JT Group Limited ('Jersey Telecom') - proposed sale

STATES OF JERSEY

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JT GROUP LIMITED ("JERSEY TELECOM"): PROPOSED SALE

Lodged au Greffe on 20th February 2007 by the Minister for Treasury and Resources

STATES GREFFE

PROPOSITION

THE STATES are asked to decide whether they are of opinion

to a g ree, in principle, that the States' shareholding in JT Group Limited ("Jersey Telecom") should be sold

and to request the Minister for Treasury and Resources to take the necessary steps to identify a suitable buyer for Jersey Telecom in accordance with the principles set out in Tables 1 and 2 of section  8 of the Minister's report dated 20th February 2007, with the outcomes of the sale process brought back to the States for approval.

MINISTER FOR TREASURY AND RESOURCES

TABLE OF CONTENTS

1. E x ecutive Summary
2. B a ckgroundto States OwnershipofJerseyTelecom
3. P r eparationoftheProposition

3.1.............. The Consultation Process 3.2.............. Professional Advice

3.3.............. Reports by Relevant Parties 3.4.............. Sale Principles

4. T h  e RegulatoryFramework,InfrastructureandConsumerProtection 4.1.............. Overview of the Regulatory Framework 4.2.............. Competition in Jersey's Telecom Market 4.3.............. Maintenance of Essential Telecoms Infrastructure 4.4.............. Consumer Protection

4.5.............. Structural Separation

5. K  ey Considerations for Jersey Telecom

5.1.............. Review of Jersey Telecom

5.2.............. Strategic Challenges faced by Jersey Telecom 5.3.............. The Potential of Jersey Telecom

6. E m  ployee Related Issues

6.1.............. TUPE Legislation

6.2.............. Pensions rights

7. S t ates Investment in Jersey Telecom and Strategic Reserves Policy

7.1.............. Proposition 133/2006 and the Strategic Reserve 7.2.............. Suitability of Jersey Telecom as a Strategic Reserve Investment 7.3.............. Form of Sale

7.4.............. An Inclusive Sale Process

7.5.............. Size of Stake to be Sold

8. S a le Principles and States Approval

TABLE OF ANNEXES

Annex 1: The Consultation Paper

A1.1 D iscussion Paper issued by the Minister for Treasury and Resources on the proposed sale of Jersey

Telecom

A1.2 Summary of responses received to the Discussion Paper issued by the Minister for Treasury and

Resources on the proposed sale of Jersey Telecom

Annex 2: Structural Separation

A2.1  B ackground to the Discussion on Structural Separation A2.2  V iews on Structural Separation

A2.3  E xperience of Other Incumbent Operators

A2.4  A nalysys – Perspectives on structural separation

A2.5  J ersey Competition Regulatory Authority

A2.6  J ersey Telecom Representations on Structural Separation

Annex 3: States Economic Adviser's Recommendation

A3.1  E conomic Adviser's report on the structure of the proposed sale of Jersey Telecom

Annex 4: P.133 2006 – Strategic Reserve Policy

A4.1  E stablishment of a Stabilisation Fund and Policy for Strategic Reserve

1. Executive Summary

Until 1 January 2003 the States was the regulator, operator and owner of Jersey Telecom, the only major telecommunications provider in Jersey. The Telecommunications (Jersey) Law 2002 fundamentally transformed this model by splitting these three roles. The regulatory role, which includes consumer protection and ensuring the maintenance of the Island's telecommunications infrastructure, became the responsibility of the Jersey Competition and Regulatory Authority (JCRA). The operator became the incorporated organisation JT Group Limited, governed by an independent Board of Directors. And the owner became the Finance and Economics Committee, and subsequently the Treasury and Resources Minister, acting in the interests of the States as an investor in Jersey Telecom.

With the regulator protecting the interests of consumers the States now own Jersey Telecom primarily as a strategic investment. The purpose of States strategic investments is to provide an insurance policy against the Island suffering serious economic decline at some point in the future.

Yet Jersey Telecom does not meet the criteria for such investments: it is too large for a single investment, it could not be sold quickly and most importantly in the circumstances in which it would need to be sold, i.e. the Island's economy was struggling, it would not be as good an investment for a new owner and as a result its value would decrease. Accordingly, Jersey Telecom should be sold and the proceeds invested in an off-Island diversified portfolio of investments. This will not only provide a better annual return to the States but also a better price in the circumstances in which these investments would need to be realised.

Although the fundamental reason for the sale of Jersey Telecom is to enhance the Strategic Reserve, so that funds are available to support current or future generations in less fortunate times, there are clearly other very important issues to be taken into account when considering the sale of this company.

