UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1258-iii

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Culture, Media and Sport Committee

Spectrum

Tuesday 5 July 2011

Ed Vaizey and Simon Towler

Ed Richards and Graham Louth

Evidence heard in Public Questions 233 - 309

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Oral Evidence

Taken before the Culture, Media and Sport Committee

on Tuesday 5 July 2011

Members present:

Mr John Whittingdale (Chair)

Dr Thérèse Coffey

Damian Collins

Philip Davies

Mrs Louise Mensch

________________

Examination of Witnesses

Witnesses: Ed Vaizey, Minister for Culture, Communications and the Creative Industries, DCMS, and Simon Towler, Head of Broadband Policy, DCMS.

Q233 Chair : This is the third session of the Committee’s inquiry into spectrum allocation. I would like to welcome Ed Vaizey, the Minister for Culture, Communications and Creative Industries, and Simon Towler, the Head of Broadcast Policy at DCMS. May I first of all apologise for keeping you waiting. There have been one or two things going on elsewhere in the DCMS remit, which has kept us busy.

Ed Vaizey: I quite understand, Mr Chairman.

Q234 Chair : We now give our full attention to matters concerning spectrum. Can I begin by saying, Minister, that you already had a pretty substantial brief following the election-with responsibility for the creative industries and broadcasting policy in the media-and you now have a huge extra responsibility from BIS concerning the whole of the spectrum allocation, as has the Department. Are you confident that you are going to be able to cope with this and that your officials can?

Ed Vaizey: Mr Chairman, I have had the responsibility for communications from the beginning of the formation of the Government, when I was appointed as a Minister. I was initially the Minister for Culture and Heritage for 24 hours, and it was discovered that the communications Minister had a conflict of interest, so I gave up heritage and took on communications. I have found it a very smooth transition. Jeremy Hunt and I, to a certain extent, shared the communications brief as DCMS spokesmen in the last Parliament, covering issues to do with mobile phones, not unrelated to the fact that Ken Clarke at that time had the shadow BIS portfolio. So I was pretty familiar with the issues already and I feel confident that I can cope with them within, as you quite rightly point out, my astonishingly large portfolio and workload.

Q235 Chair : And in terms of DCMS officials, obviously this represents a significant expansion in the responsibilities of the Department. Are you sure that the Department can cope?

Ed Vaizey: Basically, most of the officials responsible for spectrum in BIS have moved over to DCMS. I was a joint BIS Minister with responsibility for communications, with officials reporting from BIS to me, and I have moved those responsibilities over to DCMS, which has simply meant that I have stopped being a BIS Minister. At the same time, those officials, the relevant officials, have moved over to DCMS, and it has been a pretty smooth transition, I think.

Q236 Chair : So essentially, it is the same officials, the same minister. The only person who has had to take this on is the Secretary of State, who obviously now is responsible, whereas previously it was the Business Secretary.

Ed Vaizey: That is correct. The Secretary of State for DCMS obviously had a responsibility for broadband. That was decided again when ministerial portfolios were being handed out at the beginning of the Government, but he now also has responsibility for spectrum, which he did not before, which was as you say, the responsibility of the Secretary of State for Business.

Q237 Chair : With a lot of our inquiries focused on issues relating to broadband, arguably it is probably more sensible to have the two under the same Secretary of State. You could say it was pretty odd to separate those to begin with.

Ed Vaizey: I think that is a very fair point. I think that the rollout of broadband and fibre is very relevant to mobile telecoms as well. What people forget is that telecoms operators do not just rely on the masts. They rely on the pipes that go to those masts-what is known as backhaul. It should be joined up, and obviously as we have said again and again in terms of our broadband rollout plans, they are technology neutral and there will be a mix of solutions, fibre obviously being the main one, but satellite, and also mobile, being a very important part. I think I would concur that joining them up is a sensible approach.

Q238 Dr Coffey: Just before I move on to the next question, Mr Chairman, can I just ask a general question. We understand that the Ministry of Defence takes up about 30% of the available spectrum between 300MHz and 3GHz, and often it is a case of, "We need it just in case". What is the Government’s policy on moving to liberalise some of that spectrum?

Ed Vaizey: We set up quite a detailed programme at the time of the last Budget. We published a document setting out our proposals to free up public sector spectrum. We have set ourselves a target to release 500MHz over the next 10 years, which is a very ambitious target. Obviously, quite a lot of that comes from the Ministry of Defence, but there are also other relevant Departments such as the Home Office and the Department for Transport. Quite a lot of work was done under the last Government. It got to a certain stage, as it were, in terms of identifying, as far as the Ministry of Defence is concerned, the kind of spectrum that needs to be released. Now we need to do much more technical work in terms of international obligations and equipment. But we are confident that we can get spectrum out, and it leads to the wider point, which I suspect will be reflected in your report, which is that spectrum has now become this extraordinarily important resource for UK plc, if I can put it in those terms, for driving the economy forward with a plethora of mobile data needs.

Q239 Dr Coffey: We have had various bits of evidence from some of the operators and external bodies, and it is a recurring theme that has come up in debates, but what discussions have you had with the Treasury about the expected financial returns from this spectrum auction?

Ed Vaizey: We have not had discussions with the Treasury about the expected financial return. We work with the Treasury in terms of a joined-up approach to the auction, so I work with Lord Sassoon. He and I have occasional joint meetings to discuss these issues, but as is quite well known now, the regulations directly surrounding the use of spectrum are pretty clear. The point about getting spectrum out is about competition and the effectiveness of the services, not simply an auction to raise as much money as you possibly can from it, and the Treasury understand that, as do we. So we are looking at a range of factors, not least a competitive mobile environment and a number of companies who are able to provide a good service to the consumer.

Q240 Dr Coffey: So over the next 10 years, I think it is, or eight years, the Government have set aside just over £800 million for investment into broadband, so £530 million in this Parliament. Will any of the financial returns be used to recoup that money or ring fenced for broadband in the future, perhaps for things we might have missed?

Ed Vaizey: From the auction? No, the auction proceeds of spectrum go into the Consolidated Fund, so they could be used for anything. They could be given to the Arts Council, if the Treasury was so minded.

Q241 Chair: Have you put that suggestion to the Treasury?

Ed Vaizey: Not yet. I thought about it this morning, when I was rehearsing in my office.

Q242 Chair : You might get a fairly dusty response. But that does raise a very important question about how strong a voice the Treasury is in this process.

Ed Vaizey: I think the Treasury is a strong voice in pretty much every process. No, I think the Treasury is content to see this process play out. There would not be any pressure from the Treasury to say, "You have to engineer the auction in a certain way to maximise receipts". The Treasury’s focus, in my dealings with Lord Sassoon, is on getting the auction up and running, getting the spectrum out there and maintaining a competitive environment for the mobile sector.

Q243 Chair : How do you view the potential conflict between getting maximum revenue return to the taxpayer, and promoting competition and therefore benefit to the consumer in the mobile telephony industry? Do you regard those as of equal importance, or do you think one is more important than the other?

Ed Vaizey: The way I have approached it as a Minister is to put my focus on competition, making sure that we have a competitive mobile environment, which has benefited the consumer in the UK in terms of lower prices and better services. It has not been on maximising revenue. I do not think there is a particular tension; certainly there is a happy medium between an auction that will extract the maximum amount of money from bidders and one that effectively allows people to get the spectrum for free. I think that the Ofcom proposals, as they stand at the moment, strike that happy medium.

Q244 Philip Davies: Arqiva, in their evidence to us, said that the premise of spectrum auctions might be becoming outdated. It said that, "As network infrastructure is increasingly shared, and with future mobile technology supporting carrier aggregation, and therefore pointing the way towards spectrum sharing, competition is increasingly focused at the service level. So there is a risk that while the proposed method of spectrum allocation promotes competition, Ofcom may be engineering an outcome that may not reflect where the market of its own volition is heading." Do you disagree fundamentally with that?

Ed Vaizey: I never disagree fundamentally with a company like Arqiva. What I would say is that there is obviously a range of ways you can get spectrum out there. One is an auction; another is what is known as a beauty parade, where you effectively assess the quality of the bids. That perhaps goes back to the Chairman’s point about revenues versus competition, as it were. Certainly an auction is better for creating that competitive tension that will ensure that people at least pay market value for their spectrum. Arqiva’s point is perhaps that we are on a journey where, as companies become more established and the importance of coverage and capacity increases, we might get to a system where you move towards different ways of allocating spectrum. We began the process of establishing mobile phone operators, effectively, by allocating spectrum. We then moved to an auction system with the 3G auction in 2000. I think an auction system is the right system to auction the spectrum that is becoming available, but things may change in the future. I don’t know, Simon, whether you want to add anything to that point about auctions versus beauty parades, as it were.

Simon Towler: Just a very quick addition, to say that there are, as Ed just said, certain circumstances in which different approaches may be possible. Particularly where you are looking at public sector bodies or blue light services, there may be concerns about their ability to bid against commercial players for the spectrum they need, so you may need to look at different circumstances. That is the focus of the communications review and the views of the Committee in your report will be extremely valuable as we move forward.

Q245 Philip Davies: Will the Government, certainly while you are the Minister, keep four operators? Is that an absolute line in the sand-that you would not allow anything to happen to allow any consolidation in the market; that there need to be at least four competitors out there?

