UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 956 -i

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Culture, Media and Sport Committee

The work of OFCOM

Tuesday 3 May 2011

Dr Colette Bowe and Ed Richards

Evidence heard in Public Questions 1 - 82

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Culture, Media and Sport Committee

on Tuesday 3 May 2011

Members present:

Mr John Whittingdale (Chair)

Ms Louise Bagshawe

Dr Thérèse Coffey

Damian Collins

Philip Davies

Paul Farrelly

Mr Tom Watson

________________

Examination of Witnesses

Witnesses: Dr Colette Bowe, Chairman, Ofcom, and Ed Richards, Chief Executive, Ofcom, gave evidence.

Q1 Chair: Good morning. This session is the Committee’s annual one that we hold with Ofcom to discuss the annual report. Previously it has been a joint session with the Business Committee but, since the expansion of the DCMS empire, it is now solely this Committee’s responsibility. So can I welcome the Chairman of Ofcom, Colette Bowe, and the Chief Executive, Ed Richards, and I will start.

The Coalition Government said that one of the intentions was to return Ofcom to a regulatory function and to give back the policy-making part of its role to Ministers. In your view, are you now just a regulator and no longer a policy advisory body?

Dr Bowe: Chairman, I will just begin, if I may, by saying-on behalf of me and Ed-good morning, and thank you for this invitation to come and meet the Committee today. You have raised a large and important question there. I would like to invite Ed to begin the response to that and then I will chime in as we go along.

Ed Richards: Chairman, I think the best way of beginning the answer is to say, of course, it all depends upon what you mean by "policy-making" and everybody has a different definition of what that is. What we are doing and what we have done is what we have always concentrated on doing, which is undertaking the responsibilities, meeting the responsibilities that we have to meet under the law. We don’t stray beyond that, because to do so would be ultra vires, and we try to meet everything that is set out in statute in a timely and effective way.

I think what was at the heart of the phrase that you refer to was a desire by the Secretary of State to be clear that he sets the policy framework and makes the important policy decisions, in particular in the broadcasting area. To be honest, that has not given us any problem. I think that is absolutely right. That is how the framework should operate and, by and large, it is how the framework has operated.

Certainly since the last election there is probably one very good example, which I think illustrates the difference. That would be local TV, where you have a clear policy mandate and policy intention embarked upon and those policy decisions being driven by the Secretary of State. But of course we are involved. We are providing a lot of technical analytical support and advice, particularly from a spectrum and a licensing perspective, and the co-existence of those two different functions seems to work very well.

Q2 Chair: You say nothing very much has changed but some of the commentators have said that Ofcom is now much more narrowly focused; that it has become risk averse; that it is not contributing to some of the big debates, which previously it would have played a major part in, for instance, things like net neutrality. Do you reject those criticisms?

Ed Richards: I think they are inaccurate, to be honest. Let’s take the two most obvious examples: firstly, on net neutrality. I think we published among the first pieces of work on net neutrality across the whole of Europe. I made a speech about the subject and we published a consultation, about 12, 14 months ago, and we are in the process of consultation with industry and others on our powers in relation to net neutrality at the moment.

So certainly, in relation to that issue, I think we have been very fully engaged and, indeed, very publicly engaged and that is because we have very clear statutory responsibilities in relation to net neutrality. So we are consulting on how we should use the powers that we have been given in law.

I think some commentators make the kind of observations that you refer to; it is typically around broadcasting. I think the difference that people see is that, relatively close to the last election, we did our five-yearly Public Service Broadcasting Review. When we do those there is a sustained period of interest and engagement with those broadcasting issues. Now we did that. We did it before the last election and we would never have done another for another five years. So we are not in that area at the moment. We are not doing a great deal of work in that area. To some people that may appear as if we have lost interest or disengaged from that area, but that isn’t the case. It is just that the cycle, dictated by the law, is that we do those every five years.

The Coalition Government is proposing-through the Public Bodies Bill-to make the Public Service Broadcasting Reviews at the request of the Secretary of State with no fixed cycle. Therefore, that will determine when we next enter into that sort of debate, but I think because those broadcasting issues are so high profile, and tend to be reported on more than the vast bulk of what we do, it sometimes gives that appearance.

Chair: So that-

Dr Bowe: Sorry to interrupt, Chairman, but I would like to add to that. You mentioned that some commentators have said Ofcom has become more narrowly focused. I am afraid that reflects a complete misapprehension of Ofcom’s role. If you look at the range of things that Ofcom is currently engaged on, as set out in our Annual Plan, which range through: the clearance spectrum, the management of the spectrum auctions next year, which will have a major importance with the infrastructure of the UK, through to the work we are doing on broadband, on Next Generation Access, the probable accession to Ofcom of responsibility for regulating the Royal Mail, I think it would be quite difficult to sustain a serious argument that Ofcom was becoming more narrowly focused.

As for is Ofcom becoming more risk averse? I have two comments on that. One is, I don’t recognise that as something you could evidence, but at a more general level I am not sure whether risk prone regulators are exactly what we want in this sector. I think, after everything that we have seen happen in other sectors of the UK, the idea that regulators should be in some way risk prone is not one that I and my board would be very comfortable about.

Chair: Indeed. You will appreciate it wasn’t my description.

Dr Bowe: Indeed, Chairman. I am sorry, I have spoken rather harshly about something that you are simply reporting, but it is something that-as you see from the warmth of my response-I feel rather strongly about, especially the point on risk.

Q3 Chair: Indeed. Therefore, do I take the message from both of you that, despite the rather apocalyptic statement of the Prime Minister before the election that under a Conservative Government Ofcom would cease to exist, it is pretty much business as usual?

Dr Bowe: I think what we would recognise-as everybody in this room, in this building would-is that people say all sorts of things before elections that do not necessarily come to pass.

Mr Watson: Hear, hear.

Dr Bowe: Thank you, Mr Watson. From our point of view, we are getting on with the job. That doesn’t mean nothing has changed and I am sure in a moment you will want to ask us about the various things we have changed.

Q4 Chair: The one thing that has changed-and you say you are getting on with the job-is the amount of money you have available to spend.

Dr Bowe: Indeed.

Chair: You are going to have to deliver roughly 30% savings on your current funding cap. Is that not going to have quite a dramatic impact on what Ofcom is able to do?

Ed Richards: It has a dramatic impact. It is 28.2% by 2014/2015. We have had to anticipate that and focus very clearly on our core duties. So, in a sense, this is a continuation of the previous question. It has made us go back and ask very hard questions about what we have to do by statute and focus very clearly on that and only that.

We anticipated these budget cuts coming because I think it was clear to anybody that, whatever the outcome of the election, there were going to be spending cuts and we knew full well that there was no credible argument for us being excused from those spending cuts, so we knew we would have to do our fair share.

We started planning for them some months before the last election. We completed that planning pretty much simultaneously with the announcement of the Spending Review, and we were able to launch a consultation and, in some cases, implementation of those proposals from October of last year. So we wanted to get on with it straightaway. We wanted to have the planning done and be clear what was being stopped, where cuts were going to fall, who would be affected, who was going to lose their jobs, and so on and so forth, and try and do that in one fell swoop.

By and large, we have achieved that. So in this budget year coming, 2011/2012, we will have reduced the budget by 22.5% of the 28.2% in one year. The rest of it will come through in the ensuing three years. That is partly because of things like the Olympics. So clearly, we couldn’t reduce spend on the Olympics prior to the Olympics taking place, but after the Olympics that spend will then fall away and that is what will make up the 28.2%. The vast majority of the savings have already been made because we planned for them some months in advance, and if you would like me to I am very happy to explain where those cuts and those changes have fallen because I think that relates to where the pressures are.

Q5 Chair: It would be helpful if you could say what is it that you are now not doing that you were previously doing.

Ed Richards: There are five things we did. The first is there are some things that we are, as you say, literally not going to do anymore. The best example of that is digital participation, where the previous Government had an allocation of money-I think it was about £4 million/£4.5 million-for digital participation, which was passed to us for partnerships and engagement around digital participation. We discussed that in advance with the new Government and the decision was taken to end that, so that is simply not being done anymore.

Secondly, media literacy where, again, there was an extended range of activities around media literacy. We have essentially stopped that apart from the research. So we still do the core research to inform people about those activities, and the extent to which people are digitally engaged, but that is all we do. All the other activities have ceased. So there are things of that kind where we have literally stopped what we do.

There is a second area where we have refocused down to the absolute core. Examples of that would be what we spend on technology. Historically, we have spent quite a bit on technology to understand developments in the spectrum technology; for example, to make sure we understand how spectrum can be used. That has been pared back very dramatically. Market research is another example where we have come back down.

The third thing we did was re-examine all of our processes. We took those processes to pieces and we reassembled them to try and make them 25% or 30% more efficient. For example, when we look at standards cases or when we look at investigations, when we have complaints from the public or from other companies, we redesigned how we do those cases and we expect them to deliver about a 30% saving, just by taking stages out and doing them more efficiently.

The fourth area is overheads and supplier costs. We have gone round every single supplier that we deal with and we have borne down and said, "You have to bear some of the costs with us. You have to take some of the cost out". The most obvious example of that is all of our IT services, where we have saved £1.3 million a year by completely re-tendering the entire operation and re-specifying it.

Then the final thing we did was very close to home things, which were: we ceased defined benefit pension accruals. So there are now no accruals-the defined benefit pensions-of any kind in Ofcom. We implemented a pay freeze early, so we have already done two years of pay freeze. That is completed and has taken place, and obviously we also reduced the allocation of money for performance pay across the entire organisation; in particular, at the top.

Those five things together are what delivered the savings. By doing it that way I think we feel confident that we can still meet our duties and purposes in an efficient and effective way. That does not mean there won’t be pressure and strain. I think there is no question that we will have to make much tougher administrative resource-based priority decisions than we have had to in the past. That is the nature of the challenge that is in front of everybody, so I don’t think I want to make any claim or apology about that; I think that is what everybody has to do.

Q6 Chair: There has been criticism in the past, particularly about the salaries paid at senior management level; is that something where you are looking to seek reduction?

Dr Bowe: I think this is one for me to respond to, Chairman. You may be aware that Ed Richards took a 10% reduction in his salary this year, which was something that Ed told me he would want to do. This was not something I asked him to do. Ed volunteered this, in recognition of the severe stress that our organisation was going to be put through.

Other senior salaries: no, we are not planning to reduce senior salaries. We have a highly competent top team at Ofcom and we aim to pay-as closely as we can-the market rates for people with the kind of expertise who carry out these jobs.

