JOINT COMMITTEE ON EUROPEAN SCRUTINY díospóireacht -
Thursday, 10 Apr 2008

Scrutiny of EU Proposals.

Chairman

On behalf of members of the joint committee, I welcome the representatives invited today to discuss this package of proposals. They are: from the Department of Communications, Energy and Natural Resources, Mr. Peter O'Neill, assistant secretary for communications; Ms Patricia Cronin, principal officer, communications, regulatory and postal affairs division; Ms Catherine McDonald and Mr. Richard O'Reilly; from the Commission for Communications Regulation, Mr. John Doherty, chairman, Mr. Bobby Hannan, Mr. Tom Butler, Mr. Shay O'Malley and Mr. Hugh Tuckey; from Eircom, Mr. Pat Galvin, Mr. Paul Bradley and Mr. Peter O'Connell; from the Irish Cellular Industry Association and the Telecommunications and Internet Federation, Mr. Tommy McCabe, director; from Vodafone Ireland, Mr. Gerry Fahy, chief executive officer; and from Alternative Operators in the Communications Market, Mr. Liam O'Halloran, chairman, and Mr. Ronan Lupton, director.

Before we begin, I draw their attention to the fact that while members of the committee have absolute privilege, the same privilege does not apply to witnesses appearing before the committee. 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 Houses or an official by name or in such a way as to make him or her identifiable.

Being conscious of the time and the numbers present, I hope presentations will be kept as tight as possible in the interests of efficiency and in order that questions may be dealt with. I ask that the three proposals be dealt with as one package in order that when questions are posed by members, they can be dealt with in similar fashion.

Mr. Peter O’Neill

I thank the Chairman and members of the committee.

Electronic communications networks and services underpin the economic and social fabric of the European Union. Communications are an integral part of our daily lives and the widespread availability of affordable and secure broadband communications networks is a key condition for realising the potential of the European Union. We are now at an early stage of what is the next step in the move towards a single telecoms market, with the European Union's adoption in November 2007 of proposals for reform of the legislative framework for this important sector. These proposals were subject to a preliminary discussion at the telecommunications Council of Ministers late last year. This followed the review of the functioning of the current market framework against its main objectives, which are to promote competition, consolidate the Internal Market and promote the interests of citizens.

A world class electronic communications sector is critical to Ireland's continued economic and social prosperity. The telecoms sector is a significant contributor to the economy as a whole, accounting for approximately 3% of GNP, with total revenues estimated at approximately €4.54 billion. It also plays a key role in maintaining our competitiveness.

It is clear that we in Ireland like to communicate. We have a higher than average mobile penetration rate of 116%, compared to the EU average of 109%. In addition, Ireland's broadband penetration rate continued to improve during 2007. We had the fastest per capita growth in the OECD in broadband subscriptions in the year to September 2007. Broadband is now provided over many platforms, including fibre, fixed networks, cable, wireless and mobile networks. Mobile broadband has been the big success story of the past year, having come from nowhere to almost 130,000 subscribers in the nine months to the end of 2007.

The Commission's proposed reform of the framework is timely. The current rules have served the market well. EU communications services are estimated at nearly €300 billion, with an average annual revenue growth rate of around 2%. Nevertheless, it is important that the framework keeps pace with technological and market developments and remains effective in the coming decade. As we migrate from existing legacy networks to next generation networks, there are implications for regulation, competition, investment and service delivery. There must be confidence and certainty in the sector in order to attract investment for the long term and to foster competition. There must be confidence among investors and in the industry that business plans can be drawn up in a clear, transparent and predictable regulatory environment. While the discussions on the proposals are still at an early stage, it can be said at this point that the broad thrust is to be welcomed. The three key objectives mentioned remain the same: to safeguard the interests of users; to complete the Single Market; and to promote competition.

The main issues in the Commission's proposals include: improved consumer protection, with a particular focus on access for people with disabilities; giving national regulatory authorities the possibility of imposing functional separation as a remedy to tackle competition problems where all other regulatory tools have proved inadequate; the strengthening of the independence and enforcement powers of national regulatory authorities; the establishment of a new EU telecoms market authority to ensure greater regulatory consistency across Europe; the extension of the Commission's powers to allow a veto on the remedies to be applied by national regulatory authorities where dominance in a market is found; a more co-ordinated EU approach to spectrum planning; and the use of the digital dividend.

Starting with the first item, the proposals which aim to improve the experience of consumers are particularly welcome. It is important that the customer is the real beneficiary and to ensure that the needs of people with disabilities are considered in the review. We very much welcome this.

In regard to the proposals to add functional separation as a remedy toolbox of national regulators, there has been a mixed reaction, for various reasons, from member states. A key priority in all of this is the promotion of competition. Competition spurs innovation in terms of products, services and customer experience and obstacles to competition must be removed. Where infrastructure-based competition is not possible, there must be open access. Functional separation would be a remedy of last resort and could only be called upon where all other remedies have failed. Competition must be facilitated to the maximum and it is imperative there is a level playing field for all competitors through the provision of true open access. For this reason, the proposals for functional separation as a remedy of last resort are to be welcomed.

The framework provides for regulation only where necessary. However, regulatory powers must be sufficiently robust. There must be confidence and certainty in the application of the rules in order to attract investment for the long term and to foster competition.

There is a strong emphasis in the proposals on the strengthening of the enforcement powers and ensuring the independence of national regulatory authorities. This is welcome. Effective implementation of the framework is key to its success and we favour strong independent regulators.

The Commission for Communications Regulation, ComReg, is statutorily independent in the operation of its functions and its enforcement powers were greatly enhanced last year through legislation. Given the size of the electronic communications market and its importance to the continued development of the Irish economy, it is vital that ComReg is able to effectively implement regulatory obligations.

I turn to the proposed new European electronic communications market authority. It has been noted that there is some reluctance, and perhaps justifiably so, to a seeming shift of power towards the centre. There has been vociferous opposition to the proposed veto role for the Commission on market remedies and the proposed new authority.

Ireland is not alone in believing that it is important that the principle of subsidiarity is respected, not least in matters concerning spectrum. Member states must retain flexibility to address matters of national importance, while also being able to influence and co-operate on issues concerning European spectrum policy.

It is also important to focus on public interest objectives as well as economic issues when considering the potential of the digital dividend. With the development of new wireless applications and services, the management of radio spectrum will become increasingly important. There is potential for newly-released spectrum to support the development of next generation broadband and to provide broadband in rural areas.

The Commission's proposals have been discussed at Council working group meetings since the start of this year, but are still at an early and almost exploratory stage. There are many details still to be discussed in the coming months and it is likely that the key negotiations will take place later this year during the French Presidency.

While we do have some concerns about the Commission's proposals as I have outlined, we support the overall thrust which is aimed at increased consumer choice and competition. We will continue to play a constructive role in the working group to reach a satisfactory conclusion.

Mr. John Doherty

I thank the Chairman and members of the committee for the invitation and the opportunity for ComReg to outline its views and proposals on the revised regulatory framework. We believe a vibrant innovative communications sector is key to the continued success and development of the European Union and its citizens. This is particularly true in Ireland's case as an island nation of an increasingly service-based economy. The continued development of the €4 billion communications sector here is critical for our continued economic success and the social well-being of our citizens. This is why proposals contained in the current review really matter. Getting them right will make a major contribution as to how the communications sector will develop in the next decade. It is in that time context we need to understand the changes that have been proposed. We have already taken the opportunity to outline our views in more detail through a memorandum we sent to members on Friday. Today I will concentrate on some of the key elements of the package and, clearly, will be happy to deal with any other aspects in terms of questions.

ComReg believes that many of the proposals will have positive results. This is particularly the case in terms of the improved consumer focus, enhanced provision on accessibility, liberalisation of spectrum use and reinforcement of the principles of subsidiarity, through independent and properly-resourced national regulatory authorities. We believe that these measures, subject to some fine tuning, will facilitate greater consumer choice, quality of service and help in the development of competition.

In terms of the details of the proposal, ComReg supports the aims in increasing consumer access to information, to facilitate choice and to provide greater protection, covering contracts, tariff information and quality of service. We support the strengthening of measures concerning accessibility. It should be noted that ComReg has setrequirements in this regard on Eircom as the universal service provider.

There are also provisions in regard to emergency services and access through the single European emergency call number 112 which we strongly support, including the proposal that disabled end-users have equivalent access to emergency services.

ComReg supports the Commission's proposals on spectrum liberalisation and spectrum trading, which we feel will enhance competition and benefit consumers through greater choice, better prices and improved quality of products on offer.

Having outlined the elements we see as positive in the review, there are other elements within the proposals that not just ComReg but all regulators across Europe and many Governments, feel are flawed, not based on robust evidence, and which, if deployed, could materially undermine many of the positive features of the proposal we have already covered. In this context, one of our primary concerns relates to the proposed increase in the Commission's powers generally but specifically in the area of market reviews and deciding on regulatory obligations.

Specifically, the Commission proposes that it would have a veto power on remedies proposed by national regulatory authorities to address competition problems in their national markets. The proposal could result in centralisation of regulatory power in the Commission's hands, enabling the Commission to overrule national decisions, reached by reference to national conditions and after full public consultation. Our primary concern is that there is a possible attempt to ensure that one size fits all which we do not think represents the national situations. These concerns around the independence of regulators, their detailed knowledge of the individual markets and that a one-size-fits-all concept may be imposed is further highlighted in ComReg's view by the proposal to establish the European electronic communications market authority.