• Is Jersey Telecom more likely to thrive under public or private ownership?

• How can we ensure consumers are protected both in terms of price and quality of services?

• Will Jersey Telecom staff lose their jobs or have their pay reduced?

• How can we ensure we will have the excellent communications infrastructure which is so vital to our finance industry?

In the preparation of this Report and Proposition the Treasury and Resources Minister has consulted on these and other issues. The Minister has also sought extensive advice from experts on the sale of telecommunications companies, lawyers, and one of the top international consultancies on the telecommunications industry. Reports have also been produced by various directly interested parties such as the Minister for Economic Development and Jersey Telecom. It is unlikely that there has ever been such extensive research and analysis by a small jurisdiction in advance of a decision to proceed with the sale of a telecoms company.

The outcome of this extensive process has been to identify that the sale of Jersey Telecom should only proceed if four principles are met, based on protecting the interests of four key stakeholders: consumers, Jersey Telecom, the employees of Jersey Telecom, and the people of Jersey as the owners of the company. These principles, and a summary of the arrangements already in place, plus any additional actions proposed, for the benefit of stakeholders are:

1. F o r the continuedsuccessof the Jersey economy and for the benefit of all consumers a sale must provide for:

– the maintenance and enhancement of the competitive environment

– the maintenance of essential telecoms infrastructure to the benefit of both today's and tomorrow's Islanders

– the continued provision of quality telecommunications services to Islanders

T h e S tates has enacted a modern robust regulatory framework which gives the JCRA sufficient powers to

promote sustainable competition and ensure the provision of affordable and reliable telecommunications services once the States ownership of Jersey Telecom is relinquished. Stringent licence obligations and the regulatory framework also guarantee the maintenance of high quality telecommunication infrastructure

and the world class services required for continued development of Jersey as a leading financial centre.

Moreover, if part of a larger entity, Jersey Telecom will be able to benefit from economies of scale to expand its product range and improve operating efficiency giving rise to a wider range of services and lower prices for consumers.

2. For thecompany, Jersey Telecom, a sale must achieve the best possible basis for its long term growth and development

J e rs e y Telecom is a well-run, efficient and attractive company with a strong financial track record.

However it now faces competitive challenges from global telecommunications companies that could be better addressed if it was part of a larger entity. In addition, if Jersey Telecom were to be retained under public ownership, it will be constrained by the Treasury's ability to take significant risks with taxpayers' assets. A privately owned entity with better access to risk capital and economies of scale is more likely to succeed in the competitive environment, and expand its activities, than a small, publicly owned utility.

3. For JerseyTelecomemployees a sale mustensure that theiremployment rights are safeguarded

A s a result of existing contractual and collective arrangements (which reflect well on the good relations

which the Company's employees have had with their management for many years), existing employment legislation and the additional measures the Minister and Company are prepared to enter into, should the proposed sale proceed, the employment rights of existing Jersey Telecom employees will be protected to an overall level at least as good as that which would exist were UK style TUPE adopted in Jersey.

T h e g reatest risk to the employment prospects of Jersey Telecom staff, however, would be the failure of

this small publicly owned utility to compete effectively with major international telecoms companies.

4. For all taxpayersand the peopleof Jersey a sale mustenabletheoptimumpricetobe achieved for reinvestment on their behalf

J e rs e y Telecom is currently a valuable company, which could command a very attractive price in the

present market climate. Expert professional advice is that the sale of a full stake through an inclusive sale process is the best option to maximise the sale proceeds for the benefit of the people of Jersey. The sale of a full stake would incentivise the prospective buyer to contribute towards the success of Jersey's economy and the long term development of Jersey Telecom, allowing for the realisation of the potential of both the Jersey telecommunications market and the company. The States has committed to the principle of safeguarding employee rights so retaining partial ownership is not necessary for employee protection purposes. The sale of a full stake is likely to generate the greatest buyer interest and realise the best price for the asset. In contrast a partial sale would realise a disproportionately smaller amount, be a far more complex transaction, would not meet the fundamental requirement of diversifying the States investments and building up the Strategic Reserve, and is less likely to attract the type of buyer willing to invest in developing Jersey Telecom.

In s u mmary the extensive research and analysis has confirmed that there are no barriers to the sale of

Jersey Telecom and that the sale would: contribute to the provision and development of world class telecommunications services to the Island, enable the company to grow and expand with a new owner that values its staff, and provide significant proceeds to be invested for the future benefit of the people of Jersey. Accordingly the Minister is seeking the approval of the States in principle to the sale of Jersey Telecom and the authority to enter into a sale process. The outcome of this sale process, including the buyer, the sale proceeds, and the buyer's investment and employee commitments, will be brought back to the States for approval before any sale is completed.