Q7 Ms Bagshawe: The Government has just successfully defended the Digital Economy Act in the courts. Obviously the implementation of this has been delayed while it was under judicial review. As you will be aware, there has been a comprehensive rejection by the courts of almost all the grounds on which the Act was challenged. So it is now time to start implementing it and the ball is in your court. When do you propose to send out the first warning letters under the Digital Economy Act? How long will it take you to get that going?

Ed Richards: I think the first point is: we won’t ever send out any letters. Let me explain the whole process. The ball isn’t quite in our court yet. It was a big step forward with the court decision; a huge step forward, especially with how definitive I think the judgment seemed to us to be anyway. So it may be appealed but it was a pretty robust judgment.

What happens next is there are a series of things that we are going to try and do in parallel with the Government. The first of those is that the Government has to take the code that we have already drafted, which is ready, through its internal clearance processes. Those are twofold: first, through the internal departmental regulatory and scrutiny committees and they have to be satisfied that the code is acceptable; secondly, it needs to be notified to the European Union to make sure it is compatible with various European directives. Those two processes will take some months.

The second thing, which is also with the Government in the first instance, is there needs to be a resolution of where the costs fall, so who is going to pay for it? As you probably know from the judgment, that question was raised.

Ms Bagshawe: Yes.

Ed Richards: So there needs to be a new settlement because the judge ruled that the ISPs could not pay for our costs. At the moment the other costs are 75/25, but there will need to be a new order to set the costs up. So again, I think that will take some months.

The third element, which is with us, is that we now need to establish the appeals body. So the appeals body needs to be ready, in place and able to receive appeals from the day the first letter goes out. We are going to work with the Government to try and do all that in parallel, as much as it is possible to do. Each of those will take some months. So I would not expect us to be in a position, such that ISPs are sending letters, probably, for another 12 months.

Q8 Ms Bagshawe: Why is it not possible for you to do some of these things, for example, the code that you have to send to the Government to be approved? Did you wait? Was it felt by Government that you should wait until after the judgment came down to deliver that code for consideration by the Department?

Ed Richards: Yes, I think that is right, and the reason was that I think everybody thought that, well, if the judge said this is essentially going to have to be sent back to the drawing board then we would all be conducting an exercise that was a waste of time. So I think both with that and the uncertainty about the costs, there was a substantial degree of uncertainty. Therefore, a discussion took place and there was a judgement made to, "Let’s get the decision out of the way to see whether we have to go back to the drawing board".

Ms Bagshawe: A discussion took place between yourselves and the Department?

Ed Richards: Yes.

Q9 Ms Bagshawe: How long will it take you to draw up this code to submit it to the Department for consideration?

Ed Richards: The code is done.

Q10 Ms Bagshawe: It is done. Has it gone in to be considered already whether-

Ed Richards: The code is done. The code is with the Government, and that process can now start. So we completed the code some months ago, but it is a code that now will be scrutinised through those processes.

Q11 Ms Bagshawe: The tribunal’s process that you were talking about, you said that would take some months as well. Why can't that be done while civil servants and others are in the process of scrutinising the code that you have just sent to the Department? Is it that you do have to do one first and then the other process, or can you do them at the same time?

Ed Richards: No, we are going to do them in parallel as much as we can. I think to some degree there is an inter-relationship on the costs side, because what will drive the costs is the volume of the level of activity. What will also drive the cost is the level of appeals. So we have to understand the relationships but, generally speaking, we are absolutely going to do them in parallel to try and do it as quickly as possible; that is absolutely correct.

Q12 Ms Bagshawe: Are you talking to any counterparts that you may have in, let’s say, France and South Korea where a graduated response has already been introduced, to see how those processes are working in the countries that are already implementing them?

Ed Richards: Yes, we are in touch, in particular, with Hadopi in France and we have very good relations with them. In fact they came over to see us a few months ago and we had a long discussion with them. We are aware of what is happening in South Korea. It is probably fair to say we had less direct contact but we know who to talk to in South Korea.

Q13 Ms Bagshawe: South Korea is perhaps a more interesting case because graduated response has been in place for a lot longer there and the market has seen quite a lot of growth, as you will be aware, as a direct result of what has happened there. Whereas, in France it is still very much in its infancy, only a few letters have been sent out and a large volume of letters have not yet been sent out; they are slower off the starting block. So I would urge you to talk to the South Koreans.

One area of policy that you will still have to consider is your recommendation to Government over whether or not the provisions in the Act, about allowing judges to consider website blocking, are effective or not effective. How do you propose to go about undertaking that conclusion, that decision, deliberating on that; and again, are you looking at the areas of the world that have already introduced graduated response to see what they are doing and how that is working overseas?

Ed Richards: Yes, we are. We have to send a report on website blocking to the Minister during the course of this month, so we are relatively well advanced but not finished. Of course, it will be informed by our understanding of what is happening in other countries and the extent to which those sorts of measures are being deployed.

Q14 Ms Bagshawe: Although the United States does not have a graduated response, it nevertheless has indulged in website blocking under President Obama’s direction. Are you aware of the activities going on in the United States? Are you looking at that as part of your report to Government?

Ed Richards: Yes, we are. In fact, you can see the effectiveness of some of these measures where they have literally taken sites down or blocked them. So we talked to the people in the States about it as well, and I think it is true to say there are many different approaches around the world now emerging that balance that kind of graduated response with or without website blocking. Sometimes the focus is more on website blocking.

Q15 Ms Bagshawe: Absolutely. They are not identical measures; they are parallel measures. In making this decision-and I take your point that it is shortly to go off to the Secretary of State-are you doing that entirely by yourselves as a regulator or are you talking to, let’s say, the record and film industries on the one hand and open rights people on the other to inform that decision? Are you taking consultations with both sides of the debate or are you, yourselves, coming up with a conclusion to present to the Secretary of State?

Ed Richards: No, whenever we do work of that kind we always talk to the interested parties. It is more difficult in this case simply because of the timescale. It is a very tight timescale, but we are absolutely talking to both copyright holders on the one side and ISPs and technical people on the other side. We would never do a piece of work like that without talking directly with those directly affected and interested parties. We would always do that. I think it is fair to say on this particular issue, rather like everything on that topic, there are widely divergent views.

Ms Bagshawe: Yes, you can say that again.

Ed Richards: I hope nobody is thinking-I am sure they aren’t-we are going to produce some sort of silver bullet with the website blocking report. I don’t think there is any prospect of that. I think what we will try and do is provide a balanced, technical analysis of what is and is not possible, and what may or may not be the consequences of certain approaches. Let me take the two opposite extremes to illustrate it. I think the notion that you could say that website blocking will, in all cases, always be effective is just nonsense. Equally, on the other side, to say that it will never have any impact of any kind, because it will always be circumvented, doesn’t stack up either.

Q16 Ms Bagshawe: Yes, the BPI has represented to me that they would seek blocking if it were permitted of between 10 and 12 websites, so hardly a massive raft of overall website blocking. Is the limited nature of what the industry is seeking clear to you?

Ed Richards: Sorry, could you-

Ms Bagshawe: Is the limited nature of what corporate holders are seeking clear to you because my understanding is that it is pretty limited?

Ed Richards: Yes, but those would be the ones that the BPI are concerned with. I think the MPAA might be concerned with others; the Premier League would be concerned with a different collection again; publishers of electronic books will be interested with a different set. So quite quickly it could become a fairly substantial number. I think that is one point. I think the second point-and in some ways the challenge if an approach like that was to be used-is how do you deal with the capability of some operations to quickly reinvent themselves in a fractionally different website, with a fractionally different URL? That is the kind of thing we are going to look at.

Ms Bagshawe: Yes. Sure. I am declaring an interest as a content creator; a novelist whose books are available on Kindle and therefore downloadable. I take a keen interest in these matters but I think it is analogous to the policing of soft drugs. You can never prevent a trade in drugs but that is not a reason not to try and do anything about it whatsoever. So, thank you, I am encouraged to hear that.

Chair: Is Mr Watson encouraged to hear that?

Q17 Mr Watson: I am sure, Mr Richards, you can feel the anxiety and frustration that my colleague, Louise Bagshawe, feels with the slothful approach the Conservative Liberal Government have taken on this very important area of policy.

Dr Bowe: Do you want us to say yes to that, Mr Watson?

Mr Watson: No, but what I would tease you out on: could you tell me the earliest date that you think that one of these music downloading thieves will receive their first letter?

Ed Richards: Many months from now. How long will it take to clear internal Government processes; how long will it take to satisfactorily clear the EU consultation process; how much progress will we be able to make in establishing an appeals body, which has never been done in the UK before, of this kind? We have to find the right kind of people to do that. How quickly will the copyright holders, after all that is done, generate a CIR-Copyright Infringement Report-give it to us and start the process? All of those are unknown. I think the only one we can safely assume is that, if the first three are all completed, one presumes that the copyright holders will act swiftly to generate CIRs but even that is unknown at this point in time.

Q18 Damian Collins: Listening to that I was going to say-to coin a phrase-it sounds like analogue policy in a digital age, but it sounds more like a cleft stick policy in a digital age, with the slow moving nature of this problem.

I want to move on to something that has been moving rather more quickly in the last few months, which is the News Corporation’s proposal to take over Sky. You initially had raised concerns about this and believed it should be referred to the Competition Commission; what was it that led you to change your mind about that?

Ed Richards: What led us to change our mind was very simply that once the Secretary of State accepted our advice and said that he was minded to refer it, and that was his intention, he also said, however, that he would consider undertakings from News Corporation and undertakings were then offered. So what led us to change our mind was the course of evaluation between our original report, which we sent to the Secretary on 31 December last year, and the conclusion discussions with News Corporation. It is worth just highlighting a couple of things within that.

News Corporation’s original undertakings that they proposed did not satisfy us. Indeed, as is now in the public domain, as a consequence of the Secretary of State’s most recent statement on the subject, you will see that we wrote to the Secretary of State, partway through that period, and said to him that our advice was that the undertakings did not meet our concerns and we still recommended referral. The Secretary of State then approached News Corporation and said, "This is the position. I am going to refer". They came back to us with better undertakings and at that point we said, "Do these undertakings, as revised, now meet our concerns?" The conclusion of the board was that they did, subject to final clarification and checking-in particular, around the key contract-to make sure that the Sky news spun-off operation was economically viable, which is something we are still doing. So that remains an open question, but subject to those being satisfactorily answered then we could advise the Secretary of State that our concerns were addressed. That was essentially the process.

