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Joint Committee on Communications, Climate Action and Environment díospóireacht -
Tuesday, 12 Jun 2018

Broadband Service Provision: Discussion

I draw the attention of witnesses to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. I also advise witnesses that any submission or opening statement they make to the committee will be published on its website after this meeting. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.

I remind witnesses and members to turn off their mobile phones as they interfere with the sound system. I welcome the witnesses for our discussion on issues relating to broadband installation. I propose that the main witnesses will speak for five minutes each and we will then take contributions from members. Is that agreed? Agreed.

We are joined by Mr. Ronan Lupton, chairman of the Association of Licensed Telecommunications Operators, ALTO; Mr. Liam O'Brien, director of strategy and external affairs at Vodafone; Mr. Kevin Barrins, director of wholesale and regulatory strategy at Sky Ireland, and; Mr. John O'Dwyer, head of regulation at BT Ireland. I invite Mr. Lupton to make his presentation.

Mr. Ronan Lupton

I thank the committee for inviting us to update it and to present evidence on the state of the market. The theme of broadband installation affects consumers in their homes but also the key area of all our businesses. ALTO is a trade association which has been operating since 1999, so we are 19 years in the fight to get quality broadband and services to consumers, while making sure that the regulatory and Government environment and the market conditions are in the correct position to facilitate services and ensure proper competition at all levels of the market. For today's purposes, we produced a long statement which the committee will have seen at this point. If it is appropriate, the statement can be taken as read. As the Chairman indicated in terms of time slots, we intend to split the presentation. Mr. O'Brien will deal with market and strategic issues and Mr. Barrins will deal with the second element, namely, regulation. The third issue is regulatory governance and the regulatory governance model, which is a voluntary scheme that was undertaken by Eircom and which resulted in significant disclosures of issues in the market. Mr. O'Dwyer will deal with that. I will briefly deal with the status of Eircom at this point. With the Chairman's permission, I will not take my full five minutes now but, at the end of the presentations, I will give conclusions so we have a proper flow to the evidence in the presentation.

ALTO has ten members, so it is a significant voice in the Irish market. Our members are BT Ireland, Sky Ireland, Colt Telecom, Magnet Networks, Siro, 3 Ireland, ESB Telecoms, Virgin Media, Verizon and Vodafone. As members can see, that is pretty much everybody in the marketplace apart from Eir and, possibly, Enet. It is a significant grouping. We operate strictly under the competition law obligations imposed on us and we are also registered with the Standards in Public Office Commission, SIPO, for lobbying purposes.

Moving to the issue of Eir and its status, members will be very aware of the privatisation and public flotation of Eircom in 1998 and the various iterations of ownership which have taken effect. What we have seen is a situation where we must rely on elements of the Eir network to be healthy and to perform and for it to comply with regulatory governance and regulation in the main. What we see is that such compliance is not what we would like it to be. We now have a new ownership structure, but what we say in our statement is plus ça change. There is now a French body of investors involved in the company. We have not really seen anything concrete in terms of proper management and governance. A message we would like to give to the committee is that, with the new board that has been installed, a number of high-profile and experienced telecoms executives are now in there and we would like to see them put regulatory governance and compliance with the regulation to the forefront of their minds, as the previous board within Eir did, which has only been let go in recent times. That is where we are in respect of our views with regard to the Eir position. We do not want to be too critical because what the regulatory governance model, RGM, piece of this presentation does is disclose certain other issues so we will get to that in due course.

That is all I will say at the moment until such time as I get to my concluding remarks which, hopefully, will follow nicely. I will hand over to Mr. O'Brien. I hope I have not killed my full five minutes with that summary.

Mr. Liam O'Brien

I will try to stick to my five minutes as well. I am delighted to be here to address the committee on behalf of ALTO. Under this section, I will briefly touch upon a number of elements around connection charges in the market, the mobile spectrum and also some European Commission implementation progress reports that were recently published.

Wholesale connection charges in the Irish market are more than twice the equivalent charged in the UK and a multiple of the fees charged in other markets. Wholesale operators in the market are paying a connection charge of €272 for the full Eir fibre to the home, FTTH, product. That compares to €113 in the UK and €67 in Spain, with a minimum multi-wholesale rental of €23, putting Ireland's as one of the highest wholesale broadband prices in Europe. A European Commission connectivity report published a number of weeks ago ranks Ireland very consistently second in Europe in terms of price for access to broadband, not at a wholesale level but at a retail level to customers. It is not only bad for-----

The price here is the second highest in Europe.

Mr. Liam O'Brien

Yes, we can share that report with the committee. We will put a link into the document. We are the highest for some charges and second highest for others in the European market. That is not only bad for operators like ourselves trying to compete in the market and relying on the infrastructure of the incumbent but it is also bad for the Irish citizen in terms of having to pay these fees.