2. B a c kgroundto States OwnershipofJerseyTelecom

Until 1 January 2003, the States was the regulator, operator and owner of the only major telecommunications provider in Jersey.

The Telecommunications (Jersey) Law 2002 split the roles of the operator, owner and regulator whereby:

• The operator became the incorporated organisation JT Group Limited, governed by an independent Board of Directors

• The owner became the Finance and Economics Committee, and subsequently the Minister for Treasury and Resources, acting in the interests of the States as an investor in Jersey Telecom, and

• The regulatory role (i.e. the responsibility for protecting the public interest, particularly the need to maintain a robust telecommunications infrastructure and promote consumers' interests) fell to the Jersey

Competition Regulatory Authority (JCRA) and the Minister for Economic Development

The Telecommunications (Jersey) Law 2002 also ended Jersey Telecom's monopoly in the local market by empowering the JCRA to issue licences to new operators.

In the past, the States was involved in the ownership of the operator because telecommunications had been seen as a natural monopoly best entrusted to a public sector organisation. This ensured that infrastructure investment took place to provide an Island-wide network and the provision of universal service that might not have been provided for at that time had the company been under private ownership.

Following the transformation of the industry model and the separation of operation, ownership and regulation, the States now owns Jersey Telecom purely as an investment. An independent Board of Directors is responsible for operating Jersey Telecom and the JCRA is responsible for regulating the industry. The current regulatory framework and the JCRA's responsibilities are discussed in detail in Section 4.

The States in recognition of the introduction of regulation and competition in the telecommunications market committed both in the Strategic Plan 2006 to 2011 and the States 2007 Business Plan to review the ownership of Jersey Telecom as well as all its other utilities.

The Council of Ministers considered a paper on the ownership of utilities, prepared by the Treasury and Resources Department, at its meeting on 15 June 2006. The Council was of the view that professional advice should be sought with respect to the possible sale of Jersey Telecom, but that the regulatory regimes for the other utilities were not sufficiently robust to warrant consideration of their disposal.#

The further investigation of the regulatory regimes of the utilities was considered by the States during the debate on  the Strategic Plan  2006  to  2011 and responsibility  for undertaking  a  review  to  provide criteria for  the protection and efficient provision of services from these utilities was allocated to the Economic Development department.

The States, with the adoption of Commitment Six of the States Strategic Plan 2006 to 2011, in June 2006, recognised the importance of the Strategic Reserve as a prudent and necessary investment to safeguard the Island's future and agreed that if possible additional contributions should be made to the Strategic Reserve. Specifically, the States agreed it would consider the possibility of doing this through the sale of States-owned utility companies.

Recognising that the utility companies are strategic assets, the States agreed in Commitment Six that proceeds from the sale of any utilities would be added into the Strategic Reserve and would not be directly used as a source to fund current government expenditures.

Consequently, the 2007 Business Plan required the Minister for Treasury and Resources to review the policy for the ownership of utilities and bring proposals to the States for approval in 2007.

Following the States agreement of the Strategic Plan the Minister undertook to issue a consultation paper to gauge views on the possible sale of Jersey Telecom, and acknowledged, as did the Council of Ministers, that further investigation of the regulatory regimes for the other utilities should be undertaken before considering further the merits of changing the States ownership interest in these companies.

In the consultation paper issued, 13 July 2006, the Minister for Treasury and Resources set out his intention to bring forward proposals for the sale of Jersey Telecom and sought the views of all interested parties.

Summary

The introduction of the Telecommunications (Jersey) Law 2002 and subsequent transformation of the telecom industry model characterised by the separation of ownership and operation and the development of  an  independent  regulatory  framework  means  that  the  States  is  no  longer  required  to  own  Jersey Telecom to ensure consumer protection and investment in essential infrastructure on the Island. As a result, the States owns Jersey Telecom purely as a strategic financial investment.

Recognising the financial nature of the investment in its strategic assets the States agreed, through the adoption of Commitment Six of the States Strategic Plan 2006 to 2011, to consider the disposal of States- owned utilities such as Jersey Telecom to fund additional contributions to the Strategic Reserve.

3. Preparation oftheProposition

1. TheConsultationProcess

Jersey Telecom is more than just a significant investment. It is an important Island institution, which provides vital telecommunications to most Islanders. Its advanced products and services support Jersey's businesses, especially the finance industry. It also employs over 430 staff, the vast majority based in Jersey. In addition, through Wave Telecom Limited in Guernsey, Jersey Telecom is the leading alternative to the incumbent operator in Guernsey.