Q19 Damian Collins: When Ofcom raised your concerns in your December report about media plurality, which could be addressed by the arrangement that has been made for Sky News, your concern was about the TV news market and Sky News specifically. You are nodding there to suggest that that was the case. Did you give advice to the Secretary of State, or to News Corporation, that that was an area where they would have to move so that you would be in a position where you could support?

Ed Richards: In effect, because I think you could read our report in no other way. The report was focused on the task that the Secretary of State set us, which is backed up by statute. So the focus was the concern about plurality. The principal concern within any idea of plurality in this context must be about news and information and, in the context of this particular merger, that is clearly the relationship between News International, News Corporation and the control of Sky News, which at the moment, pre-merger, remains not wholly owned and not wholly controlled by News Corporation. So that was the key issue. It was in precisely that area that News Corporation tabled the undertakings and the proposal to separate Sky News, as an independent company with the same shareholding that it currently has. The process of discussion between us and them then concerned what other safeguards did we need to make sure that we could be confident that that would be both economically sustainable, and credible, in relation to the editorial independence and integrity of Sky News. That was very much at the heart of our deliberations and discussions.

Q20 Damian Collins: Do you share a concern that the Secretary of State raised with us when he gave evidence, a month or so ago, that the regulator only has the power to consider these issues when there is a proposed merger or takeover, not to look more generally at consolidation within the media market as a result of business performance?

Dr Bowe: Not only do we share that concern, Mr Collins, but if you read our December report to the Secretary of State you will see that we raised it with him and we said, "There is an issue here. There seems to be a gap in the legal framework, it is only on the consideration of a transaction that one can have a look at this". We raised this in comparison with other work that we do on the telecoms side of our work where, as you know, we are able, if we believe that there may be a case to investigate, to launch an inquiry into-as one might put it-excessive dominance of any particular organisation that has grown organically. We don’t have analogous powers in the case of media plurality.

This came to our minds while we were doing this piece of work. So, not only did we give advice to the Secretary of State in December-as Ed has described-about the proposition that was then before him but we said, in effect, "By the way we have put our finger on this and we would like you, the Secretary of State, to consider this". I was very encouraged to hear what he said in the hearing with you a month or so ago, because it seemed to me that he had taken that point. Obviously, it is something that will require a change to the law but with the upcoming Communications Bill, which is promised for the second part of this Parliament, it looks as if the Secretary of State is minded to take some action there.

Damian Collins: You announced in March a review of TV air time sales-

Chair: Shall I bring in Tom and we will finish BSykB and then we will come back to TV air time sales.

Q21 Mr Watson: Can I just ask: is it your view that, in making his considerations, the Secretary of State can consider the new admittance of criminal wrongdoing by News International with regard to breaches of RIPA, when testing whether News International can be relied upon to fulfil the commitments it is giving under the UIL?

Ed Richards: I think that has to be a question for the Secretary of State and the Department, because the issue there is how is he exercising judgement in relation to the test in front of him and what criteria is he using? In relation to us, you see, I think it has been very clear what our role and what our contribution has been and is, which is a specific assessment of the plurality issue in relation to the media market, market shares, the exercise of influence, and so on and so forth, and I think that is a very specific set of issues. Whether he takes into account something of that kind in a situation of this kind, I think that has to be a matter for him and the Department, to be honest.

Q22 Mr Watson: Can I just read you a short extract from the guidance notes of the Competition Act, which I think relates to this particular issue. I am sorry, Mr Richards, the trouble with your responsibility is the devil is always in the detail. You will know that more than me.

Ed Richards: Indeed.

Q23 Mr Watson: At paragraph 7.24 it says, "Evidence of breaches of UK broadcasting standards may be taken into account. Another factor relevant to the inquiring media owners’ commitment to standards objectives might be the compliance of any other broadcasting enterprise it controls with the broadcasting standards in other geographic regions or jurisdictions". It goes on to say, "Similarly, the record of any non broadcasting media enterprise in compliance with the standards applicable to those media enterprises might also be considered as adding to the overall assessment of an enterprise’s commitment to standards in markets where it operates. This would include standards imposed under the self-regulatory regimes". I read that to say that, had you been aware of News’ liability on phone hacking, you could have taken that into account in your decision and that the Secretary of State-now that they have accepted criminal liability in certain cases-could take that into account himself now.

Ed Richards: Our area of expertise, and the area that I feel that is appropriate for us to comment on, would be all of the content you set out there, in particular to the word "broadcasting". The area that we are concerned about on the phone-hacking side is not broadcasting. It may well be that the Secretary of State, looking at that, seeks advice in relation to that side of things but we have not followed and we are not responsible for exactly what has or has not taken place there, or indeed what has or has not been admitted. I think I would still want to draw a line between the two, in terms of where we are able and expert to comment and advise the Secretary of State.

Q24 Mr Watson: When it comes to the UIL, though, given that phone hacking is a clear breach of the PCC code-it is actually a breach of law as well-would there be a test? Had you known about it would you have tested their commitment to the UIL and taken into account their previous commitments on self-regulatory issues that have been breached?

Dr Bowe: I would like, Mr Watson--and by the way I hope this doesn’t feel as if we are not engaging with you because I hope you can see that we are.

Mr Watson: It does seem like that, Colette, if you don’t mind me saying.

Dr Bowe: I apologise if it doesn’t, but I would like to reinforce very strongly what Ed has just said. Our role in this has been to advise the Secretary of State on the issue on which he asked us for advice and which, under the law, is what we have to advise him on, which is issues of media plurality. That is our remit. We began this session, as you will recall, by talking about: what should Ofcom’s role be? I hope we were very clear that we see our role as being to offer advice, technical input, under the statutes as they stand. The sort of important issues you have raised-and I acknowledge the importance of them-in my view, are matters for the Secretary of State.

Q25 Mr Watson: One last bite of the cherry. I accept that you have a very clearly defined remit and you had a referral on plurality grounds, and as part of your negotiations you rather adroitly gained certain commitments under the UIL that would guarantee plurality. My point to you is: is it appropriate that whoever makes the decision tests the commitment to delivering on those UILs, and given that we have had an admittance of criminal wrongdoing, which was denied to a Parliamentary Committee, that should be taken into consideration? You are not going to answer it, I know. Do you know why you are not going to answer it?

Dr Bowe: Tell me.

Mr Watson: Because it would be devastating if you gave me the honest answer, which is obviously the Secretary of State should take that into account but you don’t want to be the guys that carry the can for saying it.

Dr Bowe: You have offered an answer to your question, Mr Watson, so perhaps we will let that lie on the record, if we may.

Mr Watson: I certainly will. Thank you.

Q26 Chair: Can I just quickly come back to your statement that you were encouraged by the Secretary of State’s response to this Committee, after your observation that you can only intervene at present where there is a takeover. Because we were told that DCMS were looking at the new Communications Bill, which is due later next year and that, in terms of competition policy, there would be a reduced role for Ofcom. This doesn’t sound like a reduced role, it sounds like an enhanced role.

Dr Bowe: Chairman, people use language in peculiar ways sometimes, don’t they? I think the clear implication of what the Secretary of State said to you, when he was in front of you-as I read it from the transcript-was that he took the force of that point that we had made about what triggers a plurality inquiry. Whether that leads to a reduced or an increased role for us I wouldn’t like to hazard a guess at the moment. We were making the point as a point about how the law works rather than as a point about what we, or indeed any other organisation, should be doing.

Q27 Chair: Have you started talking to the Department about how a Communications Bill might amend the current regime?

Dr Bowe: We have had only the most general of discussions as yet, and we are still in the very early stages of talking. Obviously one of the things that we will want to do is we want to have a pretty public process about this, and if I can make a little parenthesis here: it might be something that we could come back and talk to the Committee about, Chairman, when we have developed our thoughts a bit more. I am sure, as part of the process for assisting the Department in framing its thinking about that Bill, as an organisation we will want to say, quite publicly, what we think has worked well; what has worked less well; what he could stop doing; what it might be rather difficult to stop doing, and so on. So there is quite a lot of that to be done, but we are at the really early stages as yet and I am sure you will appreciate that it would be a bit previous of us to start sounding off at this occasion.

Having said that, we would love to come back and talk to you about our experience of doing this, which-well, not in my case but in Ed’s case-we have been doing since 2002, I think.

Ed Richards: 2003.

Dr Bowe: 2003, I beg your pardon. It just feels likes 2002.

Ed Richards: Yes, it does. Can I say on this plurality issue: the reason we include it in the report because when you look at it in the round, in the way that we were forced to buy the event of the proposed merger, it does seem to be a very clear defect in the overall legislative framework. We are not in the habit at the moment of wandering around trying to find things where we say, "This must be reformed" or, "In our view". It just emerged in the clear light of day, in that intense four-week period in which we had to the report to the Secretary of State, and it became unavoidable for us not to refer to it once it had become so crystal clear to all of us in the conduct of that piece of work.

Dr Bowe: Yes.

Q28 Damian Collins: Before we go on to the TV air time review-and I would like to ask some specific questions about that-but to conclude on the media and Sky. The reason I raise it in the context of this series of questions is: what consideration have you made for the advertising market of the coming together of Sky with News Corporation newspapers and the opportunity to offer cross-media deals? Do you have a view on that and is that something that is going to be considered by your general review of the TV air time market?

Ed Richards: It is not the issue that made us decide that we would do this review, but it is clearly one of those contextual factors that you have within your horizon when you are thinking about it. In doing the review we will certainly have an eye on that kind of development. I would not put it more strongly than that because it is about the market not any individual company or any individual development, so it is one of those things that we will look at.

The reasoning that led us to undertake the review was a variety of things: force of weight of opinion, concern and anxiety over a sustained period. The Competition Commission have suggested or asked us to do this review twice now. It is difficult to meet anybody in the industry who will not immediately admit to you that it is very opaque, difficult to understand, and it is an area where there are a very small number of people who appear to understand how the system operates.

We did not jump to the assumption that there is a problem. The point of this review is to identify whether there are a set of concerns that warrant deeper analysis and possible recommendation by the Competition Commission in due course. We haven’t made that decision-I want to emphasise that-but I think we had reached a point where the level of anxiety and collective concern meant that it was a boil that had to be lanced. I wouldn’t want to be in this position two years hence with people still raising questions about how opaque the advertising market was; did it work anti-competitively; was it functioning effectively, and unable to answer those questions. So, the cumulative effect of all of those things made us decide that we had to take it on, look at it, do the analysis and then decide whether we think there is a problem.

Q29 Damian Collins: What is your timeframe for the review?