The Commission justifies the proposed body by its claim that an inconsistent regulatory approach by 27 national regulatory authorities is hampering the development of the Internal Market for electronic communications. However, to date the Commission has provided no real evidence in support of this assertion. The Commission in its earlier consultation specifically rejected the notion of a centralised regulation.

The European electronic communications market authority would create a significant additional layer of bureaucracy to perform functions which today are largely performed by the European regulatory group, namely, to advise and assist the Commission. This would seem to us to be in clear conflict with the Commission's own better regulation agenda. Radio spectrum is considered by the member states to be a valuable national resource. The proposal would give the Commission high level powers over some spectrum management matters. While ComReg supports the concept of harmonisation in the case of pan-European services, it considers that Commission proposals are too wide-ranging, ignore the concept of subsidiarity and are based on a one-size-fits-all concept which it believes is inappropriate.

The declared aim of the Commission's proposal in the matters mentioned is the consistent implementation of the regulatory framework, with the pursuit of the Internal Market as an objective. ComReg fully supports the aim of pursuing greater consistency in applying the regulatory framework and is fully committed as a member of the European regulatory group to promote greater harmonisation. The Commission has over-stated the issue of consistency.

Bearing in mind that the proposals are unlikely to be adopted in the member states for at least a further two years, the market analysis in the interregnum will continue to demonstrate convincingly that the Commission's current proposals are disproportionate and unnecessary. The current proposals represent a substantial shift of power from the national level to the Commission and undermine a key principle of regulatory framework, namely, regulatory decentralisation and subsidiarity, which recognises the vital role which national knowledge, experience, expertise and resources play in order to define and implement remedies, tailored to national markets.

Based on the European Commission's decision-making processes in the past, we have concerns regarding the delicate balance between a centralised approach and devolving tasks to national competencies. In particular, we have concerns that the specific requirements of the Irish market might be overlooked in any centralised approach by the Commission. One example of this is that in the review of the markets undertaken last December the Commission reduced the markets overall from 18 to 7. Despite inputs from European regulators across Europe about the lack of evidence in some of those markets, the Commission ignored that advice and, for instance, removed markets like the international transit market, which we believe is important for the Irish situation, and it seemed to have little evidence to support its particular removal.

I would not like to leave the committee with the impression that ComReg is opposed to the overall package of measures or does not recognise that there are areas where improvement can and should be made. There is much in the current proposals to be welcomed. However, in a limited but highly significant range of areas, we and the European regulatory group fundamentally disagree with the proposals by the Commission to achieve the overall objectives of promoting the sector and the need of end-users. We believe that those concerns are shared in other member states and hope they will be addressed satisfactorily in the consideration of the draft regulatory package. Apart from this, the proposals are positive and forward-looking. In particular, the consumer-focused proposals will facilitate greater consumer choice and competition, and ComReg supports these proposals.

Chairman

I thank Mr. Doherty for his presentation and now invite Mr. Pat Galvin from Eircom to make his presentation.

Mr. Pat Galvin

I thank the Chairman and members for this opportunity to address them on the reform of the EU telecommunications package. We have circulated a document and as I am conscious of the time constraints that apply, I will deal with the executive summary and refer specifically to some points in the supporting paper.

From a high level we all understand the key role regulation plays in the industry in which we operate, especially on the level of investment, the speed of innovation of new services and the scope of consumer benefit. In assessing the revised legislation——

Deputy Simon Coveney

Has the circulated document been sent to members by e-mail or put in their pigeonholes? If there is a document, it would be helpful to have it to facilitate our putting questions to the representative.

Chairman

We will ensure it is given to the Deputy shortly. I ask Mr. Galvin to continue.

Mr. Pat Galvin

Before considering what is proposed, we are obliged to assess the impact of change on the industry in the past ten years, particularly the role regulation has played. Regulation, in conjunction with technology change and a transformed approach to business by individual operators, has resulted in dramatic improvements for Irish consumers and businesses over the life of that regulatory package. In particular, new competing networks, especially mobile, wireless and cable, are offering competitive products, choice and innovation to what was traditionally the incumbent copper network. Prices have reduced significantly in real terms and broadband usage here, as referred to, is now among the fastest growing among the OECD countries.

In our supporting documentation we have identified three key goals that regulation set out ten years ago to achieve. The first one was the promotion of competition, the second was the promotion of consumer rights and consumer welfare and the third was to encourage investment. When we examine the evidence from all independent sources, including ComReg and the EU, it is clear that in the case of the first two objectives, the promotion of competition across all platforms and the promotion of consumer welfare, we have been very successful. No one could argue that the industry has not been fundamentally transformed from the industry that the first regulatory package addressed in 1997 and which was finally brought into formal legislation in 2003.

However, our view is that this is a once-off opportunity. The rules and regulations for our rapidly changing industry only change every seven or eight years. What will be agreed in the package will have a fundamental impact on our industry in future. Therefore, if we are happy to consider that the objectives have been met, the key question is whether we need the same objectives as we look forward. Policy must be future-looking. The concern we have in general is that the current reform proposals seek to continue a regulatory approach initiated ten years ago in 1998 when the telecoms market and the EU were fundamentally different. Since then the market has undergone such profound change and faces even more radical change and challenges that regulatory policy needs to be refocused. We get one shot to get the rules right and they will have a role to play for ten years into the future.

Our concern is that we believe the reform proposals do not address the main future challenges for the sector. The key challenge for policy makers is to ensure Ireland's telecoms infrastructure and services benefit from a regulatory regime that encourages the step-change in investment that is needed to place Ireland at the forefront of global economies in terms of information and communications technology availability and usage. Our concern is that the current regulatory model, which is now ten years old and is being reviewed, is based on a relatively short-term view of the market with regulatory outcomes mainly measured in terms of price levels and market share. This results in micro-management of a very dynamic market and perhaps a lack of confidence in the industry to develop. Public policy needs to support the vision of a long-term healthy investing sector supporting sustainable competition.

The reform debate should focus, therefore, on how to adapt the regulatory approach to reflect the dynamic nature and the high risks associated with investment in next-generation networks. New access infrastructure, in particular fibre, is essential to meet rapid increase in data traffic. We forecast a six-fold growth in data traffic in the next two years. Systematically extending current rules defined for old legacy infrastructure in the expectation that this will lead to rapid development of advanced, high-capacity networks will not work. Analysis shows that an investment deficit exists not only in Ireland but throughout the EU compared with other global regions where the regulatory model, especially in America and the Far East, has evolved to meet future requirements. In that sense, reform of the framework should reinforce the transitory character of ex ante, sector-specific regulation and present a realistic ambition for a high-performing sector driven primarily by market forces.

I recall that when this initial package was introduced it was explicitly presented as a transitory need to intervene in the market with precise regulatory intervention tools. The market has moved on since then. There is no argument that this package and its scrutiny was needed in the early stages of liberalisation. The market has changed fundamentally. We must look forward to what best attracts investment into the industry and whether the regulatory model has a role to play. We strongly argue that it has a significant role to play in that vital objective of encouraging investment into the future. Those are our general concerns of a more strategic nature.

I would like to refer briefly to some of the individual components and support some of what has been said, particularly by Mr. John Doherty. There are four or five key components in the legislation, aside from its strategic direction. With regard to functional separation, Eircom's view is that if such a remedy, arrangement or initiative is to be introduced into the market, it should be at the voluntary will of the company concerned in terms of its shareholders deciding how to organise its business and structure. Functional separation is a highly interventionist regulatory measure. Any intervention such as that from regulation creates significant additional risks for investment and sustainable competition. We believe it should be very much a voluntary decision. One of the concerns we have with functional separation is that having regard to the other measures in the legislation, including the establishment of a pan-European regulator and the establishment of veto powers for the Commission, there is a scenario whereby an individual private company could be functionally separated, even if that company or the national regulator is not favour of it.

Taken together, we have a serious concern about the extent the central role of the European Commission and the new body proposed by the Commission may have in very rigorous intervention in the affairs of private companies. These are measures that even competition authorities have chosen to use only in extreme circumstances. Given the dynamic nature of the industry we deal with every day, we would be concerned about the introduction of that type of radical remedy. The industry should not be a test bed for regulatory remedies that have not been proven necessary to be successful anywhere in the world.

I mentioned the pan-European regulatory agency. I agree that the case from the European Commission for that new layer of regulation at EU level is not convincing. In terms of process, we are concerned that it was never proposed and consulted upon in the individual construction of the review. This was produced at a later stage in terms of a new initiative.

We agree that the regulatory process needs checks and balances. As a regulated company, Eircom is extremely aware of that. However, a key goal should not be to create a new layer at EU level which impinges on the principle of subsidiarity and increases complexity and cost. We would similarly refer to the EU Commission proposed veto. The best regulators are the highly skilled regulatory bodies with local knowledge who are intimately aware of the specific characteristics of the Irish market. The nature of the veto proposed by the Commission would affect the ability and freedom of the national regulator to do its job in that sense.