For these reasons, a consultation process was initiated prior to the lodging of this proposition.

A transparent and rigorous process was put in place to enable all aspects of the proposed sale of Jersey Telecom to be considered, and a public consultation was part of this open debate, enabling the people of Jersey, and particularly the stakeholders in Jersey Telecom, to make their views heard. This consultation paper is reproduced in Annex  A1.1.

The consultation period ran from 13 July 2006 to 8 September 2006. A total of 35  written responses were received by the Treasury and Resources Department during this time.

The majority of these were from directly interested parties such as Jersey Telecom employees, the Board of Jersey Telecom, the JCRA and Amicus, bodies whose views on the proposed sale have already been published. Beyond the directly interested parties, responses were received from a small number of professional and other representative bodies, private businesses and individuals.

All views raised during the consultation period (both those raising concerns and those endorsing the process) were carefully assessed and a paper with a summary of these responses was published in November 2006. The paper is included in Annex  A1.2. These views are also discussed and addressed in this report.

2. ProfessionalAdvice

Following publication of the consultation paper and in accordance with the States Strategic Plan 2006 to 2011, the Minister undertook the task of exploring strategic options for the sale of Jersey Telecom with the assistance of expert professional advisors.

A competitive tender process for the selection of advisors was undertaken, and following rigorous evaluation a consortium of advisors led by Citigroup was appointed to advise the Minister on the feasibility of the various strategic options for Jersey Telecom.

It should be emphasised that the advisors were engaged not to commence a sale of the Company but to conduct a thorough review of the feasibility and options for a sale including the option to retain the asset. They were also asked to highlight any material issues that would prevent or delay a sale, their terms of engagement reiterating that it is the States Members as a body, and not simply the Minister for Treasury and Resources, who have the authority to allow a sale to proceed.

The advisors were engaged in the evaluation of strategic options for the sale of Jersey Telecom as a completely independent project, the remuneration for which is not dependent on the commencement of a sale process but relates solely to the objective analysis conducted in the phase leading up to the lodging of this proposition.

This team of professional advisors conducted a detailed review of Jersey Telecom to assess its market positioning within the telecoms market and the feasibility of the various options under consideration. This included a review of relevant public and private information provided by Jersey Telecom as well as sessions with senior management at Jersey Telecom. In addition, the advisors held working group sessions, involving Jersey Telecom, to understand key employee-related issues and discuss appropriate ways to address these.

Furthermore, full consideration was given to a number of relevant reports produced by other parties, as detailed in

Section 3.3 and referenced throughout this report.

This report and proposition is thus based on the recommendation of professional advisors, after the review and assessment of issues relating to Jersey Telecom, the market and all stakeholders.

To summarise the advice received:

• There are no significant issues that would prevent or delay a sale of Jersey Telecom

• This report and proposition puts forward the best strategy in relation to the States investment in Jersey Telecom

3. Reports byRelevant Parties

Several directly interested parties to a sale of Jersey Telecom have provided their views in reports provided to the Treasury.

Reports in relation to the structural separation of Jersey Telecom were received from the JCRA, Jersey Telecom and the States Economic Advisor. In addition, the Minister was advised by international telecom consultants Analysys, in relation to the structural separation of Jersey Telecom. These reports have all been provided as Annexes 2 and  3 to this document.

Substantial time and effort have been devoted to analysing and understanding the various aspects relating to the proposed sale of Jersey Telecom. These findings and opinions have received due consideration in this report.

In the preparation of this report and proposition, responses to a consultative process, the advice of professionals and the opinions of various directly interested parties were all taken into account. It is unlikely there has ever been this level of detailed analysis undertaken in a small jurisdiction prior to a decision to proceed with the sale of a telecoms company.

4. Sale Principles

The consultation paper highlighted the key principles on which a sale would be considered. Following consideration of responses to the consultation document, extensive research and the receipt of expert advice, these principles have been more closely defined as follows:

• A sale must provide for the continued success of the Jersey economy, and in particular contribute to:

– The maintenance of the competitive environment under the current regulatory framework;

– The maintenance of essential telecoms infrastructure to the benefit of both today's and tomorrow's Islanders

– The continued provision of quality telecommunications services to Islanders

• It must provide for the achievement of the best possible basis for the long term growth and development of Jersey Telecom

• It must ensure that the rights of Jersey Telecom's employees are safeguarded

• It must enable the optimum valuation to be achieved for reinvestment on behalf of taxpayers into the Strategic Reserve.