Ed Richards: About six months.

Damian Collins: That is from March, so by-

Ed Richards: From when we began; six to seven months, and then we will make a decision whether to refer or not.

Q30 Damian Collins: Have you started the review now?

Ed Richards: Yes.

Damian Collins: You have. So you announced it in March, so that was the start of the work in March, so by middle September, October, that sort of time?

Ed Richards: Yes, exactly.

Q31 Damian Collins: There has been obviously considerable debate, raised by ITV in particular, about CRR and the advertising market. Is that on the table in this review? Would you expect the review to make a clear recommendation one way or the other on that?

Ed Richards: Very unlikely that we will make a specific recommendation to CRR because that is not what we are looking at. We are looking at the overall trading mechanism. However, if we refer it is unimaginable that, in a broader examination of the television advertising mechanism, CRR is not considered. It would have to be. That is the logic. It is not specifically about CRR, but if you look at the broader market CRR will inevitably be looked at if we refer it.

Q32 Damian Collins: Would you also expect to give a view on advertising minutage, and whether that should be standardised across all forms of TV, especially at a time when the distinction between terrestrial and satellite television is not as distinct as it once was?

Ed Richards: This is a very difficult issue; a very sensitive issue. We are re-examining that issue and we do so in roughly parallel timescales. So we will aim to say something about that on roughly the same timescale. It is one of these issues where, as a regulator, in our position it is the most difficult kind of issue because you have two sides with polar opposite opinions, and anything we do will displease somebody a great deal. There is absolutely no other way through it. So if minutes are levelled down because it is just television now, there is no real difference, then ITV and Channel 4 and Five would probably be very pleased. If they are levelled up then nobody will be very happy, but if they stay the same ITV and Channel 4 and Five will not be very happy.

We have had extremely aggressive lobbying on this from all sides and in our first assessment we very much focused on the economic consequences of it: the distributive impacts, the efficiency effects, and so on. The reason that we have decided to do a bit more work on it is because we feel that there is another set of issues, which we need to get to the heart of, and that is what is the relationship here-not just the economic effects-through the different organisations? Also we have to go back to: what is the viewer concern? Is there a viewer concern about the level and quantity of advertising and is there, around that, any justification or any set of reasoning that would lead you to err on one side or the other. So that is what we are doing now.

Q33 Damian Collins: In general, do you have a concern that now might be the time to consider the deregulation of this market and looking at some of the business concerns as well? Because a lot of the regulations seem to have been created at the time when ITV really came together as a national company, when satellite television was largely in its infancy and online advertising was a relatively small part of the market. Things have changed very dramatically, but a lot of the codes and regulations that we have in place seem to belong to that other era. For me, I think there is some relevance here with the growth of Sky because it is a much stronger, much more dominant player in the market than it was at the time when the ITV merger took place.

Ed Richards: We would very much agree with the thrust of what you are saying. By way of illustration, there are a host of areas where we have already deregulated the level of detailed regulation on the commercial public service broadcasters; so ITV in particular. There is a swathe of changes that have taken place since 2003 to deregulate in that area. A particularly important one, in this advertising context, is that we removed the so-called advertising sales rule, which required ITV to sell out all of its advertising and Channel 4 and Five as well. We removed that.

I would expect there to be further questions raised in the lead-up to the Communications Bill about how much deregulation of what remains. It isn’t that much, to be honest, but of what remains how much more deregulation there should be of companies like ITV. I would say it is nothing like what it was five years ago and I think the notion of this huge heavy burden isn’t right.

The one area where I would counsel caution in the deregulatory thrust, is that a pure thorough-going deregulation of advertising would involve the same for the television companies: you can show as much advertising as you want. That is real deregulation. Viewers are hugely opposed to that and, more intriguingly, so are the companies. The companies are hugely opposed to it, and we understand that quite a lot of the advertisers-who you might think at least some would be in favour of it-are also opposed to it. The reason is that viewers don’t like the clutter; the television companies don’t want it because it would create a huge excess of supply, drive price down and they would be worse off; and the advertisers typically don’t want it because they want a high quality product that viewers value, not one which is full of advertising. So it is a very interesting point where, if we were pure economic pointy-heads, we might say, "Well, why don’t we go for full deregulation?"

Dr Bowe: Which we are not of course.

Dr Coffey: You have answered your own question. You said neither the advertisers nor the broadcasters want to do it, so you have just answered it.

Ed Richards: Or the viewers.

Dr Coffey: Exactly, but you have just answered your own question.

Ed Richards: When you look at it like that you say, "Well, let’s think very carefully about that" before you do it, but in terms of all the general arguments about: it is one market; there is Google as well as TV; Sky much more powerful. These are the characteristics that people would generally associate with a movement to huge deregulation and all I am saying is: in the area of television advertising you have to be slightly careful.

Q34 Damian Collins: Although, from what you say, if you did deregulate in that way, the TV stations would not pack their schedules with advertising slots, they might even remove some.

Ed Richards: That is the theory. It is not what has happened in American commercial radio where there has been a tendency to do exactly that. It is full of advertising, and for some reason no one can quite break out of that cycle and reposition themselves with less advertising. I think it is one of those things where there are theoretical answers to why: well, surely it wouldn’t happen, but there is some evidence around the world that suggests you should be quite cautious about it.

Q35 Damian Collins: I am not an expert on American commercial radio but I would have that is a sufficiently different market from UK commercial TV.

Ed Richards: I think it is a question of how companies behave in a fully deregulated market. It is not that different, in the sense that if you go to a typical US city there are anywhere between 20 and 50 radio stations and in a digitally enabled household for television, which we will all be by 2012, there is a minimum of about 50 television stations and potentially upwards of 300 or 400, so it may not be as dissimilar as it sounds.

Dr Bowe: Mr Collins, I think the essential point that you are making to us is the one, which is, okay, you can analyse this and say this is how we think people might react, and so on. I think what I can detect under your questions is a view that says, "Look, why don’t you deregulate and then these businesses can make the decisions that suit them and their customers?" Am I right in thinking that is the way you are going?

Q36 Damian Collins: I think that is certainly the thrust of my remarks, at a time when the media market is changing so much that it is not like in the old days where you had a dominant ITV, which was the only volume player in the market other than the commercial channels as well and the internet market. I think, looking at the advertising market in the round, including the ITV market too, that times are different. So I think your review is timely and, certainly, the thrust of my looking at it is that it could be a time for a deregulatory move but I appreciate we have probably taken quite a lot of time on advertising.

Dr Bowe: We are completely taking your point. I don’t want you to think we are saying, "Can it be done?" I think choosing your moments and your time to do this is part of the fine art of getting this right.

Damian Collins: Yes, I think it is a good moment.

Ed Richards: One other small point to mention is that the level of advertising is controlled by European law in any case, so there is an upper limit even if we wanted to deregulate further.

Dr Bowe: Ed, that is a very good framework in which to explore the kind of points that Mr Collins is making, so I hope you can see that we are taking this. Ed-as he has to be, as he is the Chief Executive-is being very cautious and measured about this. I am in a rare display of slight disunity, I feel intellectually attracted to-

Damian Collins: I am intrigued by your candour.

Chair: Less risk averse perhaps.

Ed Richards: I think it is me that is being risk averse.

Q37 Dr Coffey: Ofcom has a special role in terms of regulating broadcasters, the BBC as well as other broadcasters, but is there not an advantage for Ofcom just to regulate the editorial content of the BBC as well, like you do for others?

Dr Bowe: Yes, well, that is a very interesting and topical-

Dr Coffey: Go on, be less risk averse on that as well.

Dr Bowe: It is a very interesting and topical question. Ed, I will kick off on this if I may. We have two or three points to make at the start of this: one is that I think, like everybody else in this business in the UK, we think that whatever regulatory regime there is, and whoever is doing it, the editorial independence of the BBC has to be supported and maintained. That is unquestionably a matter of national importance, and I think that is where we start from.

The second much less highfaluting proposition is that: however you deliver regulation for the BBC you have to do it in a way that makes most efficient use of public money. The BBC is financed out of what is essentially public money, so is Ofcom, and I think however you draw the line between us and the BBC you have to make sure that you do it in an efficient way.

As you well know what we have been doing for the last four or five years is operating under an MOU with the Trust, where we do some of it, they do some of it. I think that we could say that has worked okay. It has worked fine. I have a slight issue with some of it, in the sense that I think it is not always clear to viewers or listeners, ultimately, who is accountable in that system where, as things stand, Ofcom is doing some of it and the BBC Trust is doing some of it. I think if you are an ordinary viewer or listener you might well be forgiven for thinking, "Well, who is accountable for what is going on there?"

So my own personal starting point of this, subject to those two big points I made at the beginning, is: I think there might be things to be done to make it much clearer to people who is accountable for what they are seeing or what they are listening to. All of that said, as you all know, there is now a new Chairman of the Trust, just arrived, and I am due to have an opening discussion with him next week. My going in point for that discussion is we, at Ofcom, will do anything we can to support the Trust in its work. I personally am planning to do everything I can to support Lord Patten, as he thinks through what is the best way to do this.

The final thing I would say is that, important though this undoubtedly is, from Ofcom’s point of view it is a relatively small part of our activities although it is something we often talk to this Committee about at great length; some of the other things we have touched on this morning, like the spectrum auctions, the work we are doing in support of the London Olympics, for example, all of our work on telecoms, are huge and dominant work programmes for us. So, although I am personally giving this time and thought, and I am hoping to be able to give Chris Patten all the support that he needs, I wouldn’t want you to take away from this the thought that this is a kind of dominant issue for Ofcom.

Q38 Dr Coffey: Thank you for sharing that. From one perspective-I used to work at the BBC but not on the editorial side-I can see efficiency, as well as effectiveness, in having common standards across broadcasting.

Can I move on to video-on-demand? My constituent is Chris Gosling, who you may well know, and he used to run Felixstowe TV, a local TV station, which closed down for a while and has resurrected itself in a particular way. He is particularly cross that ATVOD is basically, he feels at the moment, treating small businesses-blossoming businesses-almost the same way as big broadcasters and, frankly, the costs are a problem, the regulation is a problem, and even now I think we still don’t have the fees set out for that. I am interested, in your view, is ATVOD over regulating and potentially strangling local TV at birth, especially when it is the legacy that the Secretary of State wishes to leave?

Ed Richards: It is a very different and interesting question this. The previous Government, in its approach to the European law in this area, set out that co-regulation was an option here and, in agreement with the Government, industry said they would like a co-regulatory solution. So that is where ATVOD comes from. The Coalition Government endorsed that approach and wanted a co-regulatory approach. So we are the backstop position. We are not doing the regulation here.

