UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 508-i

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Culture, media & sport Committee

The work of Ofcom

Tuesday 9 July 2013

Dr Colette Bowe and Ed Richards

Evidence heard in Public Questions 1 - 80

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Oral Evidence

Taken before the Culture, Media & Sport Committee

on Tuesday 9 July 2013

Members present:

John Whittingdale (Chair)

Mr Ben Bradshaw

Angie Bray

Conor Burns

Philip Davies

Paul Farrelly

Mr John Leech

Steve Rotheram

Jim Sheridan

Mr Gerry Sutcliffe

________________

Examination of Witnesses

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

Q1 Chair: Good morning. This is meant to be the Committee’s annual session looking at Ofcom’s annual report, although I think it is a little over a year since we last met on that subject. I would like to welcome the Chairman of Ofcom, Dr Colette Bowe, and the Chief Executive, Ed Richards. Can I just start by saying to Dr Bowe, you and I have known each other a long time and I was sad to hear of your decision not to seek reappointment, which I know you have now made public. Could you tell us what made you reach that decision, and also what parting message you have?

Dr Bowe: I can certainly answer the first of those with pleasure. As for parting messages, this Committee did of course scrutinise my appointment, so you might like to do an exit interview with me when I leave, when I would perhaps feel slightly freer to talk about some of the issues that we have talked about over the years; but that is entirely a matter for you.

Let me just say a word about why I have decided not to do a second term. As you will recall, chairman, I was appointed in March 2009 for a five year term, renewable, and I came to the conclusion quite early in my tenure that it is important that the occupant of this particular role is very visibly and at all times seen to be completely independent of politics. I came to the view, therefore, that it was desirable that the occupant of this job should have a fixed term, so that at no stage could anybody even think that any decision that the Ofcom board had made might have in any way been conditioned by the Chairman’s desire to be reappointed. I took that decision quite early in my tenure.

Frankly, I was sorry that this thought had not come to my mind when I was first appointed, because I would have told the Government at that time that I would do a fixed term. Once the thought had come to my mind, I then communicated it to the department and as you know, Chairman, I made it clear last week at the publication of our annual report that this was my view. I remain very much of the view that the occupants of roles like this need to be able to demonstrate very clear independence. Having a fixed term is one very obvious way to do that.

Q2 Chair: Ofcom is a very powerful body that seems to be accumulating responsibilities, with even more being suggested. Do you have a feeling that Ofcom is beginning to be drawn into the political arena?

Dr Bowe: There are two different questions there. One is accumulation of responsibilities. The second is, drawn into the political arena. They are separate, actually. On the question of accumulation of responsibilities-and I am sure Ed Richards will confirm this in a moment-the various things we have been asked to take on during my tenure, prominently including the regulation of the Royal Mail and the postal industry, I have to say have not been of our seeking. You will also be aware that under the Digital Economy Act we took on further responsibilities. I would like to make it extremely clear, and I am sure all Members of the Committee will understand this, that we are the creatures of statute. If the Government changes, through Parliament, a statute, then we will do what we have to do, but we very much do not seek to extend our reach. Both Ed Richards and I have very clear views of the dangers for an organisation of overstretch; of getting too thinly stretched; of not being able to give things the proper attention. For that reason, we absolutely do not seek further responsibilities. They have been, however, thrust upon us.

As for political closeness, well, I will not dilate on the kind of issues we have been dealing with, but every Member of the Committee knows that in recent years we have had to deal with some extremely politically sensitive issues, and I have taken a view that it has been important for public trust that these very sensitive issues are being dealt with by a demonstrably independent body. Independent of the Government but answerable to you, and that is something that I attach a lot of weight to. When I say "independence", it is the Government that I am speaking about. In terms of Parliament, we are completely accountable to you.

Q3 Chair: We are going to come into specifics in more detail, but just in the last few months, Lord Justice Leveson has suggested Ofcom might be involved in regulating the press. The Home Secretary started talking about Ofcom having a role monitoring hate speech on TV. We have the concern about child pornography online; it is suggested that Ofcom may have to take on the responsibility. It does seem that you are being asked to do everything?

Dr Bowe: As I have said, this is not of our seeking.

Chair: But would you say, "Hold on, we have enough to do"?

Dr Bowe: I think you can assume that that is a view that we would strongly express, but the form of decision is, if Government asks Parliament to change the statute and Parliament decides to do this, frankly, it is not my job to start saying to Parliament, "Sorry, we are not going to do that." But we do have to make clear at all times what we think are the dangers of excessive stretch in any organisation’s remit and its ability to keep focused on its core activities. We are at our core a competition regulator and it is very important to hang on to that, we think.

Q4 Mr Bradshaw: Can I just turn this argument around? It could be said that your expansion is a symptom of your success. I seem to recall senior politicians, if not threatening you with abolition, then at least threatening you with the reduction of your responsibilities before the last election. The opposite has happened. Why are you so modest about your potential, given the context that we want fewer regulators, we want integration of regulation? Why are you so unambitious for your organisation, that you seem so resistant to take on any more responsibilities?

Dr Bowe: There are two points there, Mr Bradshaw. One is about being modest, which I would hope we are. I do not think anybody in this room would like to have people from Ofcom sitting in front of them who were preening themselves, and I think we are suitably-I hope-modest about our ability to deliver. We are, however, ambitious for our organisation. We are ambitious for us to do what we do well and to do it to the utmost of our abilities in the interests of consumers. That is what our ambition is. We are not ambitious to extend our reach into all sorts of other areas. As you know, this is where organisations go wrong.

Q5 Mr Bradshaw: But if someone has to do it, you are the best people to do it, are you not?

Dr Bowe: As I have said, if Parliament wants us to take on further responsibilities, of course we do that; but we are always very alive to the danger of losing focus, drifting, mission creep, all of those things. I feel at this point, however, if I may, I would like to ask the chief executive to say a word about this, because this is as much his issue as it is mine.

Ed Richards: I would very much agree with everything Colette said. From my perspective, I always ask myself, does it fit, would it fit in a sensible, coherent way with what we do? Is it within the grain of what we do, and secondly, what does it mean for the resources and the ability of the organisation to do what we do already, well? The organisation prides itself on doing a good job, getting on and doing a good job with its existing statutory responsibilities. Everybody in the organisation feels very strongly about that. All of the senior team are very mindful of the risks of the additional and exciting or interesting new opportunity, which on the face of it would be extremely interesting, but the consequence of which might be that we are stretched too thin and we start doing the core job poorly.

I will say to you very openly that we were absolutely worried about that when we were asked to take on postal services. We did not know much about postal services. In fact, to be frank, I think we knew almost nothing about postal services. We knew it was a network business, so we knew there was probably something we could do sensibly, because we know how to regulate the economics of network businesses. We knew it had a USO, so we felt comfortable with that as well, because we obviously have that in telecoms as well. We knew there was a connection between postal services and the rise of electronic communications; in other words, the replacement of the letter by the email.

But other than that, it is hugely different. It is a logistics business; it is dominated by people rather than capital expenditure; it is in decline, in terms of the volume of activity. Everything else we do is essentially increasing. So we set out on that path with some trepidation and we have to think very carefully about how we would integrate Postcomm, and who from the existing team of economists, lawyers and so on that we could deploy on this new set of challenges. It has worked out very well. We are all comfortable with where we have reached on that, but it was a nontrivial task, and it required a lot of careful management, thought and planning to reach where we are now. That is our general nervousness, and there are dangers in being enticed into new areas that might on the face of it seem attractive, but which carry risks with them. As Colette says, we would never say never. We would never sit in front of you and say we absolutely do not want or negate something. We just think very carefully about those issues before we step forward.

Q6 Mr Leech: You have just given an example of postal services, that you were worried about but you have managed to sort out the transition. Are there any examples of areas that you have been asked to take on, where you do not feel that you have had the expertise and have struggled to get the expertise to deal with that area of regulation?

Ed Richards: Not so far. Not in terms of expertise. One of the advantages of Ofcom is that it has a critical mass. It is of a size and has a diversity of tasks that means we can attract pretty good people, in a way which perhaps smaller regulators find it difficult to do. That side of things has been all right. There are challenges in the DEA area of online copyright infringement. Essentially, the most difficult skills challenge there is attracting people who really understand IP networks, because if you really understand IP networks, you typically will be working for one of the big tech companies, and they will typically be offering you a huge amount more money than we will offer you. That is the area where we really have conversations with people in which they say, "Look, if you are in that ballpark, I’m not even contemplating it." So we have a severe skills challenge in that area, where we are essentially crossing over with the labour market for the tech companies. But we found a way through that and in that area, as you will know, everything has been delayed quite considerably, so we have been able to cope.

Q7 Mr Leech: So your concern about getting bigger is not necessarily about getting bigger, but is about not necessarily having the skills to deal with the new area of responsibility?

Ed Richards: No. It could be about skills, but that is less likely. Every decision of any real consequence or significance goes in some form to our board. There is a limited amount of board time; there is a limited amount of capacity. We need to know that the range of issues that we are dealing with is something that ultimately the board can assess properly, treat seriously and come to a wise decision on. In part, one of the things we are saying is, we just need to make sure we have a manageable set of issues. Some of the issues we deal with, as you all know very well, are highly controversial, and need very serious deliberation and time and space to do that. The greater the number of those issues, inevitably, the more pressure on the bottleneck up through the senior executive team, through to the board.

Perhaps financial services, I guess, but outside of financial services we probably have the biggest collection or range of controversial, difficult issues, either through their economic magnitude or through their public sensitivity. We are very conscious of making sure that we can do a good job with those. It is less about attracting skills. There is a resource dimension to it of course-in an era of restraint and austerity, and where budgets are under pressure-but it is not just that. It is also about the capacity at the most senior level of the organisation to assess and deliberate effectively on what are highly controversial or highly material, highly valuable decisions.

Q8 Mr Leech: Are there any responsibilities that, even now, having taken them on and dealt with them, you would have chosen to get rid of if you had the opportunity to?

Dr Bowe: The quick answer to that is, of the various things we have been asked to do-as Ed has said-we are now getting on and doing them. Frankly, to be absolutely honest, I think it would be a bit unsettling for our industry if we suddenly started saying, "You know what, we don’t really want to do that."

Mr Leech: I was not suggesting that you name and shame the areas of regulation that you wanted to get rid of. I was just trying to get a sense of whether your reluctance to take on additional responsibilities might just be an element of the unknown, as opposed to real concern about you being responsible for them. If you have taken on stuff that you would not necessarily have chosen to take on, yet you have dealt with it perfectly okay. Are you not just being overcautious?