Needless to say, Eircom and every operator in the sector absolutely support the principle of consumer rights. Eircom is the universal service operator and it faces rigorous standards of service and pricing which the regulator has imposed. It is happy to do that. We have concerns to ensure that it is done on a fair and equitable basis and contributed to by other operators on the market, and we are happy that the Commission proposals do not change that fundamental right. We generally welcome the spectrum management reform proposals and the liberalisation elements. Again, we would be careful to ensure that spectrum as a national resource is properly protected in terms of its most beneficial impact on the market.

As we are part of the IBEC-TIF body, Mr. Fahy will refer to other issues where Eircom agrees with the IBEC-TIF position.

Chairman

Perhaps Mr. Gerry Fahy from the Irish Cellular Industry Association will make his contribution.

Mr. Gerry Fahy

I have circulated my presentation to the members. I am here in my role as chairman of the Telecommunications and Internet Federation, TIF, within IBEC. I am also strategy director of Vodafone Ireland, not chief executive. TIF is a broad group. It represents the vast majority of operators in the Irish telecommunications market today. A number of industry groups do the day-to-day work in TIF, namely, the broadband and next generation network group, the cable and broadcasting group, the mobile group, the outsourcing services group, the regulatory affairs group and the telecoms and technology group. We also have three affiliate organisations — the Irish Cellular Industry Association, Mobile Marketing Association Ireland and the Irish Telecoms and Security Fraud Forum. The TIF is a broad church and that church can accommodate a number of different views. These organisations within IBEC are competing rigorously on the Irish market and do not always have a consensus view on every point. I will highlight areas where there is consensus and also areas where we might have a slight difference of view on the main structure of the proposal.

The proposed legislative change in the regulation is a journey that will take a number of years. We believe it is important that this and other committees as well as the Department closely follow the development of the regulation as it goes through the various stages. The committees and the Department should work closely with the industry and continually consult and engage with the industry because the industry will have strong views which will evolve as the thinking evolves during the process. The proposed reform that particularly concerns TIF is the proposed central European regulatory body. We believe this significantly undermines the subsidiarity principle, which is very important in this context. We do not believe that one size fits all in terms of the outcome of regulatory decisions. There are relevant issues to be considered in each local market and it has served Ireland's telecommunications market well to have that principle in operation heretofore. The market has developed in a very competitive fashion on foot of the current principles that operate and there is no reason for that to change.

The creation of the European electronic communications market authority with a power of veto over national regulatory decisions creates a lack of transparency. It is not clear whether it will engage in consultation processes, how it will arrive at its decisions and whether there will be any ability to appeal those decisions. These are fundamental rights under the current regime and must be retained. We share the view of ComReg and Eircom that this development is neither helpful nor useful.

With regard to functional separation, there are basically two views among the members of IBEC-TIF. A broad number of members believe that the separation of companies' operations and assets, whether functional or structural, should remain a voluntary decision of the individual companies and the shareholders. To introduce a highly interventionist regulatory remedy such as functional separation into the "toolbox" of national regulatory authorities increases the uncertainty in the sector and raises additional risks for investment and sustainable competition. Effectively, it is a high risk, one-way bet in that it cannot be undone. That is the view of one group of TIF members. Another group of members believes there are circumstances where such a remedy should be considered. However, it should not happen in any general circumstances but purely as a last resort to resolve the issues that face the market.

The industry shares the broad agreement that consumer rights are very important and should be highlighted and addressed in proposed regulations. However, we query the effectiveness of some of the measures proposed and the feasibility, associated costs and the funding required. We agree with the proposals in principle but at the detailed level we are concerned about the costs they have for the industry and that these costs are fairly considered and fairly allocated. With regard to co-location and facility sharing for bottleneck facilities, there is a divergence of views in the TIF. One set of members considers that it should not be warranted in any circumstances while another group believes that in the event that it is mandated it should apply not just to the electronic telecommunications sector but to all those who have ducting facilities, including public authorities, public organisations, ESB, the National Roads Authority and so forth. Wherever ducts lie, they should be liberalised.

We welcome the intention to periodically review "must carry" obligations across the EU. TIF will expect clear guidance on the application of the "must carry" obligation, which should be linked to services with a clearly defined public service remit. With regard to the proposed reform of the current spectrum management regime, we are generally supportive of this proposal. However, spectrum is an extremely delicate and complicated issue and we should adopt a step by step, evolutionary rather than revolutionary approach. It should ensure no market distortions are created or problems created for existing services, such as interference and so forth. Now is the time to begin debating how best to use spectrum in the UHF band — effectively the digital dividend — that will be liberated when analogue television is switched off. It should not be automatically presumed that it should be allocated directly for other broadcast services. It is a spectrum which is ideally useful for other services such as terrestrial mobile services and so forth.

Network security is being harmonised. It is an important issue. It is in the commercial interest of all operators to ensure that networks are secure and robust. We do not believe there is a legislative requirement to address this because there are already guarantees of security in national legislation.

There is a related issue, although it is not directly dealt with under this directive. It is an example of where regulation can go well beyond what is intended and have unintended consequences. The data retention Directive 2006/24EC provides for data to be retained in a comprehensive and longitudinal timeline fashion. This generates significant technology costs and capability questions for the industry. The cost of compliance with that directive is disproportionate to the objectives of the directive and visits significant costs on our industry and customers. This is an example of where perhaps well-intentioned directives can generate unintended and disproportionate consequences.

Chairman

Finally, I wish to call on Mr. O'Halloran from ALTO.

Mr. Liam O’Halloran

Thank you, Chairman. ALTO represents the alternative operators in the Irish telecoms market and has 13 members who are operators in the fixed line and fixed wireless segments. We rely for our business on a market that is open to competition and has a level playing field. ALTO welcomes the opportunity to give its views on the reform of the EU framework for electronic communications as proposed by the EU Commission.

Not all national markets are the same and, thus, various countries have various degrees of competitiveness in their markets for telecommunications services. In Ireland, while the retail market is tending towards being competitive, the wholesale market is not competitive and regulation is still required to improve this situation. However, a number of markets that are the subject of ex ante regulation in Ireland — specifically international transit, leased line and mobile access — were last year removed from the Commission’s list. This highlights to ALTO the need for independent national regulation that cannot be pressurised from the centre to reflect the situation in more advanced markets. We also oppose the setting, at European level, of a definite date for the removal of competition rules by the EU.

Functional separation is a tool that should be made available to national regulators after appropriate market review and consultation processes have been followed. It is a necessary solution to offset some of the major problems caused by incumbents with SMP who use their infrastructure to leverage value for their retail businesses to the detriment of competition.

It is also important to identify that functional separation takes place at the access layer, to ensure that there is competition for wholesale services as well as retail services. This is relevant in the Irish context where structural separation in proposed at the wholesale layer only. When functional separation is implemented, it should be technologically neutral and not just copper-based, that is, fibre should also be included.

Functional separation of itself has a lot to recommend it as a solution. It has been implemented in the UK. Here the incumbent gave undertakings that voluntarily brought about the separation of its access business from its wholesale and retail divisions.

Today, broadband penetration in the UK is 25% compared with our 18%. The biggest impact has been in unbundling the local loop, where 4 million customers have been added to BT wholesale operators. That would be equivalent to 400,000 in Ireland and, as we all know, we have about 20,000 customers. That being said, while we support functional separation we are aware that the UK is the only market where this has been applied and that the model may need to be changed to take into account some consequences as yet unforeseen. However, it is a good solution and will benefit competition when it is adopted by the national regulator as a method of last resort. Therefore, we support it.

The proposed market authority, or EECMA, adds a layer of centralisation and bureaucracy to the market which principally damaged the independence of the national regulator. There are some positive elements in the proposal that could be implemented by strengthening the European regulators group or ERG, of which ComReg is a member. Up to now, the ERG has been providing a co-ordination role between national regulators.

Putting the ERG on a firmer legal footing with clearly defined responsibilities, as well as giving it responsibility to provide opinions to the Commission when it exercises its veto on market reviews, would be an important component of its mission. We are aware of a proposal by the European Parliament, referring to this body as the body of European regulators in telecom, known as BERT.

The inclusion of the security agency, ENISA, is inappropriate to a market regulator and should be left independent.

ALTO supports the Commission proposals to liberalise spectrum. Allowing more flexible uses will lead to more innovation and consumer benefit. Ireland has unique spectrum advantages in that we have no close neighbour or interference, as such, and therefore will benefit from a more liberalised view. However, there has to be regard also for the need for harmonisation across Europe. ALTO would support that being advanced by the Commission to support interoperability and the development of pan-European services.

Deputy Chris Andrews

I will have to rush off soon to speak in the debate on the Lisbon treaty legislation. What sort of budget does ComReg have for regulating the industry? What is the yearly cost of such regulation? I am aware that the industry makes a financial contribution to ComReg, but how much is it? Is there a surplus year-on-year that is returned to the Exchequer by ComReg? If so, should this money not be given back to the industry so it could provide lower call costs for consumers? If that surplus is returned to the Exchequer, is it ring-fenced for industry or the benefit of communications? How much input do the industry and the Department have in the initial stages of legislation? What submissions does ComReg make concerning legislative matters? The broad thrust of much of the legislation that comes before us has been determined, although we can make some changes. In the early stages of framing legislation, therefore, what sort of input do the industry and the Department have? I appreciate that a huge amount of work is involved but I want to be satisfied that the industry and the Department have the necessary input to influence change and that they are proactive enough in the process of drawing up legislation.

Mr. Peter O’Neill

I presume the Deputy is talking about EU legislation.