Q39 Dr Coffey: They are reporting to you, isn’t that right?

Ed Richards: We have to be careful on that. Co-regulation does not mean-and if it is to mean anything it cannot mean-that Ofcom is doing it, otherwise it is a meaningless concept. So we have to be clear that if we go for and people want co-regulatory approaches, which are fine with us if they are the right thing, then we are not doing it. We are a backstop position on some issues, which I will come to in a moment, but I am aware of what is going on obviously.

In terms of the fees question, I think that has been reconsidered and they are looking at that again. There clearly was a question about the relative fees for a very big broadcaster and some very, very small ones. I would say it is important even for some of the relatively big broadcasters, because sometimes what they do is try and establish dedicated video-on-demand services as profit sectors and for them, as an individual profit centre, fees are a real question, even if they are part of a much bigger company. So I think it is a real question about what you might call a nascent infant set of industries, but that is being looked at and reconsidered and I hope that some progress will be made on that.

In terms of the regulation itself: so this derives from European law and if you are a video-on-demand service, if you are a TV-like video-on-demand service and you have editorial responsibility, then you have to be regulated through ATVOD. What is also happening at the moment is that ATVOD are trying to set out what the scope of that regulation is, and who is included and who is not. There are few cases where people have been included on a first examination by ATVOD and those companies have appealed and said, "We do not think we should be included", and those appeals are now with us, as the backstop appeal. So we are playing an appeal body role in that case. Because we are literally looking at those at the moment, I don’t think it is right for me to say precisely where we are on them because no decision has been made.

Q40 Dr Coffey: I will move on to a slightly wider element of it. I understand that the directive specifically excluded electronic versions of newspapers and magazines, and yet ATVOD seems to have made a determination, six weeks ago, that video-on-demand will be subject to regulation. So can you tell us more about: is there a risk that ATVOD is going to effectively start regulating online newspapers; and that is not the purpose of the directive?

Ed Richards: That is clearly the fear of quite a lot of newspaper groups. You don’t have to travel very far to hear very substantial concern among various newspaper groups about this happening. I think the question is not: should they or shouldn’t they be regulating newspapers? They shouldn’t be regulating newspapers. That is very clear. Nobody is proposing that they, or anybody else, regulate newspapers other than the current self-regulatory model.

So I think the question and the reason that this will become inevitably controversial is: what are the services that newspaper groups are providing? Are they newspaper services on the web or are they becoming, or have they become, television video-on-demand services? If they are categorically the latter then they will be included. If they are not, and they are just electronic versions of newspapers, they will not be. That is the line between the two. So I think I would say this: if newspapers do what newspapers have always done, and do that electronically, then they will not be included. If they start to do other services that essentially make them television video-on-demand companies, then those services are likely-by any reading of the law-to end up being included. I think there was never any intention, and there is no intention, to include newspapers but it will hinge upon what activities and services newspaper groups and other groups, magazine publishers and various others as well, choose to operate in the future.

Q41 Dr Coffey: To take that a step further, again I am being shameless, but I will use a local example, my evening paper, the Evening Star, has quite a big online section but it is basically reporting what is in the paper and they, and others, are starting to use videos to add. Where you have a photograph in the paper they are using videos as part of that story, but it is still what is news in the newspaper, it is just a different format-additional format, actually-a supplementary format to delivering that. So I am worried that you are going to be having this extra layer of regulation on newspapers that are simply providing something to people, frankly, who look at news on the go nowadays using one of these.

Ed Richards: Something of that kind shouldn’t be caught because that would be merely supplementing the electronic newspaper. I think the question is whether they are providing a completely different service, which is a television video-on-demand service. What you are describing seems to me-and I hasten to add this is based on what you are saying, so in any of these cases one would have to look at them individually on the facts-to be merely about supplementing the electronic newspaper. That seems to me to be something quite different. If its primary purpose is a video-on-television, like a video-on-demand service, that is a different service

Dr Coffey: That is helpful, Mr Chairman.

Q42 Chair: Just going slightly broader. You will be more aware than I, but consumers today access audiovisual material through a huge variety of different means: radio, television, online, and so on, and yet there is an extraordinary difference in the degree of regulation, which you are responsible for. We can spend a long time debating whether or not a sex scene at 9.05pm was a bit too graphic for that time or not, and yet any young person can go on the internet and get hard core pornography without any difficulty at all, it doesn’t matter what the time of day is. Is it becoming obsolete the content regulation role that you have?

Dr Bowe: Can I begin a response on that, Chairman, by saying that I think that is going to be possibly one of the most difficult questions that the forthcoming Communications Act is going to have to address. Without wanting to duck that, I think it is going to be classically one that you, as elected politicians, are going to have to take a view on, because it goes right into the heart of what people want, feel comfortable with, what their expectations are about the thing that is in their living room. It is not, I think, something where ultimately decisions should be taken by people like me and Ed Richards, who are essentially sort of technicians in this matter, if I can put it like that. I think it is going to be a matter where a judgement has to be made about what the public does or does not want. I think that is classically something, in our kind of system, for democratically elected politicians to determine and for it to be enshrined in something that we then have to implement. That is my sort of textbook response to it.

At a personal level, I share all your concerns. I feel extremely anxious about the fact that young people and children-even children as young as five-are now having a degree of dexterity with their ability to access the internet, which makes it exceedingly difficult for a concerned parent to exercise the kind of parental control that we are all accustomed to in our own lives.

I think there are a range of technical solutions to that problem but they are never going to be perfect. The essential question you have put to us, about whether the kind of twentieth century approach to what is acceptable on a television screen at different times of day, I think, in the end, is going to have to be one that you, as politicians, strike the balance between the liberalising instincts versus the protection of minors instincts. I wouldn’t like to have to draw that line at this moment.

What all our research tells us-I think it is right to say, Ed-is that, to my mind slightly strangely, people still have different expectations about what they see on their television screen as opposed to what they see on their computer screen. That to me seems extraordinary because I actually consume quite a lot of my television through my computer screen, so to me it is not an actual difference.

Q43 Chair: That may not survive the launch of YouView and Google TV.

Dr Bowe: Well, indeed, but at this moment what our research is telling us is people are saying, "Yes, if I’m sitting in my living room and I’m watching this on the television with the family, this is what I expect to see". I think the very interesting political issue for you is going to be at what moment that very profoundly held view starts to change. Ed, I hope I have correctly represented the results of the research.

Ed Richards: Absolutely. The only thing I would add is that it is not obsolete but it is definitely on borrowed time. It is not, not functioning at the moment. Contrary to what you might read in some of the newspapers, we are actually policing the watershed on a weekly basis at the moment and we have just held a couple of "in breaches" very recently. That is happening today, and it clearly still matters to people because we receive complaints about a whole range of things. So it definitely matters to people and we are definitely policing it, but, for all the reasons that you have described-and Colette has agreed with-that system will have to change and adapt if it is to be sensible and credible for the lives of people over the next 30 years.

Q44 Damian Collins: A question to follow on from that. Do you think there should be more guidance and clearer restrictions on the ability of people to access post watershed programming through the TV-on-demand players, ITV-

Dr Bowe: You mean more labelling?

Damian Collins: Yes, more labelling and made clearer, say if you are using BBC iPlayer or 4 On Demand, which seems slightly better than BBC, actually, in this regard. Because there is the general issue of what is available through fairly popular platforms on the internet, but then there is also the question of broadcasters who are made to apply by the code, in terms of the watershed, what goes out on broadcast, but then on their online players that content can be accessed 24 hours a day.

Ed Richards: I think it is a very good question. I think it is the cutting edge. In a sense, there are two leading edges of this: one is the open internet, the Wild West. Yes, if you want to you can find pretty much whatever you want, and the dexterous teenager at quite a young teenage age can do that. I think we all know that. The other edge is the on demand services. That can be: the iPlayer, ITV.com, 4 On Demand or in homes with cable service, for example, there is just an on demand service pretty much for everything. I think, as we also all know, some of these exercise PIN control or have entry questions, but I think we all also know how easy they are to circumvent if you are quite a young teenager. Some of them, I think I am right in saying, literally just say, "Are you 18?" Well, guess what a 12-year-old says when they are asked that question. The PIN control can work, could work, but, of course, how many people live in a household where the family PIN for a service like that is, of course, known to everybody? There is a lot of thinking to be done around this, I think.

Q45 Ms Bagshawe: The Secretary of State-and you referred to this in your opening remarks-has made the development of local television one of his key policy priorities. What role do you see yourselves playing in the development of local television services?

Ed Richards: Well, I mentioned earlier that what happened with local TV is that it was a manifesto commitment by the Coalition Government. The Secretary of State has made it a policy priority, so he has set the policy framework and he is driving it forward. Alongside that, of course, we have a role to play. Probably the two most obvious areas, one is: he asked us for technical advice on where spectrum might be available. We have done a first set of work on that, which is complete, and we are doing another set of work literally at the moment on-

Q46 Ms Bagshawe: Just to interrupt, do you think there will be enough spectrum to meet the likely demand for these local TV channels?

Ed Richards: Again, that is a very interesting question and I think it is impossible to know. It is impossible right now to predict exactly how big that demand will be. Let me give you an illustration. We are likely to be able to provide spectrum in London. Will there be demand in London? I would be surprised if there wasn’t. We are also likely to be able to provide some spectrum in some quite small areas. Now, will there be demand for that? It is very difficult to know. The economics will be much more difficult. On the other hand, you may see a community radio type model emerge where people are not trying to make a profit; they do it on a volunteering basis and it is much more practical.

Q47 Ms Bagshawe: Like public access television in the United States?

Ed Richards: Exactly. You might see very different models emerge and, therefore, I think the level of demand is really quite uncertain at the moment. We think we will be able to identify spectrum in a substantial number of cities and towns, but that number isn’t clear yet. So, that is the first half of what we are doing, the spectrum side.

The second half, which again depends upon a decision by the Secretary of State, is: if he takes the decision and Parliament approves a decision that there will be local TV licences of whatever kind and form, then we would run the licensing process, rather like we do for community radio. That is the second bit of work that we have already begun to think carefully about how we would do it in the circumstances that that happened.

Q48 Ms Bagshawe: You say you are uncertain about demand. Does that mean people are not approaching you for these licences? Do you think it might be worth in some cases offering spectrum in big cities, Manchester, London, where you can anticipate there will definitely be demand; in other cases might it not be better to provide an online delivery system in case you are offering spectrum for which there is no demand?