One only has to look at Eir's financial performance as well to see some of the evidence of that flowing through in the books. Eir's total profitability or earnings before interest, taxes, depreciation, and amortisation, EBITDA, at 40% means it is one of the most profitable incumbents in Europe, and it is fixed-line EBITDA, so taking it away from the mobile business it is 45%, which again is very high in terms of its peers in Europe. It also, coincidentally, has one of the highest reliance on a wholesale market than anybody else, relying upon other operators like ourselves here representing ALTO. More than 26% of its revenue comes from wholesale operators so one gets a combination of high prices and also, effectively, a large part of that market then underpins its business. It is also, perhaps not coincidentally, one of the most heavily indebted operators in Europe, with more than €2 billion of debt still on its books. That is not a great financial vista.

It is our view that the current regulatory structure is fundamentally failing the market. I refer here to the lack of regulation of the incumbent and of Eir. Two independent reports commissioned by ComReg last year, the so-called Cartesian report and the KPMG report, point to some of this, highlighting significant governance findings hindering Eir's behaviour and how it behaves in the market.

ComReg has completed an initial review and it is consulting on that. Hopefully, more progress is expected during this year. We feel that the most appropriate model that will deliver proper fundamental and systematic changes is what is known as functional separation, which is effectively a separation of the retail from the wholesale arm of Eir into two distinct entities as the only avenue that will ensure sustainable competition in the market. When one sees a company which has a wholesale and retail business effectively side by side, one gets the sort of behaviours one sees in the market whereby there is a connection charge to wholesale operators of €272 and effectively a free connection charge to its own retail customers on the other side. Some of those sort of behaviours are what can occur. For us, what this means is that it is a fantastic opportunity for ComReg in the coming years to address some of these issues and to take the appropriate action moving in that direction. We believe that only deeper structural remedies can provide the right competitive environment and give that balance to the regulatory regime that we are looking for.

A slightly tangential point is that there was an auction early in 2017 for 3.6 GHz spectrum, the so-called 5G spectrum. The auction was run by ComReg. That spectrum is key for the roll-out of 5G in the coming years. Another operator still remains on that spectrum nearly 18 months later and ComReg is refunding money to operators as a result. This is money that was paid to ComReg to purchase the spectrum and that is now being effectively drip fed back to some operators because we have not had access to that spectrum. We do not want that to continue-----

Who is responsible for that? Is it an issue for ComReg that Eir has not given companies access?

Mr. Liam O'Brien

In effect, the market operators have to agree. ComReg will oversee a transition plan. It cannot force access to the spectrum. It will oversee a transition plan. We are engaging with ComReg on that. It has been a very lengthy process. It has probably been longer than those who are trying to get access to the spectrum to provide services would have anticipated.

I ask Mr. Barrins of Sky Ireland to address the joint committee.

Mr. Kevin Barrins

I am going to speak about ComReg's remit with regard to regulation. All members of ALTO have the height of respect for everyone who works in ComReg. I worked there from 2000 to 2003. The staff of ComReg are very diligent and have to contend with extremely complex issues. I would say the level of complexity of the issues they have to deal with has grown exponentially since my time in ComReg. They are contending with a plethora of different technologies, including fibre to the curb, FTTC, FTTH, and asymmetric digital subscriber line, ADSL. To the consumer, all of these things look the same as broadband, but they have made ComReg's task much harder. As far as I understand, ComReg's resources have not increased one iota since the 2000-2003 period. At that time, we were working off between 125 and 130 staff and I think ComReg has a similar number of staff now. We have some sympathy for ComReg when it is dealing with delays, market reviews and dispute resolutions because of the resource constraints it faces. While we all accept that delays happen, the difficulty arises when delays persist for periods of three or four years. We can all live with delays of two, three or six months.

I will give an example. In 2013, ComReg conducted an interim review of its 2011 market review. This coincided with the launch of Eircom's primary broadband product, which is an FTTC product. As part of its main broadband product for the future, Eircom was selling speeds of up to 100 Mbps. At that time, ComReg determined that there was no need to impose a charge control on FTTC services given that this was a nascent technology. It believed there were sufficient constraints to protect consumers, including us, and retail customers. That worked fine in 2013 and 2014, but Eircom was bringing in more and more customers all the time. Its market power, in an economic sense, was increasing. It increased prices by 10% in 2015 and by a further 20% in May 2016. This 30% price increase in the space of 12 months caused alarm bells to ring. It was clear that the constraints which were placed on Eir, as it had become by that stage, were not sufficient. Everyone in the industry, including ComReg personnel, knew that something had to be done. We are now in June 2018 and the market review that was initiated by ComReg has not yet happened. We are still subject to those prices, which of course are passed onto consumers because it is a wholesale charge. According to ComReg's preliminary review report, as a consequence of what I have outlined there has been a transfer of wealth from other operators and customers to Eir.