Deputy Chris Andrews

Yes.

Mr. Peter O’Neill

In fact, what we are doing today is part of the input process into the legislation. What will come out of today's committee deliberations, and any further deliberations the committee might have, will be matters that we will take into consideration in the negotiations.

Deputy Chris Andrews

It was really in its infancy. When a germ appears, at what point does the Department become involved in this process? When is the Department notified? Is it like a big seed? How much work has been done before the Department gets involved in drawing up legislation?

Mr. Peter O’Neill

It is part of an ongoing process. The initial seed comes from the European Commission. It develops proposals that are discussed in Commission working groups which the Department attends. All member states are part and parcel of the initial input into this. They are essentially European Commission proposals. In terms of trying to shape what the end product will be, the real work is done in the Council working groups. The proposals we are talking about today are now in the Council working group. As a member of that Council working group, Ireland attends it, along with the other 24 member states. That is where the details are thrashed out. Each member state will bring its own particular situation to bear. Part of Ireland's position will be influenced by what the industry has to say about it and what this committee has to say about it. It is all part and parcel of that process.

Chairman

Does Mr. Doherty wish to give the ComReg aspect of it?

Mr. John Doherty

First, I will explain how the levy is made up. ComReg is completely financed by the industry. It comprises two elements: one is a levy and the other concerns spectrum fees. In the calculation of those two elements, since liberalisation, ComReg has returned almost €300 million to the Exchequer. The bulk of that money arises from spectrum fees rather than the levy. Clearly, we have a range of statutory functions. We looked after the postal licensing area. We publish and separate our accounts, as required under the Acts, but the levy income supports ComReg and the residue of that levy income, which when one thinks about it is the provision of very valuable spectrum and a national asset, comes back to the Exchequer. It is, therefore, used by the Exchequer in that sense so it is not the same as a levy on the industry. It is the use of a national asset for which we charge an income on behalf of the State. We pass the surplus back to Government through the Department to the Department of Finance.

Deputy Chris Andrews

What period of time does the €300 million cover?

Mr. John Doherty

It is since liberalisation in 1990. I believe the exact figure of €297 million. In the previous year, we would have given back approximately €12 million. All of that arises in the context of the levy on spectrum utilisation. That is the money which is quite rightly given back to the State since it is for the use of the national asset spectrum.

Deputy Chris Andrews

Could a case be made that it should be returned in order to bring prices down for customers?

Mr. John Doherty

We have a national asset which companies use to provide their services. They make profits out of those services. The country provides the spectrum for that utilisation and we charge for it. In a sense, ComReg is the repository for that and we give the surplus back to the State.

Chairman

There is an infrastructural deficit. People hear about gigabytes compared to those in other countries and the capacity in terms of speed. Is there not a need for greater investment in infrastructure? Is there not an infrastructural deficit? People have indicated to me that the capacity and speed is two gigabytes compared to six gigabytes in some other countries. Is that not a difficulty in a very advanced economy?

Mr. John Doherty

One has to recognise the difference between advertised speeds and what people get. There has been much difficulty in the United Kingdom with high average speeds advertised but which people do not get. On the basic principle, we would stress that almost every company, including Eircom, have announced significant upgrades in speeds. We see this as a progression of the industry.

Chairman

What is the average speed at present?

Mr. John Doherty

It varies. Are we talking about a business user or a private individual?

Chairman

A business user — for example, a solicitor's office.

Mr. John Doherty

Many of the larger business practices and solicitors may use leased lines. They would have the gigabyte capacity available to them which they want. Industry is possibly using 100 megabytes and above. The issue on speeds is primarily a residential market one where the broad average product in this marketplace is probably in the 1 to 3 megabyte level. Those speeds are increasing. Smart Telecom, Eircom and others have introduced new speeds. There is a need to continue to have the investment climate. That is an issue at which we are continually looking, that is, how to ensure, in a technology neutral way, that investment continues in this marketplace so that the climate is there for those investments to take place.

That is quite different to the fees paid by companies, such as Vodafone and others, for the spectrum. They are using a very valuable national asset. If there is a surplus, it correctly goes back to the State. Not to confuse the two issues, but it would not be appropriate to use the spectrum money from Vodafone to give to Eircom for that type of approach as distinct from creating the environment for Eircom and others to invest in next generation networks, which is basically what we are doing.

Chairman

I refer to the point Mr. O'Halloran made in regard broadband and a roll-out of 25% versus 18%. Is there not a huge deficit in certain regions of the country where, unfortunately, the infrastructure would not be great and the capacity to get broadband would be poor?

Mr. John Doherty

A number of measures have been undertaken. The Government launched the national broadband scheme to try to address the last 10% or 15% of the country for which commercially driven broadband has not reached. We expect that will start to be committed from June onwards. That is a continuing programme.

We need to be very careful with the figures being bandied about. It is interesting that when one uses the barometer of households, the actual household penetration of broadband in Ireland is 45% as against 49% in the United Kingdom because we have larger families. We must be very careful about the metric we use. A simple 100% measure, like 18 to 25, does not fully reflect that 45% of Irish households have access to broadband. Mobile broadband is being increasingly taken up. We are actually leaders, even though we always portray ourselves very negatively. In areas such as mobile broadband and wireless broadband, Ireland is among the leaders in Europe in terms of those technological deployments. That is very welcome and we should continue to develop the cross platform competition.

There is not only one solution to this. It may be wireless, satellite or whatever. I suppose we are keen to recognise that mobile broadband and wireless play a significant role in this as well.

Mr. Liam O’Halloran

I would be afraid people would get the impression that our broadband penetration and the quality of the broadband issues are solved by the introduction of wireless or mobile. They have their place but they are not the solution to the problem. We will face limitations going forward in terms of what they can deliver.

The longer term question in regard to businesses being able to get access to good broadband in rural and other such areas will bring up the issue as we roll out next generation networks and whether it will be commercially viable for people to invest in them. At that point it will be a question of debate as to whether Government should put some money into that or should be part of that infrastructure investment. At that point, in the context of the revenue stream coming out of spectrum or whatever, somebody might be able to find some of the investment money there to reinvest in the future.

Mr. Gerry Fahy

On the regulatory levy and the surplus, there is no question that there is a national asset and there is no dispute from industry that there is an appropriate fee to be paid for the use of a national asset. Sometimes there is a question about the level of those fees and whether they are appropriate. The question of a surplus is an interesting one. Industry is often asked to do things on behalf of society such as to fund the provision of emergency answering services, whether fixed or mobile. Where Government or society looks for industry to fund these activities, there is a question as to whether some of that surplus could be allocated to cover those activities the Government requires industry to undertake on its behalf.

On the question of broadband, Irish broadband penetration is growing at a faster pace than in any country in Europe. That is bearing in mind the demography of Ireland in that the population is very spread out. TIF recommended to the Government that it should consider the rural broadband scheme because we recognise that 10% of the population are beyond commercial reach in today's technology terms, so we would support the rural broadband scheme as recommended by TIF.

Mr. Pat Galvin

I wish to add to some of the comments on Deputy Andrews's question. I refer to the point about broadband speeds. As Mr. John Doherty pointed out, we need to differentiate between business and residential. Irish business generally has been very well facilitated by the industry, mainly because it uses a different solution. The industry is quite proud of the contribution it has made to the economic growth of business, in particular, in the past ten years.

There are issues at a residential level, mainly around location of individual households which may be beyond the reach of the technology. Everyone will agree that the progress on that has been substantial. Any customer who does not get broadband is a huge concern to us as service providers. We will do everything we possibly can but sometimes it is impossible if somebody chooses to live, as they are entitled to do, in place which the signal does not reach or where the cable distance is too long. That is why the NBS is an extremely welcome initiative by Government. We cannot discuss that because it involves a public tendering process. If the money for spectrum that was returned to the Exchequer, to which Mr. Doherty referred, is used for the NBS, it will be a win-win situation for everybody.

With regard to Mr. O'Halloran's point on the future, ultimately, the household speeds to which people refer will be provided in a fibre environment which is the type of ambitious target we in Eircom would like to set for the country and which——

Chairman

Will that replace cabling?

Mr. Gerry Fahy

It would replace the copper network, which is still very robust and good as technology improves but, ultimately, in countries with massive broadband speeds, the networks are predominantly based over fibre. The copper network is replaced with fibre, which is brought as near as possible to the home, resulting in improved speeds.

We tend to be unduly harsh on what we have achieved. Japan, for example, is a world leader in broadband but, according to a Japanese Government publication in January, 5% of the country is without broadband access. The Government intends to close that gap by 2010. Ireland has a 10% gap, mainly due to demographic features, which the Government has rightly targeted to be closed by 2010. As Mr. Doherty said, on a global measurement, we are doing well. That does mean we are happy and we will strive to improve continuously.

Chairman

Deputy Noel O'Flynn was Chairman of the Joint Committee on Communications, Marine and Natural Resources, which produced a detailed report on broadband during the previous Administration and I am delighted he is a member of the committee. His committee was at the cutting edge of the reports that led to many of the changes under the previous Government.

Deputy Noel O’Flynn

I hope the Fianna Fáil leader designate is listening to the Chairman.