Ed Vaizey: No. But I will answer this question carefully. Obviously, the auction is designed to maintain the four competitors who are capable of being national wholesalers, that is, effectively running a national service. But it is quite clear from Ofcom’s consultation, that it is agnostic about who those four competitors would be, in the sense that somebody could come into the auction and get the spectrum and roll out a service. Obviously, I support a competitive environment, but there is nothing to say that there could not be consolidation in the industry in the future. That is not a policy point, it is simply a reflection of how the market works. We had a merger between Orange and T-Mobile just before the last election, and that was subject to the normal competition regulations, and it has resulted in the merger being cleared subject to some spectrum being made available by the merged entity. I can have a philosophical view that four mobile operators is a good thing, but that does not mean that there will not be consolidation in the industry.

Q246 Philip Davies: What do you say to the people who claim that the decision to liberalise the 900MHz and 1800MHz licences could be characterised as state aid?

Ed Vaizey: One of the things that I have learned in this job is the amount of try-ons you get from telecoms companies. I am amazed that they do not litigate on the basis of what tie Ed Richards is wearing when he makes an announcement. The state aid has been tried in France and failed, and in terms of the liberalisation, we were following the law. Liberalising 900 and 1800 was required by a European directive. We were required to liberalise that spectrum to provide 3G services, and that has benefited all the competitors; Vodafone and O2 in 900 and Everything Everywhere in 1800. Obviously, Three has something to say about that because they do not have either of those spectrums, and their USP was that they had 3G service at 2.1. As for the state aid point, which is O2’s point about the spectrum floor, again I think that argument is flawed, in both senses of the word. We are entitled to set out rules for how people get hold of spectrum and the rules surrounding that and as I say, I do not think it is an argument that is going to get very far.

Q247 Philip Davies: Did the Government consider charging O2 and Vodafone for using the 3G services on the liberalised 900 licences?

Ed Vaizey: We are going to charge them. We charge a licence at the moment and Ofcom, once the auction is out of the way, will review the charges for those licences. The point there is, at what point do you revise the licence fee? Do you revise it now, in which case you are slightly sticking your finger in the air and deciding a price, or do you revise them after the auction, when you have a much better idea of the current market value of sub-1GHz and over-1GHz spectrum. At that point, you can then have a proper evaluation of what a market licence should be for that spectrum. We are going to charge them for it.

Q248 Mrs Mensch : I am going to ask you about the beauty parade concept, which I like very much as an image. What is the Government’s position on harmonised spectrum that cannot be competed for properly in the open market by satellite operators, so they provide coverage of last resort? We heard evidence last week from a satellite operator that it provides mobile coverage around the world in places where nobody else can reach. It is the Carling Black Label of mobile phone operators, but it needs that harmonised frequency in order to do it. Of course, maritime communications and others are entirely reliant on satellite operators for their communications; they cannot afford to pay the same market rates for harmonised spectrum. Do the Government have a position on this as a public service versus cost-benefit part of the auction?

Ed Vaizey: I am struggling with the Carling Black Label reference, Chairman. Heineken reaches the parts that others beers cannot reach, so I assume-

Mrs Mensch : I am a non - beer drinker.

Ed Vaizey: Mrs Mensch, you were groping for a Heineken reference but I can’t remember what the Carling Black Label strap line was. Simon, what is your view on Mrs Mensch’s statement, since you have passed me a note that I am not sure I fully understand?

Simon Towler: The satellite bands, the bands of harmonised spectrum, are agreed at the International Telecommunications Union, and we participate fully in those discussions. So it is a question of the UK Government participating in the discussion to ensure that there is spectrum available for satellite operators in those areas.

Mrs Mensch: Thank you.

Q249 Dr Coffey : Building on that, I felt the satellite operators had suggested that the European Commission had almost been cavalier, not realising the impact on them. That is the impression I took from our evidence session a couple of weeks ago. They were just nervous that they almost seemed to be forgotten.

Ed Vaizey: I don’t understand the insecurities of the satellite industry. We have a very successful space industry in this country. I have the international space centre in my constituency, so I have a special interest in it anyway. But satellite cannot provide the kind of capacity that mobile phone companies can provide, or indeed fixed-line broadband is going to provide, in terms of data. But it is there as a complementary technology, particularly for the parts that are difficult to reach. But the satellites that have recently been put into orbit to cover European communications do not have the kind of capacity that we are going to need. The fundamental point, and I think it is part of the Ofcom consultation, is that the spectrum that is going to be auctioned and is bid for and bought by whoever-the main mobile phone companies and possibly others-is going to provide 4G capacity for the majority of the population. But there is certainly an argument about what one does about spectrum that is not used by the mobile phone companies, simply because it might not be economic to put in place the infrastructure to use that spectrum, and whether or not we can make that available to other operators who are prepared to use it. There is an element of-we have put in place trading rules for spectrum. Whether or not that is relevant for, as it were, unused spectrum in uneconomic areas, or whether the trading system will develop in a different way, is also another question. That to me is what needs to be looked at; how you encourage the use of unused spectrum once mobile operators have, as it were, put their networks together.

Q250 Dr Coffey: There is currently a duopoly on the sub-1GHz spectrum, Vodafone and O2 have the 900MHz band. Clearly there is an opportunity; would Ofcom be within its rights to say, "Actually, Vodafone and O2, you are not going to get either any 800MHz or the smallest amount possible, to allow for competition"?

Ed Vaizey: That is a tricky question to answer. Would Ofcom be within its rights? Ofcom could put forward rules. It has not put forward rules, but it could put forward auction rules-I think, in theory it could put forward auction rules, Simon will kick me if I get this wrong-

Q251 Dr Coffey: I should ask not whether it is right but whether it is reasonable.

Ed Vaizey: I support Ofcom’s process. It is attempting with the auction process to make sure that everyone has access to sub-1GHz spectrum. They recognise its importance and I think that that would be the outcome of any auction. So that is a good thing, and I do think it is reasonable that there are four operators with access to sub-1GHz spectrum.

Simon Towler: If I might add-

Ed Vaizey: If you could just clarify.

Simon Towler: It is absolutely right that the proposals from Ofcom suggest-and we agree with it, we have no reason to dispute that suggestion at all-that what is required for the viability of four operators is a mixture of both sub-1GHz and over-1GHz spectrum. The Ofcom proposals are designed to achieve that balance, and I think you have heard from just about all of the operators that some aspect of that balance is wrong. You might conclude that if they are all slightly unhappy, the balance might just be right, on the premise that you probably cannot please everybody completely.

Q252 Dr Coffey: You will be pleased to know that I asked them about judicial review and neither Vodafone nor Telefonica seemed to have an appetite for it, in public.

Ed Vaizey: Good. We will see what happens. We hope that certainly the operators do understand that this is a very clear and transparent process, and that Ofcom has set out its proposals. It has had a full consultation and it will reflect on the responses and then set out the rules. But I do hope that all the operators understand that the auctioning of spectrum is becoming imperative for our economic growth. I hope that they will reflect on that and the fact that they have had a chance to put their views and Ofcom has had the chance to consider them and put forward rules. I hope that the Select Committee will use its influence and have discussions with them, should they choose to go down a particular path.

Q253 Mrs Mensch : What is the Government’s thinking behind the imposition of a floor in spectrum auctions? It was an interesting evidence session in the Select Committee last week, because we saw a significant difference of approach between O2 Telefonica and Vodafone. O2 Telefonica objected only to the floors on the auction and accepted the ceiling that Ofcom proposed, whereas in contradistinction, Vodafone was quite happy with the floors, but did not like the ceiling, thus perhaps leading us to believe that O2 was quite happy for other smaller players to come in as owners of spectrum, whereas Vodafone would prefer a consolidation in the market. Given that there is an aim to preserve competition, what is the Government’s thinking behind the imposition of the floor in the auction?

Ed Vaizey: I would like to stress, Mrs Mensch, that it is Ofcom’s thinking. So Ofcom has set out auction rules, clearly, that are designed to maintain a four operator model, but also, importantly, to ensure that each of those operators has the capacity to be a national wholesaler, i.e. run a national network. Therefore, the idea behind a floor is to ensure that they have a minimum amount of spectrum with which they can carry out that task, and the idea behind a ceiling is to prevent people grabbing all the spectrum and therefore effectively knocking one of the competitors out of the game. So I am very much a floor and ceiling man.

Mrs Mensch : Fair enough.

Q254 Chair : May I turn to the new rules that Ofcom has announced, which are going to allow mobile operators to sell some of their existing capacity? We took evidence earlier in this inquiry from Everything Everywhere, which has taken over both the two previous operators who were essentially given the 1800MHz spectrum. It is now keen to be able to sell it at a vast profit. Are you comfortable that the mobile operators are going to make so much money on the basis of what was a public asset?

Ed Vaizey: I think there are a number of points to make there, Chairman. First of all, while it is true that the spectrum was effectively allocated to these operators, they have paid an annual licence for it, and that was in effect the financial arrangement that we put in place in whenever it was-1991, I think-in order to gain revenue, rather than an auction. It was obviously the auction of 3G spectrum that turned auctions into the norm. So we got revenue from that spectrum and we have had it for 20 years.

The second thing is that Everything Everywhere, O2 and T-Mobile have invested an enormous amount in this country-I think the figure they use is something like £50 billion-and we are grateful for that investment and the creation of British jobs.