Dr Bowe: Ed, can I just say a quick word here, because you just instanced financial services as being another sector that poses very complex challenges? If you think back to what happened in the regulation of financial services, you will see that what happened there was the creation of a very all-encompassing regulator that covered everything that happened in the City. Various things happened, we will not dilate on them, but what we now see is a completely different regulatory structure, which has intense focus but spread among a number of regulators on different aspects. It is having watched a situation like that unfold that makes you as a regulator think, always be sure you can provide the right level of focus on what you are doing and do not give in to a temptation to think, "Yes, we can keep doing that, because actually, we can do it." It is not about resources, it is about focus and it is about staying pretty clear about what matters, and making sure that you can get your arms around something. That is our concern. This is not about a feeling that we have not got the resources to do it, it is much more about seeing what happens to organisations, frankly, that lose focus. It is not good.

Q9 Chair: Since you mentioned the issue of resources, Ofcom have been quite successful in bringing down your overall costs.

Dr Bowe: Yes.

Chair: We congratulate you on doing so well. Equally, you will be aware of the complaints about the rise in charges that you are requiring, particularly telecom providers, to pay. Would you like to say whether or not you have sympathy with them, or whether or not they have to look forward to further increases in charges, particularly if the burden on the taxpayer is going to come down, or if you take on some of the things we have been talking about? Does that mean the taxpayer is going to have to pay more? How do you see that working out?

Ed Richards: Let me set out the whole picture if I may, briefly. We have achieved a 26% reduction. By the end of next year, we will have achieved the target 28.2%. I suspect we will exceed that. As a result of the recent 2015-2016 settlement, that will then become 33%, and I think we can do that. We have, I hope, a very good and proven record on reducing costs, but those are the headline figures. What has happened is that, underneath the headline, there are differences in charges between the sectors-post, spectrum, telecoms, broadcasting. There are differences in charges for the taxpayer and to companies, and both of those vary within the overall number coming down by that 26%, rising to 33%.

The critical thing, which it is important to be aware of, is that every single sector over the spending review will see their bills fall. The point is that some have fallen a lot more dramatically than others. In the telecoms and network services area, the fall is only about 7%, but the cost of Ofcom to the taxpayer is already some 36% lower than it was three or four years ago. The taxpayer has benefitted very substantially and, as a consequence, some of the companies have benefitted less significantly.

The most recent manifestation of that was because we did a detailed piece of work on our IT systems. We reduced the cost of the IT systems overall, but what we were also able to do was, rather than spread those IT systems on an estimated basis across the different areas, we were able to be much more precise about where those costs should fall. In doing that, what we identified was that in our view-we checked with the National Audit Office very carefully before we made this decision-the level of cost that was falling on the taxpayer element of our work, essentially spectrum, should fall, and that the element of cost that should fall on the companies in the telecom sector should rise. Once we had that information and we felt that that was the right judgment-as I say, we checked that with the auditors-we felt we had to do that, and that is what caused the uptick in fees for that group of companies. But I will return to the general point. Over the period, all of those companies will still have seen a fall in their fees in totality.

Q10 Paul Farrelly: You must be counting your blessings in not being asked to take over responsibility for newspapers.

Dr Bowe: You may think that, Mr Farrelly, we could not possibly comment.

Paul Farrelly: No answer required. The next things that you are going to be involved in-we do not have a date yet for the Government’s White Paper following the communications review. Do you have any expectation in terms of timing?

Ed Richards: Not specifically. We are expecting a document. We do not know precisely when it will be. We probably do not know any more detail than you do on that. We know that there is a document. I am sure it will be extremely interesting when it emerges, but we do not know when.

Q11 Paul Farrelly: I am sure you will be extremely interested in it. What would you be most interested in? What do you think should be the priorities? Where is legislative change needed, which is the purpose of the White Paper, and what would be the consequences if it is not done in a speedy and timely fashion?

Ed Richards: It is probably important to say that our view and, I suspect, the view of the sector more generally, but ultimately you would have to ask them that, is that there is nothing profoundly broken in the current legislation that means that we would sit here now and say, "If X does not happen, we can’t meet our duties", or anything of that kind. Overall, the structures work reasonably well. There are a series of probably second tier issues that it would be better if they could be addressed.

On our list, and probably top of the list without any doubt, is consumer switching, where I think we face an uphill task in addressing the challenge of switching in the new communications environment. What I mean by that is a converged environment in which essentially, people are buying bundles of services. At the moment, the switching processes and the background to all of these things are a technology or service by service, and that means that switching processes are not very good. We would very much like to see a very clear and strong commitment to making an easy and convenient switching experience for the consumer, partly because that is very good for the consumer and partly because it helps competition. We know that is good for competition and that will help us all in the long term. That would be top of our list without any doubt.

Then we would like to see the broadcasting competition powers clarified. We would like to see a little more clarity on EPG prominence. In both those areas it is not because the powers do not exist, it is because it is unclear precisely what the powers allow us to do. It is not a catastrophe, it is not a disaster, but those are things which could very helpfully be clarified.

Q12 Paul Farrelly: You were straining there to give a pre-valedictory valedictory.

Dr Bowe: No. I am not straining, but I wanted to add one thing to what Ed has just said, which is about nuisance calls. I know, Chairman, the Committee is going to have a very thorough drains up on all of that, and I would like to say that we would be very happy to come back and talk to you about it. We do need some support on additional powers, both for us and indeed for other people. This is less about us than about other people, but a White Paper on the Comms Act would be a very good place to have those issues on the table. That is the specific thing I would add.

But to go back to how Ed began, none of this is about, "This is broken, it needs fixing." Most of the things we are talking about reflect the fact that since this Act was framed in around about 2001, 2002-

Ed Richards: 2002, 2003, yes.

Dr Bowe: -the technology has changed. The kind of point Ed just made about how the bundles now work was unthinkable 10 years ago, so there are things that need to be updated to reflect how we all use the technology.

Q13 Paul Farrelly: Can I ask you one supplementary on your top priority, on switching? We have had a lot of firms lobbying us to say this does not work smoothly. Why should consumers have to make two calls, one to their existing provider and to the new provider? Why not just to the new provider, before they can switch? I step back and think of my experience in, time after time, dealing with the erroneous transfer department at British Gas when people are switching my supplier under false identities to try and create their own identities through generating utility statements. It is a nightmare to fix, because there is a consumer protection issue here as well, rather than just the ease and convenience for people who may be just behind in the market, and those who have a vested interest.

Ed Richards: There definitely is, and I think in moving to any new system, we have to keep an eye on that consumer protection side of things. Anybody who has switched knows that it can be very complicated and can be very frustrating. What we know about markets is that they work better-competition is more dynamic-if consumers can exercise their choice in a way they do not associate with being very difficult or full of hassle and so on. I think the core idea is clear and is right. Consumer protection needs to be at the heart of the system that is designed.

It is worth observing, of course, that it is not that we have not had slamming and consumer protection problems and erroneous transfers with the current regime. We have had. In fact, we have had some serious problems with it under the current model, so for me, what we are trying to do here is to create a much easier switching experience, but one which also makes improvements on the risks associated with slamming and erroneous transfer as well. We will go as quickly as we can in that direction. No doubt it will be imperfect, but I think we ought to be able to make improvements on both sides.

I would not want to leave the Committee with the impression that there is a trade-off between the two and that somehow, if we go to a system that is more convenient and is easier for consumers, automatically you are increasing the risk of slamming. We do not believe that is the case. We just need to keep an eye on that and make sure there are mechanisms in place to stop that, and embrace the more effective switching mechanisms.

Q14 Paul Farrelly: It does not work in the energy markets, because my point is analogous. So that in my point to British Gas, for example, or the electricity person or whatever that market is, I have not given you permission. It is quite reasonable for me to be contacted, or vice versa, to see whether I want to be switched, because you just get involved in months of nonsense. And the answer comes back, "Well, that’s not the way the market works", and that is not satisfactory.

Ed Richards: That is clearly not satisfactory and we would not tolerate that sort of answer for a second. The erroneous transfer issue interests me.

Paul Farrelly: It is a nice metaphor.

Ed Richards: It is, but it is very different to somebody maliciously moving it. It is typically associated with the deficiencies and the database of one or other of the providers and they have simply misidentified the house or the line that has asked to be moved. My favourite example of this, which illustrates the point, is somebody who had built a small flat in their back garden or a bungalow or something for a nanny and the nanny phoned up wanting her broadband switched.

Of course, the database just said it was number 12 Privet Drive, or whatever it was. The main householder had the line switched and, of course, found this outrageous. They traced it to the fact that the database had not recorded that 12A existed and that the nanny had actually asked. It can be things of that nature and that tends to be the problem on the erroneous transfer. It is very different to a malicious slam.

Paul Farrelly: My concern-and I will leave it here, John-is it facilitates the ease of identity fraud.

Dr Bowe: Yes.

Ed Richards: Yes.

Q15 Angie Bray: Just a quick question on switching because I think everybody is keen to see this eased and made better for consumers. It has been, I think, in your annual business plan for about five or six years now.

Dr Bowe: Yes.

Angie Bray: You still have not got there; you are saying it is still an ambition. Why is it taking so long and is this pressure being applied by BT or what is it that is slowing it down?

Ed Richards: It is essentially in line with what you are inferring. It is complex. You have to deal with very complex technical systems. We have to act proportionately, so even though we have a-

Angie Bray: What does that mean exactly?

Ed Richards: We cannot make changes that are disproportionate in their impact on companies relative to the benefits arising. What that means is we have to prove-

Angie Bray: It means you are being slowed down.

Ed Richards: We have to prove that there is a loss of competition. We have to prove there is consumer detriment. All of that is challengeable in the courts by the companies extensively at every level. Some of this information to prove those sorts of things is very difficult to come by and it is very difficult to analyse because it involves estimating costs of systems changes and that is on the cost side. Equally, it involves estimating the benefit to consumers of an easier switching mechanism. That is quite a hard thing to do. All of that we need to put together in a form that we can then withstand in a court appeal, being cross-examined by a QC on the analysis of the estimation of consumer benefit. That is what we have to deal with on a daily basis.

Consumer switching is probably the most difficult issue we face in terms of litigation risk today. Almost all the companies, almost every single one bar two, I think, are clearly against the proposals that we have put out. They would like it to stay exactly as it is. That is, I have to say, typically associated with companies who have an established base. Surprisingly enough-or you may not be surprised-the companies who support the change we want to make are the insurgents. They are the smaller companies. They are the competitive challengers. You can deduce what you wish from that, but that is broadly the position. Each of those companies has made absolutely clear that it is intending to challenge us in the courts at every step of the way. It is no more complicated than that.

We believe that that appeal’s model should be reformed to make it not such that we cannot be appealed-because clearly we should be-but that the threshold is altered so we can make decisions in a more timely way. But switching is probably the most difficult that we are dealing with at the moment. It is inherently complex, therefore inherently easy to challenge. The current arrangement means that you can challenge it very easily. A large number of very big companies have made it abundantly clear that they will challenge it.

Dr Bowe: If I may, Chairman, I can see, Ed, from the expression on Ms Bray’s face that she is finding this a frustrating response.