Each of these principles is examined in turn through Sections 4 to 7 of this report and the supporting annexes. The relevant sections set out the implications for a sale and demonstrate how the proposal has been constructed to address these principles and any concerns raised in connection with them.

Summary

In the preparation of this report and proposition, responses to a consultation process, the advice of professionals and the opinions of various directly interested parties were all taken into account. It is unlikely there has ever been this level of detailed analysis undertaken in a small jurisdiction prior to a decision to proceed with the sale of a telecoms company. A set of clearly defined sale principles governing any sale has been set out to provide for the continued success of the Jersey economy, for the long term development of Jersey Telecom, to safeguard the rights of employees and to enable the optimal valuation to be achieved for reinvestment on behalf of taxpayers. The proposal put forward addresses these principles.

4. TheRegulatoryFramework,InfrastructureandConsumerProtection

1. Overview oftheRegulatoryFramework

Through the Competition Regulatory Authority (Jersey) Law 2001 and the Telecommunications (Jersey) Law 2002 a robust regulatory framework in Jersey was set up to protect the interests of consumers whilst allowing operators to invest with confidence in the continued development of Jersey's telecommunications market.

Article 14 of the Telecommunications (Jersey) Law of 2002 empowers the JCRA to license any operator with respect to telecommunications that concern Jersey. Under the terms of this Law, the JCRA has a primary responsibility to perform its functions in "such manner as [it] considers is best calculated to ensure that (so far as in [its] view is reasonably practicable) such telecommunications services are provided, both within Jersey and between Jersey and the rest of the world, as satisfy all current and prospective demands for them, wherever arising".

In so far as it is consistent with the above primary duty, the JCRA must:

• Protect and further the short-term and long-term interests of users, wherever appropriate, through the promotion of competition

• Promote efficiency, economy and effectiveness in commercial activities connected with telecommunications

• Further the economic interests of Jersey

• Impose a minimum set of restrictions on those engaged in commercial activities connected with telecommunications

• Ensure that those engaged in telecommunications activities have sufficient financial and other resources to conduct those activities, and

• Have regard to the special needs of the disabled or those who have limited financial resources or particular needs

The JCRA has been granted extensive powers to enable it to competently and fully address its responsibilities.

For instance, the JCRA has the powers to regulate the licence terms of operators that provide telecommunications services on the Island. Through this measure, the JCRA is able to control the abuse of any dominant position in the market through the application of a more stringent set of licence conditions than those which apply to smaller operators or new entrants. The JCRA can also impose obligations on the dominant operator to maintain an Island- wide infrastructure and provide Island-wide services.

As another example, the JCRA has the authority to monitor the behaviour of the telecom operators through the enforcement of reporting requirements, including accounting reporting along separate business lines to increase transparency.

Further, the JCRA has the authority to intervene at any time and to impose remedies on all licensed telecom operators to address situations with which it is not satisfied.

The Minister for Economic Development also has an important role within the regulatory framework in the maintenance of infrastructure and protection of consumers. Where he considers that it is desirable in the interest of the public to do so, he is authorized under the terms of the Law to give written directions to the JCRA in respect of principles, procedures or policies to be followed in relation to the implementation of any social or environmental policies regarding telecommunication. The Minister may issue guidance to the JCRA in relation to any other matter relating to the performance of its duties.

Having received a written direction from the Minister for Economic Development, the JCRA is obliged to ensure that the directions set out therein are observed and must consider any guidance given to it.

In short, the JCRA has considerable powers to ensure consumer protection and maintenance of essential infrastructure. The Minister for Economic Development has the ability to extend the responsibilities and the authority of the JCRA as appropriate. These together provide for a robust regulatory framework where the JCRA is able to implement wide-ranging actions where it considers appropriate to promote competition in the market place, ensure maintenance of infrastructure and protect consumers. The framework also ensures sufficient flexibility in the role of the JCRA as the market evolves and regulatory practices evolve accordingly.

2. Competition inJersey'sTelecomMarket

The consultation paper, Annex  A1.1, stated that given the development of a competitive marketplace and the powers currently available to the JCRA, there were no barriers, in relation to the market structure, that should prevent the sale of Jersey Telecom.

Many of the responses to the consultation paper recognised the high level of competition in the Jersey mobile market with each of the three licensed operators owning its own network. In its advice to the Minister for Economic Development, the JCRA notes that competition in the mobile sector is "developing on a sustainable basis under current regulatory rules".

In the fixed line market, Jersey Telecom faces competition from Newtel Solutions and Cable & Wireless Jersey while also facing threats from technological developments.