Ed Richards: Let me put it a slightly different way. There definitely is going to be demand. It is not that we aren’t receiving interest. There is definitely going to be demand. I think it is the character and nature of that demand that is not yet clear: will it be profit-making ventures or will it be volunteer community-based or what? It is not yet clear. There is definitely going to be demand, certainly in relation to the level of interest that we have had. Whether that converts into actual licence applications and the start of an actual service only time will tell.

If we get to a licensing process, it is quite likely that we would do, in effect, tranches, and we would do a first tranche that would be the most attractive ones to see if that could get going. I think the answer to that is that that is where our thinking is, yes.

Q49 Ms Bagshawe: Do you have a view yet on the long-term viability of local television, perhaps based on experience in other countries again?

Ed Richards: The read-across to other countries is always quite difficult because the economic circumstances and the conditions for ventures of this kind, even though they are often similar, they are always actually different. For example, in the US there is a very highly developed regional advertising market for television. There is not a comparable market in the UK.

Q50 Ms Bagshawe: Do you think that is a question of economies of scale? Because the Secretary of State has often referenced, in his evidence to us, the United States television market. Having lived in the United States for some time, I am very familiar with the local television advertising, and so forth, and it strikes me that is purely a function of economies of scale, which almost by definition cannot exist in this country.

Ed Richards: It is obviously a much bigger country with much bigger markets so that is one of the reasons, but I would not want to sit here and say that a market of that kind will not develop in the UK because I think it could. The Shott Report, which Nick Shott did for the Secretary of State, certainly suggested that a market of some degree of that kind of advertising will develop and there will be a share of the national advertising market. I don’t think we can know.

The economics in some areas will be challenging; in other areas they may be less challenging. It is all obviously a lot easier if you do the things that the Secretary of State is proposing to do. So, if you reserve spectrum and you make that free, if you provide £25 million from the BBC, if you provide a high and advantageous position on the EPG, all of these things make the economics much more viable. I also think you will see a range of companies. As I said, it may be viable in one area for a community public access type model, which would be wholly unviable for a profit-making entity that has to make a return on its capital.

Q51 Ms Bagshawe: We could see quite a hodgepodge of services and providers at different levels of, shall we say, professionalism once local television is introduced; wildly different results in Felixstowe and London?

Ed Richards: Yes, I think the preferred terms are "diversity".

Q52 Ms Bagshawe: Diversity. I will try and remember that one. You mentioned community radio; obviously, with the digital switchover part of the FM spectrum is now going to be given to community groups. They will be coming to you probably now looking for their licences, and so forth. What improvements can you make to transparency in terms of who receives those licences and who does not? Because we are going to have a new movement of community radio in the country once the switchover has been completed.

Ed Richards: We probably will. Obviously, switchover has not been confirmed and there is a long way to go before it is, I think. Then there is a separate question about whether the best use of the liberated spectrum would be community radio, but it is definitely a candidate for obvious reasons.

The heart of your question is about: how is community radio licensed, how does it function? We know quite a lot about that already. I think we have licensed 228 community radio services already, which we are very pleased about. I think it is a really good result. We have only had about 17 back that couldn’t make it work. That is a better rate than we expected because some of these are very rudimentary operations. So that has worked really well. We are about to license a new batch, depending on the level of demand-largely not in London because there are no frequencies left in London-and we will see how that unfolds. The experience, generally speaking, has been a very positive one; very positive. If you go and visit these community radio stations, certainly the ones I have visited, they have a real buzz. They often have a really strong volunteering core to them. The people doing it are there because they want to do it and everyone I have come across has been really very positive.

Dr Bowe: If I may, Chairman, if I could just ask Ms Bagshawe a follow-up. You talked about lack of transparency. Do you have a concern about that because that is the first time I have heard that raised as an issue.

Q53 Ms Bagshawe: I have actually had complaints turning up in my surgery from local radio enthusiasts saying that they want to get licences, they can’t get licences and they are wondering how the process works. I think there may be out there, among enthusiasts for community radio, a wish to know that Ofcom is going to conduct this process in an open and transparent way, that people that wish to run community services will all have a fair crack of the whip, I suppose.

Dr Bowe: Look, can we take that on board and we will have a good think about whether we can improve what we say on our website, and elsewhere, to the community radio people how you go about this.

Ms Bagshawe: Sure.

Dr Bowe: Because it sounds as if we are not quite getting that right, Ed. So let us see if we can brush up what we do on the website.

Q54 Ms Bagshawe: Community radio, as you will be aware, is at the heart; it may have small audience figures but it is deeply at the heart of local communities. It is a very big, big society project. If the switchover does happen, with the availability of the FM frequency it is something that lots of little community groups are very concerned about, so there will be a whole new raft of licensing for you to do.

Dr Bowe: We are all for it and we will take that back and we will have a good look. If there is some way we can improve and polish up what we have on the website about it, then we will do it.

Ms Bagshawe: Fabulous, thank you.

Dr Bowe: If you get more things through your surgery let us know.

Ms Bagshawe: Only one so far but he was very persistent.

Dr Bowe: Well, put him on to Ed.

Ms Bagshawe: I will do.

Ed Richards: It is very familiar; all radio licensing is always hotly contested.

Ms Bagshawe: Yes. As I say, it was a slightly unusual thing to be faced with.

Ed Richards: An iron rule.

Ms Bagshawe: I have raised it with you now.

Ed Richards: Yes.

Q55 Dr Coffey: I am delighted that of 228 I think my constituency has three of them: Felixstowe again, Blyth Valley and Demon community radio. Ofcom has had interactions, certainly with one of them, to try and help them improve their regime.

Thinking about use of spectrum, I have a view that YouView will be a good way to deliver local TV, and yet there are concerns being expressed that the broadcasters putting together YouView-very exciting, looking forward to it coming out-are almost putting up walls, not trying to deliberately stop other people but I feel it could be a way to liberate so much of activity, including delivery of Government services or other services through your TV. My mother will hate me for saying this, but she will not have a computer particularly in her house but she will have a TV. If it is connected to the internet, she will realise that, of course, if and when I hook it up for her, but this may be a way for YouView to really deliver the broadband solution to every house in the land. Not the solution of broadband, sorry, but the delivery of service.

Ed Richards: It should be an open standard and it should be open to local TV providers or, indeed, other service providers. That is my understanding of what is intended. If that were not the case and if a group of broadcasters were colluding together to prevent the operation of services by other companies, I think that would be a concern.

Q56 Dr Coffey: So some early concerns that have been expressed to me you think are not particularly well founded?

Ed Richards: No.

Dr Coffey: Okay, fair enough. Can I add a little plug in, Mr Chairman, that BBC local radio has offered to community radio groups to give them some training as well to improve their content quality. Thank you, Mr Chairman.

Chair: Do you want to go on to-

Q57 Dr Coffey: Straight on. I have a particular interest in the upcoming auction, and I know you are still consulting on it. My particular view is that there is a tension going on, I expect, with the Treasury and DCMS as to how much money they are going to get for 4G licences. With the requirement previously to have universal coverage of 2G/3G, I think there is a desire by the Government not to necessarily have universal coverage for 4G, even though yet again, living in the countryside, I believe 4G on-the-move delivery of broadband spectrum is actually going to be important again in delivering that to rural communities. Can you say a bit more about where your thinking is, and perhaps some interesting ideas of, perhaps, one operator offering universality and others, perhaps, having more selective licences but they may pay a premium for that?

Ed Richards: Sure. There are three different levels of this at least. There is second generation what we might call voice services; there is third generation, which is the current generation of data; and fourth generation, or LTE as it is called in the industry, and they are interchangeable, essentially. LTE stands for long-term evolution, and that is a 4G standard. There are other 4G standards as well, like WiMAX, but LTE is likely to be the globally dominant one. Each of them is offering higher bandwidths and more capability in a sense.

We have a different challenge in relation to each one, but I think there are some very positive steps forward. The first is that the extension of the 3G licences went with an obligation to roll out to 90%, and that is a significant advance from where it is at present. I think that has to happen-I will not quote a date because I might be wrong, but I am very happy to come back to you. That is now a new licence obligation for the 3G operators. Now, 90% is not great, which is why we have been able to propose in the 4G assessment, which we put out recently, that at least one of the licences in the fourth generation must be 95%.

This is for consultation, but the reason that we think we can do that is because 4G tends to use-we expect it to use-the same sites and base stations and it uses the lower frequency in the spectrum, similar to 2G. Therefore, it is much closer to 2G. 2G is at about 97% to 98%. We can move forward quite a long way, as compared to where we are with 3G, with 4G and that is really positive. It is for consultation, and I think we are looking for representations from everybody about whether they feel that number should be increased in the licences granted.

You are right to allude to the question of the impact on the auction. That isn’t a matter for us; it is a matter for the Government. Let us take the obvious example: if you said that every single one of those licences had to cover 100% of the coverage-to take an extreme example-geography and population, clearly that licence is going to be worth a lot less money to the bidders, so there is a very real relationship. We have pitched it at 95% because we felt that, given our understanding of the technology and the economics associated with the network rollout, that was a meaningful advance on data coverage from the 90% we will get for 3G to 4G, but wasn’t tipping over so far that they would have to be building large numbers of new base stations incurring very substantial additional cost and, therefore, having a questionable impact on the economic efficiency. We are consulting on that and I think we will be very interested to hear views on that, along with all the other issues.

Q58 Dr Coffey: There was concern also there were some threats going on, of some of the existing operators issuing legal challenges. Can you tell us any more on that?

Ed Richards: I am afraid we live with that, day in, day out, and the threat of litigation and actual litigation is part and parcel of what we have to deal with. It has increased in the UK over the last 20 years in my career, visibly increased, and we live in a much more litigious society in these kinds of areas than we did in the past but we have to live with that. The rules are the rules, and we are quite rightly subject to appeals and challenge and well-resourced companies have become much more adept at using those tactics and much more willing to use them. Most of these companies are multinationals with huge resources, so tactical or strategic deployment of litigation I think is just what we live with and we have to grapple with.

Q59 Dr Coffey: Do you think they could be potentially abusing their collective market power in terms of the consumer?

Dr Bowe: In terms of their possibilities for litigation do you mean, Dr Coffey?

Dr Coffey: Yes.

Dr Bowe: No, I don’t think we would say that at all. Our system is designed such that it is subject to these kinds of legal challenges. As Ed has said, it is how businesses operate. They do it in the interests of their shareholders. We live with it, we respond to it, and that is the way it is. I think it would be quite wrong to see that as being abusive behaviour.