Angie Bray: It is frustrating, exactly.

Dr Bowe: No, I understand that and just to go back to where we started this train with Mr Farrelly’s question, again, there are two things here. If you are going to switch it can either be what is known as gaining-provider led, i.e. the people you are going to switch to who, of course, have the incentive to do it, lead the process or it is losing-provider led. Hey, guess what happens if it is that? In some ways this seems an extremely easy-everybody thinks, "Obviously the people who you are going to should be in the driving seat in this process."

As Ed has described, the thing we cannot do-and I do not think you would want us to do it-is say, "Look, it is perfectly obvious this is what ought to happen and we are going to use our considerable muscle on you, the telecom sector, to make sure this happens" and I know that is not what you are saying.

Q16 Angie Bray: It seems strange that, in your annual business plan, you keep saying this is an ambition of yours. It is not an ambition that you have put back by saying, "Actually it is proving a bit difficult." You keep saying it is a big priority for you.

Dr Bowe: Yes.

Angie Bray: But we do not seem to be any further forwards.

Dr Bowe: But we are.

Ed Richards: On this we are further forward.

Dr Bowe: The key thing is-and the reason why Ed has given you this account of this-what he has just described is what goes on between us saying, "In annual plan year so and so, this is what we would like to achieve" and then how far have we got along that road? We have got a very long way along that road. But as Ed has described the road is a very stony one from our point of view. There are big bucks involved here.

Q17 Angie Bray: Is there any kind of timeframe now you can show us or is it still too soon to say?

Ed Richards: No, we are coming to the conclusions of fixed broadband and telephony that we identified in terms of consumer detriment as the priority and we are coming to the conclusion of that. We have made clear in other documents what the overall intention is and how we will then work through an assessment of each of cable, pay TV and mobile. They are all different, so we have to do them each individually in the same way.

As things stand, while we have made a lot of progress-and I think we will take the important next step relatively soon-it will take a few more years. In a sense, my answer to Mr Farrelly is exactly on this point. We want to do this. We think this is the right thing to do but it is very hard going. I think that is why it is at the top of our list for the White Paper, or whatever document it will be, to have support and to make the legal environment for us easier to make progress. It is really hard going.

It is not alone though, it is worth saying. Many of our priorities are multiple years to achieve. You will find also we have had the delivery of superfast broadband networks. We have probably had that for the last three years. We will probably have it for another two or three because that is how long it takes to roll out a network to 60%, 70%, 90% of the country. Some of these things are difficult and do take many years. This one, in my view, could take a lot fewer years if we had a better environment in which to do it.

Q18 Philip Davies: You were saying earlier how much you need to reduce your cost base and the Chairman was very fulsome in his praise of how much you had reduced your cost base. It does beg the question though, why were you so over-bloated and inefficient for so long before you reduced your cost base?

Dr Bowe: That is a really good question.

Ed Richards: Nothing is perfect, is it?

Dr Bowe: No.

Ed Richards: The only answer to that is to explain how we did it and I think we had a bit of luck and we did some very intensive work, which we expected to do. The luck we had was the fact that we had a substantial budget allocated for the Olympics and when the Olympics finished that budget just dropped to zero. That was a great stroke of luck for us because that was right in the middle of the spending review period and it was a very big task for us. We had over 100 spectrum engineers monitoring the Olympics, making sure there was no interference. A huge project over 18 months to two years and at the end of it that budget just dropped to zero.

The other stroke of luck we had, going back to an earlier question-certainly luck in terms of budgetary implications-was the integration of postal services. We took over the responsibility and, therefore, the budget for Postcomm and we have been able to reduce the cost of providing postal regulation by 56%. That was an opportunity in part because we could obviously do away with all the overheads and costs associated with running a separate organisation. In a sense, that was a stroke of luck. Treasury tasked us with doing 33%, we managed to do 56% and a lot of that cost could just go straightaway.

On the other side of it, we ran a massive intensive organisation-wide and very painful exercise in going through every single function of the organisation from top to bottom-the resource allocated, the process through which we did it, the legal regime sometimes-and asked every single area to reduce the budget. That was a very painful process but it yielded a lot of budgetary benefits. Then in other areas decisions were made, the most obvious example of which was the work that we used to do in media literacy, where the budget was essentially reduced to a nominal one.

In some areas it was just a question of saying, "We are just not going to do anything any more." That was not about being fat or inefficient but it was just we are not doing what we used to do. That is the way we did it and, apart from the first and the third points, the middle part of it, which was substantial, was not easy. It was very difficult and we let a lot of people go. There were a lot of very painful decisions. I think that is the answer to the question.

Dr Bowe: Can I just add a rider to that? Chairman, as you know, it is not often I disagree with my Chief Executive but I think this is going to be one of those moments. I do not think luck had much to do with it frankly, as Mae West might have said. Ed cannot possibly say this but I will. There was very tough, ruthless management involved in this. It was difficult.

What Ed and the executive team at Ofcom did is something that people do not often do in this situation, which is when faced with a multi-year target to reduce something, to do the majority of it at the beginning of the period, rather than to do a rather painful series of salami slices. It was painful for the organisation but it was carried through in a way that I am satisfied and the board is satisfied with. It did not mean there was any diminution in our fundamental work to protect consumers of the UK. But I do not think luck had much to do with it, frankly. Ed, I can say that, but you cannot.

Q19 Philip Davies: On the protection of consumers, you will be aware that the Internet Telephony Service Providers Association has concerns over net neutrality.

Dr Bowe: Yes.

Philip Davies: I just wondered what Ofcom’s position was on this.

Ed Richards: On net neutrality?

Philip Davies: And those concerns.

Ed Richards: Could you just remind me precisely what its concerns are?

Philip Davies: That some people in the industry are, in effect, blocking people from accessing sites that may be seen as being in competition with their own services.

Ed Richards: Yes.

Dr Bowe: Yes, the classic traffic management.

Philip Davies: Yes.

Dr Bowe: Just to be clear, Mr Davies, you are relating a concern that somehow Ofcom is not doing what it should in this area.

Philip Davies: I wondered what your view was and what you are doing about it.

Dr Bowe: Right, okay.

Ed Richards: Okay. We were quite early out of the doors on net neutrality. We were one of the first European regulators to say anything substantive on this a few years ago. Our position is that we are trying to balance the need to make sure that network operators are able to make a return on the substantial investments that they are making at the moment, with the fact that the open internet has obviously been an extraordinary source of innovation, access to information and so on. We work with industry to make sure there is transparency about traffic-management policies. We have made it very clear that we do not expect to see legal services blocked.

We have also made it clear that we do not see that taking place, other than in one or two areas. It would be interesting to know if the organisation you are referring to has evidence of that because when we looked we could not see very much evidence, hardly at all in fact. But we did make clear that we would be very uncomfortable with that and we have highlighted the risks if that were to take place where a company was vertically integrated; in other words favouring its own downstream services. If that were the case, what we would look at is whether that company had market power and, therefore, whether it was abusing it and whether there was a competition concern.

Q20 Philip Davies: Where service providers block people’s access to Skype, for example, what is your view about whether or not they should be able to do that?

Ed Richards: That is the most difficult case and it is probably the only one we are aware of. There may be others but it is probably the only one we are aware of. I think it is fair to say that we are not comfortable with that. We have made very clear that we do not think it is a good idea for people to be blocking legal services. However, there is a difficult question about our powers as to whether we could prohibit that. We do not think we can at the moment.

What we can do is examine that against the competition in the market and ask whether it is anti-competitive behaviour. We do not believe that is happening, other than in the mobile sector. What we find in the mobile sector, I believe, is that there are only one or two companies who are doing that. Consumers who want to access Skype do have the opportunity to do so through other providers. That is in the context of a competitive market at the retail level for mobile and, therefore, we would be cautious about acting on competition grounds.

If Parliament wanted to make it absolutely clear that there should be no blocking of any legal service per se then that would give us a clearer and more definitive power. That would be a matter for you. At the moment I think we are, at best, unclear about whether we would do that. We have expressed serious reservations about it because I think steps in that direction do make you worried about the risks to this great benefit that the open internet has brought. It would bring into question the scope for innovation and the same levels of innovation that have taken place over the last 15 to 20 years.

Q21 Philip Davies: When you say there are just one or two providers, it is the biggest providers; it is people like EE that is involved in this. It is not just some small provider. Would you at least say, as a minimum, that where it happens it should be made abundantly clear to the customer before they sign up to any particular plan, that that is the case?

Ed Richards: Yes. We are very strongly in favour of clarity and transparency in relation to traffic-management policies, of which that is one. There is a code of conduct or a voluntary code that industry has signed up to. We have encouraged them and made clear that we think that should be available at the point of sale and that transparency should be effective. We are reviewing that at the moment and one of the issues that we are going to be looking at is the extent to which consumers can understand the traffic-management policies that are being utilised and whether they are making choices in the knowledge of those plans. That is something we are looking at at the moment. I think the operators feel very strongly that they do make that information available, consumers can see it and then they can exercise choice. There is obviously an interesting question as to whether that is actually the consumer experience and that is what we are looking at at the moment.

Q22 Philip Davies: I just want to detect an idea as to what you consider to be transparent to the customer. If you take the publication from EE, you have these nice glossy adverts, where I cannot see anything about any restrictions, to be perfectly honest, but in fairness to EE-I see you have your glasses there, Colette, I do not think-

Dr Bowe: Yes. Even with my glasses on I cannot read the small print.

Philip Davies: Obviously you might need binoculars for this one rather than glasses.

If you have your microscope ready or your binoculars at the ready-and I am struggling to read this myself, Chairman-it does say, "Orange data, mobile internet browsing or tethering, whether it was part of an inclusive allowance or not, is not to be used for other activities such as non-Orange internet-based streaming services, voice or video over the internet, instant messaging and peer-to-peer file-sharing."

Dr Bowe: Yes.

Philip Davies: What does that mean?

Dr Bowe: Quite.

Ed Richards: I do know what that means.

Dr Bowe: Do the customers? Yes.

Ed Richards: But I accept that we are up to the point that where the typical consumer would not know what that means and I am not going to disagree for a second about this. This is absolutely what we have highlighted to the industry and we have made very clear that in the review one of the things that we are looking at is not whether the information is available but whether it is easy to access and whether it is easy to understand. I think that demonstrates very clearly that there is a distance to travel on this issue.

Q23 Philip Davies: Would you accept, as the regulator, that putting that kind of gobbledygook in tiny writing like that is not what you would accept as being acceptably transparent to the customer about what they are signing up to?

Ed Richards: It does not appear to pass what I would regard as a transparent and clear form of communication. As I have said, I think it is an area where the industry is going to have to improve as these issues become more and more important. I would be surprised if our consumer research reveals that people regard that as a clear and transparent form of communication, very surprised.

Q24 Philip Davies: Is this something you intend to do something about?