Jersey Telecom offers access to its network through the products and services contained in its Reference Interconnect Offer ("RIO"), which was published to meet licence obligations established by the JCRA, and which the Company will be required to follow even under new ownership.

The terms of the RIO ensure that the networks of other operators are able to connect to the network of Jersey Telecom, thereby ensuring a level playing field for any new entrants in the fixed line market. In addition, Jersey Telecom offers a full suite of wholesale broadband products whereby other licensed operators can utilise its fixed network to compete in the retail broadband market.

All of the tariffs offered by Jersey Telecom in these categories are regulated by the JCRA and proposed changes from the Company are subject to cost-justification submissions and 21-day notification periods before they can become effective.

The product offers referred to above ensure that an appropriate level of competition can thrive and the JCRA has the authority to involve itself where and when it believes necessary should problems be encountered.

An indication of the positive effects of competition can be seen in Jersey's fast growing broadband market where competition has served to drive the Island's broadband penetration of households to approaching 60%. Testimony to this is the success of Newtel in gaining market share through the take up of new broadband customers.

There were some comments, arising from the discussion paper, that retail tariffs for telecommunication services in Jersey are higher than those in UK or Europe. The reality of the situation is that all operators in Jersey are under constant pressure to make similar offers to the market to those available in the UK, despite the fact that operating a quality network on a small island like Jersey is subject to poorer economics.

It is interesting to note that the price cap put in place by the JCRA, covering the period 1 July 2004 – 30 June 2007, required that Jersey Telecom's prices for its core fixed line product fall, in real terms, by a factor of 2% below the rate of inflation' per annum. This requirement has been exceeded by the Company indicating that competitive forces (both on-Island and off-Island), rather than regulatory intervention, are playing a central role in the pricing decisions being adopted by the Company.

Moreover, there remain measures that can be effected such as different forms of access to the network which have proved successful in promoting competition in many European countries. Newtel has already expressed plans to become such an access-based competitor.

Sustainable competition is desirable and beneficial. The prospect of Jersey Telecom either now or under new ownership obliterating all competition is highly unlikely given:

• The existence of regulatory measures that favour new entrants over the incumbent Jersey Telecom, effectively creating a level playing field

• The scope of the JCRA's authority as set out in the Telecommunications (Jersey) Law 2002 and the Competition (Jersey) Law 2005

• The prospect for further JCRA and Ministerial intervention where this is considered appropriate

There have been concerns that an acquisition by an existing market player will reduce competition in the market but it must be noted that the JCRA will have to review and provide the final approval for any potential transaction under the terms of the Competition (Jersey) Law 2005 and the Change of Control' condition in Jersey Telecom's operating licence. The JCRA can refuse to approve any transaction that would have an undesirable impact on competition, as an acquisition by an existing player might, and it can apply conditions to any approval it does give to mitigate the situation where it believes the transaction would lessen competition. These powers are referred to later in Section 8 of this report.

Summary

There are many examples of regulatory measures put in place by the JCRA to promote competition, where it is considered appropriate, in Jersey's telecom markets and the effectiveness of these measures has been demonstrated. The scope of the JCRA's authority is sufficiently robust to allow it to continue implementing wide-ranging actions to promote competition as regulatory practices evolve.

3. Maintenance of EssentialTelecoms Infrastructure

The  consultation  paper  stated  that  the  decision  to  sell  Jersey  Telecom  would  not  adversely  impact  on  the continued provision of essential telecommunications on the Island.

There were responses to the consultation in agreement and responses that felt independent owners of Jersey Telecom would not have the same level of interest in Jersey and would therefore be less inclined to ensure the maintenance of essential infrastructure.

Telecommunications  is  a  network-based  service  and  the  maintenance  and  continued  investment  in  network infrastructure is fundamental to ensuring the continued provision of products and services. The financial services industry  in  Jersey  will  continue  to  demand  increasingly  advanced  products  and  services.  Hence  there  is  a commercial imperative for Jersey Telecom, irrespective of who its owner may be, to ensure that its fixed line network remains modern and resilient such that it can carry all necessary services, for example high-speed broadband access, to residential, business and wholesale customers across the Island. The continued investment and maintenance of the local fixed line infrastructure is essential if new revenue streams are to be secured and should the Company contemplate scaling back any investment, this would jeopardise future returns.

Furthermore, the threat of competing operators gaining market share through the provision of superior products would provide further incentive for any future owner to continue investing in Jersey Telecom's infrastructure.

