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Delegated Legislation Committee Debates

Draft Electronic Communications (Network and Services) (Penalties) (Rules for Calculation of Turnover) Order 2003

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Second Standing Committee
on Delegated Legislation

Thursday 16 October 2003

[Mr. James Cran in the Chair]

Draft Electronic Communications
(Network and Services) (Penalties)
(Rules for Calculation of Turnover)
Order 2003

9.55 am

The Minister for Energy, E-Commerce and Postal Services (Mr. Stephen Timms): I beg to move,

    That the Committee has considered the draft Electronic Communications (Network and Services) (Penalties) (Rules for Calculation of Turnover) Order 2003.

I give you a warm welcome, Mr. Cran. The Committee will know that the Communications Act 2003, which received Royal Assent on 17 July, puts in place a new regulatory framework covering media ownership, broadcasting and electronic communications networks and services, under the regulation of the new Office of Communications. The framework aims to create better quality and more flexible regulation, including a greater emphasis on self-regulation, and it equips Ofcom with a range of powers that will enable it to deal effectively with anticompetitive behaviour in the sectors that it regulates. We want a dynamic communications sector that will enable businesses to thrive and to benefit consumers through the competitive provision of services, but we also want to ensure that consumer and citizen interests are properly safeguarded.

The planned big bang day for Ofcom is 29 December, when the second commencement order will effect the transfer to Ofcom of the functions of the five existing regulators in broadcasting and communications. Staff will also formally transfer on that day to coincide with the transfer of functions. The 2003 Act is deregulatory in that it abolishes the previous regime under the Telecommunications Act 1984, which required that anyone wanting to run a telecommunications system had to do so under a licence granted by the Secretary of State or the director general of telecommunications.

The new arrangements, as required under European directives, are based on a general authorisation that entitles any person to provide electronic communications networks and electronic communications services, subject to compliance with conditions of entitlement set out in section 45 of the 2003 Act. The conditions comprise two categories: general conditions and specific conditions. The specific conditions comprise universal service conditions, access-related conditions, privileged supplier conditions and significant market power conditions.

We also took the opportunity to fix the generally recognised deficiencies of the procedures under the 1984 Act. The old regime did not provide an effective means for third parties to have an alleged breach investigated and enforced, it did not provide sufficient

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incentives to avoid breaches, or sanctions against repeating them, and the machinery was cumbersome. The new arrangements address those shortcomings by creating a power to fine and by giving broader rights of redress for affected third parties. Ofcom will be able to impose financial penalties on those found to be in breach of conditions of entitlement, and require them to remedy the consequences of the breach, as well as ordering them to comply in the future. Subject to Ofcom's consent, third parties will be able to bring civil proceedings for the recovery of losses suffered as a result of a breach as soon as the contravention occurs, even when Ofcom has not taken action beforehand on the matter. Previously such action could not be initiated until the relevant enforcement order had been made by the director general of telecommunications.

I shall now explain the purpose of this quite straightforward order and where it fits in the enforcement arrangements. The order will provide a key definition related to the regulator's power to impose fines on communications providers who contravene the conditions of entitlement. That is to say, it will define the meaning of ''turnover'' as the basis for specifying the maximum fine that can be imposed. It is quite a narrow order. Once it is approved, Ofcom will be able to exercise its powers to impose penalties under the networks and service provisions of the 2003 Act. In the transitional period up to 28 December, those powers will be exercisable by the Office of Telecommunications. An explanatory memorandum setting out the policy background to the order was laid before Parliament with the order on 8 September.

Peter Bottomley (Worthing, West): The Minister made reference to 28 December, and we know that 29 December is vesting day for Ofcom. Was that date chosen so that on the first Monday in the new year it will have its new powers? It seems an odd day to choose.

Mr. Timms: The hon. Gentleman is correct that 29 December is the planned date. In fact, we originally considered a slightly earlier date, but a major process must be undertaken before the transfer occurs. There may well have been a concern to put the new arrangements in place ahead of the new year, but I am not entirely sure why the 29th was chosen. We were very keen that Ofcom should be up and running by the beginning of the new year, and I know that it also is eager to take up its responsibilities ahead of the new year.

The power to impose penalties supports and strengthens the enforcement procedures set out in sections 94 and 95 of the 2003 Act. Section 94 provides for a notification to be given to a provider who contravenes any condition of entitlement. If the contravention is not rectified within the period specified in the notice—usually not less than one month—section 95 allows for the issue of a notice specifying corrective action, which can be enforced through the courts. Section 96 allows Ofcom to impose a penalty if a provider has not put right a notified contravention within the specified period, or if it has not complied with a subsequent enforcement notice.