Dr Bowe: Yes.

Philip Davies: Or are you waiting for the EU Commissioner who has spoken about this to-

Ed Richards: No. We are currently reviewing it. We published our position on net neutrality and indeed our plan to review the transparency forms well ahead of the European Commission, well ahead of most other European countries. I think there is only one, maybe two, ahead of us. This was some time ago and we have been in dialogue with the companies about it for many months. They know this review is taking place and they know that this is an issue. The reason it is so important is because the argument that I think allows them and us to be comfortable about there being some traffic management, which has its benefits, is that the consumer is able to understand what that is and to exercise choice. If that is not true then the greater argument seems to me to be in jeopardy. This is very important to us and I hope we can convey to them that it should be important to them because if it is not the case then it takes you to a different place in relation to net neutrality.

Dr Bowe: As part of that communication I would very much hope that the businesses are aware of what is being said here this morning. This is a concern being expressed by Parliamentarians, to which I hope you can hear, Mr Davies, we are giving a very positive response. I would hope the industry is listening to this and, by the way, we are not waiting for the EU, we do this.

Chair: I think the industry is well represented in the room.

Dr Bowe: I thought they were, Mr Chairman, so I am speaking back there at the moment.

Q25 Chair: Can I move on? At the beginning, you said that Ofcom was principally a competition regulator.

Dr Bowe: Yes.

Chair: While we are on telecoms, we now have a reasonably competitive market in telecoms and low-speed broadband but we are moving fast into the world of high-speed broadband where there is much less competition. You regulate the prices charged for access on to the BT copper network.

Dr Bowe: Yes.

Chair: You do not regulate the price charged by BT for access to their fibre network and there are strong complaints, which you will be aware of, from telecom providers that BT are charging too much. How do you respond to that and do you think there is a case for intervention?

Ed Richards: Shall I?

Dr Bowe: Yes, you go ahead.

Ed Richards: There are a series of points to make; the first is that it is worth remembering we are, relatively speaking, in the very early days of superfast broadband. The market-compared to current generation of broadband or copper broadband-is very small. It is growing quickly now but it is very small. It is quite early to make big bold statements about the level of competition. The second overarching point I would make is that we are very conscious of the issue of competition but we have had to be equally conscious of making sure that there was a regulatory environment in which investors/shareholders were willing to make an investment, such that you would have a superfast broadband network deployed in the UK by the private sector as widely available as possible.

As we thought about this issue over the last few years we have had to balance both investment and competition, and it is very different to the copper world. In the copper world the capital expenditure required to create competition was very modest and the confidence about the level of demand was very high. In the superfast broadband world the opposite is true. The level of capital expenditure is much higher and there is considerable uncertainty about the level of demand. It is a much more considerable and much more risky investment. That said, we absolutely do not want to lose the gains that we have secured in relation to competition over the last few years as we move to the superfast broadband world.

We have not regulated the price of the superfast wholesale product but we have required the provision of the superfast broadband product to other retailers. Anyone who is in the broadband market is able to sell fibre, and you may have noticed that Sky have begun to advertise their own fibre service and TalkTalk are indeed selling it, as I think are EE. People are in the market now and I expect that to continue. The reason that we did not feel it was necessary to regulate the price of the superfast product at this point-I am now talking about the last time we did this because we are literally consulting on this now as well and it is important not to pre-empt that judgment. But the reason that we took the position we did three or four years ago was because we took the view that the new superfast product would be constrained in its pricing by the existing products and that has borne out to be the case.

If you could get 20 megabits per second or 10 megabits per second on copper and copper was very cheap, there is no way that you would then pay triple that price for a 40 megabits per second service or even an 80 megabits per second service. What we believed was that the pricing for those services would have to be close enough to the copper services-that is an increment because you are getting a faster service-but close enough for them to be able to sell it and that has proved to be the case.

If you look at the superfast broadband prices in the market they are not very much higher than the copper prices. On the evidence we saw over the last three or four years, that seemed to work. The prices for consumers are very competitive. They are competitive on an international benchmark. What we now want to see is other providers, as well as BT, offering that fibre service and I think you have begun to see the start of that. We are currently looking at those questions about the regulation of that for the next three-year period and that is in consultation at the moment. We are looking at all those issues but that is a description of the approach that we have taken over the last three or four years.

Q26 Chair: The other providers who are beginning to offer fibre services are now entering the market but they have still only a tiny share compared with BT. They suggest that, as I say, the price they have to pay for access to the fibre network is excessive and that BT are operating an internal cross-subsidy, if you like, by charging a lot for their fibre and then essentially the bit that competes with the other providers is charging virtually nothing. Do you think there may be some validity in those claims?

Ed Richards: We are currently looking at a Competition Act complaint that is associated with those issues. I have to be very careful with what I can say because it is a legal case and is likely to end up in the courts after us. If you will forgive me, I have to be quite constrained in what I can say.

Q27 Chair: The trouble is that will go on for years, will it not? Competition Act complaints can take for ever.

Ed Richards: Competition Act complaints do take a considerable period of time. They are difficult, complex and typically are appealed at least once, if not multiply. It is a difficult issue, however, we are looking at the parallel issue-essentially the same sort of questions-in the market review that we are doing under ex ante regulation at the moment. The issues are absolutely on the table. We are looking at them full on right now. The market review side of that has a sensible timeframe, a fairly short timeframe. I would like to reiterate that we are trying to balance the two things. If we simply took the BT superfast product and said, "Right, tomorrow we are going to regulate it to cost only", what you would be saying to BT’s investors would be, "You can make a substantial investment on a risky new service and we will immediately regulate you to cost."

I think we would be concerned about the implications of that, both in the near term and in the long term. We do need to make sure there is access. We need to make sure other companies can compete but we also need to make sure that people making risky investments believe and can make a fair return-not an unreasonable return but a fair return in light of the risk they are taking-so that not only in telecoms but in other areas people regard Britain as a good place to invest in new infrastructure.

Q28 Angie Bray: But is it not the case that BT has been given quite a large dollop of taxpayers’ money to help them with their roll-out of fibre? It is not just about protecting one particular investor, it is about making sure that the taxpayers get value for their money and it is about £1.5 billion. With that in mind, where does the balance lie? I understand you have to protect investment.

Ed Richards: Yes.

Angie Bray: But even philosophically, where is the tipping point between where you protect the investment and where you start protecting the consumer?

Ed Richards: It is a very fair point. Everything I have just said has essentially been addressed to the commercial deployment, so the 66%, and nothing I have said has been addressing the public subsidy. We have very minimal role-

Dr Bowe: Excuse me, do you want to just explain the public subsidies for the last-

Ed Richards: Yes. The public subsidy is exclusively for the areas of the country that the Government believes the commercial deployment will not reach, so roughly speaking beyond 66%. In those areas our role is minimal. What we have done is to create an underlying regulatory environment to permit people to bid, enable people to bid, other than BT. We have provided technical advice on networks and things of that kind. We have made sure that any public subsidy is consistent with there being downstream competition. But in terms of the use of the money and the allocation of money to BT winning the contracts and so on, that is being done by the Government and BDUK and we have only an advisory role on the fringes, to be honest.

Q29 Angie Bray: Fairly or unfairly, there is a perception among the providers that BT is pretty much a monopoly in many ways and that Ofcom is not standing up to it and is tending to back off a little bit and that you are not really prepared to make the case against BT’s over-dominance in the market.

Ed Richards: Do you mean in particular where the public subsidy is?

Angie Bray: I think the perception is that in every way BT is allowed to be too strong in these negotiations.

Ed Richards: I would not agree with that from our perspective and let me explain why. I think in the commercial areas you have Virgin, who deployed first. They deployed very successfully. They have the biggest share of superfast broadband take up, not BT. We have very healthy competition between the two of them and it is possible for others to have entered the market. In the public subsidy areas, where I think it is particularly acutely felt by some operators, it is important to go back and just explain what we did do because sometimes one may be given the impression that we were sitting back and content to let BT win all these contracts. That is not true.

We started the process and made sure that there was an access to BT’s ducts available through a service called PIA, Physical Infrastructure Access. We set a price of access to those ducts, which was among the lowest in Europe. We put that on the table at the request of industry and some of the people who wanted to bid. When the principal alternative bidders. came and spoke to us about it they said, "That is good enough. That is what we needed from you. Thank you very much." What they then had to do was decide whether they still wanted to bid, whether they still felt it was possible to outbid BT and, by the look of it, most of them have decided it is not.

I do not believe that is because the regulatory environment was not there. The regulatory environment was there. I think it is probably more to do with the fact that you are dealing with a company that has huge scale and, therefore, does have substantial economic advantages. If you look at other countries, as well as the history of the UK, what you typically find-particularly in the rural areas-is that it does tend to only be one company that rolls out. At one level, I think I would say we should not be quite as surprised as we all are. The economies of scale and scope advantages that BT have are going to be considerable and I think to some degree that is what you have seen. In a competitive process it was always going to be the case that they would be a formidable competitor.

Q30 Angie Bray: Okay, one final question. One of the other things that all the other providers have to put up with is they have to work with BT’s Openreach’s performance, so it is servicing and maintaining their lines, which has been woefully inadequate. When is Ofcom going to get tough with that?

Ed Richards: It was a very difficult year last year, essentially, and the performance was clearly not at the level that was acceptable to competitors, customers. There is no question about that. There are two views of this, BT’s view, as you probably know, is that there was-

Angie Bray: The weather.

Ed Richards: They did experience the worst weather in 100 years and whether that is statistically accurate or not, I do not know, but it obviously was quite a grim year for weather. The other view is that they should have been providing a service at the approved levels and on time. We did get heavily involved with it. I am pleased to say that the services dramatically improved in this year.

Angie Bray: As has the weather.

Ed Richards: As has the weather, indeed. The provisioning in the fault-rate repairs is much better. There are still some issues around business internet services, so it is not perfect yet, as I think BT would accept. The core consumer-residential services are far better, but we do not want to see that happen again. In the current market review that I was mentioning earlier, we have, for the first time, said that we wish to consider quality of service objectives and obligations that would be part of the regulatory contract emerging from that market review, if we were to go ahead with them. That would bake in a level of service that was required, rather than just an agreement between the companies. I think there was a lesson to learn. I think the industry as a whole, including us, are in the process of learning it and we have set that up in the market review that is currently being consulted on.

Q31 Chair: Can I quickly turn to fixed narrowband telephony services?

Dr Bowe: Yes.

Chair: You will be aware the European Framework directive of different countries across Europe having to move to introduce caps on fixed termination rates. Every other country seems to have sorted this out a long time ago, whereas Ofcom has taken a very long time and is now going to introduce it at very short notice to the extreme anxiety of most of the providers. Can you say why that is the case and are the concerns being expressed about the consequences of such a narrow timeframe justified?