It is remarkable to see that Eir has rolled out its entire FTTC network and basically overhauled and upgraded its whole network entirely from cashflow. It has not had to go back to a single shareholder for a cent of equity. It has not gone to a bank to raise a cent of debt. It has all been done through cashflow. If we took a pragmatic view, we might say "We may have been overcharged, but at least we got an FTTC network out of it". The problem relates to what will happen in the future if these prices are not reduced very soon. According to the press release released by Iliad after it acquired Eir, "In the medium term through this investment, Iliad expects to generate a dividend stream and yield a double-digit return on equity." It is clear that Iliad is hoping that the transfer of wealth will continue for some time to come. At the time of that announcement, Iliad referred publicly to a €1 billion investment plan in Ireland over the next five years. If one mentions a figure like €1 billion, it looks really good and gets one a great headline. In fact, when it is matched against what Iliad's revenue stream will look like over the same period, it involves a capital intensity rate of approximately 15%, which is pretty modest and well below what Eir has been doing over the past five years. Indeed, it is well below what Iliad has been doing in France, where it has had a capital intensity rate of 30%, or twice its figure in Ireland. I think that is quite significant.

Mr. O'Brien mentioned the FTTH connection charges. The plan seems to be the same again, as it involves €270 for a connection. I appreciate that it is expensive to connect homes in rural areas. Telecoms investments are meant to be recovered over cycles of 20, 30 or 40 years. One does not look to get such investments financed upfront by other operators. One does not allow operators to start selling one's product and then start charging those operators a good chunk on a monthly rental basis thereafter. The transfer of wealth point is of concern. These are not our complaints. In its preliminary review, ComReg said that these charges should not be charged upfront at this level. It believes the charges should be considerably lower. I guess it is a question of why we are seeing these delays. One of the concerns we have is the litigious history of Eir. ComReg might say it is not affected by that, but the reality is that the amount of work it has to do to dot the i's and cross the t's means that it needs more resources. In addition, as Mr. O'Brien has suggested, ComReg needs more powers so it can be confident that the decisions it makes will stick.

The next speaker is Mr. O'Dwyer, who is the head of regulation of BT Ireland.

Mr. John O'Dwyer

I will speak about the regulatory governance model. I had to look up the regulatory governance model to be sure what it is. By 2011, there had been years of difficult times marked by problems with trying to get the original broadband going. There had been arguments, complaints and disputes against the old Eircom. There was a change of management in 2011. The new managers decided they were going to reform Eircom, try to improve its relationship with industry and work better with industry. They made some commitments to the industry. I remember a big meeting at the Gibson Hotel. They made a commitment to the industry that they would work better. We are now finding in some of the documentation - we did not know this at the time - that Eircom made commitments to ComReg about how its reform would work. Eircom has documented this. Basically, it made voluntary commitments to the regulator around non-discrimination and improving its relationship with industry, etc. Those voluntary commitments comprise what we call the regulatory governance model. Eircom committed to having a better model to improve the situation, but there was no noticeable change from 2011 until approximately 2015. We carried on having disputes and complaints, etc. In August 2015, when we were having some difficult discussions about issues we were having with broadband at the time, Eircom published a document that was distributed by email to everybody in the whole industry. It was quite stunning to receive this document, which was not necessarily distributed as confidential, from Eircom. It described the whole regulatory governance model that the company had agreed in 2011. This was the first time we saw it. In the paper, which highlighted and documented a number of issues of discrimination or compliance that Eircom was having, the company recognised the issues and set out what it was going to do about them. We might have disagreed with the detail of some of the solutions, but at least they were there. The document in question is quite technical. It is difficult to digest whether the many issues covered in it are actually very serious. Some of them-----

Was that document published?

Mr. John O'Dwyer

It was certainly published to the whole industry.

Is it available and on the public record?

Mr. Ronan Lupton

It is referred to extensively in our statement. There are three iterations of it - from 2015, 2016 and 2017. It is colloquially known as the Styles report. It is a public document.

Mr. John O'Dwyer

If one observes this document without going into the detail of regulation, it is difficult to work out what it really means. When one gets into the detail of it to try to understand it, one sees that some, but not all, of the issues are very serious and have quite serious implications. I would like to mention something called address matching as an example.

We did not have postcodes at the time and there is a unique version of everybody's address within Eir's system. The problem is it may not be necessarily the same address that the current occupant of the house would know. As the addresses are not necessarily unique, it can be difficult sometimes to work out what the customer thinks the address is as against the system's address. It is very important to get this right because if a service has to be delivered, it must go to the right address. A telephone line, for example, must be delivered to the right address. This was complicated when unique addresses were not available. Eir had a better set of addresses for its downstream retail arm than was being provided to the rest of industry.

It could take up to a week for some operators selling broadband services, for example, to try to work out the exact address with the customer. This frustrated customers who wondered why the companies did not have something as simple as an address. It could take a week to get the address right going back and forth with Eir trying to work it out. The customer might think the new provider is not doing a very good job and he or she would not move but rather stay with the current provider. It hindered customer choice in changing a provider. This is important, certainly to the customer, and causes consumer harm because customers could not exercise choice and had to pay more money than they might have done otherwise. The new operator would also be hindered from earning money from winning customers. That was the problem.