I acknowledge the work of the telecommunications providers, TIF, ComReg and the Department and the progress made over the past 12 months. They have all done a great deal to advance the roll-out of technology. My committee's final report made two recommendations having made 12 in its initial report in 2004 and more than 40 overall. I would like to put a question to Mr. O'Neill. If functional separation and new regulations are introduced, how will they be financed? Will incentives be provided, for example, to operators with copper in the ground currently or those who do not have sufficient fibre? Is it envisaged by the Department that operators with fixed line networks based on copper will be encouraged to move to a fibre option, which would mean the introduction of a completely new infrastructure on their networks? I presume operators will be encouraged to move to the best technology, which is fibre, if connection speeds of between 40 Mbs and 100 Mbs are to be provided. Mr. Galvin mentioned Japan and that is the rule of thumb there and in other countries that are very advanced in using this technology.

Will the Department offer incentives to encourage fixed line operators to invest in their infrastructure? If change from copper cabling and coaxial cabling used by television operators to a fibre network for the future is to be encouraged, we must ensure we have a state-of-the-art technology for the future. Should the Department consider financial incentives, for example, capital allowances so that they would change? Has the Department completed the audit of fibre networks? How much fibre is on the ground? If the new regulations are introduced, what will happen to the metropolitan and local area networks? Are they operating to full capacity? Is Mr. O'Neill reasonably pleased with their progress? If functional separation from the main incumbent and others with the infrastructure is achieved, is it envisaged all the MANs would be used, as there would be no need to roll-out fibre, for example, alongside them? A number of telecommunications companies have copper in the ground and if they invested in fibre, surely it would not be envisaged they would roll out fibre alongside the MAN, which is a fibre option? What mechanism will be in place to incorporate the significant investment by the Department on behalf of the taxpayer in the MANs?

Why does Mr. O'Doherty think the EU considers it necessary to reserve powers to intervene in markets where it feels the regulator is not carrying out its functions? What added value will the new European telecommunications market authority bring to the regulation of Ireland's telecommunications?

I did not expect Mr. Galvin to be in favour of many of the new regulations when I read the brief last night but will they encourage more operators into the marketplace?

Mr. Peter O’Neill

Japan was mentioned a few times. Japan and Korea are held up as two countries that are advanced in terms of the roll-out of fibre networks. Even at that, broadband is not available everywhere in Japan. Even though Japan and Korea provide 100 Mbs speeds, usage is low. The majority of people in Japan use this speed for e-mail, which they could send with a 2 Mbs speed. According to the OECD recently, productivity in these countries has not changed at all, despite the heavy investment in 100 Mbs speed. The Department is preparing a policy paper on next generation broadband, which will be distributed for public consultation.

Chairman

When will that be published?

Mr. Peter O’Neill

Within weeks. Perhaps five or six weeks.

Chairman

Would it assist the formulation of the committee's view?

Mr. Peter O’Neill

The committee would certainly have an interest in it. We have found in researching the paper that most governments and industries are taking a reasonably cautious approach to the roll-out of next generation broadband. Nobody is rushing into it. We have particular circumstances in Ireland, with a significant rural population and low density housing. Technologies such as wireless might have a particular relevance. People are being cautious because not all the technology is fully developed. Despite what has happened in Japan, Korea and elsewhere, there is no rush to invest in next generation networks. Our policy paper will reflect that and it will also reflect the fact that the private sector should make the investment in infrastructure, as has happened up to now. The Government has a role in ensuring regional development takes place and it must step in where the market fails, as it is doing with the national broadband scheme.

Deputy O'Flynn asked about functional separation. On the issue of the contents of the regulatory package, I noted that functional separation is being proposed as an option of last resort and in so far as the Department supports functional separation, it is very much as an option of last resort. Two forms of separation are being spoken about in telecoms, namely, functional separation and structural separation. Eircom has proposed the latter and ComReg is carrying out consultancy work to assess what this might mean. Regardless of the nature of the regulator's proposals on functional separation, there is nothing to prevent Eircom from structuring itself as it wishes. It may separate functionally or structurally, provided it complies with regulatory rules.

There are 20 operators in the market. The Department is of the view that this level of competition has been instrumental in the spread of broadband and the increasing speeds operators are beginning to offer. A healthy market is characterised by the existence of a number of operators and competition.

The metropolitan area networks, MANs, are State infrastructure. Nobody sees sense in fibre being built beside a MAN because to do so would create duplication. The Department's policy paper will examine how to deliver best use from the MANs. Substantial State infrastructure is in place, for example, the ESB, CIE and Bord Gáis have fibre. It may well be possible to achieve greater synergy from State infrastructure and we will examine this possibility.

Deputy Noel O’Flynn

For clarification, has the State finished investing in its own telecommunications infrastructure?

Mr. Peter O’Neill

No. More than 90 metropolitan area networks are in place. A value for money report on the MANs will be published within weeks. Following the first and second phases of the MANs, a third tranche of MANs will be built. We will take lessons from the value for money report on the existing MANs and apply these to identify locations and the order in which future MANs will be built. When I say we have not finished investing in metropolitan area networks I do not know whether we will invest further in them but we will examine that possibility.

Deputy Noel O’Flynn

Mr. Galvin indicated we have a 10% deficit in terms of broadband roll-out. Is it envisaged that the State will encourage telecoms operators to invest in the final broadband roll-out, rather than doing so itself?

Mr. Peter O’Neill

Yes.

Deputy Noel O’Flynn

Is it envisaged that incentives will be offered to operators which may decide to invest large sums in this infrastructure?

Mr. Peter O’Neill

Financial incentives are not on the table at the moment.

Deputy Noel O’Flynn

Will incentives be offered in the area of capital investment?

Mr. Peter O’Neill

No, we are trying to work towards a healthy market where the regulatory regime and competition will provide the incentive for companies to invest.

Mr. Tommy McCabe

I represent the Irish Cellular Industry Association, ICIA, and the broader grouping, the Telecommunications and Internet Federation, TIF. As Deputy O'Flynn will recall, when we considered the issue of broadband several years ago, broadband speeds and penetration were much lower than at present and there was a definite problem. The industry will recognise that we have increased penetration dramatically over the past 12 months. The latest figures from ComReg indicate there are currently 870,000 broadband subscribers. The Telecommunications and Internet Federation has expanded its broadband committee and renamed it "TIF broadband next generation networks".

Next generation networks, NGNs, is an area the joint committee may like to consider because we need to move beyond the current debate. While I accept there are still problems in broadband, the Government strategy of tackling the final 10% is solving them.

To look ahead towards next generation networks, we have produced a policy document entitled, "NGN Principles", which we circulated to the joint committee earlier in the week. We are pleased to have worked with the Department on the document and will meet ComReg next week to discuss these principles.

Consideration should be given to how Ireland can instigate investment in next generation networks which will bring more competition and investment. What is needed is not so much incentives but a regulatory framework and policy direction from Government which will give companies assurance that they will achieve a return on their investment. Industry is willing to engage in this debate, which is yet to take place. While many committees have been established on NGNs, the issue needs to be addressed. Perhaps the joint committee could get back to us at a future date to determine what progress has been made in this area.

Deputy Noel O’Flynn

What is the industry's view on future connectivity speeds? We heard, for instance, that while speeds of 40 Mbs to 100 Mbs are available in Japan, they are not being used. Does the industry expect to have fibre rather than copper available to it?

Mr. Tommy McCabe

Everybody agrees that the ideal is to move towards fibre. The traditional view is based on the argument, "Build it and they will come". While this model has limitations, by and large the greater speeds and applications will come. In the same way that no one will return to black and white television now that colour television is available, no one will opt for slower speeds if higher speeds are available.

The applications are still being developed. It does not make sense to have 100 Mbs per second for using e-mail, as is currently the case in some places. We need to develop applications in business and residential markets. The next generation of children are using these applications for games and entertainment. The applications are coming on stream as society changes. We need higher speeds, investment and fibre. While industry is willing to play a role across the board, it needs a framework, which is currently absent.

Mr. John Doherty

I will make a contribution on one point before answering the Deputy's question. From what I have heard, one could conclude there is not an climate for investment in next generation networks. That is not the case. One of the three-yearly devices ComReg uses is the weighted average cost of capital. We have made it perfectly clear to the industry in two consultations that if there is high risk, lumpy type investment in areas such as next generation networks, we will be willing to examine the matter.

Chairman

Would ComReg subvent or support such investment?

Mr. John Doherty

This is a way for the industry to earn a specific rate of return. It is therefore used as a way of incentivising the industry.

Chairman

It is a return on investment.

Mr. John Doherty

To be clear, it is not the case that this does not exist. This is the most appropriate approach. Picking winners is a challenging task. We are trying to move forward all the competing technologies. However, for the avoidance of doubt, ComReg has stated in two separate documents that if Eircom or others have particularly lumpy investments for next generation networks, we are willing to examine these specific areas of risk. We need these companies to identify these areas and come back to us.

On Deputy Noel O'Flynn's question on the reason the European Commission might want a veto, the stated reason the Commission has given is that some regulators and telcos are still owned by governments. In other words, the incumbent telco in some of the new accession states is still fully owned by the government. There is a belief in the European Commission that some regulators may not be as independent as it would like because they receive all their funding from the government. However, we should all recall that when the Commission sought a veto in 2003 it was not supported by the European Parliament on the basis of subsidiarity and national context. The stated reason for the Commission is to try to ensure independent regulation.

Deputy Noel O’Flynn

What is the position regarding the establishment of a European regulatory authority for telecommunications?