Ed Richards: I would interpret history slightly differently to the way that the question implied, if I may, Chairman. We had, I believe, relatively low termination rates historically. Some other countries had very high ones and, therefore, they moved to reduce them below ours and now we are proposing to reduce them again. It is a slightly more subtle picture I think. We are obviously consulting on this at the moment. We have not made a decision but the proposal is that we move to a much lower termination rate and there are a number of reasons for that. The principal reason is because we think it is better for competition.

The situation with a termination rate is that, essentially, the terminating company has a monopoly on terminating the call. If it is charging more than the cost of carrying that termination out then it is clearly raising costs and charges to others in a way that is distorting competition and cannot be good for competition. I think we are convinced the right thing to do is to reduce termination rates to a low level that reflects only the cost associated with delivering that termination. In parallel, we had the same set of questions in relation to mobile-call termination and, as I am sure you know, we have reduced those rates again significantly in order to promote competition and also in order to prevent the fees that were being charged fixed users to call mobile phones.

Again, you will all know that sometimes those are very high and a significant part of that charge was the termination rate. Having done that in order to benefit fixed providers by reducing the mobile termination rate, there does seem to be a very strong argument to reduce the fixed termination rates that are being charged for mobile providers. That is a straightforward parity or equity, in a sense, depending on whether you are a fixed or mobile operator. There is a question about the glide path and how quickly we move to it. I think we are very sympathetic to the concerns there.

The concern is that some companies have set up businesses essentially based on a regulatory arbitrage. They take the termination, they terminate calls for companies or organisations, they take that money and build a business off the back of that, and if we reduce the termination rates that is a difficulty. We have to think about how quickly to do it but, on the other side of it, we have plenty of companies who would like us to do it straightaway, particularly the mobile companies who feel that it is wholly unfair that they are being charged fixed termination rates when mobile termination rates are very low. We have many clarion calls on the other side of the debate to reduce to cost straightaway. We have to weigh that with the risks and instability to the companies who have built businesses around higher termination rates. That is what we are assessing at the moment but it is a finely balanced call from both directions, to be honest.

Q32 Chair: The companies that have long-term contracts, who, if this is introduced very suddenly at the moment as a consequence, would incur quite significant losses, you are sympathetic to their concerns.

Ed Richards: Only to a degree. The reason I am sympathetic only to a degree is because we have been signalling this for many months. It has been in the air in the European context for quite a long time. For decisions on mobile termination rates, for which the read across is-for anyone in the telecom world-completely obvious, has been in play for a considerable period of time. I think the other reason I have perhaps less sympathy than you might, on the face of it think, is that if you build a business around a regulatory intervention of that kind, I think it is wise to anticipate or think about contracts in the context of the risk of regulatory change. There is always a risk of regulatory change.

There is a legal obligation on us to review these markets every three years. This is widely known, everybody is aware of it and everybody is aware that regulators can change decisions in relation to charge controls or the price of calls where they regulate them. Sometimes they deregulate them completely. It is not a bolt from the blue and it is not an issue that people should not have been able to anticipate or consider in advance. Having said that, we have some sympathy and we are aware that we have to think carefully about the implications for companies who have contracts that would be questioned or jeopardised by a change. We are doing precisely that but I think it is important to paint the whole picture.

Q33 Mr Bradshaw: Why has progress been so slow at implementing the provisions on copyright infringement in the Digital Economy Act?

Ed Richards: In all honesty it is a question you will have to pose to the Government. We have done all of our work that is preparatory. We drafted the Code. We have done a considerable amount of work on preparing how we would do the independent appeals body. We have done a lot of work around the cost order and the allocation of costs. The obstacle of late has been the cost order, and that is with the Department. While we have been providing advice, the decision on what to do next on it and the timing of it is for them.

Mr Bradshaw: So it is the Government’s fault?

Dr Bowe: I think you had a discussion with Ed Vaizey about this fairly recently.

Mr Bradshaw: Yes, we did.

Dr Bowe: I know he gave an account of the issues around the costs order. That is not a matter for us. We are not saying it is anybody’s fault, we are saying it is not a matter for us.

Q34 Mr Bradshaw: When do you expect the first letters to go out?

Ed Richards: I do not think we know at the moment.

Dr Bowe: We do not have a view.

Q35 Mr Bradshaw: Because it was supposed to be the beginning of next year, was it not?

Dr Bowe: As Ed has explained, further work has to be done by people other than us in order to make this happen.

Q36 Mr Bradshaw: You said that Ed Vaizey gave an account. Is it an account that you accept or share?

Dr Bowe: I do not think it is for me to sit here and comment on whether I agree or disagree with what a Minister has told this Committee. With immense respect, Mr Bradshaw, I think that would not be a proper thing for me to do.

Q37 Angie Bray: Can I turn you attention to cyber security? As you know it is an area of serious concern and the Government has made it quite a priority. Do you think that the UK’s communications infrastructure is at risk from the lack of security vetting, in relation to the procurement of equipment from companies based in potentially hostile countries?

Dr Bowe: Chairman, could-

Chair: If you would prefer that we dealt with this question at another time in a private session then I am content we should do so.

Ed Richards: That might be better.

Dr Bowe: I think that would be better, Chairman. We are very happy to discuss these matters, but in a different context, please.

Chair: Okay. We may well want to pursue it on another occasion.

Dr Bowe: Okay.

Q38 Mr Bradshaw: I know you are modest, but you are generally considered to-

Dr Bowe: We are incredibly modest, I can assure you.

Mr Bradshaw: You are generally considered to have done an extremely good job at regulating most broadcasters. The BBC Trust is generally considered to have done a pretty dreadful job at regulating at the BBC. I know because of your modesty that you are not enthusiastic about taking on more responsibilities, but do you at least understand the logic of those like me who argue for all broadcasters to come under your remit?

Dr Bowe: We understand your logic perfectly.

Q39 Mr Bradshaw: Thank you. So you would not resist such a move in the future?

Dr Bowe: As we have already said a couple of times this morning, if such matters are determined by Parliament then, of course, we are creatures of statute. I guess where we stand on this at the moment, it will not surprise you to know, is ahead of charter review and renewal. Frankly, one can see that Tony Hall has his hands full without us starting the discussion about changing some of these important foundation stones of the present regime. I would not at all wish anything we said here today, or anywhere else, to make the task of the present management of the BBC any more difficult than it already is. Mr Bradshaw, I hope that does not feel as if I am trying to dodge the question.

Mr Bradshaw: No, no. You were very clear.

Dr Bowe: I hope you can see what I am trying to say there.

Q40 Mr Leech: Would it be fair to say though that it would be perhaps easier to accommodate the regulation of the BBC within Ofcom than some of the other tasks that you have been given in recent years? In terms of the work that you already do.

Dr Bowe: That is a very loaded question, is it not? As I have said, if Parliament asked us to change what we do and how we do it, then we can do it. You are absolutely right, of course, there is a continuum there. We do already have a strong regulatory relationship with the BBC Trust, which I have to say works very well. We often have to deal with issues that are either the same issue or very close. One of the things I would like to say, in case anybody has any concerns about this, is that we and the BBC Trust go to lengths to make sure that we work properly together. That is a very long-winded way of saying it would not be an enormous stretch. But, as I have just said to Mr Bradshaw, I do not want us to be doing and saying things in this context or anywhere else that makes it look either as if we are on a kind of land grab, or that makes the already very difficult job of the BBC harder than it already is. We absolutely do not want to do that.

Mr Leech: You have made that very clear that you are not.

Q41 Philip Davies: Do you think you would do a better job at regulating the BBC than the BBC Trust do?

Dr Bowe: With great respect, I think I am going to resist your enticing question there, Mr Davies.

Q42 Philip Davies: Well, how about an answer to this one: you say that if Parliament decided to give you this particular role, you would do as Parliament wished. In order to help Parliament to decide whether or not to give you this role, how would you regulate the BBC differently to the way that the BBC Trust have been regulating the BBC?

Dr Bowe: Goodness, that is quite a long question. As I can feel that Ed is burning to come into this, I am going to shut up in a minute. We are talking about regulation, what we do under the Broadcasting Code, in terms of issues like fairness, privacy, impartiality, all those things we do with many broadcasters. Of course we do fairness and privacy in respect of the BBC as well. Whether we would do it better or worse than the BBC Trust, frankly, I do not know. You would have to be judge of that. But it would not be an enormous stretch because the Broadcasting Code exists. How the BCC is regulated, as distinct from how it is governed, which might perhaps be your question. But how the BBC is regulated is frankly pretty well like, I would say most other broadcasters in this country are regulated. I think that is possibly not quite your question. Your question might be how the BBC is governed. Before you respond to that, Ed do you think I have conveyed that rightly?

Ed Richards: I do. There is this important distinction between regulation and governance. I think Colette is entirely right, we regulate lots of broadcasters. This is what we do, with hundreds and hundreds of broadcasters. The governance question, as in if we started with the question of somebody has to be custodian of the £3.5 billion, making sure that value for money is delivered and all of those questions. That seems to us to be a very different task. That is not a task that we undertake in any other respect. I think it is important to distinguish between the two.

Q43 Philip Davies: When you regulate broadcasters do you also consider yourself to be a cheerleader for those broadcasters as well?

Dr Bowe: Absolutely not.

Ed Richards: No.

Dr Bowe: We are not in any sense whatsoever trying to do the job, for example, of the board of ITV. ITV has a board, very ably led Archie Norman. It is the board’s job to take commercial decisions and to act as cheerleader or whatever.

Q44 Philip Davies: Do you think being a cheerleader for those organisations would impact on your ability to regulate?

Dr Bowe: Well, do you know what, it doesn’t even come up. It is absolutely no more-

Philip Davies: So nonsensical it does not even arise?

Dr Bowe: To go back to Ms Bray’s line of questioning a few minutes ago, it is no more our job to be a cheerleader for ITV than it is our job to be a cheerleader for BT or TalkTalk. We do not do cheerleading.

Q45 Paul Farrelly: I just wanted to come back to this distinction, because as a regulator you would not be involved in making any difference to what-the BBC sometimes makes it very difficult for its friends, and I am one of those friends. You would not get involved in what we have seen as continuing rampant cronyism at the BBC, in terms of the payoffs, the friends culture. If you are part of the clique you are favoured, if you are not you are subject to the usual management disciplines. That would not be your remit, would it?

Dr Bowe: I am not quite sure what the question is there, Mr Farrelly.

Paul Farrelly: Your remit as a regulator would not stray on to where boards are-

Dr Bowe: Do regulators get involved in things like management remuneration?

Paul Farrelly: Absolutely.

Dr Bowe: Well, the answer in our sector is no. Although, NB, in financial services the answer is starting to be "a bit", interestingly. I know that is not really your question.

Paul Farrelly: No. It is down to the trust-

Dr Bowe: You have to distinguish between regulation and governance.

Paul Farrelly: Governance and regulation.

Dr Bowe: What we do is regulation.