There have been opinions that a private owner would be less willing to invest in telecoms infrastructure. The example of Manx Telecom is particularly relevant in this regard. Originally owned by BT, and now under wholly private ownership, Manx Telecom has developed a reputation for being at the leading edge of telecommunications development. The company has invested more than £50  million over the last five years in the Isle of Man's telecommunications infrastructure and is committed to a further £30 million investment over the next three years. Manx Telecom was one of the first companies in the world to offer broadband ADSL services to its customers and, in December 2001, became the first telecommunications operator in Europe to launch a live 3G network. In November 2005, the company became the first in Europe to offer its customers an HSDPA (3.5G) service.

It should be noted that whilst the task of maintaining essential infrastructure remains with the telecom operators, the obligation to maintain essential infrastructure is one that is legally imposed through the existing Telecommunications Law and enforced by the JCRA. Hence, the risk that an independent owner would not invest in infrastructure is low.

Jersey Telecom's existing licence (issued by the JCRA) includes obligations to, inter alia:

• "Take all reasonable steps to ensure the integrity of the Network" (licence condition 9.1)

• "Develop and operate the Licensed Telecommunications System so as progressively to achieve standards in line with international best practice and in particular, the Licensee shall achieve and comply

with relevant standards established by ETSI, the ITU and such other international benchmarks as the JCRA may direct from time to time" (licence condition 17.1)

• Take "steps that the Authority considers necessary or expedient to ensurethe continuity and continuation of the provision of Telecommunications Services or any constituent parts thereof" (licence

condition 23.2)

There are, therefore, a number of conditions already contained in Jersey Telecom's licence that could be relied upon in the unlikely event that the incumbent operator was not undertaking the required level of investment.

Further, through its authority to regulate the license terms of operators that provide telecommunications services on the Island, the JCRA can impose obligations on the dominant operator to maintain an Island-wide infrastructure and provide Island-wide services (i.e. universal services). It should be noted that the network requirements to facilitate the provision of universal services can largely be met on the existing network. In addition, the JCRA also has the authority to require all telecom operators to contribute towards funding the provision of such services.

The JCRA is able, within its current scope of authority, to further ensure the maintenance of essential infrastructure through strengthening existing provisions in the licenses to ensure the integrity of the network. It is common in other jurisdictions for the regulator to build in network roll-out obligations into license terms, or specify technical quality parameters. These are all measures available to the JCRA within its current scope of authority, to be exercised as deemed appropriate.

If any concerns regarding the level of investment were not being addressed through commercial necessity or existing licence conditions, then the JCRA has recourse to the Telecommunications (Jersey) Law 2002. If it were of the view that current and prospective demands were not being met through the prevailing investment program of the incumbent operator, it would be obliged to take action and could, with justification, require any operator to take the action that it deemed necessary.

Extract from the Law

" 1 9 D irection to comply with licence conditions

(1 ) W  here, in the opinion of the Authority, a licensee is in contravention of a condition contained in a

licence, the Authority shall give a direction to the licensee to take steps, or specified steps, to ensure compliance with that condition. [Continues]

(5 ) T h e obligation to comply with a direction is a duty owed to any person who may be affected by

the failure to comply with the direction.

(6 ) W h ere a duty is owed under paragraph (5) to any person –

(a ) a n y breach of the duty causing loss or damage to that person shall be actionable by that

person; and

(b ) a n y act that, by inducing a breach of that duty or interfering with its performance, causes

loss or damage to that person and that is done wholly or partly in order to cause the loss or damage to that person shall be actionable by that person. [Continues]

(8 ) In addition to the right of any person to bring civil proceedings as referred to in paragraph  (6), the

Authority may bring civil proceedings, for an injunction or other appropriate relief, to compel compliance with the direction."

The JCRA has confirmed that the obligations of the licence issued to Jersey Telecom remains the same regardless of whether Jersey Telecom is in public or private ownership and the JCRA retains the ability to remove the licence in case of significant breach of its terms.

Measures that bind the prospective buyer to a certain level of investment in infrastructure, through commitments provided by the prospective buyer in the sale process, will also be examined and given due consideration as appropriate, depending on the nature of the buyer and the perceived need to incentivise the buyer.

Summary

The current regulatory framework and licence obligations are stringent enough to guarantee that the maintenance of high quality telecommunication services required for continued development of Jersey as a leading financial centre is not endangered. Also market competition is likely to provide further incentives for Jersey Telecom, regardless of ownership, to deploy a network that ensures the provision of innovative and superior products to protect its current market position.

4. Consumer Protection

The consultation paper stated that the framework for consumer protection is sufficiently robust to allow the States to relinquish control of Jersey Telecom, while preserving accessibility, affordability, high quality and reliability.