A two-pronged approach followed. The first was to get Cartesian and KPMG to do a governance investigation operation. This made a number of recommendations, one of which was to have an independent oversight body looking at the governance and operations of Eir, keeping that under control. Simultaneous to those consultations, ComReg investigated non-compliance and took legal proceedings through the High Court. It found several cases of non-compliance and has taken Eir to the High Court to have fines imposed for non-compliance. The case has been held up by a challenge in the High Court which will be heard later this week.

Mr. Ronan Lupton

There are a number of issues we would like to summarise in what we think the committee can do to assist the market and bring better services to the communities and constituents that they serve. ComReg needs bigger and better fining and civil sanction powers. Nine regulators have submitted a document to both the Law Reform Commission and various Ministers under a consultation process that sets out the position. We support that fully and wholeheartedly. They need the teeth to regulate the market. While that sounds like a turkey wishing for Christmas, if there is no incentive to behave, the regulator cannot do what it needs to.

That is civil sanction.

Mr. Ronan Lupton

Yes, they should be quick and meaningful sanction powers. There is a second issue that is extremely important for the committee's work. In 2003, the communications regulator operated with staff levels of approximately 120 people. At a minimum, 70 staff need to be put into ComReg. The industry pays for this and the funding would not come from the Exchequer. ComReg's recent returns reported that €136 million was returned to the Exchequer on a cost outlay of €32 million. That is the most up-to-date information. We are calling for more resources, including lawyers, economists, wholesale compliance staff, retail staff if necessary. This also applies to national broadband plan. A plethora of people are required to buffer the regulator and do so quickly.

The third issue of market reviews will be resolved with resourcing and a surge, if that is appropriate, of people going into ComReg. The fourth issue is what Mr. O'Dwyer spoke about. It is a highly complex issue and difficult to address in the time available to Mr. O'Dwyer. I should be very clear about it. The regulatory governance model affects the ability of the people before the committee - the new entrant operators - to provide competitively priced high-speed broadband services to all the nation. We are required to use the services of the incumbent from time to time and if it is not correct or there are non-compliance or discrimination issues built in, they must be dealt with and ComReg must get going on that piece of work faster than it says it will.

I mentioned in my opening comments the matter of a new board within Eir. Very high-profile executives are due to take seats on that board. Compliance with regulation should be at the forefront of their minds, as should the facilitation by Eir of its wholesale customers - the telecommunications operators we represent - for the benefit of the consumer. This requires a reduction in prices and facilitation of high-speed services.

Mr. O'Brien mentioned the 5G impasse, a straightforward issue that I will not get into. Another point is worth noting and Deputies Dooley and Ryan will be aware of it. The issue of passive infrastructure, namely, access to poles and ducts, is controversial as it can upset constituents if roads and so on are being dug up. Eir has that infrastructure and to some extent the ESB network is available as well. We need fit for purpose access to passive infrastructure as new entrants and we call on the committee to consider that issue for its report. There are five or six points that we have noted as being key to resolving many of the bottleneck issues and constraints that stop consumers from obtaining effective services and these have the effect, if not remediated, of keeping prices high in the market.

We are all tight on time. Rather than getting into a to and fro discussion with the witnesses, I ask them to provide additional information. Will they elaborate on the civil sanctions and powers they are seeking? What are these powers and sanctions and what issues do they wish to address? We had a flavour of that today. There is the straightforward issue of beefing up the regulator, which is important. I was taken, to some extent, with the detail provided by Mr. O'Dwyer. It is good for members to hear that but we will not be able to resolve it other than through empowering the regulator to address it. It is useful that Mr. O'Dwyer set out the detail of the scramble and how frustrations can arise. It would be helpful if more detail on regulatory governance was provided in writing to enable the committee to address the issue with the regulator at a later stage.

The witnesses have made a strong presentation. From a political perspective we will regularly be in touch with the companies and Eir pushing, more often than not, for the quicker roll-out of services. People in awkward locations cannot understand why they cannot obtain services that are readily available elsewhere. It falls on us to consider the regulatory element. The regulator, ComReg, has a role with us in that interaction. I hope we can address such issues. If more information can be provided, we can be facilitated in that regard.

I thank the witnesses for their presentations. Reading the opening statements, there are some eye-opening issues, including the price comparisons for connections for fibre to the home and shortcomings in the so-called market. At the press conference at which the Minister announced he would allow Eir to cherry-pick 300,000 of the easiest to reach 840,000 premises and households, I argued the decision would throw petrol on the flames by allowing Eir not only to dominate but to control the market.

Mr. Lupton said Deputies Ryan and Dooley are aware of the passive infrastructure issues. I have some knowledge of that issue as well because I have been raising it from the word "go". Simply put, there is a charge per pole for access and Eir has the market by the windpipe.

That is a simple fact. Unfortunately, allowing Eir to cherry-pick the 300,000 households has exacerbated the problem. Many of the issues being raised today confirm that.