Mr. John Doherty

I understand approximately ten people work in this area in the Commission. The proposal from it is to establish an agency with 135 staff. It has given us no background details on the reasons for deployment. It seems there will be a bureaucratic overlay and that it will not be able to deal with domestic circumstances. If one considered it was a way of centralising activities, it might have a function. It increases cost and remoteness from the actual market and makes it that much more difficult to solve the problems of specific markets.

Mr. Pat Galvin

Deputy O'Flynn asked whether the package would attract more operators to the market. This question focuses on the key issue associated with how regulation impacts on markets. Clearly, regulation has a very significant role to play in creating the conditions for competition and not in trying to pick winners, which the market should do.

On the question of market entry, regulation is very important, as are technology, change and the lowering of barriers to entry. There was a generation in which nobody could enter the telecommunications industry except the State. Now, with the development of technology, particularly ICT, there are considerable niche markets for potential companies within the broadly defined industry.

Looking at the issue strategically, a challenge for a regulator and maker of the policy underpinning regulation is presented by striking a balance between having sustainable competition and ensuring long-term investment. This is critical and we believe the balance is not always struck correctly. If Ireland is to make a step change from the incremental development of broadband to a more transformational approach involving a fast move to the use of fibre, it will clearly pose a challenge to regulators and policy-makers. The industry would like to understand exactly what constitutes the State's vision. As I stated, the option is either to continue to develop incrementally and improve our rating vis-à-vis other benchmarked countries or to rise to the challenge of moving to fibre optics. The latter would address very significant regulatory issues.

On market entry, if we consider the trends in other sectors, including the United States, there is large-scale market entry at the beginning of liberalisation. Inevitably, there is consolidation thereafter. Recently there has been consolidation in the Irish market between mobile and fixed operators. Some entrants enter the market and leave because it is tough going entering a market that is very competitive at retail level. As I stated, the challenge for regulators must be to strike the correct balance and ensure competition is sustainable and not for its own sake.

Our view on functional separation is informed by what has happened in the regions where it has occurred. Mr. O'Halloran mentioned the United Kingdom in this regard. The reality is that a UK Cabinet Minister recently called what was, in effect, a summit meeting to understand the reasons the United Kingdom was drifting behind the rest of the world, including other countries in Europe, in respect of fibre optic investment. We argue that the functional operation model, focusing on the old copper network, is not one that should not be considered but one that must be superseded if one wants to look forward. The United Kingdom has 2,000 homes served by fibre, even two years after the functional separation of British Telecom. Ireland has 13,000 which can be attributed to one new entrant which targeted a particular lucrative market. There is concern in the United Kingdom that Openreach functional separation has brought new entrants and boosted existing players, but based on backward-looking technology. We need to be more radical in Ireland and consider what regulation can do to transform us, if that is the desire of Members of the Oireachtas or development agencies such as Forfás. If that is the vision, we need to determine how the reform package can be delivered in an open, transparent way that is fair to all, including investors.

Mr. Gerry Fahy

On Deputy Flynn's comments, while fibre represents a very important technology to underpin next generation networking, it must be understood over 50% of the Irish market is represented by wireless customers. As Mr. Doherty stated, the fastest growing form of broadband today includes both fixed and mobile wireless systems. We need to keep our minds open. Picking winners is very difficult and caution is advisable because technology is evolving so quickly. The opportunity to apply digital dividend spectrum can also unleash the capability of wireless technology. Multiple technologies can be used to deliver the vision about which we are talking. As an industry, we are not trying to pick winners but to set the context, provide the incentives and let technology and competition sort out the winners.

Mr. Liam O’Halloran

On the pace of change of broadband applications, three years ago Bebo and Facebook did not exist — they were in a garage in Silicon Valley. All of a sudden, they have become part of what is being achieved in social networking and collaboration. The decisions one makes today do not have an impact for approximately five years. We, therefore, need to think ahead, not just about what is relevant today.

Chairman

We need to look to the future. Must a ten-year cycle be considered?

Mr. Liam O’Halloran

It is probably a six-year to seven-year cycle. The next generation networking and fibre roll-out involves a ten-year period.

Senator Paddy Burke

Most of the questions I was to ask have been asked, some by Deputy Flynn. Mr. O'Neill referred to our great success story. It is such a significant story because we were coming from such a very low base. However, there are considerable tracts of Ireland without broadband. Every day of the week I hear from people who cannot get it. Since the privatisation of Eircom, what role does the State have, bearing in mind the various reports being issued? Does it have any role? Is it not a question of market forces between Eircom, Vodafone and the other providers? These are the companies which will be making the investment. How does the State plan to invest in this area? I find it difficult to understand its role. The Department seems to have no role in broadband provision in various areas.

Mr. Peter O’Neill

The Senator stated I had mentioned a great success story. I would not like the view to be circulated that I believe the whole problem is solved. Ireland has been slower taking off than other countries because the initial investment in broadband by companies was slow. There is no doubt that we are catching up rapidly and achieving the highest growth level in the OECD. We are progressing very rapidly in the right direction.

The private sector is regulated. This regulation provides a set of conditions, rules and incentives in terms of the return on investment that causes the sector to undertake certain actions. On the roll-out of broadband, most of the country has been well served by the private sector. There are now 20 operators providing broadband. Approximately 10% of the country is without broadband, the reason being that private companies cannot make a commercial return in bringing it to the areas in question. This brings us to the role of the State in broadband provision.

When this meeting is over, I will be going directly back to the Department offices to chair the steering committee of the national broadband scheme. We are engaging in a tender process to select a company charged with the task of providing broadband in those parts of the country currently unserved. We have gone through a rigorous process of identifying the affected regions which can be seen on maps on our website. By the middle of 2008 we will have selected a winner. From then for the next 18 months, broadband will be brought to those parts of the country which do not have it.

That is a critical role in which the State will continue to play. Where there is market failure, the State will step into provide a service.

Senator Paddy Burke

I welcome Mr. O'Neill's comments on a VFM report and the lessons that can be learned from the past. I recall some years ago at committees that fibre-optic cable was seen as the way forward. In 1998, Chorus received the contract to lay fibre-optic in Castlebar, one of the most progressive towns in the country, costing approximately £700,000. To this day, not one single household has benefitted from it. It was a waste of money; it was squandered. I hope the VFM report will take such examples into account and lessons will be learned.

I welcome the statement that the State can step in to provide for areas with no broadband. Where do Eircom and Vodafone see themselves in the market and in the provision of services five years from now?

Regarding dropped calls, almost every mobile telephone call breaks up. When the person redials, they incur a second charge. This should be addressed and those calls should not be charged. Is it due to a lack of communications masts?

Mr. Pat Galvin

Five years seems a long time but the way the industry is changing it is difficult to predict the shape of it. The long-heralded convergence between information and communications technology with the Internet and video content, as distinct from network provision, is consolidating very quickly. In five years' time the industry may be fundamentally different. The traditional revenues companies might have envisaged to be sustained may not exist. Many telephone companies have had to change fundamentally their business plans as guaranteed streams of revenue simply disappeared through Voice-Over-Internet Protocol, VOIP. There are some fundamental business drivers forcing us to examine our business plans.

Eircom operates at the two levels — the network and the wholesale side and the retail side. We intend to play a significant and ambitious role in the market in the future. We want to invest but we would like the conditions in the market to be pro-investment. We intend to be a high quality provider of services across the country and to be so in five years time.

We intend to continue our universal service obligation, USO. Eircom has been designated as a company to provide voice telephony service up to a certain threshold, which we are happy to do. Although we do not know what shape the USO may be in the future, it may include broadband with a properly funded mechanism. We intend to serve all members of the community at both levels of the market and retail from the small user to the largest corporations.

We want to capitalise on market conditions and regulatory encouragement to invest and upgrade the national network to a mainly fibre-based one. As Mr. Liam O'Halloran said, that is a longer-term and high-risk project and is the reason we have regulatory discussions.

Mr. Gerry Fahy

As I am here in my role as the chair of the industry federation, I will confine my comments to a generic response rather than a Vodafone response.

Dropped calls in the cellular industry, particularly in rural areas, have to do with the capability of rolling out the network. There are significant issues around planning and much opposition to the siting of communications masts. If operators identify areas where coverage needs to be improved, it can prove very difficult to make the investment in those areas as there may be local opposition to the raising of a mast. It is not always in the gift of the operator to address those issues. There are significant costs associated with investment. To cover the costs of the network, the cellular industry has a network rates bill of €30 million per year, a considerable drain on resources.

The pricing trends in the cellular industry are such that packages have large numbers of free call bundles so dropping a call does not generate an extra cost to the customer.

Senator Paddy Burke

What changes to the regulatory environment are needed to upgrade from a copper wire to fibre-optic network?

Mr. Pat Galvin

This probably requires a discussion on the implementation of the package rather than the overall thrust. It was encouraging to hear Mr. John Doherty speak of a stable and predictable rate of return for fibre investment.

One of the hallmarks of the initial regime for telecommunications was that it was to have a disruptive intervention in the market. That was the basis on which regulation was done. The obligation on regulators, according to one of the early chairmen of the Office of the Director of Telecommunications Regulation, ODTR, was to disrupt the status quo. This was an understandable interventionist tactic when there were entrenched monopolies, single operators and inefficiency. We all concede this was a feature of the industry.