Responses to the consultation were broadly of the opinion that the existing framework was sufficient to ensure consumer protection although there were concerns about the effectiveness of the JCRA in enforcing decisions cost-effectively on an independently-owned Jersey Telecom.

The entry of new operators in both fixed line and mobile telecommunications provides for competition which is generally regarded as an effective mechanism in consumer protection, as the threat of losing customers over price and service quality ensures that operators consistently strive to deliver the best products and services to the consumer market. Hence, the competition presented by these operators should itself pose sufficient threat for Jersey Telecom to ensure accessibility, affordability, high quality and reliability to defend its market share.

There are, of course, many forms of competition and equally many mechanisms for regulating the market to ensure consumer protection, such as tariff regulation and increased license obligations, some or all of which could be explored and employed by the JCRA should it determine there is a need to do so.

As previously mentioned, the JCRA has considerable powers and scope within its current authority to implement such wide-ranging actions as it considers appropriate. The regulatory framework also ensures sufficient flexibility in the role of the JCRA as the market evolves and regulatory practices evolve accordingly.

With regards to the ownership of Jersey Telecom, the JCRA itself has communicated that it is neutral as to whether Jersey Telecom is States or privately owned.

However, ownership of Jersey Telecom by certain telecom operators, or possibly certain investors, is likely to be beneficial for consumers, as it is likely to provide cheaper and quicker access to technologies, lower costs and improved operating efficiencies through economies of scale and transfer of knowledge.

Summary

The regulatory framework, JCRA's scope of authority and the competitive environment are sufficient to protect consumer interest and ensure provision of affordable and reliable services once the States control of Jersey Telecom is relinquished. Moreover, as part of a larger entity, Jersey Telecom will be able to benefit from economies of scale to expand its product range and improve operating efficiency translating into a wider range of services and lower prices for consumers.

5. Structural Separation

There is broad agreement that infrastructure or access based competition is not financially viable in Jersey given the economics of rolling out multiple fixed line networks on a small Island. The alternative is hence to operate a single network and provide wholesale access to the network to competing retail operators. Jersey Telecom is such a network operator and already provides wholesale access to other retail operators.

However, this gives rise to a conflict of interest: Jersey Telecom acts as both a supplier and a competitor in the retail of fixed line services to consumers. It is argued that structural separation of the wholesale and retail businesses of Jersey Telecom could align the incentives of the wholesale business to deal with any retail operator on exactly the same terms.

Careful consideration by various parties was given to whether structural separation of Jersey Telecom would, in the event of a sale, be the optimal structure for promoting competition and thereby economic growth.

The Minister of Treasury and Resources, reviewed the reports from the various parties on the subject of structural separation. A summary of the various views on structural separation is provided in Annex A2.2 to this report and proposition. The reports of the various parties are provided in Annexes A2.4, A2.5, A2.6 and A3.1.

In addition, the Minister sought and took professional advice from Analysys in consideration of the structural separation of Jersey Telecom from the perspective of the market, the incumbent and the regulator.

Setting aside the prospect of a sale, it is widely acknowledged by the JCRA, Jersey Telecom and Analysys, that structural separation would involve the radical restructuring of an industry that is one of the cornerstones of Jersey's success as a financial centre. It is noted that structural separation would result in a significant change in the dynamics within the telecoms industry in a way that the change in ownership of Jersey Telecom, given the existing industry model separating ownership, operation and regulation, would not.

A major disadvantage when evaluating some of the radical structural options is the lack of empirical evidence of its effect. This was again a concern cited by all parties. There are few known examples where the network and retail elements of a telecommunications operator have been completely separated and practically none where the wholesale and retail businesses have, post separation, come under separate ownership. Hence, it follows that there are few precedents with regards the competitive outcome of such a decision nor any model for regulation under such a regime. Waiting for precedents to emerge, and then for these precedents to chart a demonstrated and credible course would take a matter of several years.

Hence, in the absence of relevant empirical evidence the benefits of structural separation outweigh the cost, Jersey Telecom should not be subject to the uncharted territory of structural and ownership separation even if it involved erring on the side of caution at this stage.

If at a point in future, structural separation was to be considered the right path forward, it could be undertaken then. Either way, structural separation is a risky alternative at this stage until the benefits can be proven and the costs quantified.

Structural separation for regulatory reasons should only be pursued as a last resort. As mentioned in Sections 4.1 to 4.5 above, the regulatory framework is sufficiently robust to provide the JCRA with the scope of authority to promote competition, and ensure maintenance of infrastructure and consumer protection through various measures (such as the reporting requirements, and measures to create a level playing field) without the requirement for structural separation to achieve the same effect.