Thirdly, it remains to be seen what value Everything Everywhere gets from the 1800MHz that it is going to sell, because obviously any operator buying that spectrum will know that it is going to be paying a licence fee for it, and not just the current licence fee but a revised licence fee because 1800MHz has now been liberalised. So whoever bids for that spectrum will factor that cost in. I think, all things being equal, I am comfortable with that process, but obviously Everything Everywhere can reflect on the fact that to a certain extent they have been able to get some income from this and therefore will not perhaps look too horrifically at Ofcom’s proposals for the auction.

Q255 Chair: It is not just a question of getting some income. On a rough calculation, the amount of money they have paid for that bit of spectrum over the time they have had it comes out at £160 million, and the estimates of how much they are going to receive for a sale is £450 million. That is nearly a £300 million profit on something that they were given. Surely you cannot feel that that is entirely right.

Ed Vaizey: Well, I watched the rough calculation being made in public in the Select Committee by Mr Watson-

Chair: Indeed.

Ed Vaizey: -and I was impressed, but I am not sure that I accept the estimates. As I say, I think there are a number of factors to be considered, not least the fact that anyone bidding for this spectrum is effectively going to have to pay for it in enhanced licence fees. I cannot comment on the price, but I am comfortable with the process.

Q256 Chair: You referred earlier to the Treasury having a strong voice in everything. Are the Treasury not going to be on the telephone to you saying, "Hold on a minute. How come we gave away something that is now being sold off at a profit of around £300 million?"

Ed Vaizey: I wouldn’t say we gave it away. We allocated it to an operator who then invested in a network that has benefited consumers and the UK, and for which they paid a licence fee.

Q257 Chair: So they are entitled to make a profit?

Ed Vaizey: I think they are entitled to sell the spectrum they have been allocated, yes.

Q258 Philip Davies: Can I just check on that point? It was a sight to behold Tom Watson, as it always is, wiping the floor with Everything Everywhere. I was as impressed as you were by that, but if I could just press you on the principle. If Tom’s back-of-a-fag-packet calculation turns out to be right and they do walk away with a profit of £290 million, is the scale of the profit not an issue to you? As far as you are concerned, whatever they have paid, whatever they get in return, whatever that happens to be and whatever the profit at the end of it, you are comfortable with it?

Ed Vaizey: I am comfortable with the process. We have put in place now a system for trading spectrum, for example, and I think if people felt that they could not put spectrum on to the market-which is what we want people to do to make sure that it is used as efficiently as possible-because the Government would then come in and take the receipts, that would stop trading in its tracks. As I say, I am not sure I accept the back-of-the-fag-packet calculations, but I am not going to get into that. I am comfortable with the system as proposed, yes.

Q259 Philip Davies: Whatever the profit it comes out with?

Ed Vaizey: Yes.

Q260 Dr Coffey: Just moving on to coverage. Minister, you have been in several Westminster Hall debates and in the Chamber as well. I think in the most recent debate an impassioned plea was made to Ofcom that it should raise its coverage expectations from 95% to 98%. As part of its submission and evidence, Arqiva suggested that 99% should be going for a once-in-a-generation opportunity to really hammer it. In terms of asking for figures, I understand that a figure of about £200 million to £230 million would be the additional cost of making the last few percentages-rather a lot of money, I accept. Do you think we should be aiming as high as possible in this auction?

Ed Vaizey: To a certain extent, it comes back to what the Chairman was asking me about earlier, which is the balance between getting spectrum out for the public good-the benefit of the country-and getting some money for the spectrum. A balance has to be struck between auction receipts and the cost-benefit analysis of 98%, 99% coverage. Coverage obligations are always problematic because they are extraordinarily difficult to measure. You could have 95% coverage, which could in effect be 98% coverage, depending on how many people are using the system, or it could be 85% coverage if a lot of people are using the network. As you know, coverage waxes and wanes depending on how many people are using the network. So it is very difficult to measure, and I think that I am right in saying that the last time we tried coverage obligations, it was very difficult for the mobile operators to match it.

So I think 95% is a realistic target, but I remain open-minded. I would like to stress, and I said in the debate, that this is a consultation and it is not just the mobile operators who are entitled to make representations to Ofcom; we all are as well. I think the debate, certainly in the Chamber, was extraordinary in terms of the number of colleagues who appeared and wanted to make the case for 98% coverage. Parliament effectively has passed a motion calling for 98% coverage; 100 MPs signed that motion. So Ofcom will have heard what Parliament said. I don’t know whether I can quite say it is the will of Parliament, but certainly a very strong message has come out from colleagues about what they would like to see, and I think Ofcom will reflect on that.

Q261 Dr Coffey: You do not have a figure in your own head of what you would like Ofcom to come out with in the end, in terms of-

Ed Vaizey: No.

Q262 Dr Coffey: In trying to get the coverage, there has been quite a lot of talk about infrastructure, and initially mobile network operators seemed to be reluctant to have open platform sharing within it. So they might hook up; Vodafone and O2 might share some masts and others might be starting to work together, but if you press them they seem to think, "Yes, if we are obliged to go to 99% we will have to share". In one way, from the outside you think that is a good thing-fewer masts, all concentrated-but one of the key things is the backhaul to get the fibre from whatever to the masts. To what extent is rural broadband coverage really going to hinge on this idea of the digital pump, the BT’s fibre network or other people’s fibre network, which Broadband Delivery UK money is being spent on as we speak?

Ed Vaizey: I think the digital pump is a very important part of the process. Again, we are not mandating any particular technology or method to deliver the broadband target. What we are trying to do is get the money out to counties and devolved Administrations to come up with solutions that are suitable for their areas. The village pump is, I think, one of those solutions, which is effectively, as you say, to put a pipe into a village with a cabinet from which you can then run different technologies in order to deliver broadband to a small community. But, as I say, the backhaul network is going to be very important for the success of mobile in any event. Simon, you are the expert in this area. Do you want to add some points about the village pump and backhaul?

Simon Towler: I think you and Dr Coffey have made the critical point-you made it in your opening remarks and Dr Coffey has made it here-that in putting a high-capacity fibre connection into something like a street cabinet-the village pump idea-you are putting fibre further out into the network, you are putting in a point of connection that the mobile operators can also use to increase coverage. The point that the Minister made at the beginning was that the fibre programme also benefits mobile coverage and the mobile industry, and that is the interconnectedness of the different technologies and also one of the reasons why we are technology neutral in our approach.

Q263 Dr Coffey: Just building on that-I am afraid I am not following the script exactly; apologies to colleagues.

Chair: Off-piste.

Dr Coffey: I am off-piste on this one. I think I raised a few eyebrows a couple of weeks ago when I was saying about this, "Isn’t it obvious then they can piggyback on the infrastructure?" and a comment came back-I can’t remember which person made it-that effectively this is county-by-county build-up and they are not necessarily following the digital pump idea, so they are just deciding what is best county by county. So the original assumptions of having a digital village pump may not actually be borne out in BDUK’s plans with counties.

Simon Towler: Well, that rather depends. Surely the whole point is that you design your network appropriate to the circumstances of the coverage that you are trying to achieve. You do not specify a particular solution as the one and only approach. It is not to say that the village pump, the digital point of presence, is a defunct idea or changed. It is just that they are working on a county basis to define local broadband plans. In addition, in the hardest-to-reach areas a small fund, the community broadband fund, is going to be available of around £20 million, particularly targeted at the smaller communities, and I would say they are most likely to be the ones who are going to be picking up and running with that idea. But I do not think that they will have a single concept of exactly what that one village pump, one point of connection will be; that it will be based on a fibre point in the first instance.

Q264 Dr Coffey: The Government in their original thing-I have taken the Secretary of State’s words almost literally in my discussions in my community-was saying, "We will get fibre to every village, because that is the idea of the digital pump". Is it fair to reflect on that now saying, "Actually, that might not happen. It will be whatever is needed that is appropriate to deliver broadband in Suffolk"? My worry, a little bit, is that we will end up with people able to get broadband but they may only be able to get it from one supplier. They will not be able to go and, say, get Sky, Virgin Media or whatever. They will be confined to Suffolk county broadband, if that makes sense, and I have a slight worry for consumers in that regard in terms of computers in their home. I am slightly getting away from spectrum here, but it is part of the same thing; is the consumer still going to benefit from competition and choice?

Simon Towler: That is part of the intention and it is part of what needs to be built into local broadband plans. You need to be building and offering something that is going to be attractive to the over the top service providers-the ISPs-so that they are going to want to come in. If you are a small community project, part of the challenge is always going to be to provide the service in such a way that it is attractive. That is certainly very much on BDUK’s mind and something it is working actively to address through demand aggregation projects and things like that.

Q265 Dr Coffey: You already know my view of how important coverage is, and mobile broadband could actually be a better solution for parts of the countryside than fixed broadband, if you like, for delivery of services. Sometimes local communities object to the erection of masts, even though they might deliver services. What action is DCMS taking with DCLG to help with the erection of masts?