Ed Richards: Yes, we would have nothing to do with that.

Q46 Jim Sheridan: Can I ask a question about the securing of the prominence for public sector broadcasters and with electronic programming? I know that you have a Code of Conduct, but as I understand it, you do not have any real powers. I am just wondering if there is anything we can do to ensure that public sector broadcasters get the prominence they deserve. Particularly with, perhaps, people buying new televisions and they could have gone from channel 3 to 33 or something like that. Is there anything that we can be doing?

Ed Richards: I think it is fair to say this is one of the areas that we feel is less than crystal clear in the current legislation. What we would say is there is legislation around EPG prominence, it is associated with public service broadcasters, and we have to have a Code of Conduct. Now, there is disquiet in some quarters about how effective that prominence is. We are aware of that. We could embark upon a major process of redrafting the code, all of that would be subject to challenge in the way that I have been describing earlier. That is one route forward. I think we would embark upon that in the knowledge that there was ambiguity about exactly what we could and could not do. If the Government or Parliament takes the view that they do want prominence to be secured for public service broadcasters, then it is probably important to debate what that means and whether there are powers available to ensure that takes place. Because I do not think they are clear enough as it is. That is the reason that we put it on the list, in answer to Mr Farrelly’s question, about what we would ideally like to see addressed in the forthcoming White Paper.

Q47 Jim Sheridan: Would it be Ofcom’s position or view that public sector broadcasters should certainly be ahead of shopping channels and that kind of stuff?

Ed Richards: Ultimately that is a question for Parliament. Our view is that we will do what Parliament asks us to do. Fundamentally, it is a question about whether as a society we want to give a clear priority to certain specified public service broadcasters. If Parliament takes the view that it does want to do that, then it does seem to follow that there needs to be appropriate power to ensure that that is the case. At the moment I do not think we quite have that. But it is important to ask the prior question. For whom do we think there should be prominence? How clear do we want that prominence to be, and which services from those organisations qualify for that prominence? After that prior decision is made then the question must be: is there an effective power to deliver that. At the moment I would say we do not feel that that is the case.

Jim Sheridan: The question was, if Parliament were to ask you for a recommendation on the issue what would it be?

Ed Richards: Our recommendation would be that Parliament should clarify the power and make sure that-it does have to decide-we would want to see both parts of the questions answered. We would want to see Parliament be crystal clear about who the qualifying public service broadcasters were and which services. When they say those services should have prominence what they meant by "prominence", at least at a high level. Do you mean absolutely at the top of a given EPG page or what? Give us clear guidance, and then a clear power to enact or enable what Parliament asks. Our answer to the question would be that we do not have that at the moment, so we would like Parliament to make that crystal clear.

Dr Bowe: Can I just add one rider, which might be helpful? Because I can see what you want to know is what we really think about how to achieve this.

Jim Sheridan: It is perfectly clear that you are moving on, is it not?

Dr Bowe: Well, I think what we would be saying-

Q48 Jim Sheridan: Being honest.

Dr Bowe: If this debate was happening in Parliament we would be saying, "For whose benefit would you want to do this?" That is what you have to start with. Why does it matter? Why does prominence on the EPG matter? You have to then say for whose benefit. You have to go back to viewer. You have to go back to consumers and say, "What do people want? What do people find easy to do? What value do they place on things?" If I hint towards the kind of answer you would get from us, we know from all the research we do and all the work we do on things like extending the licences for the public service broadcasters that the people of this country place a high value on public service broadcasting. That would be a clue towards where we might be going. You have to ask the question, "For whose benefit would you be wanting to do this?", because one of the things that I always feel when people talk about EPG prominence is people drift into talking about it as if it is an issue for the public service broadcasters. Well, actually it is an issue for their viewers and their listeners, and that is where you start. What do people value in this country? All the evidence tells us that people in this country value PSB a lot.

Q49 Mr Leech: Are you saying that there are no rules or regulations at the moment that dictate that channel 101 on Sky is going to be BBC One?

Ed Richards: No, there is code and I think the phraseology is "due prominence." We have to establish what "due" means. We also have a duty to act proportionately. We have a series of questions in the current legislation and within the other aspects of our duties that we have to take into account. It is not, "They must be at number 1". It is due prominence or appropriate prominence, I forget which one it is now. But there is a rider. So we have to say, "What does that mean?" We then have to say, in making sure that is the case, generally speaking, we have to act proportionately. So what would be the consequences of imposing anything or requiring anything? There always are consequences. You cannot just change EPGs willy-nilly without there being-if you are putting someone higher up, someone else is moving down. There are consequences that need to be assessed. For us it becomes quite a difficult set of questions where we are weighing different arguments and different implications, much of which we would have to research carefully. In a sense that is what creates the ambiguity. I think the answer to your question directly is: "No, it is not as simple as there is a law or a code that requires service X to be at 101 or 102." We do not have that clarity. It is a much more subtle situation.

Q50 Mr Leech: So hypothetically if Sky TV wanted to move Sky 1 up to channel 101 and push BBC One down to 102-

Ed Richards: No, they could not do that. That would be contrary to the code, because the code requires fair and reasonable behaviour by EPG controllers, of which Sky is one. They are not able to manipulate it, again, willy-nilly for their own advantage. Equally, it is not as straightforward for somebody to turn up and say, "I’m a public service broadcaster and I have a new service" and therefore it must be at 101 or 105.

There are constraints on the owner of the EPG. Sky could not do what you are describing. Equally, there are questions that have been raised by certain public service broadcasters about their current position on certain EPGs. In a sense that returns us to the point we have been trying to make, which is: we can weigh these in the balance, but many of these decisions would be finely balanced and are indeed slightly ambiguous. If you want it to be more certain then Parliament would have to make it clearer and more certain for us than it is at present.

Dr Bowe: Yes.

Q51 Mr Leech: You were saying under no circumstances could you move BBC One from 101 to 102 and move Sky 1 up. So something tells you that, but it is not set in stone. Why is it that you come to that conclusion that you cannot move the BBC One from channel 101?

Ed Richards: Because that would not be fair and reasonable under the VG code.

Q52 Mr Leech: But if reasonable prominence is to be on the first page of the Electronic Programming Guide, surely it does not matter where on the front page of the Electronic Programming Guide you are.

Ed Richards: I do not think we have said what is or is not reasonable prominence in that situation. It is more a question of at will moving somebody from their current position against their will, and that is not reasonable behaviour. I do not think within that is a judgment about whether 101 is the definition of prominence. Bear in mind, it is never going to be as easy as that, because of course the BBC itself has many channels, so they cannot all be 101. ITV has many channels, only one of which is defined as a public service channel. Channel 4 has many channels, only one of which is technically defined as a public service. There are a lot of quite difficult questions in here, but we are not making the judgment that I think you were implying in that case.

Q53 Mr Leech: How important is it for the broadcasters to be on that first page of the Electronic Programming Guide?

Ed Richards: Opinions on this vary. In some ways it may be important in the negative. In other words, if you are not there it may be very important. But being there does not give you any particular advantage relative to the others that are there. What our research shows is that it probably does not matter hugely at the moment to, for example, BBC One or ITV 1. The reason for that is that they are so well established everybody knows who they are; everybody knows how to find them, and huge numbers watch them. It probably is not as important as it might appear. At the moment, this obviously could be changed through time. Where it appears to be much more important is further down the EPG where you have less well-known channels where there does seem to be quite a big impact as to whether they are on the first, second or third page of a particular genre. For example, in children’s, I think it probably is material as to whether you are on the first page or the second or third. The evidence of people moving around the EPG suggests that that is the case. It is much stronger for less well-known channels where people finding them, perhaps serendipitously or who are selecting just by the first screen, and they have not gone to the channel as their destination channel. It tends to be much more important for those. Back to the general point about what do audiences want and how important it is, where this really counts as we look to the future is for the digital public service channels that are not BBC One, ITV 1, Channel 4. It is the ones where they are trying to build a public service broadcasting service, but using a portfolio of channels that are in addition to the historic core channels.

Q54 Mr Leech: Do you not think though that if you moved BBC One or ITV 1 to channel 135, say, that it would have a massive impact on their audiences?

Ed Richards: Overnight I think it would have almost no impact. Through time it would be a very dangerous thing to do and I would expect ITV or the BBC to ferociously oppose it, and I think they would be right to ferociously oppose it. The honest answer to your question, I think in the very short term it probably would make no difference at all. Because people, they want to go and watch Coronation Street, they will find ITV. It would be a big issue in the long term and the medium term, but overnight I do not think it would make any difference.

Q55 Mr Leech: Just out of interest, do either of you have Sky TV?

Dr Bowe: Yes.

Q56 Mr Leech: Can either of you tell me what is on at various points? Can either of you tell me what is on channel 108?

Ed Richards: 108?

Dr Bowe: 108? No.

Mr Leech: I think 108-

Dr Bowe: Well, no. I could tell you what is on 107, but I cannot tell you what is on 108. Okay, I can tell you where Liverpool FC TV is, which is what my television is permanently on.

Mr Leech: I have no idea what is on channel 108 either.

Dr Bowe: Oh damn. We could have said anything.

Mr Leech: The point I was trying to make is that is on the front page of the Electronic Programme Guide, and none of the three of us who have Sky TV could say what was on channel 108. But I bet you could tell me what channel Sky Sports 1 was on.

Dr Bowe: Yes.

Ed Richards: Yes.

Mr Leech: Or Sky Movies.

Ed Richards: No.

Mr Leech: No?

Ed Richards: No, I could not tell you what Sky Movies is on, I could tell you what Sky Sports is on. But it depends on your personal preference.

Dr Bowe: Where are we going with this line of questioning Mr Leech.

Chair: I hope we are going to move on.

Dr Bowe: This could go on for quite a long time, could it not?

Mr Leech: The point that I was trying to make was that I think there is quite a serious issue about prominence on the Electronic Programming Guide.

Dr Bowe: Yes.

Ed Richards: Of course.

Q57 Mr Leech: From what you have said to us it sounds as though that it is not clear exactly what prominence public service broadcasting should get or what is considered to be prominence?

Dr Bowe: Yes. And how that is enforced is where you started.

Mr Leech: Therefore, it would be far better for it to be very prescriptive about what is considered to be prominence as well as having a framework for deciding which channels should get prominence.

Ed Richards: More prescriptive. It is quite difficult in a dynamic environment of changing technology to be absolutely prescriptive in legislation. But I think it would certainly help to be more prescriptive and clearer about Parliament’s intention. Without any question I think that is the case. Just to be absolutely clear, we do think this is a very important issue. Our view is that if you are going to have public service broadcasters, and we believe they are the right thing to do for wider reasons, which have been discussed many times, then it is very important to make sure they have the tools and the armoury to support them. Prominence in EPGs is a critical part of that. We do think it is extremely important. We would prefer Parliament to make its intention in this area clearer, more prescriptive but not seek to be absolutely prescriptive. One of the reasons that we think this matters more is because of course we are moving to a much more fragmented world of many different devices, or new EPGs and so on and on forth. Therefore, we need to keep pace with that and there is a danger that we do not. It is a very important issue, and prominence will matter very significantly. It matters today, and it will matter significantly in the future. I do not personally subscribe to this view that we now all know how to Google and search everything so your position on the front page of the EPG does not matter anymore. I think that is quite wrong. It does matter, and I think we would look to Parliament to offer more clarity about its intention in this area.