Ed Richards: It is worth adding as a rider that if we go right back to the start of the session you asked me about resources and could we do our job. Without any doubt, the biggest pressure on us is as a result of litigation because I have to put people up in witness boxes against some of the best QCs in the country. They are interrogated by professional economists and professional competition silks and they have to defend our position. I can’t put amateurs up to do that. I have to put people who can match the quality of the people that the companies, many of whom are hugely resourced global corporations, can put up. In terms of the biggest risk to us being able to do what we are here to do on behalf of the consumer, and on behalf of the cities in the UK, that would probably be in my top three or four.

Dr Bowe: Chairman, before we move on to Mr Watson, could I make a request? We have managed to drink all our still water and we are both getting terribly thirsty. So, if there is another bottle of still water, thank you very much. Thank you.

Q60 Mr Watson: We have inherited responsibility for scrutinising Ofcom on spectrum matters. It is devilishly complex. I would like you to treat me like a novice when you answer these questions, if that is okay. I have read your Statement on the Variation of 900MHz and 1800MHz Wireless Telegraphy Act Licences document, dated 6 January. Essentially, what I think you have done there-tell me if I have read this wrong-the old 2G network has been souped up. You have turned it into a hybrid 3G network and, therefore, the value of that network has now increased. Am I right?

Ed Richards: That is one of the things we have done; it is pretty close. I would give it a slightly broader description. So firstly, there was a European requirement that that spectrum should be liberalised, which is the origin of it. Secondly, the Government then passed a direction essentially telling us to do it. We then did it, and the effect of that is to allow the use of the 2G for 3G purposes. That is clearly a consumer benefit because it is a better service, more people want it and you are not restricting the use to one thing.

Your question is about: is the effect of that to increase the value of that licence? In effect it is once it has been fully used for those services, and where we would pick that up, which is probably not in there but it is in the Government direction, is that we would expect to revise the fees paid by the mobile operators at 2G in light of the new market value for that spectrum. That will happen after the auction in the early part of next year.

Mr Watson: That is what I thought it said. Thank you.

Ed Richards: It absolutely is and they know that.

Q61 Mr Watson: The current users of that spectrum are O2 and Vodafone?

Ed Richards: That is correct.

Q62 Mr Watson: What fees do they pay now?

Ed Richards: I think it is about 60 million.

Q63 Mr Watson: Between the two of them?

Ed Richards: No, I think that might be per annum each, but can I come back to you on that?

Mr Watson: Yes, sure.

Ed Richards: Dredging from my memory, it is about 60.

Dr Bowe: That is the kind of order of magnitude, but we had better write to you about that.

Q64 Mr Watson: I also have your Consultation on assessment of future mobile competition and proposals for the award of the 800MHz and 2.6GHz spectrum. That is the recent one in March. Your market value for the 800 spectrum in this document is £200 million. Is that right?

Ed Richards: There are different values associated with different things, so I would have to check exactly which bit you are referring to, but tell me where you are heading.

Q65 Mr Watson: What I am trying to work out is: why haven’t you raised the fees now for Vodafone and O2? Given if there is an equivalent market that is worth about £200 million, those fees seem staggeringly low to me, and there is a taxpayer interest given that this spectrum is a public asset.

Ed Richards: It is a very good question and the answer is that the fees will absolutely rise, but we need a benchmark. We need something to assess how much they should rise by. The most obvious source of that is the auction proceeds, so we will know that-hopefully, if things go well-in the first quarter of next year. We will use that as a benchmark to say, "What is it appropriate for the fees to be?" I would expect it to be a multiple of the fees that they are paying today, so those fees will go up. Then the second-

Q66 Mr Watson: When you say "multiple" you mean at least double but possibly more than that?

Ed Richards: Possibly more than that. It will certainly be substantially higher than is currently the figure. Let me tell you why. We don’t know the result of our auction, but that will be the principal data point to benchmark. If for some reason our auction doesn’t work out in the way that we expect, which I have no reason to believe at the moment but let us suppose that were the case, then we also could refer back to other data from other markets where similar spectrum has also been valued in auctions. So we have a variety of ways of assessing it, and I would be very surprised if those numbers were not substantially higher than they are today.

The second question is: why don’t we levy it today? There are two reasons for that: first, we don’t have the most likely best data; and secondly, once we have that data then we can make a credible assessment. We have to have something to base it on that we believe robustly, and the UK market is the most relevant data. Then the question that would then be asked is: do we levy it retrospectively? Our understanding is that we do not have the power to raise fees retrospectively. That is a legal question as to whether we could or could not do that, and our understanding is that we can’t.

Q67 Mr Watson: I am really sorry about this, because my research has basically been done on Google so treat me like a novice. The Italians liberalised their market and they charge €64 million to each of the phone companies for doing the same thing. What you have just said to me is the value of this market has considerably increased. They will be paying staggeringly more money, perhaps in the region of tens of millions of pounds. They could have done it from January but because we don’t have the data we are going to leave it until the next quarter of next year. So would I be right in saying there is potentially a loss to the taxpayer, as a result of those actions, running into something like tens of millions of pounds?

Ed Richards: You can connect the two in that way. As I said, it is not that they are not paying; it is a question of how much.

Q68 Mr Watson: Not paying a fair rate. Let us face it, Vodafone hardly pay any tax in this country, so I think people would be upset that they are not paying adequate fees for the spectrum, which is the basis that their business is modelled on.

Ed Richards: That spectrum is definitely more valuable as a result of it and they are definitely going to pay substantially more for it. I think the legitimate question you are raising, which is: when does that start? I think in part that is something we would have to discuss with the Government, but we have looked at our own powers and our own powers are clear. We could not create an arbitrary number. We have to have a number that is based in something. The basis for that is obviously the 800MHz auction. Once we have that, we can apply it but our understanding is that we can’t apply that retrospectively. We can have another look at that and adjust it.

Q69 Mr Watson: We will come back to it, but in your document at 3.22 you say, "Ofcom does not consider it would be a good use of its limited resources to undertake a prior review in the interim." Does that mean because of your cuts to your budget you have not done that assessment to work out what the figure is?

Ed Richards: We make a lot of administrative priority decisions now. I wouldn’t link it to the cuts in the budget, but I would certainly say I only have one team who is qualified and able to prepare that auction. So we are making a judgement about whether they should spend the next six months getting the auction ready and getting the spectrum out for consumers to use, or conducting an exercise that we would have to consult on, we would have to analyse responses on. There would be wildly differing views. O2 and Vodafone would say one thing; Three, Everything Everywhere would say something completely different. It would be a 12-month project and it would delay the auction probably by 12 months. That is a real-

Q70 Mr Watson: So it is not fair for me to say that the fees paid by O2 and Vodafone are tens of millions of pounds less than the market value you could command?

Ed Richards: I think they have only just begun to re-use it, O2 I think. I am not even sure Vodafone have actually begun yet. So it is a very fair question to ask and it is a very fair point to make. I genuinely think that. From our perspective, we face both a resource priority decision in the short term and then we will face a question in relation to whether we could impose it retrospectively. In terms of consumer benefit, the priority for us must be the auction because there is concern already that the UK will not have this spectrum available and for use for consumers quickly enough as things stand.

Q71 Mr Watson: Couldn’t the Treasury help you with a one-off investment in a bespoke assessment, which would ultimately benefit the Treasury probably by tens of millions of pounds?

Dr Bowe: You can see from our demeanour, Mr Watson, as we sit here that we think that is at the unlikely end of the spectrum.

Q72 Mr Watson: Colette, I am very disappointed with you today. You have given a concession to Louise Bagshawe on transparency on local radio, but you have given me nothing so far.

Dr Bowe: Well, when you are suggesting-

Mr Watson: I am trying to help you.

Dr Bowe: I know you are trying to help me and can I say I deeply appreciate it.

Mr Watson: Of course, yes, thank you.

Dr Bowe: I know that you are a very helpful person, but when you say, "Can we go to the Treasury and say, ‘Please can we have a handout so that we can do this?’" I can see a pig flying past the window.

Q73 Mr Watson: I am going to go to George Osborne and say, "Ofcom have told me they are losing tens of millions of pounds as a result of not charging Vodafone what they deserve to pay for their licence, because they don’t have the money because they are focusing on the auction".

Ed Richards: We are focusing on the auction, but if O2 and Vodafone were here they would say, "We have scarcely got this going. It will not be fully operational for"-anyway, they can speak for themselves. It is an absolutely reasonable point to make. We have a range of choices we have to make, and you have highlighted the point in our document where we make the choice that the priority is to get the auction ready and get the spectrum out. That is absolutely correct and the consequences are the consequences.

Dr Bowe: Can I just add one point here in a very serious vein, which is: what Ed has described is something that we have to do all the time. You have to make choices about how you use your resources. This has nothing to do with the cuts we have had to make to our budget. We have always had to do that. There is an enormous number of things you could potentially do, and one of the things that Ed and his team and one of the things that the board has to do is constantly be thinking, "Where can we best use our resources, which have always been limited, to get the best results for consumers?" We have always had to do that.

Q74 Mr Watson: Would you ever ask the question: what is the taxpayer interest?

Dr Bowe: Sorry, say that again?

Mr Watson: Do you ask the question what is the taxpayer interest?

Dr Bowe: We ask the question: what is in the interests of consumers? Because that is what our primary statutory duty is, which is not the question that, as Ed says, the Treasury always asks. Mr Chairman, this is almost the first time I have had a chance to say this, this morning, our primary statutory duty is to consumers. So when we are thinking about these kinds of issues, about: where do we put resources, we have to put them in the place where consumers and citizens are likely to get the most result.

Mr Watson: I am looking forward to working with you on this, representing the interests of the taxpaying consumer, Colette. I won’t ask any more questions, but thank you.

Dr Bowe: Can I just mention, Chairman, there may well be other questions on spectrum, but you and I had a word about spectrum previous to this meeting. As a result of that we have arranged for a briefing for the Committee on spectrum issues, which I hope the Committee will find helpful. It is simultaneously somewhat complex but exceedingly important for the infrastructure of the country.

Chair: We are grateful for that and looking forward to it. In return, you may be aware that we are likely to have a formal inquiry into spectrum allocation.

Dr Bowe: We would welcome that, Chairman.

Q75 Chair: I expected no less. One other small question. You were talking about the balance of your interest being representing the consumer rather than the Treasury. Another aspect of this is that one of your prime purposes is the creation of a competitive market. We have already seen a reduction in the number of operators with the merger. When you come to conduct the auction, to what extent is the need to maintain four operators in this country, or maybe even more than four operators, one of the considerations?