Ed Vaizey: I will ask Simon to answer that specific question. Our relationship with DCLG is more, from my perspective as a Minister, on the rollout of broadband fibre, so we have obviously spent a great deal of time focusing on passive infrastructure access-access to ducts and telegraph poles and things like that. We have worked, for example, with DCLG on regulations to ensure that new housing developments are properly broadband enabled-or codes of practice, I should say, to be more accurate. So in that sense the sharing of infrastructure is very important. As far as I am aware, the issue of the siting of masts and changes in any planning regulations around that has not surfaced, unless some discussions have been happening at a different level.

Simon Towler: Ed is absolutely right, we have a very active dialogue with DCLG on a range of issues associated with facilitation of the rollout of broadband, and that does include planning for masts. You are quite right that some people do not like them, either because they have concerns, well founded or not, about the potential health effects, or simply because they find them ugly. Discussions are going ahead in the context of the development of the National Planning Policy Framework between members of my broadband team and the relevant officials in CLG. That is at the development and consultation stage, so we are engaged with CLG officials. They sit on the broadband delivery programme board, so there is an opportunity to air with each other interdepartmental concerns so that they can be addressed. In the Budget the Government announced a strong presumption that planning regulation should not hinder the development of broadband deployment, so we are trying to ensure that planning regulation does not hinder broadband deployment, including mobile and masts, but as ever with all of these issues there is a balance to be struck between the rights of individuals and economic development needs.

Q266 Dr Coffey: The Government have already paid for a lot of fibre to go to different parts of the country-to schools, to prisons and similar. I know that this is a perennial question, but what do you think is stopping mobile phone operators and others from piggybacking on that network? There seems to be a reluctance. They want their own fibre to go somewhere as opposed to sharing somebody else’s. What do you think the barriers have been in their minds to not using already established assets?

Ed Vaizey: There should not be any ideological barriers, if I can put it that way. I think the two barriers were, first of all, confusion about whether state aid rules applied, that somehow you were getting a hidden subsidy by using a network that had been paid for by the Government, the taxpayer. We have clarified those rules, as far as I am aware, and there is no issue with state aid, but it is often what councils bring up with us. The other reason is often pragmatic, which is that technically it is much more difficult than people assume and sometimes the fibre is in the wrong place. The classic question you always get is, if the fibre is running down the side of an A road so that you can put traffic signals up, why can’t it run to the local housing estate? Often there are technical or physical reasons for that, but in theory, unless I am completely wrong, there should be no problem. We are very much supportive of public sector networking.

Q267 Dr Coffey: There is no reason why phone masts could not be put on top of those traffic signals, is there?

Ed Vaizey: Yes, that is right.

Simon Towler: You are right. You are getting to the limits of my knowledge, but as technology improves, designs of masts change so that they are smaller, less intrusive, require less power-all of those things. There are designs, for example, that fit on the top of lamp posts now, and so forth. So, as the need for mobile data increases exponentially, what you will see is a need for greater numbers of mast sites, but they will get smaller and, again, that is balanced. There is an inverse relationship between the requirement for mast sites and the requirement for spectrum. The more spectrum you have, the fewer mast sites you need; the greater the density of mast sites you can achieve, the less spectrum you need for a given amount of data.

Q268 Mrs Mensch : Just a quick supplementary, Minister. I wonder whether your Department has taken a view on the intriguing technological advance that the Committee heard about last week, whereby broadband fibres are used to deliver mobile phone coverage by plugging a cell into a broadband connection, which then provides mobile phone coverage in a limited area where there may not be a mast. It may be a village of outstanding natural beauty-no mast, no coverage, yet people can have a five-bar service delivered via wired broadband. This seemed to me to be a very creative solution that would benefit a number of villages in my constituency and I was wondering whether the Department was looking into it as a way forward for areas where there is hard-to-reach mobile phone coverage.

Ed Vaizey: Yes, I think you are referring to femtocells, Mrs Mensch, which I have seen in operation in Swindon in the research laboratories of Alcatel-Lucent, which is based in Swindon. It was very instructive, by the way, to hear how a foreign company still wants to invest in the UK because of the quality of the people they can recruit, but that is a side issue. The only mobile company at the moment that is using femtocells for the consumer is Vodafone. The other ones are using them for business, but they are not rolling them out for consumers, which I find baffling. I am in a similar position, I suspect, to you in the sense that I have to stand in the middle of the road in my village to get a signal, and unfortunately I am not a Vodafone customer.

Q269 Mrs Mensch : Vodafone told us that it was trialling these cells for consumer use at the moment in various out-of-the-way villages which have wired connections but do not have good mobile phone coverage. I presume that this is something that the Department would welcome were it to be rolled out on a wider basis.

Ed Vaizey: We absolutely do welcome it, and we would encourage other mobile operators to adopt this technology as soon as possible.

Simon Towler: If I may add, as part of the consultation document, of course, the more prosaic element here is the low power device spectrum that is being made available, because there is still a spectrum requirement. That is aimed at possibly promoting the use of femtocells, so that would be a welcome development.

Q270 Chair: Can I come back to the issue of licence fees? We have already explored the windfall that it appears Everything Everywhere may be about to receive from the sale of their spectrum. My colleague Philip Davies touched on the question of how much the two other biggest operators, Vodafone and O2, have been paying for their existing spectrum. Surely by acknowledging that the price is going to go up substantially following the auction, that is an admission that they have been underpaying ever since the liberalisation of that spectrum.

Ed Vaizey: Yes, but the spectrum has been liberalised effectively only since December of last year, so they have been underpaying, if I can use your phrase, Chairman, for six or seven months. As I say, once we get the auction out of the way we will have a chance to review those licence fees and they will be paying a proper rate. If you think that, if that takes 18 months they have got away with it at a discounted rate, I am not sure that I agree because there is a difference between passing an Act that says you can now liberalise your spectrum and actually putting in place the technical measures that mean you can take advantage of that liberalisation. So, again, I am not sure that Vodafone and others will have yet seen the benefits, despite what their competitors say.

Q271 Chair: Nevertheless, that spectrum suddenly became more valuable, which is recognised in the fact that you are about to increase the price for it. They bought a spectrum, originally, that was restricted to certain things and then they got a free benefit when it was liberalised.

Ed Vaizey: Yes, they got the benefit because we complied with the European Commission directly, which required us to liberalise that spectrum, and they will pay for it after the auction when we can put a value on that spectrum, based on what the market was prepared to pay for similar spectrum, and come up with an appropriate licence fee.

Q272 Chair: Do you accept that the price they pay may well be double what they are paying at the moment?

Ed Vaizey: I wouldn’t like to speculate.

Q273 Chair: But it does sound as if the three biggest operators in this country, for different reasons, have made a killing at the expense of the taxpayer.

Ed Vaizey: I don’t think they have made a killing at the expense of the taxpayer. I think they have been paying a licence for their spectrum that has been set at an appropriate level and, to be fair, has been reviewed several times. I think the last time it was reviewed was in 2004. So they have been paying an appropriate licence for that spectrum. That spectrum has now been liberalised, which will benefit the UK consumer. The consumer will benefit from the investment these companies have made, albeit they are not doing it for charity, obviously. Once the auction is complete, we will then know the value of that spectrum and Ofcom will be able to consult and set appropriate licence fees. If it tried to do it now it could be subject to judicial scrutiny because, as I said earlier, it would be groping in the dark for a proper value for the licence.

Q274 Chair: Can I also come on to the more general question about the usage of spectrum. A lot of attention is focused on the benefits for mobile data transfer and so on, but we also heard last week from Inmarsat, who pointed out that they had spent a great deal of money launching satellites and you cannot just go up and tweak a satellite to change the spectrum that it uses. Are you confident that existing users, particularly the satellite industry, are not going to be disadvantaged by this?

Ed Vaizey: As I say, I don’t think that the spectrum auction should disadvantage satellite users. I don’t know, Simon, whether you want to-

Simon Towler: I have no reason to believe that they would be disadvantaged by the auction process.

Ed Vaizey: It wasn’t an issue at the last auction, for satellite users, and I am not quite sure what their specific concerns are. As I say, we regard satellite as an important part of the mix of technologies that will deliver broadband to the consumers, but I think even the most fervent supporter of satellite technology would acknowledge that it is not going to be a central delivery mechanism for broadband. It is going to be complementary; it is going to fill in spots that are difficult for conventional providers of broadband to reach.

Q275 Chair: Indeed, but we are talking about satellites that are using spectrum not just for the purposes of delivering telephone services. We are talking about extremely important marine navigational use and that kind of thing.

Simon Towler: Spectrum proposals will not interfere with existing services in the adjacent bands.

Q276 Chair: There has been some concern that there might be some interference. You are pretty confident about it?

Simon Towler: It would be a matter for Ofcom, in its role as the manager of the radio spectrum, to ensure that that did not happen, but there is no reason to believe or suspect that that would be the case. It has not been the case with previous rounds of development of mobile telephony and mobile broadband.

Q277 Chair: Can I come on to another concern that was expressed to us, which is that Ofcom’s prime duty has been to look after the interests of the consumer. Yet it has not always been able to take full account of the interests of British business and the two might not always be the same thing. Do you accept that there might be an argument for widening the remit of Ofcom in that area?

Ed Vaizey: Yes, I do, and that is why the communications review is important. I have not seen many of the representations we have received since the Secretary of State, Jeremy Hunt, sent out his call for evidence in May, but I suspect that one of the issues that will come up, particularly in terms of spectrum usage, is that Ofcom could have a duty to take into account the interests of business. I am not expressing a view on that, by the way, Chair. I am just saying that that would be a legitimate argument that could be put forward, and we would reflect on it in the Green Paper that we hope to publish at the end of the year.