The separation of Eir's wholesale and retail markets into sections is important, but is it viewed as something that has to happen? Mr. Barrins outlined ComReg's shortcomings, in that it needed greater civil powers and 70 more staff. He referred to the ongoing review of prices. When did it start and when is it expected to finish?

Mr. Kevin Barrins

There were three consultations last year. I believe the first was in February and they finished in May, which was more than a year ago. The last full-market review of the broadband market was done in 2011. There was an interim review of market remedies in 2013. The European Commission recommends that markets be reviewed every three years.

Something to bear in mind is that I am one of those Eir customers who are watching their prices increase and increase. Householders are being driven crazy when trying to contact companies about charges. Mr. Lupton represents some of those companies. I wanted to use this opportunity to highlight that issue with him. I thank him for the information he has provided.

I am seeking further articulation of what was meant by the power to take civil action. It would be useful for us as legislators to have people's views.

A connection fee of €67 in Spain versus €272 in Ireland is an astronomical difference. While I recognise that there will be differences, the fee in Britain is €113, which is approximately 42% of our charge. The rural nature of our country is not the whole reason. In some cases, the infrastructure is already in place. I have spent some time trying to work out what would happen if there was a charge per pole to build infrastructure and get past the blue speckles on the map. Eir has got the 300,000 households that are the easiest to reach. How will companies go beyond that point? In some areas with which I am familiar, Eir has 20 houses in a group but, a mile up the road, there are only scattered houses. What price range per pole are we talking about? Would it be between €10 and €30? Would that be an annual charge? Would that approach be feasible and, if so, what would be the implications for the householder?

I will call Senator O'Reilly next, after which the witnesses can respond in whatever order they wish. They may want to divide up the questions.

I join in the welcome that my colleagues have given the witnesses. Their engagement has been informative and well presented without being patronising. Our remit as committee members, parliamentarians and representatives of our communities is to ensure, first, that the country has blanket coverage and everyone has equal access to high-speed broadband akin to the rural electrification of the past and, second, all of this happens in the most cost-effective way from the consumer's point of view. It is a double remit and we are addressing both.

The pricing comparison is interesting and scary. I assume that the argument that Eir would make, one that was touched on tangentially by Deputy Stanley, is that it must tackle difficult terrain and infrastructure and that it is a unique case. According to the witnesses, though, it has a high profit level. They are also claiming that ComReg does not have the necessary power, that is to say, Parliament has not conferred on it those powers apart from providing it with internal resources. Can that be achieved by ministerial order or must it be done by legislative process? It would be interesting to know, as our committee would have to pursue the matter.

Colleagues mentioned how 120,000 homes had been handed to Eir for the current phase of broadband delivery. Had that not happened, as posited by Deputy Stanley, could the witnesses' organisations have taken up that work in a structured fashion? Was there an alternative to giving Eir the comprehensive remit to deliver to those 120,000 homes? Could ALTO have filled the gap?

Regarding access to infrastructure, Cavan County Council held a briefing session with Oireachtas Members and told us that it had put a county level plan in place to ensure as easy and efficient a level of access as possible to structures for all providers. I presume that is the norm. Is this approach achieving anything?

Will the witnesses comment on the issue of charging a price per pole?

The witnesses said that the industry pays for ComReg's extra staff. Is that a question of the Minister ordering a higher levy? What mechanism is involved? Would a higher staffing level be any use without ComReg being given new teeth? Is there any point in giving ComReg a hotel-full of staff if it does not have power? Does it need both and how would we go about achieving that?

I will follow on from Senator O'Reilly's questions about ComReg. Does it need extra staff or greater expertise? The witnesses might expand on that point. There would not be a cost on the Exchequer per se by providing more additional human resources to ComReg, but there could be higher tariffs, which might be passed on to the consumer. Would that be the case? When ComReg finds that there have been breaches, what is it capable of doing to sanction a company and how does that work? There is considerable overlap in these questions.

Mr. Ronan Lupton

There is, but we have just decided on a structure. I will take powers and resources, which will address Deputy Stanley's and Senator O'Reilly's questions in some part, Mr. Barrins will take the pricing issue raised by both members, Mr. O'Dwyer will address the functional separation, that is, the splitting of Eir's wholesale and retail markets, and Mr. O'Brien will address investments. A question was also asked about civil sanctions, which I will take.

The issue of powers and resources is an interesting one. ComReg desperately needs resources in any event - legal resources, economists and spectrum experts. Per what we have already said, the multitude of issues and technological developments that are laid firmly at ComReg's doorstep to regulate and supervise is extraordinary. Some 120 staff split between the seven or eight departments within ComReg is not enough. Expert staff are required.

I must clarify a point in my evidence. The State received a surplus of €136 million. That money was collected from us in the industry and returned to the Department of Finance to do with it what it willed. The cost of running ComReg was €32 million, an increase year on year, in the last accounts. Effectively, we are paying money to the Exchequer. As such, taking some of the money from that pot to pay for the staff would not be a strain on the Exchequer. That would be my submission.

Would Mr. Lupton mind repeating that part?