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The 2003 Act provides Ofcom with the flexibility to impose a penalty as an alternative to an enforcement notice or as an addition to it, if that is appropriate and proportionate to the circumstances of the case. Ofcom must notify the person on whom a penalty is being imposed within one week of its decision to impose a penalty, the reasons for it and the period within which it is to be paid. If Ofcom is satisfied that a person is in serious and repeated breach of any conditions, and that the imposition of penalties or an enforcement notice, or both, under section 95 has failed to secure compliance, it can suspend or restrict the person's entitlement to provide networks and services and/or associated facilities. Failure to observe the terms of such a suspension will be an offence.

Section 97 sets out the amount of penalty that can be imposed under section 96, and it is in this context that the definition of turnover provided by the order is necessary. In deciding on the amount of penalty, Ofcom is required to take account of any representations made by the notified provider as well as any steps taken by him to comply with the notified condition and to remedy the consequences of the contraventions.

The penalty must be appropriate and proportionate to the contravention for which it is imposed and is not, in any event, to exceed 10 per cent. of the turnover of that person's relevant business for the relevant period. Relevant business is defined in section 97(5), (6) and (7) and broadly consists of any one or more of the provisions of an electronic communications network or service, the making available of associated facilities, the supply of directories, the making available of directory inquiry facilities or the supply of electronic communications apparatus. The relevant period is defined in section 97(5) and covers the period of one year ending on 31 March preceding the notification, subject to exceptions for providers who have not been carrying on business for a full year or who have gone out of business.

Section 97(3)(a) provides that the turnover of a person's relevant business for a relevant period shall be calculated in accordance with such rules as may be set out by order made by the Secretary of State. That is the purpose of this order, which sets out those rules.

I note at this point that placing that definition in secondary legislation rather than in the Act is consistent with practice in the Competition Act 1998 and various utility statutes, as is the maximum value adopted of 10 per cent. A definition in secondary legislation provides flexibility to amend a rather technical definition as future circumstances may require, without the need to amend the parent Act.

The rules are set out in the schedule and provide that turnover is limited to amounts derived from the relevant business, net of sales rebates, VAT and other taxes directly related to turnover. Where the relevant business consists of two or more undertakings, the turnover is to be calculated by adding together the turnover of each, excluding turnover resulting from the supply of goods or the provision of services between them. The rules also provide that any aid granted by a public body to a notified provider that relates to one of the provider's ordinary activities

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should be included in the calculation if the notified provider is itself the recipient of that aid and it is directly linked to the carrying out of the relevant business. The intention is that the turnover taken into account be suitably related to the business on which a penalty is being considered by Ofcom. In addition, the turnover of a notified provider has to be calculated in conformity with accounting practices and principles generally accepted in the UK.

The order was subject to public consultation and just one response was received, which suggested that the order should clarify that the basis for accounting should be practices and principles generally accepted in the UK. We were happy to agree to that. The consultation was very fruitful, albeit limited in its responses.

Although section 19 of the Human Rights Act 1998 does not apply to secondary legislation, I am happy to confirm that the order is compatible with the convention rights, as I have previously affirmed in a letter to the Chairman of the Joint Committee on Human Rights.

The overall effect of the new regulatory regime established by the Communications Act 2003 is assessed in the regulatory impact assessment carried out for the Communications Bill. This order, which sets the rules for determining the turnover to be taken into account when setting the cap on financial penalties, introduces no additional regulatory burden.

The changes to the enforcement regime that I have set out today, in particular the power to impose fines and the availability of more effective third party rights, represent a significant enhancement of the regulator's powers, but they are balanced with the provision of procedural safeguards for those subject to enforcement. The new right of appeal on the merits to the Competition Appeal Tribunal is a major safeguard, and other checks and balances are built in: a right for those subject to enforcement action to argue their side of the case before a definitive decision is taken; no penalty to be imposed against someone contravening a condition if they promptly take appropriate action to comply and remedy the consequences of the breach as soon as it is drawn to their attention; and suspensions and restrictions of entitlement to provide networks and services to be possible only if strict conditions are met. In the case of third party action, it will be a defence for the provider to demonstrate that they took all reasonable steps to ensure compliance and exercised due diligence. The Act was drawn up so as to provide a good balance.

Under section 392 of the Act, Ofcom is required to publish guidelines on penalties and to consult the Secretary of State before doing so. A consultation on draft guidelines is under way, and will close on 24 October. Parliament must give its approval to the method used for calculating turnover for the purposes of penalties as set out in the order. I hope that the Committee feels that the measures represent a fair balance between the powers of the regulator on the one hand and those subject to the powers of enforcement on the other. I commend the order to the Committee.

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10.9 am


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