Q278 Chair: Finally from me, the PMSE sector, which has occupied the attention of this Committee and others in the past; they remain concerned. Do you think that their interests are being properly looked after?

Ed Vaizey: I would hope that they are, Mr Chairman, genuinely. When I came in as the Minister, we had the issue of compensation for channel 69 equipment. We had a range of options from the Treasury, from as little as possible, to the industry, to as much as possible, and I think we came down somewhere in the middle. I was quite pleased that my submission to the Treasury was accepted, that we should give PMSE operators more compensation than the bare minimum. Obviously, I am aware of a range of concerns about potential interference and so on, but I think that we are moving them from channel 69 to channel 38. It is a more than like-for-like channel, so there is enough bandwidth and spectrum for them to use new equipment. We have put in place a compensation regime. We are aware of the concerns about white space devices. There is a trial going on in Cambridge at the moment, as you know, looking at white space devices and the impact they have on other devices. So I would like to think that we reflect on their concerns and we act on their concerns. That is where I think we are. Do you want to add anything, Simon?

Simon Towler: I think that covers it fairly comprehensively. The point and the reason why you are, very properly, holding this inquiry is that you have a scarce resource with competing demands on it and you have to try to strike a series of very difficult balances between different uses of radio spectrum, balancing public good, economic benefit and a range of other issues, and you try very hard to make sure that if you are changing use of spectrum the incumbent users are not unduly disadvantaged. But when there are growing requirements for new uses there is bound to be a trade-off of people having to give up spectrum in certain areas. By making channel 38 available, we are trying very hard to make sure that their needs are met.

Q279 Chair: The sector has already been required to move bands at some considerable cost and now on top of that it faces the danger that there is going to be interference, particularly from white space devices, and they are told, "Don’t worry, Ofcom will come and sort it out within a matter of hours". If you are in the middle of-I gave the example of a Bon Jovi concert last time, it isn’t much reassurance that in a couple of hours’ time the interference may be dealt with.

Ed Vaizey: Well, I think Metallica might have been a better example, Mr Chairman.

Chair: My colleague had a particular concern.

Ed Vaizey: I was not aware that Ofcom was going to turn up in a van at the concert and tweak the aerials. I do not want to comment on that. As far as I am aware, channel 38 would be no different from channel 69, and the white space device issue is not an issue to do with the new channel. It is to do with the fact that white space devices are coming on the market. So, quite properly, trials are being conducted to ensure that there is not interference. I do not see any threat to PMSE with the new channel so I am not quite sure what their concern is.

Simon Towler: I think you have hit the nail on the head with the white space trial. To make sure that interference issues are minimised trials will be conducted and, as far as can possibly be managed, people will ensure that new white space equipment does not interfere.

Chair: I think that is all we have. Thank you both very much.

Examination of Witnesses

Witnesses: Ed Richards, Chief Executive, Ofcom, and Graham Louth, Director of Spectrum Markets, Ofcom, gave evidence.

Q280 Chair: We now come to the second part of this morning’s session. Can I welcome a familiar face to the Committee, Ed Richards, Chief Executive of Ofcom, and also with him Graham Louth, who is Director of Spectrum Markets. Philip Davies to start.

Philip Davies: Will the restrictions you propose placing on the auction reduce the chances of the true market value of the spectrum being realised?

Ed Richards: I think the restrictions that we are proposing-it is important to say that they are only proposals at the moment and we are currently wading through a huge volume of submissions on that very topic-would clearly affect the auction, and they are intended to affect the auction. One can contrast that with an absolute free-for-all approach. Clearly it is possible that one would get different outcomes in terms of the actual revenue raised with those two different approaches. So I think it is important to go back to say, "What are our duties here from Parliament?" Our duties, as you probably know, are not to maximise revenue. They are to make sure the spectrum is used as efficiently as possible and also to promote competition. So the approach that we have taken in this area is primarily concerned with ensuring that after the auction there is effective competition, and we have set that out in considerable detail in the consultation document.

However, those proposals will not take all the intensity and competition out of the auction, so we do not expect that the result will be no bidding, no competition and no intensity in that auction. I do not think that is our judgment about what the result will be. But the prime motivation, without any doubt, is to ensure that after the auction there is effective competition for consumers and businesses across the UK, because all the evidence shows that effective competition delivers substantial economic benefits to the whole economy.

Q281 Philip Davies: You said your priority was not to maximise revenue, which probably has alarm bells sounding in the Treasury as we speak. I just wondered what discussions you might have had with people in DCMS and the Treasury about the expected financial return.

Ed Richards: What we tend to do always is keep the relevant Government Departments abreast of our thinking in areas of this kind, where they would quite rightly have an interest. What we have not done is provide any Department with a number or an expected revenue from the auction. The reason for that is that I don’t think anybody can do that reliably and I would be very cautious about doing it. It is instructive to think about the last auction in this regard, the 3G auction. I think expectations were for a very small number of billions and we all know that the outcome was in excess of £20 billion. Nobody that I am aware of predicted a number anything like that and that was the product of the circumstances at the time, the dotcom boom and all the rest of it. I think the world is very different now. It is very difficult to predict precisely how many people will compete and bid in the auction, and therefore I honestly think it is a fool’s game to try to predict exactly what the number is. Inevitably there has been discussion about the overall approach and where we are heading, but I have not, and nobody in Ofcom has, volunteered any number.

Q282 Philip Davies: No, it wasn’t that you might have provided them with a number, it was more that they might have provided you with a number that I was more interested in; that there was a certain amount of money that they wished to realise from it that then would govern your approach.

Ed Richards: I see. I misunderstood the question. The answer to that is no. Nobody at any point has said to us, "What you need to deliver is X billion or million". That has not happened. There have been interesting exchanges, and completely reasonable and legitimate exchanges, about the approach we were proposing to take to the auction and to the timing and things of that nature, but no number on their side and no number on our side either.

Q283 Philip Davies: So your approach genuinely is that this is the outcome that you want to see and whatever that raises is what it raises and that is that?

Ed Richards: Our starting point is ensuring that the spectrum will be used efficiently and to ensure there is effective competition. If you combine those two starting points then what you have is an approach to the question of how we design the auction, but I don’t think that either of those, or indeed the approach we have taken, are inconsistent with a competitive auction. I think the kind of situation you might be imagining to stretch the issue and see where it breaks is where we took a particular approach that meant that there would be only one bidder with consequences for the intensity of bidding in the auction, but we are not in that territory, partly because no one can predict accurately or precisely who will bid. I think we know that the mobile operators are interested in the spectrum; I think they are all publicly on the record in relation to that. I think a number of other organisations, companies, might also be interested and we simply do not know that at the moment.

So our approach is to promote effective competition, to ensure the spectrum is used efficiently. That is where the wider benefits and the much more long-term benefits to the economy lie, but the proposals we are making are not inconsistent with competitive bidding in the auction either. Graham, do you want to add anything?

Graham Louth: I was going to add one point that we have had an example in Europe of over-regulation leading to a failed auction. The Dutch attempted to award their 2.6GHz spectrum, reserving a very large amount of that spectrum for new entrants, and basically not enough new entrants turned up at the auction and consequently they didn’t even sell all of the spectrum and the spectrum they did sell went for the reserve price. We are absolutely nowhere near that sort of situation with our current proposals in the UK and I don’t envisage that we will get anywhere like that going forward either.

Ed Richards: One point to add, which is interesting, is that because we want to ensure that the spectrum is used efficiently, we want the people who value it most highly to end up with it, because that is your proxy for the value they can deliver to the economy. To ensure that that is the case, you need some competitive bidding. So I think from our own perspective we want to see people reveal their preferences and reveal their value or the value they place on the spectrum.

Q284 Philip Davies: In light of the backlash against the decision to liberalise the 900MHz licences held by two operators, in hindsight do you wish you had done that differently?

Ed Richards: The process of liberalisation? Graham might want to come in on this in a moment, but I don’t think so. There are two points to be made on it. The first is that we have a longstanding commitment to liberalising spectrum where we can because we think it makes the spectrum more economically attractive and of greater value. Secondly, there was a European directive on this subject requiring liberalisation and the Government enacted that. So there was a general objective, but there was also a requirement on us to do it. As we approach liberalisation we always keep a careful eye on any competitive implications and that is what we did in this particular case. Graham, you might want to talk a little bit more about how we did that in this case. But overall we would want to liberalise where we can and we would do so with an assessment of the competitive implications, and that is what we did in this particular case.

Graham Louth: A couple of points from me. We liberalised at the beginning of this year, implementing the Government’s direction of December last year. O2 has already started to make use of that flexibility. They are deploying 3G technology in the 900MHz band in certain city centres. That is bringing consumer benefits today. O2’s customers are getting a better 3G mobile service as a result of that than they would have done if we had not liberalised that spectrum. As Ed has said, the key question for us was, does that give rise to a distortion of competition? I see no evidence today that consumers are suffering detriment as a result of a distortion of competition as a result of the fact that O2 can make use of that spectrum for 3G.