We would like to move towards a more stable and predictable longer-term view so when a regulatory regime is established it gives sufficient length of time for the rate of return allowed and identifies a period over which certain commitments to investment can be made.

The level of the rate of return is very important. Risk premium on next generation networks, NGN, and fibre is very high. Going to capital markets to finance these, one needs some degree of stability in the regulatory regime and some degree of guarantee of what the return might be.

We are also required to have the cost base of regulated prices examined. Historically, the model has been that costs were not the real costs, as far as the regulator was concerned who made an efficiency adjustment before the price was struck. Investors have to examine all these risks before the wholesale price is set. Those are the kind of regulatory issues that are more to do with implementation of the package. We would like the package to acknowledge and give direction towards that type of stability and predictability in regulation. That is the change telecoms companies will need in order to guarantee investment.

Chairman

Does the delegation agree the Commission should manage the secondary spectrum trading system? Would ComReg welcome the proposal to increase the resources, independence and effectiveness of national regulators by limiting the influences of other bodies such as governments? How would these measures be enforced in practice? I have no doubt the analogue and digital system and the commission of the secondary trading system will be financially beneficial to everybody involved. There is much capacity from the analog and digital perspectives as well.

Mr. John Doherty

ComReg fully supports the Commission's move for things such as spectrum trading. In essence, as we move from an analog to a digital world, the premia we can use the spectrum for, and the efficiency we can get from it, will be better driven by market forces, including matters such as spectrum trading in those areas.

Chairman

Will this be dealt with completely separately and will there be complete autonomy?

Mr. John Doherty

The Commission is talking about very narrow areas within the spectrum. For instance, it recently announced a spectrum for the use of mobile phones on aircraft and such like, which would be pan-European.

Chairman

That was announced this week. On that issue, what are Mr. Doherty's thoughts on this and how big an announcement was it?

Mr. John Doherty

It was almost inevitable, in view of the progress in hand. There are limitations, however. Every NRA has its role to play in terms of the enablement of it. The issues on safety and customer care are clearly matters for other agencies rather than telecoms. There are some narrow areas where that type of pan-European approach has advantages. Our view is that those types of spectrum decisions normally should be made by the national regulatory authorities or governments in the specific markets. However, we welcome some of the other initiatives such as spectrum trading.

In the context of the independence of regulation, I go back to the point I made to the Deputy earlier. The European Commission is concerned that some regulatory bodies, because of the way they are funded and their proximity to a telco that is also owned by government, are not sufficiently independent. In the Irish market we are independent by legislation and I do not believe those types of rules are aimed at regulatory bodies such as ours. Nevertheless, as a member of the European regulatory group, Ireland would welcome the fact that regulatory bodies across the 27 countries have similar legislative bases and are similarly independent. That is a welcome recommendation from the Commission.

Deputy Simon Coveney

I must apologise for having to leave at what was, perhaps, the most interesting part of the meeting. I am not a full member of this committee and there was something else that I had to attend to. I do not wish to hold up the committee, but perhaps I can ask a number of questions. It is not often that we get such a knowledgeable group all together, dealing with the same issue.

In the context of what has been spoken about, I have a question for Mr. O'Neill. The Department has made a decision that in areas where there is market failure for broadband roll-out, we are going to apply the national broadband scheme. I believe there are three competing companies left for that scheme and the results of the tendering process are to be announced in mid-summer. We have had repeated assurances from the Minister that anywhere in the country where consumers do not have access to broadband by 1 July this year, the national broadband scheme will solve their problem.

Can Mr. O'Neill deal with some of the problems that may arise as a result of that objective? My understanding is that the only way the national broadband scheme can solve problems in rural parts of Ireland — on peninsulas such as Dingle and Beare and in places such as Donegal and inland mountainous areas where there are problems with coverage — is to use wireless. The problem with that, however, is that certain areas may not be targeted specifically. This means there will be overlap of coverage in areas already covered by the market mechanism. Is it not the case that there will be potential problems? In an effort to solve the problem for areas where there has been market failure — where it does not make financial sense for a company to roll out broadband, never mind a next generation network — the market will potentially be influenced in neighbouring areas by creating coverage therein. Does Mr. O'Neill envisage legal challenges, for example? If Eircom does not win the tendering process, is it fair to suspect it may legally challenge the process if its network is being impinged on or affected by a State-commissioned company? That is my first question, as regards the national broadband scheme.

Chairman

Does Deputy Coveney want to get a reply first?

Deputy Simon Coveney

Perhaps I will just ask two further questions. Otherwise we shall be going back and forth, and I do not want to detain the committee. Presumably, while I was away Mr. Galvin from Eircom spoke on the merits of structural versus functional separation. Perhaps he might address that issue and Eircom's plans into the future. How does he see his company in three to five years' time? I was present to hear his request for — let us be blunt — a regular price floor, essentially, in the wholesale market, to allow the company to invest in the network.

I also have a question for Mr. O'Halloran. From the viewpoint of his members, would he rather see, in the future, structural or functional separation or a continuation of the current regulatory environment for Eircom — in the interests of his members and the necessity to get access to unbundled local loops, or some unbundling, for that matter? What about the need for a more competitive environment for wholesale provision in Ireland?

In terms of functional separation being a remedy of last resort, which was described as radical and untested, my understanding is that it has been absolutely tested. There is functional separation in the UK which is working perfectly well. Unless I am wrong, I believe it has been tested and shown to work — with functional separation within BT in the UK. Is that an appropriate remedy for Ireland or is structural separation, which is a more permanent policy strategy, preferable?

The final question I wanted to ask relates to the whole issue of spam, viruses and cyber attacks, which I believe this package is encouraging national regulators to address. How can we address the spam issue? Mr. Fahy might be interested to hear that I am a good Vodafone customer, and I have a Vodafone e-mail service. I conservatively estimate that I probably get between 30 and 50 spam e-mails a day — which essentially means I shall have to change my e-mail. Can anything be done in terms of the role of the platform operators in trying to address that issue? In terms of regulation, what might help that process?

Mr. Peter O’Neill

The national broadband scheme, as mentioned, is going through a tendering process at the moment. As I am chairman of the committee overseeing the tendering process, I am restricted in regard to what I say about it at this stage. I am not saying that in an effort to avoid the Deputy's question. There were a couple of technologically related issues about overlap and that, which, in a generic sense, perhaps, could be better answered by Mr. John Doherty. However, I can say the national broadband scheme is technology neutral. When we went to the market we did not prescribe, we left it up to the bidders to decide what the technology, or mix of technology, if relevant, should be. The position we are in at present is technology neutral. I cannot comment on what might or might not emerge, nor would I attempt to suggest what Eircom might or might not do if it wins it. I will leave that to Mr. Pat Galvin, if he wants to venture a view.

Deputy Simon Coveney

With respect, that is not a satisfactory answer. It is a fact that in order to provide broadband to some parts of the country we will need wireless technology. It will not be possible to link up every house or business in the country, even for broadband connection, never mind next generation broadband connection. It is in the nature of wireless technology that it does not pinpoint particular houses or businesses but provides a range of services.

Without putting Mr. O'Neill in an impossible position, is there an issue in this regard? If there is a specific pocket that cannot currently access broadband because it is in a valley or on top of a mountain, and in providing a solution, which I accept is platform neutral in terms of the request, there is a result that impinges on another area where a provider such as Perlico, Eircom, Strencom or BT is currently providing a service for, say, €30 per month, there is the potential for unfair competition for the provider that happens to be geographically next to an area where an attempt is being made to solve the problem. Is there anything in the tendering process that addresses this issue?

Mr. Peter O’Neill

I was not trying to avoid the question. I intended to hand over to Mr. Doherty to answer that question.

Deputy Simon Coveney

Perhaps Mr. Doherty is better placed to answer it.

Chairman

With a contract pending, I fully understand Mr. O'Neill's position. Mr. Doherty might address the issue.

Mr. John Doherty

We have exactly the same caveats. We are talking in a hypothetical sense. The first point to recognise is that the areas we are trying to address are generally speaking areas that are not serviced. When one looks at the map with regard to the location of existing operators, it is clear the reason the State is doing this is because there is no provisioning in certain areas. That is not to suggest some issues of seepage may not occur in individual areas which we will have to examine and manage individually. However, while the answer may not be wireless — I have no idea of the answer to that question — if wireless was the approach used, we must recognise that no providers operate in the broad areas we are trying to address, such as Leitrim, Donegal, south-west Kerry and similar areas, despite the fact we have issued licences or made licences available for those areas. If they do operate, and if that is the particular technology used, there are interference issues as well as the issue of existing conditions under the licensing. These are all elements we will have to examine on an individual basis should they arise.

The broad objective is to try to get broadband for 250,000 people who cannot currently access it. Will this be challenging in terms of making it all work to the nth degree? It may be, if wireless is used in some areas. The broad objective of trying to meet the 250,000 target should not be stopped because there may or may not be individual issues that may arise if wireless was the provided technology at the end of the day. However, we do not know this yet and, therefore, all I can say is that technology solutions can be found to this issue in time.