Ed Richards: It is in many ways the most fundamental because I think only when you have made a judgement about that can you make a judgement about the auction design. We have said very clearly in our proposals that, in our view, the UK will be better off if we have four wholesale competitors as opposed to, say, three or two. Now, that is a view that is not universally held. There are many other countries with only three and some with two, but when we looked at the evidence on this we think that the UK consumer over the last 10 years has done pretty well on a comparative basis. Everybody has complaints of some sort about their contract or not-spots, and so on and so forth, but if you look at: availability, take up, pricing, innovation, a range of criteria, the UK mobile market delivers pretty well for the consumer on a comparative basis.

Our view is that one of the key reasons for that is that we have had more competition than some of the other markets. It is true we went from five to four and there were some reasons-we can go into that in more depth, if you would like to-but our view was that we should absolutely try and keep four. We should design the auction to support four and we should let competition unfold from there, but it is absolutely at the heart of how we were doing things. If you didn’t do that, in a sense, you might as well just have a spectrum free-for-all, but the consequence of a spectrum free-for-all, it is almost a racing certainty that you would move to three quite quickly and possibly to two in due course. I think consumers, both ordinary individuals and businesses, would pay for that in the long term.

Chair: We shall look forward to exploring these in more depth in due course.

Q76 Damian Collins: On a different topic but on the theme of competition and investment in the network, I just wanted to ask about the rollout of broadband, particularly in rural areas, and in particular the question of whether BT is charging too much to allow other companies to use its poles and ducts. Virgin Media raised the issue recently and said it would be cheaper to build a new network than use the one that BT currently operates. I wanted to know what your view was on this.

Ed Richards: We do not have a settled view on it because I am anticipating that it is something that we will have to examine in considerable detail, and which will end up being appealed to the courts. The reason for that is that, again, it is a polarised issue. If the price goes up it is good for BT; if it goes down it is good for everybody else, so you have to make a judgement.

Where we are at the moment is that we required BT to make the poles and ducts available through regulatory intervention. They are also required by us to put a reference offer in the market. They have done that and they have done that on time. What we are now in the process of doing is seeing if there is a commercial negotiation that can agree a price. That is what we tend to try and do. We don’t go around looking for things to regulate. It would be much better if the parties can just agree a commercial rate and we never have to do anything.

However, if you are asking me straight now what do I expect to happen, I think it is unlikely that they will agree a rate. There is a timetable for that, which I think concludes in June, and if after that there is no agreement and there is a dispute brought to us, we will end up setting a price. At that point we will examine the detailed economics of the cost of providing ducts and poles and, therefore, what a regulated price should be but, until we do that, we couldn’t give you a view as to whether they are more or less highly priced.

Q77 Damian Collins: Is there an issue here because BT effectively sets the price too high? It is not like a normal market where everyone thinks, "Well, we are not getting the value. We could get out of this network because they’re charging too much for it" because, by allowing Fujitsu to build a network on its poles and ducts, it is just bringing competition into the market where it currently doesn’t exist. It seems to be a bit of an impasse here and, following on Mr Watson’s call for the efficient use of public money, if the Government is to spend public money to invest in extending the network it would seem a shame if this money ends up going to BT to pay an inflated price for access to their network.

Ed Richards: The reason there is a potential impasse and there is a potential issue is because I think a commercial negotiation might not deliver a mutually agreed price, and that is exactly why you have us to regulate the price. That is one of those inextricable functions of Ofcom. As I said, where things stand at the moment, I anticipate us doing that but we have to let the commercial negotiation process conclude first, but that is imminent. I think that will be concluded by mid to the end of June, so we will know quite quickly whether we are going to have to regulate it or not.

After that, then we will set a price if it comes to us, and then that will form the basis for companies to decide whether they want to use it or not. When it comes to the use of the Government funding, I think what is important there is that the taxpayer gets the best value for money. I don’t know what the best value for money will be. It may be Fujitsu and some other companies; it may be BT; it may be some other companies that we don’t know about. I think when you arrive at the point of spending the money the key question must be, I would have thought: who is delivering us the best value for money? I think that should be an open question until the tendering process finishes.

Q78 Damian Collins: One final question, Mr Chairman. If the road you go down is that you have to intervene and set a price, do you think that process will be completed within this calendar year, so by the end of this year?

Ed Richards: Probably unlikely to be concluded within this calendar year because it is like all of these decisions, we have to do detailed economics and then it is appealable. So we have to have something that we can defend in a court. That is the nature of these issues.

However, even though the whole process is unlikely to be concluded by the end of this year, we would certainly expect, in those circumstances, to have consulted upon the range of prices that we would be looking at. Therefore, anyone bidding would have a pretty clear idea about the area that they would be in. I think that is consistent with the timetable for the Government’s spending on rural broadband. We are very mindful of the connection between the two. So we want to connect them and make sure it works with that timetable but, at the same time, not do something in such a way that we just get turned over in court as soon as it is appealed.

Q79 Chair: Can I ask you one last question, which is a particular concern of mine you may recall from previous sessions. One of your priorities for the year is to develop policies that will improve the ease of switching between communications providers.

Dr Bowe: For some reason, Mr Chairman, we thought you might ask us about that.

Chair: You thought this might come up.

Dr Bowe: We just felt it might come up.

Chair: It is also the case I think that one of the top causes of complaint to Ofcom is slamming and switching of consumers who do not want to be switched. What are you doing to improve the safeguards for consumers who find themselves switched without their knowledge or permission?

Dr Bowe: Do you want to start?

Ed Richards: Three things to say, I think. The first is that you are absolutely right; it still is not good enough. We are still not where we want to be. Levels of complaints to us, it is not the top but it is near the top, and they have come down significantly but not far enough.

There are two important things we are doing: one is strategic and one is tactical enforcement. The strategic is that we have done a piece of work that is asking what should the switching process be, with the aim of switching being easy, convenient and hassle free for the consumer. Our proposition on that is that we should have an approach that presumes, other things being equal, that we should have what is called gaining provider led. So the person who has won your business can run the process for you and make sure it is smooth. That is the strategic position and we are going to run that through June, the rest of this year.

On slamming itself and enforcement, what we have discovered is there are two categories of problem. There is downright slamming, what we call malicious slamming. That has to be eradicated. We have introduced much tougher rules. It is now prohibited; it is a prohibited marketing activity. We have an open investigations programme and specific investigations in relation to specific companies open in that area.

We also need to look at the other half of it, though, and that is what is called "erroneous transfers" where someone has not been maliciously slammed. It is essentially a database process error between companies. It is where-I am proposing-Mr Collins has phoned up, he has transferred supplier, it is all agreed, it is exactly as he would like, but we accidentally switch you because he has given us a number and we thought that was his flat. Not "we", I hasten to add, but the companies. We think that accounts for about half of the complaints we receive. We have a detailed piece of work under way with industry to try and resolve and invest in eliminating these kinds of process errors that drive people mad, because sometimes it literally means you are switched off and you don’t know anything about it.

Chair: You do not need to tell me.

Ed Richards: This indeed happened to you, Chairman, and you are not alone. It is a really serious problem. It is not colossal numbers but when it happens it drives you bananas.

Q80 Chair: Can I just ask a very simple question. I still do not understand why it can’t be that there is a requirement that, before a consumer has their service transferred to somebody completely different, there should be at least some evidence-a signature on a piece of paper-that the consumer has said that that is what they want to happen. That would solve all of these problems.

Ed Richards: It would solve some problems and create some others.

Q81 Chair: What problems would it create?

Ed Richards: The problems it would create are that evidence from the past and other industries, and including telecoms, is that it significantly reduces competition and switching. The numbers go substantially down. It is true in energy, in insurance and in telecoms and in other markets that a verbal agreement is legitimate. The safeguard we have in place is that you should have a letter from your losing provider asking you to confirm that you want to go ahead with the switch. You have 10 days to say, "No, I have been slammed. I didn’t ask to be switched" or, "I have changed my mind", so there is a cooling-off period so that safeguard is there.

If you required a written signature, the hassle factor, the time factor and the ever getting it done factor, all of those things, the evidence is that that dramatically reduces switching and, therefore, competition. In a different part of the world, we were asked by the PAC to do everything we could to drive switching rates up and what were we doing to promote switching. A signature would significantly deter it, I am afraid, and so that is the trade-off.

Dr Bowe: It is a really important point, Chairman, and I know it is of small consolation to somebody who finds himself in the position that you did. As Ed has said, if we are to make competition work in this marketplace it has to be dead easy for people to switch.

Q82 Chair: This is not just about my experience. I will give you another example, which you will sympathise with having previously headed the Consumer Panel. I had a constituent come to see me whose mother is elderly, suffers the early stages of dementia, had a call and she was talked into it. She didn’t realise she was agreeing to a switch, and yet by the time it had happened it was too late.

Ed Richards: The safeguard for that is the letter saying, "You have agreed to switch. Can you confirm? If you do not want this to happen, just call us up" but I agree, in a situation like that, it is very difficult to deal with. Certainly, we have had cases in the past-I am just remembering now-where we had individuals complain about what they regarded as companies taking advantage of infirm, elderly relatives. In one particular case I remember, I went back to the company and had a very stern conversation with them around the lines of, "This is completely unacceptable". I think in that case that was dealt with. You have scores, hundreds of selling agents all round the country, which generally speaking are good for competition. They are trying to compete against each other, and you will occasionally get situations of this kind, which are regrettable but which are part and parcel of that competitive market, I think. We have to then deal with them as best as we possibly can.

Dr Bowe: Ed, I think we have to say something, if I may, stronger than, "This is regrettable". I think we ought to have zero tolerance for the abuse of people who, for whatever reason, are not able to make a rational decision on their own account. Chairman, you have wound me up here a bit this morning to think some more about this. Ed, we need to think about the enforcement of those requirements in our code and actually what we can say as a regulator about not being prepared to tolerate that kind of abuse. Competition is fine, and encouraging people to switch is fine, but if there is a dark underside, which is abuse, then we are not going to stand for it. I think we should be very clear and we come out and say that.

Ed Richards: I do think it is quite rare but when it happens we should-

Dr Bowe: When it happens it is horrible. It is horrible.

Chair: Well, you will find in your office a letter from me with a case. I shall look forward to the response. I think that is all we have for you. Thank you very much.

Dr Bowe: Thank you, Chairman. It has been a pleasure as always. We look forward to the briefing on spectrum, which is scheduled for next month. Thank you.

Chair: Thank you.