We did a lot of analysis over a number of years to reach the final decision. It revealed that there is the potential for a competitive distortion, but it is not an immediate risk. It is not something that is likely to materialise in the next year or so. It is something that might materialise in three to five years’ time if other spectrum is not available to match the 900MHz spectrum, but the key point is that other spectrum is available. We have the 800MHz spectrum. It will be available from the beginning of 2013 and onwards from then, and so there are opportunities for other operators to acquire spectrum that will allow them to deploy services that match and even better the services that Vodafone and O2 can deliver using the 900MHz spectrum. Some years ago when we looked at the issue we were concerned about the impact on competition and we were proposing some measures to mitigate those concerns. As time went on, the 800MHz spectrum became more of a reality. It became increasingly close in time to the point where we felt comfortable that liberalisation of the 900MHz would bring consumer benefits and would not harm competition because the 800MHz spectrum would be available to balance the benefit of the 900MHz spectrum.

Q285 Philip Davies: What other measures did you consider?

Graham Louth: We considered requiring Vodafone and O2 to give up some of the 900MHz spectrum so that it could be made available to another operator or operators.

Ed Richards: It is worth adding that this is a very good example of the kind of very difficult judgments that we have to make sometimes in this area. The reason they are so difficult-this is not the only example, there are others as well-is that many of the advocates within the industry, so one player or another player, would like the world to be exactly equal between everybody. The problem is that in resource markets of this kind, and this is in a sense a resource market because it is control of spectrum rights, the world is never in a position where everybody can start equally. Somebody has a historic right from many, many years ago to something; somebody else bought something else; this is at one price, that is at another. So, often people have this ideal objective in which everybody can be exactly equal and the world just simply is not like that.

The kinds of calculations we have to get into are how can we make sure that there is sufficient competition, effective competition, to secure that on one side-that is the concern that Graham was expressing; the concern we would have in this case-but on the other hand recognise that in a case of this kind, for example, there are immediate real benefits to consumers from liberalising. So we have to try and balance those two up and look at the relative risk of this particular liberalisation in relation to competition against the immediate consumer benefits of liberalisation. On this issue the key was that the prospect of relatively near-term supply of 800MHz spectrum, and therefore a substitute alternative to the 900MHz, diminished our concerns from a competition perspective and we weighed those diminished concerns against fairly obvious immediate benefits from the liberalisation. It is a good example of a series of the kind of calculations that we have to make.

Q286 Philip Davies: Did you anticipate a backlash from some people on the back of the decision you made?

Ed Richards: Yes. As I am sure the Committee is discovering, in this particular sector opinions among the players are highly polarised, and if one takes a regulatory decision that affects players X and Y in one particular way it is usually the case that A and B do not like it. So I think we assumed that that would be the case rather as night follows day, and it usually is, I have to say.

Q287 Dr Coffey: Can I add a sub-question, which might come up later in our brief. I heard you saying that you considered requiring Vodafone and O2 to give up some of their 900MHz. Would it make sense to restrict how much of the 800MHz they can have in order to get the playing field level for the four operators, especially on the rural broadband issue, which I obsess about?

Graham Louth: Our proposals include what we call a sub-1GHz spectrum cap, and that would have the effect of limiting the amount of 800MHz spectrum that Vodafone and O2 could acquire in the auction. That is part of our proposals. Obviously, we are reviewing that. As Ed has indicated, the responses are polarised; Vodafone and O2 are not entirely happy with that cap and Everything Everywhere and Hutchison do not think it goes far enough.

Ed Richards: I think that is absolutely at the heart of the auction design and at the moment everything we have put in that consultation; everything is a consultation. So the proposal for debate is that we do think there is a competitive issue in the holdings in a spectrum sub-1GHz and therefore we are proposing those restrictions that Graham described. That is exactly what we are discussing with all the players at the moment.

Q288 Dr Coffey: You could go further and say that Vodafone and O2 cannot have any of it.

Ed Richards: We could. As I am sure you have discovered from the views on this, if you strip it down to its bare bones, this particular question, what you discover is that you have two players who think that there should be no restrictions whatever and two players who think that the restrictions we have proposed do not go anywhere near far enough, and they cannot both be right. They are at opposite poles. It is important to say that we haven’t made these proposals somehow just by splitting them down the middle. We would never do that. We have thought very carefully about the technical characteristics of the spectrum and the economic nature of competition in this market and we are trying to ensure that we can be confident that there will be effective competition in the future-to design the auction in that light, but to do so by being the least intrusive we can be. So we don’t want to put in regulations in relation to the auction that are any greater than the minimum necessary to ensure effective competition. Otherwise, going back to Mr Davies’ question, that would be to begin to interfere with and mitigate the intensity of bidding around the auction. So we do not want to do that. We want to do the minimum necessary to ensure effective competition and that is the approach we have taken.

Q289 Dr Coffey: I will move on to my favourite topic of coverage. Your own research has shown that 2G covers about 97% of the UK population; 3G I think is about 87%. That is from the study published last year in November. You are aware of the debate in Parliament about going to 98%. In fact, Arqiva in its submissions to us has suggested making it 99%. Why did you choose 95% originally?

Ed Richards: The origin of the 95%, which I should emphasise is part of that same consultation, so it is what we are considering at the moment, was an estimate of the coverage that could be delivered by existing base stations. So, in other words, you would expect the existing operators to be able to deliver broadly that level of coverage without any significant diminution in the value they would place upon the spectrum, and it was a starting point. It was a starting point that we thought was a positive one, in the sense that it already proposed an obligation or a coverage level that was in advance of 3G, so a very good start. What we want to do, as I think we set out in the document, is now make sure that we have understood the costs and benefits of extending it, and indeed challenges that we set it too highly. I know Vodafone, for example, thinks that we have underestimated the cost associated with even reaching 95%, and others may take that view as well. Primarily, the debate now seems to be around the actual cost of taking it beyond 95%.

Let me just say a couple of things about that, if I may. The first is that we are fully engaged with that discussion and listening carefully to what a very wide range of people want to say about this. The second is that we are doing our own work. We have increased the amount of effort we are going to put into this, partly because of the level of interest, and that will ensure that we have the best cost estimates we can have. We have studied the topography, the quality of service expectations, the characteristics of the spectrum and so on and so forth, so we have the best understanding of the cost estimates possible. The third thing that we will do, which I think is very important, is try to make a credible, sensible assessment of the relative costs and benefits. The benefits side of that is obviously quite challenging in some levels. How does one calculate the benefit or the monetary value of what is essentially an inclusive approach? The economic benefits may be easier.

The difficulty will probably also be on the costs side, but that is what we are trying to ascertain now. We have been listening to the evidence that people have been giving you, and I think you have heard a range of numbers somewhere between £200 million and £540 million, to take you from 95% to 98% or 99%. That is quite a big difference, so it is important for us to try to pin down more precisely what the number might be as we go from 95% towards those higher numbers. If you think about it on a per person basis, you are talking about the difference in estimates between £100 to £300 or £400 per person, and I think as you go above 98% and 99% those numbers probably rise quite dramatically because of what would be necessary at that point. So there is a significant job of work to do at the moment. It is both costs and benefits, and we are very much engaged in that at the moment.

Graham Louth: May I just make one comment? You also need to be conscious of the fact that the quality of service and the nature of the service that is to be provided has a huge influence on the cost. I do not know what underlies Arqiva’s cost estimates, or the specific ones they mentioned to you, but it is possible that they do not relate to an indoor mobile broadband service, which was the coverage obligation we proposed. You have heard evidence about the way in which mobile technologies might contribute towards the Government’s fixed broadband agenda, and it is a lot easier and a lot less expensive to provide a fixed broadband service wirelessly than it is to provide a true mobile broadband service.

Arqiva manages to deliver TV coverage to 98.5% of the population from a relatively limited number of transmitters. It is able to do that because you have to have an aerial on the roof of your house pointing towards the transmitter in order to receive that service. If you had a handheld mobile TV in your living room it would not work. So there is a big difference between a fixed broadband service delivered wirelessly and a true mobile broadband service. Our focus was on the true mobile broadband service and the cost of delivering that is likely to be materially higher than the cost of providing a fixed broadband service using wireless technology.

Q290 Dr Coffey: Thank you for that. I think that was very helpful. You have not obviously decided on a figure of what the extra coverage would be. If you stuck at 95%-you will have heard the arguments before-that is 3 million people who don’t have it, and it would not surprise me if that included people on the Suffolk coast. There are quite a lot of places where there are not-spots. But in your consultation you talk about the 95% coverage obligation results in broadband services having the equivalent coverage to today’s 2G services by 2017. Just for my own understanding, why do you think it will take quite so long to do that? If we encouraged you to push it up to 98%, or even 99%, how much longer will it take?

Ed Richards: It is a very interesting question. It broadly comes back to the same conundrum, which is that you could do it faster and you could even have a higher number faster, but that simply requires engineers to deal with the masts, so there is a cost implication. Again, I think we set 2017 as the aim because we thought that was consistent with not having a significant impact on the assessment of the operators. So the operators would start, as everyone would expect, in the more urban areas, particularly in the areas that will be cleared first and therefore they will be able to deploy first. London is an obvious example after the 2012 switchover process. They would start there, get that done, begin to make money and then roll out throughout the country after that. Now, clearly you could say to them, "Right, we want the 95% done on a much tighter time scale or we want a higher number done on the same time scale". The implication of that is not that it cannot be done. It is merely that they would say, "Well that’s going to have a cost associated with it and we will need to reflect that in our bidding process".