Mr. Pat Galvin

With regard to the Deputy's question on structural versus functional separation, I have not taken a position on structural separation, which has not been part of the discussion to date. However, functional separation has certainly been part of the discussion. We alluded to the Deputy's point with regard to whether it is a proven regulatory remedy. To be clear, our concerns about the way functional separation is presented in the paper have less to do with its merits as a remedy and more to do with the fact it could be a mandated rather than a voluntary process. Every company is entitled to structure itself as it sees fit to meet market conditions. As a regulated company, we are already compliant with very clear obligations as to how we account for our network business and retail business. Obviously, we would always intend to be fully compliant. Our concern is a scenario whereby through a European Commission veto or through the new pan-European regulatory authority one could envisage very extreme remedies being imposed and mandated centrally by the regulatory institutions, even though this would not be the desire of the company. This is seen as a very interventionist type of mechanism.

On the point regarding the substance of functional separation, our view is that while BT has been functionally separated for two years, we are not sure what the longer-term impact of the market is, and we are not sure it is a solution necessarily appropriate to Ireland. BT publicly stated that it sees it as a UK solution for a UK problem and not necessarily one that might apply in every country, which is accepted.

Our concern is that Openreach in the UK, if it was to be applied to Ireland, is focused entirely on the copper network. It is too separated in functional terms from the overall BT company to allow maximum use of the copper network for development of innovative services by new entrants. We believe we need to look beyond the vision of the old-style copper network into what we need to do from a regulatory perspective to ensure we transform that copper network to a fibre network. Two years after Openreach was established in the UK, the British Government recently called the industry together to reach an understanding on how we can do something about fibre. According to the I-Data report at the end of January, the UK has 2,000 fibre homes whereas Ireland already has 13,000 and other parts of Europe have significantly more. There are, therefore, question marks about the long-term beneficial impact on network transformation as distinct from the short-term market gain for some new entrants. This is the balance that needs to be got right in the debate. That is our position on functional separation.

On structural separation, the Deputy is correct that, in a bid to have a very open and transparent discussion of these issues, we have circulated positions on structural separation. However, our view is that this is simply a structural issue and the fundamental issue is that it must be discussed in the context of what are the investment requirements. If structural separation in the future facilitates that or is part of that environment, let us discuss it. However, in terms of specifically focusing in on that, we would like the debate to be around the wider investment scenarios and the ambitions we have to significantly increase investment.

This brings me to the third part of the Deputy's question, which concerns the regulatory price floor. We are simply suggesting that capital follows return. It is a highly capital intensive industry and if there is a regulatory premium on the risk that capital sees in investing in fibre, which there inevitably is, when allied to the scale and scope challenges in the Irish market, this will make it a very difficult commercial call. All we are seeking is to get the balance right to ensure the regulatory regime acknowledges the risk and rewards it appropriately.

Mr. Gerry Fahy

I wish to reflect on the Deputy's point on the risk of litigation around the outcomes of the national broadband scheme. One of the issues is that it was recommended by the industry as a whole so the industry believes this is a good thing to do. We recommend that Government undertake this activity. There are 250,000 customers who have not got broadband today. To a certain extent, there is a well-known network effect that the more customers there are of a service, the better the whole service does for everybody involved. A further issue is that a provision of the national broadband scheme was that the providers of that scheme had to provide wholesale access to third parties. I believe this is still part of the scheme, so those who are competing with these parties can now get wholesale access to 250,000 additional customers. There is, therefore, a strong incentive for people to go with the outcome, in the sense of market outcomes.

On the Deputy's specific question on spam, viruses and so on, it is not just an issue for Vodafone or the industry in Ireland but one for the industry worldwide. There are multiple problems and it is a very complicated issue. Those the operators are trying to defeat are very well financed and criminal activity will obviously continually evolve and seek to defeat whatever measures are put in place.

The other issue is data protection. Customers' data may be compromised in a situation where they unwittingly convey their e-mail address to a user operating in an insecure environment in which the customer's e-mail address is accessed by a third party. There is little a service provider can do to block legitimate e-mails to the customer's address. There are many aspects to this issue. The industry is keen to work with regulators and other information and communications technology, ICT, players to deal with it. It is a complex issue and the solutions continually evolve as the challenges change.

Mr. Liam O’Halloran

There are two approaches to the separation issue. The first aspect is the question of the point in the value chain at which the separation takes place. The second is the question of whether it is a structural or a functional separation. A separation at the wholesale layer facilitates competition at the retail level. On the other hand, separation at the access layer generates wholesale competition at the wholesale layer as well as the retail layer. From a competitive operator's point of view, the access layer separation is preferable. This is what was done in the United Kingdom, for example.

That approach has a significant and speedy impact in terms of the take-up of local loop unbundling. In the United Kingdom, the numbers went from a very small base to 4 million in a timeframe of approximately 12 months. One might contend that it is a short-term impact and so on but if there is a market problem that needs to be fixed in terms of making up a large deficit in competition, this approach has certainly been shown to be effective. There will always be difficulties because it is a painful process, but it is also worthwhile. Another consideration is whether this approach should be engaged in voluntarily, as in the case of the United Kingdom, or, as in the case of the Commission proposals, whether regulators should be able to mandate it. We all recognise this is a solution of last resort because it can be painful and can take a long time to achieve.

The second question relates to functional separation versus structural separation. In the case of the former, one retains some of the benefit of a vertically integrated organisation in terms of communication and co-ordination of investment. With structural separation, there are different investors with different requirements. If a company wishes to separate structurally, that is, voluntarily sell off pieces of its business, that is a reflection on its investor objectives and the ability to raise capital. Such a company should not be restricted if that is its objective. Otherwise, it is limited into the future. It is largely a question of the investor and the investment in the company. We may be seeing that type of a proposal in the Irish market because of the uniqueness of the investors.

Deputy Simon Coveney

I have a final question on the Commission proposals. Is it fair to say that although there is some disagreement among delegates and members in terms of how we achieve competition at both retail and wholesale level, we are all agreed that we are not in favour of the proposed European telecoms market authority and that we see it as a potential threat to the independence of ComReg? If so, the report of the committee should reflect that view. All the presentations seemed to express concern in this regard. Are there any other areas where the specifics in terms of what is proposed are of concern to the industry, the regulator and the Department alike? My impression is that the proposal regarding the European telecoms market authority is a step too far in terms of the shift in the decision-making capacity and power of the regulator from Ireland to Brussels. If that is the case, the committee should reflect that aspect.

Chairman

That is a good point. I have another question. Do the delegates agree with the Commission's recommendation to reduce the markets that are subject to regulation from 18 to seven? This would entail the deregulation of up to 11 products. Is this not a seismic shift?

Mr. Peter O’Neill

It is certainly our view that the proposed European telecoms market authority represents an unnecessary interference. Another issue of concern to us is the proposal for the Commission to have a power of veto over remedies applied by national regulators.

Chairman

Is that a comitology matter?

Mr. Peter O’Neill

No, it is not. We consider it a step too far.

Another of our concerns relates to spectrum planning. We regard subsidiarity as absolutely crucial in terms of Ireland being allowed to use spectrum in a way that is in our national interests. We agree with the Commission's proposal in terms of pan-European use of spectrum but we do not want it to dictate how our spectrum should be allocated within the State.

Mr. John Doherty

I agree entirely with the points made by Mr. O'Neill.

Mr. Pat Galvin

On the pan-European issue, we support the consensus. There is another subtlety in terms of the European process in that this was not part of the Commission's review documentation in 2006, that is, it was introduced at a later stage. I am not suggesting it was an attempt to rush something through but, if it is so fundamentally important for the Commission, it should have been part of its thinking at the beginning of this process.

Deputy Simon Coveney

It is an add-on.

Mr. Pat Galvin

Yes, it is an add-on since the original documentation. That is a concern.

Eircom is a rigorously regulated company. Of the 18 markets that are currently regulated, we are involved in 17. We support the reduction in the scale of market review. It is a significant regulatory burden to be involved in this type of review on an ongoing basis. We would probably differ from the Commission in this regard and there may not be consensus on this issue. We make our argument and present evidence to the Commission, which would then make its informed decision as to whether a market is competitive. We would look to substitution between mobile and fixed at the retail end. There is much complexity in this issue and the move to reduce the markets is not necessarily something with which we disagree.

Mr. Gerry Fahy

The Telecommunications and Internet Federation, TIF, agrees with the consensus on the issue of subsidiarity. It is not helpful for the powers of national regulators to be reduced. On the markets, there are differing views within TIF on whether the reduction in the number of markets is a positive or negative change.

Mr. Liam O’Halloran

We certainly agree that the proposed European telecoms market authority is a step too far. We support the idea of the body of European regulators and telecommunications providers that is under discussions in the European Parliament. On the number of markets, we have concerns about certain markets being taken out by the Commission, particularly markets ten, 14 and 15. That is causing significant difficulties for us.

Chairman

I thank Mr. Peter O'Neill, Mr. John Doherty, Mr. Pat Galvin, Mr. Gerry Fahy, Mr. Liam O'Halloran and their colleagues for their valuable contributions and for answering our questions. Likewise, I thank members for their thought provoking questions. Our discussion has been informative and will help the committee in finalising its scrutiny report on the three relevant Commission proposals. If the delegates discover in the coming weeks any relevant additional information that might be of assistance to us in finalising this report, we would be very grateful to receive it. We will send the delegates a copy of the report. As the relevant committee of the national Parliament, it is important that we achieve consensus at an early stage on these important proposals which have a potentially significant impact. We will convey the issues raised in today's meeting to the Minister.

The joint committee adjourned at 1.30 p.m. until Tuesday, 22 April 2008.