Mr. Ronan Lupton

I said that €136 million was sent to the Exchequer while approximately €32 million was what it cost to operate ComReg in the previous 12 months. That report is available on the website. We have just distilled it down for the purpose of the evidence today. As such, members will see that the industry is paying through a levy order, which is set out in the evidence, a significant amount into the Exchequer and ComReg is funded from that particular money. In effect, we are paying for it. It is not going to be a strain.

The €4 million-----

Mr. Ronan Lupton

There is no deficit.

They are taking €4 million more from the operators.

Mr. Ronan Lupton

Not at all. What I am saying is that a surplus goes to the State of €136 million, which we pay through a levy order, while the cost of operating ComReg is €32 million. As such, there is no deficit at all in that. That clarifies the funding issue so we will park it. As we say in our submission, the resources just have to happen. That is the reality. I am aware that ComReg has written to the Department of Public Expenditure and Reform with a number, which I do not know but estimate at €70 million, at minimum, to buffer it up properly. That is consistent with looking at the Data Protection Commissioner and the various other semi-State regulatory bodies with significant tasks and which are, in some instances, including this one, funded by us. Hopefully, that addresses that point.

Everybody has asked me about civil sanctions and I highlight one point on that. Deputy Niall Collins has a Private Members' Bill which looks in particular at the Competition and Consumer Protection Commission and arming it with civil sanction powers. Many of the regulators, including ComReg, have co-competition responsibility and co-competition powers. We say that if the Government adopts the Private Members' Bill, it should simply be extended to the other regulators which have asked for civil sanction powers. They have all made submissions to the Law Reform Commission within which Dr. Ciarán Burke is writing a report on this subject, which will probably overlap with the committee's work. It is probable that Dr. Burke's report will contain recommendations on civil sanction powers. There are constitutional issues and issues on the powers of the courts and whether a regulator can simply fine someone without the approval of the High Court. That is the current status but I do not really want to get into it for present purposes. However, I note that there is a requirement for quick and efficient sanctions. I do not want to appear like a turkey wishing for Christmas because it affects us too. We could be fined if we misbehave. It is something we are looking for structurally across the industry to give ComReg more teeth.

It is currently very harmless.

Mr. Ronan Lupton

It is fairly weak in the context.

It would not affect Mr. Lupton's members.

Mr. Ronan Lupton

Not really. A company can be prosecuted and convicted before the courts, which would give rise to issues regarding licence applications and various other things. That is obviously a significant issue. However, the fining power set out in the communications legislation is out of date and anachronistic. We need better sanctions and an upgrade of the current legislative regime or structure. Moving forward, civil sanctions can provide quick wins. While I hate using a simple expression like that, the reality is that it is an incentive to behave. It is not just Eir, but everybody. It will be across the board. We have to be careful how we ask for it, in case we get something we do not like, but that is where we are on that. I highlight that Fianna Fáil Private Members' Bill because it is not too far away from what we foresee as a route to facilitating ComReg.

I will pick up on the issue of the 300,000 premises, which Mr. Liam O'Brien may deal with also. As a lawyer, which is the other hat I wear aside from being chairperson of ALTO, I note that the State had no choice in respect of facilitating the transfer or deal around the 300,000. There was no issue in respect of that because it was commercially viable for Eircom to apply to carve out those homes. That is just the way it is and we can say no more than that as it would be unfair to do so. That is the position we are in. I will hand over to Mr. O'Brien to speak from an investment point of view.

Mr. Liam O'Brien

To go back to what Mr. Barrins said at the start, we are speaking here about long-term investments in the market. Investments in fibre infrastructure for homes are not made for a small number of years, they are made for decades. What is important in that context is the fact that in making those investments, one looks into a market where one has confidence in the market, in the regulatory regime within the market, in the prices within the market and how the market will operate and evolve. When there is uncertainty as to how a market will evolve, when there are delays in market governance and reviews and when there is a regulator with limited powers who is unable to enforce compliance on other operators, it creates a drag on investment. Others would be less likely to invest. Notwithstanding that, Vodafone has created with the ESB a joint venture partner, which is separately a member of ALTO, called SIRO. Members might be familiar with it. As such, we are putting our money where our mouth is and not just standing on the sidelines throwing stones. SIRO is investing hundreds of millions of euro to bring fibre to homes in other parts of Ireland.

Senator O'Reilly asked whether others would have done the deal on the 300,000 premises and as Mr. Lupton said, it is slightly more complex than that given the nature of the deal. However, others are investing. We are also investing in fibre to the home in the Irish market through our joint venture with SIRO. Wholesale competition is part of the answer here. It is a "Yes" on regulating incumbents to ensure they operate in a fair and compliant way but there is also an onus on industry and on us to be part of that solution. We feel the investments we are making are part of the solution. While we are bringing money to the table, it unlikely that we can replace Eircom and cover the whole market. We all want a strong but fair Eir in the market. It needs to be there to give access to constituents and access to ourselves.

