network providers when calls made from their networks land (or ‘terminate’) on mobile networks – fall steadily over the lifetime of the next period of mobile regulation (between 2011 and 2015) from 4.3p/minute now (and 4.6p on 3’s network) to 0.5p/minute. Termination rates were 23p/minute in 1995.

Ofcom believes that this cut will lead to cheaper calls and, although it is a little shy of giving figures, partly because there is no regulatory compulsion on operators to pass on the savings, other than via other regulated products (as well as via the weight of Ofcom’s publicly-expressed expectations in this area), the newspapers (e.g. here and here) have happily done them for it (although as The Guardian‘s version suggests, this is likely somewhat to overstate the case). Nevertheless, the suggested annual costs stripped out by the move represent some six times Ofcom’s total annual budget.

In contrast to yesterday’s announcement of the outcome of its investigation into the pay TV market, there was no subsequent wailing and gnashing of teeth from those subject to the announcement (though Orange has had one or two things to say [registration required; limited viewing time]; while, in contrast, Terminate the Rate, supported by 3 and BT, amongst others, was clearly rather chuffed). Mobile operators are likely to challenge the proposals during the consultation period but, publicly, there has been little reaction from them. This could be because operators have already discounted the cuts – which have been long expected, given their origins within EU attempts to lower mobile termination rates under Viviane Reding, the previous Commissioner – or because, as Robert Peston suggests on his BBC blog, they are likely to respond by shifting their business model to accommodate them. It is also true that, as the next charge control period comes to an end, pressure on these rates is likely still to be present, as Ofcom believes that:

As the market adapts [i.e. to the current proposed reductions], we believe that further reductions in termination rates will promote competition, the development of innovative tariff packages and the growth of genuinely converged fixed and mobile services. [para 1.13]

The review of termination rates – these are proposals and, as such, are subject to consultation – will conclude with a statement later in the year.

Written by Calvin

01/04/2010 at 3:49 pm

Posted in Telecoms regulation

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Ofcom budget and annual plan, 2010-2011

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Amidst some kerfuffle over its proposals on the pay TV market, which have been three years in the making and which have concluded with something of a bloody nose for Rupert Murdoch, Ofcom has simultaneously published its annual workload programme for 2010-2011. The news release for the annual plan trumpets another year-on-year cut in the Ofcom budget – apparently, this is the sixth year in a row where the budget has been lower than previously. Demonstrating the declining cost of regulation is no doubt a good idea around election time, not least given the appetite the Tories demonstrated last year for taking an axe to Ofcom, and may also be a good defensive reaction against whatever departmental spending reviews are around the corner.

Declining budgets are, however, likely to put significant pressures on union negotiators when it comes to pay reviews and the existing proposals for efficiency savings in property, IT services and procurement will put the 860 or so staff working right across Ofcom, including in these specific areas, under some strain regardless of their contributions to developing its work programme. According to its website, Ofcom is one of ‘Britain’s top employersscoring particularly highly on pay and benefits and working conditions – things that are not only hard-fought for and which do need to be defended but which, from an organisational perspective, clearly provide an important differentiator as well as added value when it comes to issues of staff recruitment and retention.

It is notable that Ofcom’s total budget for the year (£142.5m) again specifically includes deficit repair contributions to the pension schemes of the legacy regulators that existed prior to the creation of Ofcom and we look forward to a similar view coming to prevail during the year as regards the deficit repair contributions made to their own schemes by companies regulated by Ofcom.

The annual plan centres on progress in nine priority areas as well as in other major ongoing work areas, summarised here. It is a complex and involved plan, entailing Ofcom (and as usual) seeking to make progress on a wide variety of fronts simultaneously. One of the ‘major ongoing work areas’ is Ofcom’s Mobile Sector Merger Support programme, under which it seeks to provide support ‘as necessary’ to the European Commission and to the Competition Commission. I’m hoping that this will be one of its quieter work areas over the coming twelve months – but, at the same time, that Ofcom continues, despite the decline in its budget, to attract sufficient resources to carry out its role effectively.

Written by Calvin

31/03/2010 at 4:15 pm