Graham Louth: We also need to be slightly conscious that there is a limit to how much roll-out a network operator can do in any given period of time, and if you require them to roll out into rural areas, then they may well not be able to deploy as quickly and as extensively in urban areas and there will be a consumer impact there. It is a trade-off between urban consumers and rural consumers for who gets the service, possibly even who gets the service first.

Ed Richards: We can certainly-

Q291 Dr Coffey: But if urban already have 3G it is-

Ed Richards: Yes, fair point. It is something we would be very happy to challenge them on and make further enquiries about to make sure we are optimising the approach.

Q292 Dr Coffey: We have also heard quite a lot about whether, if push comes to shove, mobile operators would work together to share infrastructure and to share masts and similar. What is in your minds about trying to encourage that? And in one way through increasing coverage by mobile operators, is it access to the spectrum or investment in the infrastructure that is really the crucial bit?

Ed Richards: The obstacles to site sharing and things of that kind were largely removed some time ago and quite substantial site sharing is now already taking place. There is site sharing between what was T-Mobile and Orange, now Everything Everywhere, and that also extends to Three. There is also site sharing now between O2 and Vodafone.

There are other areas of sharing in the network as well, particularly on the Everything Everywhere side, so there are opportunities to do that, and our general approach is to look at the economic benefits, but also at the risks to competition of those sorts of collaborations. There is no in principle objection, and it clearly does offer benefits in terms of reach, and I think that is what has happened over the years.

In relation to the choice between investment in infrastructure and spectrum, I think our view is that they are not alternatives. You have to have both. Clearly you have to invest in infrastructure to deploy, but you have to make your judgement about how much spectrum you need as well. The reason why that is important is that the only alternative seems to me to be to give them the spectrum for nothing, and if you give them the spectrum for nothing you have no confidence that you are giving it to the people, the companies, the organisations who most highly value that spectrum. It does seem to us that one goes with the other and we should not see them as alternatives.

It is also worth adding that in our experience-certainly in the UK and I think in Germany, Europe’s largest economy-even though many people have made an argument about the cost of spectrum or price of spectrum being an obstacle to investment in networks, the evidence that we have seen does not seem to bear that out. The reason why it does not bear it out is that, once you have paid for the spectrum, that is a sunk cost and you are making future decisions on the basis of those costs being sunk. If you look at Germany and the UK where the greatest amount of revenue is raised in the 3G auctions, there does not seem to be any detriment in relation to roll-out or indeed the level of competition or final outcomes for consumers-in other words, the availability of suppliers, the quality of services, the prices and so on. I think we are certainly among the best in Europe, among the best in the world on those criteria and I think the Germans are as well.

Q293 Dr Coffey: I have one last question. What discussions have you been having with BDUK about their roll-out plans for rural broadband? One of the constant things we hear from mobile phone companies is they need that backhaul to make sure they can deliver it. Meanwhile, other money is being spent elsewhere. Can you tell us a bit more about that?

Ed Richards: We are closely in contact with BDUK; there is an important relationship on a whole variety of fronts. We tend to have information and can analyse it and give support in that way. Some of it we will be releasing later this week, which I hope will be useful. There is close discussion about the regulatory environment for these kinds of things and we give them a lot of technical input on the technology side as well, where we have substantial expertise. So there is a lot of dialogue.

Backhaul is clearly one of the issues that comes up regularly, and I hope we have made a useful contribution to their thinking. It is definitely true that you need backhaul-it has a dual function today, and in the future even more so, which is for not just fixed backhaul but fixed backhaul for mobile. I think we are very conscious of that; it is important that we make sure that the regulatory environment adapts and evolves in light of that, and I hope we have contributed to BDUK having a full understanding of that, certainly from a regulatory perspective.

Q294 Chair: Can I come back to the issue of fees. The Minister who gave evidence before you appeared to accept that those who got 900MHz licences had essentially been underpaying ever since you liberalised the spectrum and would perhaps have had up to two years during which they were paying considerably below the market value. Would you agree?

Ed Richards: Rather than agree or disagree, it might be useful for me to describe how I think we see it, and the situation that we are in.

There were many years when the spectrum was used. There was then a period after, I think, 1994 when we were able to introduce administrative incentive pricing; or our predecessors were. That was 1998-thank you, Graham-and the mobile operators were paying some tens of millions between them. We reviewed that at a certain point from our perspective which was, as I have said, not to maximise revenue. Our perspective was efficient use of the spectrum, and the amount of money that they were paying we calculated to be within the range of what we would expect to ensure efficient use of the spectrum. We always said then, and have always said since, that there would need to be a review post liberalisation.

The liberalisation process was, as described earlier, driven by a requirement under a European directive, and we have followed that through under the Government’s direction. The Government also then made it very clear that in this particular case they had a specific view about how we should price that particular spectrum, and said that we should look to ensure that it was full market value, having particular regard to the auction result. Clearly you cannot actually have particular regard to the auction outcome until you have done the auction, so we have an interregnum; that is true to say.

Two points on that are worth clarifying. First, we believe that we have no powers; we cannot do anything retrospectively so we cannot go back and say, "Well, you should have been paying more when it was liberalised". We don’t believe we can do that. The second point is that we face another challenge in relation to this which is that we could immediately have re-priced, or set about consulting upon a higher number or a different number, but to do that we would have used essentially the same people who are preparing the work for the auction-Graham and his team and others. In our view, the administrative and economic priority, or the public interest priority was very clearly to get on with the auction and then come back and deal with the pricing question. We have been very clear about that all the way through. So I recognise the point you are making, but I think from our perspective we have considered the alternative options available to us, as I have described, and I think we are adopting the most sensible one.

Q295 Chair: Can I put to you two arguments, both of which I suspect you will be familiar with. The first comes from Vodafone, which says, "What you are proposing is unfair because we are bidding a price for the newly released spectrum and at the same time we are going to face the additional cost of its reflecting back on the amount we are currently paying for the spectrum we already have. This is unfair because that does not apply to all the others"-obviously it does to O2-"and it is going to distort the competition".

Ed Richards: There is a circularity of the kind that they describe. I am not sure that I would describe it as unfair because others might say it is unfair that they are paying what they are currently paying for liberalised spectrum. So making judgments about what is fair and unfair is difficult. I think the question for us is whether we believe that this would distort the auction in a process that jeopardised efficient use of the spectrum or indeed competition in due course? That is a more focused question and challenge. That circularity, or that apparent circularity clearly could risk what you might describe as an approach to the auction affected by a future price. So you could see somebody making an argument for a strategic approach to bidding that reduced your level of demand so that you did not have to pay as much in due course. I think that is conceivable, but it suffers from a couple of very profound flaws; one is that we have also made it very clear that the auction price will be only one of the potential benchmarks we could use. So if there was a strategic reduction in demand with the intention of seeking to depress the revenues and therefore the price they would pay in due course, then the consequence of that would be that we would see that and we would choose an alternative benchmark. We have been crystal clear about that.

The second weakness is that the danger from the bidders’ perspective of that sort of strategic reduction is quite straightforwardly that somebody else buys the spectrum that they actually need to compete in the future. So it is an interesting case, but there are one or two quite significant holes below the water line.

Q296 Chair: Can I put to you another argument made by another operator that you may be familiar with, which is that it is quite right that people should pay more for the 900MHz spectrum because there are new uses of this, particularly for high-speed mobile broadband. But when it comes to the 1800MHz spectrum there are no devices that use that high-speed mobile broadband and so it is unfair that that is equally going to face higher charges in the future based on the auction. You will be amazed to hear that this comes from Everything Everywhere.

Graham Louth: I am assuming that Everything Everywhere is referring to the fact that there is not 3G technology for the 1800MHz plan. It is possible to deploy 3G technology in the 1800MHz band, but it is not widely adopted around the world so the equipment is quite expensive. However, the next generation 4G technology, LTE, is definitely going to be used in 1800MHz band. In fact that is one of the leading contenders for the next use of the 1800MHz band. I think in the longer term it is absolutely clear that the 1800MHz will have other uses and potentially a different value, although whether it is much higher than the current price of the 900MHz is yet to be seen.

Q297 Chair: Will you take that into account when you are setting the prices?

Graham Louth: Yes, absolutely.

Q298 Chair: Can I turn to another aspect of the 1800MHz spectrum, which is the sale by Everything Everywhere of a chunk of that, and the Tom Watson question, which I will put in his absence, which I am sure you will have heard about when we had Everything Everywhere before us. Essentially, Everything Everywhere is going to make a substantial amount of money from a public asset that it was given for nothing and for which it has been paying a licence fee that is considerably less over the period of time it has had it than it is going to recoup through the sale.

Ed Richards: Again, that is a good question and it is a fair challenge, and I think we have to say that in resource markets of this kind these things sometimes happen. Crucially, we wanted to make trading possible and available in order to make sure the spectrum was in the hands of the people who valued it most highly. So that is the general approach to trading. Now that is not quite what has gone on here; this is a forced divestment as a result of the merger. Nevertheless, it enables that spectrum to be reallocated for alternative use to other parties and we will have to see who bids for it and indeed what they raise as a consequence of it. The slight difficulty I have with this is that if one permits trading because of the general economic benefits, it is very difficult to then go back and say, "Well, you made too much money out of that so we have to somehow claw it back". I think that would remove all incentive, in certain circumstances, to trade and you can think about analogies in land, in oil rights or gas rights and other situations where these kinds of things can happen. It isn’t-I do see the point entirely, but another set of factors is operating.