Mr. Kevin Barrins

Senator O'Reilly referred to pricing. There is a question around whether the delay in wholesale price reductions are a consequence of a lack of powers or resources and the answer is that it is probably a lack of resources. ComReg has the powers to reduce prices and has outlined what, in its preliminary view, prices should come down to. While that could ultimately be appealed, ComReg certainly has the power to implement lower prices. Connected to that, the Chairman asked whether it was about staff or expertise. While it is a combination of both, expertise is required in the wholesale area certainly. It is an extremely complex area from market definition to designation of somebody having dominance in accordance with EU legislation to then going to the job of building cost models. These things are extremely costly and difficult to build and there are pages and pages of Excel sheets in that regard. A great deal of expertise and input is required for that. It is a question of having the right kind of staff also. I do not know what the wage structure in ComReg is but it might be something that could be looked at if the necessary expertise is required. The Chairman asked if this would impact on consumers, which is highly unlikely given the figures outlined by Mr. Lupton on the levy. The current levy is at 0.2% of revenue for each operator. No one will be passing that on to the consumer.

There was a further question on the need for functional separation, which Mr. O'Dwyer will deal with more extensively. I will deal with it in relation to pricing. One of the things that emerged from the KPMG and Cartesian reports was that Eir's wholesale and retail pricing division sit together. They literally sit in the same place in the office. That is an extraordinary advantage for one's retail arm to have. It is simply not credible that the retail arm does not know what the wholesale arm is doing. When one is sitting down strategising about pricing and is in that 300,000 home footprint, one will ask what a good policy would be. They might charge €270 for connection at the wholesale level and nothing at the retail level. Anyone will say intuitively that there is something wrong with that, if one is offering it for nothing at the retail level and for €270 at the wholesale level, while taking on some small regional operators. Some small operators have come on with Eir, which will tell one that it has lots of operators connected, but Eir is still doing 80% or 90% of retail sales there. That is a problem and it needs to be looked at in respect of functional separation.

I reiterate the points made by Mr. Lupton and Mr. O'Brien. It was a sensible decision by Eir on a commercial basis to cherry pick the 300,000 premises and the Government was stuck between a rock and a hard place because of EU state aid rules and really had no choice in the matter.

Mr. John O'Dwyer

I will finish up on functional separation. The concept of functional separation is about creating space between the wholesale division of Eir and its retail division. Creating that space helps one to understand whether there is any discrimination or poor treatment taking place. In a functionally separated world, the wholesale division would still be owned by Eircom and ultimately controlled by it from the top. However, its focus would be set as wholesale and the employees in that wholesale division would be incentivised with a bonus structure or whatever to sell wholesale services. They would not be incentivised to sell whole-of-group services. If they are incentivised for the whole group, they get a benefit if retail makes a lot of money as well as wholesale.

Perhaps Mr. O'Dwyer will explain how the telecommunications operators achieve that in practice? How can that interference in Eir be made?

Mr. John O'Dwyer

There are a few ways it can be done in practice. The companies know which employees work in wholesale or retail. They can be identified through employee reference details and so on. The wholesale employees are incentivised and paid bonuses to do a good wholesale job, and that is their function. There is reporting internally and the company would know its finances and so on. If wholesale does well, the employees working in the wholesale area would be rewarded, as one would expect.

Another way is through system separation, where the wholesale division has its own databases and systems for order handling, etc. The wholesale division owns the systems and retail has a different set of systems. If retail wants to buy something from wholesale in those cases then it goes through the same front door as everybody else who uses wholesale. One creates a system separation level. It has become much easier to do that these days because with cloud-based systems, new physical systems do not have to be built. Retail and wholesale versions of software can be run. Systems can be created to ensure the wholesale division is separate. In doing it this way, we can see the space that has been created between the wholesale and the retail divisions. Retail employees should not be on the wholesale systems and they should not have access to the data other than for items they are buying from the wholesale division. A split is created with space between them.

With regard to the bonus schemes and incentives, an overlaying governance is needed to make it clear to the wholesale division employees that they are wholesale, that they do not share the confidential information of the other operators with the downstream arm and that they do not talk to the downstream retail arm about what other companies such as Sky, BT or Virgin are doing. The governance is set up so that employees understand the rules. There can be disciplinary practices if the rules are broken and so on. There are ways of doing it. In the UK it has been done by BT with its Openreach set-up. It has evolved to another step now but the discrimination issues are well handled with functional separation.

That is a role for ComReg.

Mr. John O'Dwyer

ComReg would need to do it. Eir has a choice. It could offer a voluntary version of functional separation, which is allowed under the European Commission rules. A voluntary version would be much easier to bring forward. A compulsory version, which the regulator would try to enforce, is much more difficult to do. I suspect that ComReg would face a number of challenges if it tried to do this because legal proceedings may be brought to try to stop it. If it was done voluntarily, as an agreement with the regulator, that would be a much quicker way of moving forward. Both the wholesale and retail businesses would be owned by Eir and the board would control them, but they would be run as two separate divisions.