Q58 Paul Farrelly: New licences for Channel 3, 4 and 5 are due to be issued by the end of 2014. On 12 June this year you set out in a letter to Channel 4, very clearly-as well as congratulating them on things such as the Paralympics coverage-some of the concerns that you have about the way it is filling some of its public service broadcasting remits. Could I ask you then, how would any possible concerns about whether Channel 3 or Channel 5 was fulfilling their remit be addressed? And do you have any?

Ed Richards: Well, they would be addressed through the licensing process, which we have to consult on. Anybody with concerns in that area would articulate them to us. In a straight answer to the question is they would be addressed through the licensing process.

Dr Bowe: But we have a different relationship with Channel 4.

Paul Farrelly: No, I understand that.

Ed Richards: It is important to understand also the distinction between the two. In Channel 4’s case it is publically owned public service broadcaster, and therefore there is a-and we have an explicit role in relation to their remit. With ITV and Channel 5, it is very different. They are privately-owned companies-they have a licence, a set of obligations and it is many years since we moved away from micro-regulating their schedule. We do not do that any more. We expect them to adhere to the broadcasting code, and we expect them to deliver the licence obligations, the principal part of which are the quotas around original UK production, regional production and so on and so forth. In those areas, they have met and indeed exceeded their obligations, so we do not have significant concerns about whether ITV or 5 are meeting their obligations at the moment.

Q59 Paul Farrelly: There is a discussion going on around that old chestnut at the moment, which is ITV regional news, with different sets of proposals flying back and forth. I am just interested in the possible knock-on effects of one of the quid pro quos, which is to almost halve the content but reinstate the original production, going from seven to 14 areas.

Ed Richards: That is right.

Paul Farrelly: How does that square with the licensing process for the local television stations? In part, that initially was meant to address the contraction of the different regional bases of ITV.

Ed Richards: It is a very good question. I think it broadly does, but I absolutely see the tension that you are highlighting essentially with ITV, where we are. Again, this has been consulted on, but certainly we have talked to many MPs in affected areas and I think they are supportive of the proposed changes.

Mr Bradshaw: Hear, hear.

Ed Richards: I think we have a better focus and a better identity to the news than has been the case in the past, so it feels like a sensible way to go. Local TV is by and large, perhaps with the exception of London, much more local and you therefore will be receiving something different again. The ITV changes take it closer to that, but not to it, so there remains a distinction. Indeed, in some of the local TV areas, what we expect to see is many of those organisations also operated hyper-local services as part of the feeder to the local TV service. They are closer, and therefore I absolutely understand the point you are making, but I still think there is probably a distinction and a difference.

Paul Farrelly: I was just checking the list after Ben’s, "Hear, hear" and I see that Exeter is not on the local TV list, so there is no potential conflict there.

Ed Richards: Pleased to hear that.

Paul Farrelly: Let’s stray on to something else. How is plurality-

Q60 Chair: Just before you do, a very quick one: ITV’s licence renewal, where are we? Soon?

Ed Richards: Should be concluded by the autumn.

Chair: Concluded by the autumn?

Ed Richards: Yes, concluded in the autumn, so well under way, some good response to consultation. I don’t see any problems to conclude it before the end of the year.

Chair: Excellent, thank you. Sorry, Paul.

Q61 Paul Farrelly: Chairman, it was a big question. Just switching tack slightly, I just wanted to ask you how the award of the London local TV licence to the company that owns the Evening Standard benefited plurality?

Ed Richards: Plurality is one of the many things that we had to take into account. Neither of us were on the licensing committee that made the decision.

Dr Bowe: We keep aside from that process.

Ed Richards: Because you need to make a dedicated decision on a specific set of criteria among competing bidders, and as it happens, neither of us was on the committee that took the decision. However, the general point would be that that is one of the factors that I am sure we were looking at. I cannot remember the criteria precisely, but you have to look at all sorts of other things; principal or very important among that would be the financial sustainability of the service at all. I think everybody knows there is uncertainty about whether the local TV services will be economically viable and what we were trying to do is say, "Are they economically viable? What kind of services are they offering to do?" and we take those into account with the other criteria.

In the London case, clearly there would be issues of concern arising from plurality of the kind that you infer, but equally, there would be considerable advantages in relation to economic viability, and then you look at the services being proposed. The advantage the Standard had is obviously they have a base of journalism and news-gathering, which is something that they can exploit in the context of that provision. So we were not involved in the precise decision, but those are the kinds of things that we are all weighing.

Dr Bowe: Yes, the kind of things.

Q62 Angie Bray: As a followup, can I just ask, were there any other expressions of interest in running a-

Ed Richards: There were. I cannot remember-

Angie Bray: From similar kinds of set-ups, from other newspapers, or-

Dr Bowe: I think, Chairman, we will have to write to Miss Bray about that, because we do not have it in our heads.

Ed Richards: But there were competing bids.

Dr Bowe: There were other bids, but quite how many and from whom-

Angie Bray: I would be most interested, thank you.

Dr Bowe: But certainly we will let you know, yes.

Q63 Paul Farrelly: That just brings me to a much wider question of media plurality and maybe this is one for your valedictory session.

Dr Bowe: Sure, which I am so looking forward to.

Paul Farrelly: We are. I see Philip has gone.

Ed Richards: He is warming up for it already.

Paul Farrelly: Just in terms of plurality, what role do you think Ofcom should play in periodic reviews of media plurality and in terms potentially of being vested with the power to deploy a public interest test, rather than it being entirely vested in the Government?

Dr Bowe: I will kick off and then Ed, you will probably want to join in. You will probably recall that in the course of last year, 2012, we gave advice to the Government at their request on what might constitute sufficient plurality, basically. We had a whole list of questions from the then Secretary of State, of which the most important was, "What might constitute sufficient plurality?" and then the second most important of that was, "Who should do what about it?" if you thought there was insufficient plurality. We gave a whole list of answers to those questions, all of which are in the public domain. In the end, we did not quite put it like this, but this is what we were conveying: in the end, the question of, "Sufficient media plurality: is there enough?" is a question of such significance for a well-functioning democracy that Parliament has to play a role in this. You absolutely have to. As you know, we are always happy to say, "Here is a pile of technical advice. Here is a way you could do it. Here is how you could measure it. Here is how you could take convergent media issues on board. What is an online version of the newspaper? Which bit of the landscape is that in?" but in the end, it has to be something that only you can decide what is adequate, what is sufficient, because it is the absolute lifeblood of a well-functioning democracy.

I have to say, we would feel very uncomfortable indeed-and I am speaking now for my successors, but I am certain they would feel like this-with the idea that a non-elected body like us were the people who were pronouncing on this. We will do everything we can to support technically decisions that Parliament makes. By the way, you will notice I am talking here about Parliament, I am not talking about the Government, but you have to be the people who say, "This is what we think is adequate. This is what we think should trigger a query about adequacy and this is what we think should happen, this is how often we think it should happen and this is who we think should look into it." We can’t tell you the answers to this. I am sorry to get a bit aerated about this, but I feel really passionate about it.

Q64 Paul Farrelly: No, no, I understand, but to facilitate, would you welcome a duty of presenting the information, surveying the landscape, periodically reviewing it so that decisions might-

Dr Bowe: Speaking absolutely personally now, I think that would be a very sensible idea. It would not be easy for all the reasons we have talked about, because the way this sector is developing means that things that you once thought were a certain kind of institution morph into being a different kind of institution, so it becomes technically very difficult. But if you are saying would we welcome it, speaking personally, I think it would be a very sensible idea. But Ed, by all means disagree with that.

Ed Richards: No, I think our primary role should be-somebody needs to be able to provide some clarity, some facts and to be able to interpret and explain the data, if you like. That is where we felt entirely comfortable and we do feel entirely comfortable, but ultimately-and again, I can speak personally-I agree completely with Colette. I think the notion that we should be charged with deciding there is too much is not right and Parliament does have to do that. What we can do is lay out what has happened.

Paul Farrelly: Plurality and competition are intimately entwined.

Ed Richards: They are, and that is why one has to make sure you think about it analytically. If you think about what we have done over the past two or three years, there was a defining moment where in the News Corp proposed takeover of Sky, that is precisely what we did. We had a very tight timescale. We had to deliver it at the Secretary of State’s request just before New Year.

Dr Bowe: No, New Year’s Eve.

Ed Richards: New Year’s Eve.

Dr Bowe: Six weeks.

Ed Richards: What it did was say, "What is the evidence in relation to the media position of these respective companies and what would the implications be?" As you know, we did that very intensively and we concluded that there was a concern and we recommended that the Secretary of State should refer it to the Competition Commission. That was just before the phone hacking affair blew everything out of the water, but in a sense I thought we were doing exactly what we should do at that point. The Secretary of State could have rejected our advice; Parliament could have had a further debate on it, but we were able to pin down in an objective and independent way what we thought the implications were and to offer a view about whether there were concerns arising. That felt the right thing for us to be doing.

Q65 Mr Bradshaw: Will you be reviewing your ruling on the fit and proper persons test from last September in the light of the recent recording of Mr Murdoch?

Dr Bowe: As you know, Mr Bradshaw, we have a continuing duty to have regard to the fitness and properness of our licensees, and we will always take into account any relevant evidence. I am not prepared at this stage to say any more than that.

Q66 Mr Bradshaw: In your ruling of September, I think it struck a lot of us as fairly finely balanced, you said, "On the evidence currently available" you were ruling that way, but you went on to say, "Should further evidence become available, we might review that." Surely this constitutes significant new evidence that you are bound to consider?

Dr Bowe: I do not think I can say any more than I have already said about our continuing duty to keep fitness and properness under review. I do not think it would be right for me in this forum to talk in detail about the fitness and properness of any of our licensees.

Q67 Mr Bradshaw: But what would trigger you to do a review? Would we have to ask you? Can I ask you to do it now formally?

Dr Bowe: No.

Mr Bradshaw: So what would make you do it?

Dr Bowe: What would trigger a review by us would be if we came to the view that there were serious issues to be addressed.

Q68 Mr Bradshaw: Are you considering that? Have you discussed it?

Dr Bowe: I do not think I can go any further than I have already gone, Mr Bradshaw. I am very sorry not to be able to be more helpful.

Q69 Mr Bradshaw: Are you normally this reticent?

Dr Bowe: Sorry, I can’t quite hear.