Graham Louth: It should not be forgotten, however, just linking the two questions, that we are about to revise the annual licence fees applying to the 1800MHz spectrum. So any acquirer of the divested 1800MHz will not pay what EE currently pays; they will have to pay the same full market value price that every other 1800MHz licensee will have to pay. So I struggle to see why anybody would be willing to pay Everything Everywhere a very large price to get hold of that spectrum if they are going to have to pay "the full market value" for that spectrum as soon as they acquire it.

Ed Richards: So whatever amount they pay, you would fully expect the bid to be discounted in light of the amount that they would be expecting to pay in the future, and that addresses a significant part of the issue, but one also needs to see it in the general context of trading.

Q299 Chair: Are you suggesting that the speculation that it might realise £450 million is far above what is likely to occur?

Ed Richards: We don’t know.

Graham Louth: We just don’t know.

Q300 Chair: Were you surprised when you saw that figure being-

Graham Louth: The calculation that I saw used today’s annual licence fee for 1800MHz; it did not use a full market value licence fee for 1800MHz. We do not at this stage know what the value of that spectrum might be to an acquirer, so I do not know whether the £450 million is correct and, at this stage, we do not know what the full market value of that spectrum will be either, so it would be wild speculation for me to say quite how much EE might make out of that sale.

Ed Richards: I think bandying around numbers of this kind is very difficult territory. I really do, and again it is very similar to the auction. It depends who comes in, how much they want it and what value they think they can attach to it. That, in a sense, is what the market will tell us rather than what we will dictate.

Q301 Chair: Can I now just move to the other users of spectrum and some of the concerns that they have expressed? Firstly it has been suggested that this roll-out of 4G services on 1800MHz may result in significant interference for people watching digital terrestrial television. Do you think that is a danger?

Ed Richards: It is a danger. It is a danger that we are well aware of, and we have been working with industry very carefully now for some months. We have a plan to deal with it. The proposals to address the risk of digital terrestrial interference are out for consultation at the moment and it is very important that we conclude that before the auction so that everybody knows where they stand. We think that a significant number of households could be affected-possibly as high as 750,000-but the vast bulk of those should be able to have the issue addressed through a simple filter. Once one has taken account of the effects of that filter, we think the number is very much lower-more like 0.1%-and for those households we may have to look at specific measures. So it is an issue, but we are consulting on a set of proposals already and we are listening carefully to what people say about the best approach to tackling that issue.

Q302 Chair: But you are suggesting that all these households who already had to go through the process of buying a set-top box as a result of the analogue switch-off, may now have to go through another process of going off and getting a filter so that they do not have a fuzzy screen.

Ed Richards: It is a very small subset. Essentially, everybody who didn’t already have digital TV has had to go through the digital switchover process region by region; this is a small subset of that number. It is a process, but let me be really clear about this; we have moved from a world in which spectrum was essentially very static, was used by the same people in the same way year after year, to a world in which spectrum is now intensely demanded, with lots of competing users and a huge amount of use out there in the world every day. That world is very different, and it is going to require people, businesses and consumers to face change as we try and use the spectrum more efficiently. In order to be absolutely clear, I do not see that general trend changing, probably for the next 20 years. This will not be the only example of this kind of challenge. PMSE, which you are very familiar with, Chairman, is another example. The spectrum was all being used and we now need to find ways to use it much more efficiently, and that inevitably means people shuffling a little bit, moving from one place to another, dealing with some interference in order to accommodate a more valuable use. For me, this is the world we are now in and it will be like this for many years to come.

Q303 Chair: You mentioned PMSE; you will be aware that users remain concerned about the dangers of interference, and in particular point out that in their business you cannot actually leave it a while to sort out. It will have a devastating effect on them if there is interference.

Ed Richards: Yes. I hope we have arrived at a good point with PMSE. I feel we have done the right thing; we have dedicated channel 38 to that use. The existing channel can be used, I think, up until the end of 2012 so there is a good overlap period because channel 38 is already available. There is £46.2 million available and we have already received claims for some £40 million. We have already distributed, I think, some £13 million and we know that many providers are already buying replacement equipment. So the process is working well in our experience; the distribution of money is prompt when people have surrendered their equipment, and I think we will see a change of this kind. I hope that that will ensure that PMSE can continue to do the very important work that it does.

Q304 Chair: Finally, it was suggested to us that the remit under which Ofcom operates, which is very much consumer focused, means that you are sometimes not able to take sufficient account of the need to help support British business. The Minister suggested earlier that there might be a case for changing Ofcom’s remit to take account of that when we come to the forthcoming communications legislation. Do you feel that your remit should be widened?

Ed Richards: There is bound to be a case for it; there is no doubt about that. It is a kind of argument and debate that we do expect to see take place in the run-up to the next Communications Act, so I would certainly not be remotely uncomfortable with that debate taking place. We do not feel discomfort at the moment with our duties at all. We are very conscious of the business sector and the needs of businesses to ensure that they can invest successfully and make a return and provide competitive services to consumers. So it certainly is not the case that we do not take account of business needs. Whether our duties need to be adjusted to guide us to take more account of business as a voice or of particular businesses, will ultimately be a matter for Parliament. This question often comes up when we are dealing with some of the international questions because then you are in a nation-versus-nation, company-versus-company negotiation. So that is where we tend to see it. In many respects, particularly in terms of international negotiations and so on, we act on guidance; we act essentially on behalf of the Government and we do that in the international negotiations so that we can use our technical expertise, but under guidance from the Government. If that turns out to be the main area of concern, it is possible that the Government can modify their framework or their guidance to us.

In relation to more domestic business, I would be mildly concerned about any significant move away from the general principles of focusing on the interests of consumers and citizens and promoting competition.

Q305 Chair: I think it was principally in the international area. You think that that can be done without legislation?

Ed Richards: Quite possibly. It is something to look at.

Q306 Damian Collins: My apologies for joining the session late. I was at a public inquiry in my constituency, but thanks to high-speed national infrastructure, I managed to make it back for the end of the session.

I want to pick up on one point that we discussed last week with Telefonica and Vodafone - my apologies if this has already been covered. They raise d the expansion of coverage and the need for BT fibre to provide point s for mast s to extend coverage. There may be problems there if BT is not able to provide that infrastructure. Have you considered as a regulator the role of BT in supporting the operators in extending coverage?

Ed Richards: Yes, it is. We did touch upon this, but not in quite the way that you are asking and I think you are raising a different and additional point. So backhaul for mobile operators is extremely important and it is something we know they are very concerned about, and with the rise in capacity required from, let alone 3G, in due course 4G technology, it is going to become more and more important. We are very aware of that and we are looking at some of the issues around that at the moment.

One of the issues is the relationship between the likes of Telefonica, Vodafone and others and BT and/or other companies who can provide them with the backhaul circuits that they need. I am aware that there has been a bit of healthy debate between the companies on that particular topic. Equally, we need to look at it in relation to our market reviews and our overall approach to regulation, and that is happening in something called the business connectivity market review, which we are under way with at the moment. It is a big topic, and we will need to make sure that we take proper account of it in our regulatory work over the next few months.

Q307 Damian Collins: Is this something you would also consider as part of your oversight of the pricing for access to BT infrastructure, if it was felt that other companies could support the deployment of that fibre?

Ed Richards: Yes. It depends on our analysis of the market, so if we determine that the evidence shows that BT has market power then we would look at remedies and those remedies could be controlling the price that BT can charge, or they could be going up stream and opening up the access of ducts and poles, for example, for others to consider investing in. We would look at both of those in the event that we determine in the review that BT does have market power. We clearly cannot do it without an evidence base. We cannot do it just on the basis of disagreement between companies because, as we all know, commercial disagreement happens all over the place. We need to root it in the analysis of the market power, and if that is what we find, we will look at the remedies. Those are the kinds of things that we would certainly consider in those circumstances, yes.

Q308 Damian Collins: Just finally, if a higher coverage target is set, 98% say, do you feel that from a regulatory point of view it would not give you any undue concerns?

Ed Richards: We are consulting on the higher coverage target at the moment and it certainly does not give us undue concerns in relation to our duties in any ideological or other way. In fact, on the contrary, it is the kind of thing that we are quite comfortable dealing with. We have to look at the costs, have to look at the benefits, try and match one against the other and see where a sensible position will be. That is the work we are currently undertaking at the moment. We are doing a considerable amount of work on that and we are going to have to try and pin down the cost estimate of the increased coverage that we were discussing earlier. That is under way at the moment, but certainly we have no discomfort in terms of the general principle or general question at all. In fact we see it as a marriage really of the classic tension between our duties on the one hand to consumers and on the other hand to citizens. The idea of extending coverage to a broader base than the market might otherwise go to, I think, is an example of what we interpret as our meeting the interest of citizens rather than just individual consumers. So we are very comfortable thinking about it, and I hope we will produce a good analysis to explain where we end up on the topic.

Q309 Chair: Thank you. I think that is all we have.

Ed Richards: Very good, thank you very much.

Prepared 8th July 2011