That has been clearly laid out. Do the witnesses wish to make any further contribution, before we wrap up?

Mr. Ronan Lupton

On Mr. O'Dwyer's point, if Eir was to offer a change in its behaviour and a change in governance, it would take a burden away from the regulator and it may enhance the ability of the industry participants to compete with one another and with Eir's regional space. The disclosures in the Styles report, which were discussed earlier, as publicly reported were extraordinary in the context of an incumbent operator operating a telephone network and how it behaved internally. If the new board can have compliance with regulation, compliance with governance and fair behaviour at front and centre of its thinking, then the significant experience it can bring to the management of Eir should see effects on our bottom lines and on the ability of consumers to get better pricing, better services and faster connections.

I have a question on the passive infrastructure. I am aware that the ALTO is in negotiation phase and I do not expect the representatives to say much, but are we talking about an annual fee for using infrastructure such as poles belonging to Eir? Even though much of it is in bad condition, Eir owns most of the infrastructure around the State. It is a private company. What protection have the other retailers in respect of how much they are to be charged per pole and so on? Is ComReg equipped? Is an annual fee paid?

Mr. John O'Dwyer

The poles are quite an issue at the moment. I understand that two years ago ComReg carried out a price review, which it does from time to time, and it came up with a regulated price for pole rental. It is €20 per year per pole, with each pole having two fibres. The problem is that this figure might sound modest for renting a pole, but whoever rolls out broadband to the rural areas will pass a lot of poles. When one multiplies it by the volume of poles, it suddenly becomes a big number. Another issue is that the regulator set the price in 2016 for the price of poles as part of the passive infrastructure work. My understanding is Eir will reflect this back by saying, "The regulator has set the price, so that is the price."

Does Mr. O'Dwyer believe this price needs to be reviewed by the regulator?

Mr. John O'Dwyer

That would be the obvious suggestion to make. Is the price is too high, is it hampering the market and is it realistic?

I ask that question on behalf of the 540,000 households that are not in the areas of rich picking. Some people might disagree about the State having to give 200,000 households to Eir, but we will park that for now. Considering the other costs retailers have, I cannot see how it would be economically viable if they have to pay €20 for each pole they pass to string cables for the other 540,000 households.

Mr. John O'Dwyer

That is the problem.

We are talking about an astronomical amount. A company may have to pass 20 or 30 poles to access the hardest to reach premises or households, that cannot be charged extra and, therefore, the costs must be aggregated across the entire base.

Mr. John O'Dwyer

Agreed. And the other problem-----

I am sure that more informed people have looked at this forensically. I have not, but the viability of the 540,000 premises to be serviced by that charge throws the entire process into question.

Mr. Ronan Lupton

The key point is that it is not economically viable in the first place. This is why there is a subsidy. That is the key.

That would need to be a big subsidy.

Mr. Ronan Lupton

Yes.

From Joe and Mary taxpayer.

Mr. Ronan Lupton

I agree completely. Members may recall that The Irish Times published a document, retrieved through a freedom of information request of the Minister's officials, relating to a review that had been undertaken of the status of the NBP. The review document said that the cost of the subsidy would increase by 60% based on the carve out of 300,000 households. We have the position where statements that say it is not economically or commercially viable are just not correct because fundamentally there would not be a need for a subsidy if it was commercially viable. I agree with the Deputy's position but there are deeply nuanced aspects in this area. Fundamentally, we need to facilitate the 580,000 premises that are outside the 300,000 carve out and the question is how to do it. Passive infrastructure access, PIA, is certainly one element and we are calling for ducts and poles to be fit for purpose and made more robust. As Mr. O'Dwyer set out, this must priced in a fashion that is workable for the industry to roll out those services. We may need to get subsidies in certain locations.

If the scheme is efficient and modelled correctly then the competitive market will take it.

It will cost the taxpayers of Ireland either way.

Mr. Ronan Lupton

Yes.

I mean both consumers and taxpayers will have to pay the subsidy.

Mr. Ronan Lupton

Yes.

Is there is a big onus on public representatives to ensure that there are efficiencies, proper regulation and that things are being done as cost effectively as possible given that the taxpayer must pay either way and in both ways?

Mr. Ronan Lupton

That is correct.

I suppose that is where the regulatory issue comes in.

Mr. Ronan Lupton

Yes.

Mr. Kevin Barrins

Linked to that, the success of the scheme will drive take-up, which is driven by low connection charges. Deputy Stanley was correct to say that homes will need 30 poles to be erected to get a connection yet everybody will be charged the same. One needs to dilute that cost by driving take-up as quickly as possible. However, that is not happening within the footprint of the 300,000 because the connection charge is far too high and take-up is slower than it ought to be.

I thank the witnesses for their excellent and informative presentations. I propose that we publish the opening statements on the committee's website. Is that agreed? Agreed.

I propose that we meet at 12 noon on Tuesday, 26 June 2018. Is that agreed? Agreed.

The joint committee adjourned at 2.20 p.m. until 12 noon on Tuesday, 26 June 2018.
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