Mr Bradshaw: Are you normally this reticent?

Dr Bowe: Yes.

Mr Bradshaw: Why?

Dr Bowe: Because I am the Chairman of a regulatory body.

Q70 Chair: Can I move on to radio? Radio always gets put right at the end, and it is a great pity, because it is very important. But the radio sector is still subject to very detailed, intrusive regulation. It is facing increasing competition and the whole world is changing with the advent of Spotify and iRadio, which we are told may arrive here shortly. Do you not think that we need to relax the regulatory regime for radio so that you are no longer trying to dictate the type of music that is played on every hour of the day?

Ed Richards: It is important to say that the regulation has been relaxed consistently over many years now. Most of the commercial companies have taken advantage of the relaxation, for example, on the detail of how we regulate localness and things of that nature. Our emerging view is that we probably can look in future towards being more relaxed about what we call format regulation, dictating what the balance is. I think it is understandable historically why we have had that-to ensure diversity-but in the plethora of distribution mechanisms and therefore this extraordinary range of choice on offer, it is fairly easy to see how one might move to a position of relaxing in that area. I think we have already relaxed in that area.

I am not absolutely sure myself whether the same would be true of localness. When this issue came up in the last legislative period, I remember very well that there was a strong push for relaxing localness by the commercial radio companies and the people who most objected to that and felt very strongly about it were you and your colleagues. MPs felt very strongly that if commercial radio were to do anything in return for their licences-bear in mind they received the licences in beauty parades, and therefore for free-that they needed to do something in return for the licence and that local news and information is where people felt very strongly. I think that would be consistent with what audiences tell us and certainly a view we would share. The facts are there has been some relaxation, considerable relaxation. We can see a very credible argument for further relaxation in terms of format and music choice and things of that nature, but I think a big question is about whether it would be right to go any further on relaxing localness obligations, and certainly we would not want to do that without, essentially, the say-so of Parliament.

Q71 Chair: But is this an area, because things are moving very fast, where you think Parliament may need to revisit the rules?

Ed Richards: Quite possibly in relation to the format controls, and we would probably have to double-check the detail of the legislation in relation to what we do in that area. In localness, it is always worth looking at it to make sure we have the right mix, but as I say, my instinct is that if Parliament looked at it, I would be very surprised if the vast majority of parliamentarians didn’t say, "We want something from the commercial companies in return for the free licences and that should, at the very least, be local news and information." I think that is important.

Dr Bowe: Yes. It is important for listeners-that is what we hear-but taking the essence of your question, our direction of travel is to facilitate in this area. Radio is a very important medium for most of our fellow citizens and you would not want it to become dominated by a single supplier.

Q72 Chair: Just on that, there was concern expressed about the requirement on Global to divest its part of the GMG portfolio it acquired, and a lot of people felt that the examination of the competition was far too narrow and it did not take account of the fact that radio is just one of a whole number of different places where advertising is competing. Do you think the competition regime needs to be looked at in a wider context than just a very narrow local radio sector?

Ed Richards: It is difficult for us to say that, Chairman, to be honest, because it was referred to the Competition Commission. The Competition Commission did a very detailed study of the markets and how you should define the markets and obviously we are very aware of the notion that there is an argument for a broader market, but we would be very wary of second-guessing another regulatory body who have done that detailed study.

Q73 Angie Bray: As someone who writes for local radio and has done so for many years, I do think it has moved a very long way from where it started. I recall a time where even the sort of IRN news would carry news reports of every single local radio station around the country, which made up the national coverage, but it was all produced in local radio stations with their local news bulletins. I do feel that we are losing that local newsmaking across the country, and it is something that we should all be very concerned about.

Dr Bowe: Yes.

Ed Richards: Just to return to the point, we definitely agree with that. Certainly, both personally and organisationally, we feel that is the crucial part of what commercial radio in a more deregulated world should still do, and I think the point that I always try to make to the commercial companies-which if you have them in, I certainly suggest you put to them-is that if you take away format controls, which I think we have some sympathy with, if you then jettisoned localness requirements, at that point, what is it they are doing for their licence? To my mind, at that point, there is no argument whatsoever for not saying, "We will auction the licences. You have to pay for them" because we are not getting anything in return at that point from a public interest perspective. I think that is the real question for them when they say, "We want complete deregulation." I do not think that is in the audience’s interests and I would ask them to think twice about whether that is what they really want, because our position would be, "If that is where you end up, then we should be auctioning the licences, not doing a beauty parade."

Q74 Mr Leech: The 4G spectrum auction didn’t raise as much money as expected and some of the operators that wanted to access it were not successful. In what way can the auction be described to have been a success?

Dr Bowe: Could we just discriminate that there are two questions there? One is the proceeds of the auction, and the second is people not getting access to it. Taking the first, I think you said it did not raise as much proceeds as expected. We were very careful never to produce an estimate of how much this process-

Mr Leech: But the Treasury were forecasting £3.5 billion in-

Dr Bowe: If you want to know where that number came from, you had better ask the Chancellor.

Paul Farrelly: Or the Chief Secretary.

Dr Bowe: Or the Chief Secretary, even better.

Q75 Mr Leech: So was that figure just plucked from the air then?

Dr Bowe: I have no idea where that number came from. I take no responsibility for it and at no stage did we ever say, "This auction is going to raise-" we never even said, "Somewhere in the region of between X and Y" and very important to know, and I will hand over to Ed in a moment, that we were not conducting the auction on the basis of a process that would maximise the take from it. That was very important. But as for the divergence between the actual proceeds and what people might have thought, I am afraid you have to ask somebody else about that, but I am sure the Chief Secretary could be very helpful on it.

Ed Richards: Yes, that is absolutely right, and because we felt auctions are inherently uncertain and we did not know who would come in for it, we never predicted a number. In relation just to the numbers raised and so on, we did feel very comfortable with where it ended up. I think the one guide for that is that we set a reserve price, and I think we would probably have been a little bit nervous in answering that question if it had only gone for the reserve price or we had not sold the spectrum, but we received revenues of comfortably in excess of the reserve price, I think more or less double, so that seems to me to be the right place. That may sound easy, but what you may not know is that in Australia, they set the reserve price too high and they have not sold one-third of the 700 MHz, which is the most valuable spectrum available. Nobody is now using that spectrum, so it is not as easy as it sounds to get these things right. So we were perfectly comfortable with where we ended up.

Q76 Mr Leech: So how do you measure success then?

Ed Richards: I am just going to come on to that. So the way we measure success-and bear in mind, as Collette said, we are expressly not tasked with raising revenue-is whether we are meeting our objective to optimise the efficient use of the spectrum and simultaneously to make sure that we are promoting competition. So the three things that we had in mind were to make sure the spectrum was all released and put into production use, which has been a complete success, and secondly, to make sure that the recipients or the winners constitute in the round a competitive market, so not one winner or a couple of winners, but multiple winners; complete success on that front. We wanted to ensure there were four winners. There were five, because BT ended up winning some spectrum as well and they will produce and offer services that will add to competition, so that exceeded our expectations.

The third objective we had was to make sure that the new 4G services were widely available, and that is where we put in a licence obligation, requiring one of the operators to provide services covering 98% of the population indoors, which will mean about 99% outdoors, way in excess of the 3G service, which in some areas is still very poor, so a service that will be almost universal. We successfully sold that licence. So our criteria for success was ensuring wide availability of service, which I think we are well underway for, and we have sold the licence; making sure there is a competitive market, where we exceeded expectations; and making sure the spectrum was efficiently allocated to companies who would bring it into productive use and offer services to consumers, and we have succeeded on that front.

Q77 Mr Leech: If you had been instructed to maximise the revenue that you could generate from the sale, what would you have done differently and what would have been the impact in terms of the numbers of operators that ended up getting some of the spectrum?

Dr Bowe: That is quite a complicated question, Mr Leech, because of course you would design the auction differently.

Mr Leech: So what would have been different about it?

Ed Richards: If you really wanted to do that, you would create artificial shortages for people who you know were desperate to get hold of the spectrum. That would restrict supply for the companies where we knew there was huge demand, and that would drive up the price. The consequence of that is that some of those companies would not get spectrum and would not be able to offer new 4G services and that would have a consequence both for the efficient use of the spectrum and certainly for competition over time. So we do know how you could do that, but we also know that there would be detrimental consequences for the efficient use of the spectrum and for competition if we did that.

Q78 Mr Leech: Finally, in terms of being told not to maximise revenue, was that in the long-term interests of customers and providers?

Dr Bowe: It was in the long-term interests of consumers and of promoting competition in the marketplace.

Ed Richards: Yes, I think that is right.

Dr Bowe: Those are our two statutory duties.

Ed Richards: We feel comfortable that is the right policy. We know that others may wish to make an argument that you should be maximising revenues, but from an economic perspective and the efficient use of the spectrum, I think that is the wrong objective.

Q79 Paul Farrelly: Just a very quick question on 4G interference. What is the latest estimate?

Ed Richards: The latest estimates are very promising. The levels of interference so far have been considerably lower than we were worried about. There are problems where people have amplifiers or boosters. That seems to be the most problematic area, but in other areas where we were concerned, the problems appear to be less. We are pleased about that. It has been put to me that Ofcom was far too cautious on its estimates about the risk of interference, and I understand that and we will be checking to see that we are not being too cautious in this area, but I would observe also that when we made our estimates and assessments about the risks of interference, we had on the one side the mobile operators telling us we were being too cautious; we had every single broadcaster-as you will probably remember-coming to you and Arqiva, the transmission operator, telling us that we were being unduly optimistic about the level of interference and that they could be far worse and many millions of households could lose their service. So we live and learn. We have discovered that this time we were cautious, but I would rather it that way round than the other way round and we will of course refine our modelling assessments.

Q80 Paul Farrelly: Can I mention one thing that may or may not resonate? One weekend I came back from my constituency to North London to cries from my family that the television was not working, the signal was going all over the place. I looked around at everything and I found that my son had connected this so-called filter that had come through the post to the television. It had an at800 logo on it, but seemed to be directing the signal to a particular channel, so I took it out and the signal was restored perfectly. Is there a problem with rogue filters?

Dr Bowe: Can we take that away?

Paul Farrelly: Maybe I will look it out and send it to you.

Dr Bowe: We will get our rogue filter detection squad on to it.

Paul Farrelly: Because all the other things had been filtered out. I do not know whether this is something that you-

Dr Bowe: We have not had a report of that, but we will take it up with at800.

Paul Farrelly: Okay. I will be in touch.

Dr Bowe: Yes, do.

Chair: It is 1.01pm, so I think we should draw to a halt. Can I thank both of you for coming and can I thank particularly Colette for the support and help you have given us during your time? We may well wish to take up your kind offer of a valedictory session.

Dr Bowe: Chairman, it has been a pleasure, and thank you. We hope we have been helpful in our comments to you today.

Prepared 15th July 2013