Examination of Witness (Questions 460
MONDAY 17 JUNE 2002
460. Do any of the Bill team have a view on
that, or anything they would like to comment on here?
(Mr Green) The only point I would make is to confirm
what Professor Cave has said. There is a system of dealing with
spectrum and who operates it whereby the Ministry actually pay
for the spectrum that they use on a comparable basis to the private
sector. We envisage that relationship continuing under OFCOM.
It has been very constructive, and we have had excellent discussions
with our colleagues in the Ministry of Defence. The spectrum strategy
describes the various bits of spectrum that then in fact will
be available for the military users, and clause 119 will allow
that to continue into the future.
Chairman: You see that under a Labour Government
things can turn out differently!
461. I am still groping a little bit here. I
am looking again at some of your report and linking it to what
you are saying. I understand that there is a charging system that
encourages efficient use and so on. Having taken a quick look
at clause 119, I think I understand that. What I am not clear
about is when you come on to the auction process. Do you believe
that public bodies such as the Ministry of Defence should themselves
be able to trade spectrum, or should they return the unused spectrum
to OFCOM for assignment by that body, or, as I thought you were
suggesting in a previous answer, perhaps that they should get
the benefit back directly as they would from a land sale, so that
there is a real incentive? I think I understand the sort of charging
incentive. What I am not at all clear about is where we have got
to on the auction for the public sector. Is it covered at all?
Should it be covered more? Can you help to clarify my confused
mind on the subject?
(Professor Cave) My own view of the matter is that
if it transpires that the Ministry of Defence has control of spectrum
which it neither uses nor needs, then ministers should make a
strategic decision which removes it from the powers of the Ministry
of Defence and hands it back to OFCOM for use either for another
public service or alternatively for some kind of commercial purpose,
when the mechanisms for getting spectrum into the commercial domain,
which begin with auctions and then lead up to secondary trading,
can come into effect. So that would be my starting point, the
hypothesis being that the Ministry of Defence is not a body to
whom one would in the normal course of events entrust the marketing
of spectrum, or jogging of spectrum or things of that kind. I
come from a business school where we talk about core functions.
As far as the Ministry of Defence is concerned, that clearly is
not a core function and is, I suspect, a function which they may
not actually wish to undertake. If on the other hand the Ministry
of Defence has some spectrum at its disposal which it would be
in a position to lease on an interruptable basis or on the premise
that it would have to pull it back into military use in a few
years' time, then in my opinion that is a task that should preferably
be undertaken by the Ministry of Defence where it is eligible.
Lord Pilkington of Oxenford
462. So you hand it back to OFCOM and OFCOM
auctions it, is that right?
(Professor Cave) This is another area for strategic
direction by the Secretary of State, because in my view the Secretary
of State should take a view as to what it should be used for.
The Secretary of State may take a view that it should be used
for a public service, in which case it will be allocated to that
public service, hypothetically for another public service broadcasting
channel, something of that kind. If, on the other hand, the Secretary
of State takes the view that it is not needed for a public service,
then in my view it should go back to OFCOM and enter the commercial
domain of spectrum for use for commercial purposes.
463. Then it does not seem that actually under
the second plan it would go back to the Ministry of Defence in
terms of their having a bonus on their public spend?
(Professor Cave) I was speaking of a bonus on public
spending as any savings associated with the military price for
spectrum. If, for example, the Treasury estimated that the spectrum
charge for the Ministry of Defence should be £120 million,
and by dint, for example, of having returned spectrum for use
for other purposes, that fell to £100 million, then in my
view that £20 million, the saving, should be available to
the Ministry of Defence for spending as it thinks appropriate.
464. Fine. By clarity of information you talk
about the Ministry of Defence having to produce as much information
as it can without breaching security and so on, and by the other
mechanisms it has released or it has handed over to OFCOM some
perhaps for public sector use, some perhaps for entering into
the private sector auction process. As the Bill is drafted at
the momentand again I come back to the Billis that
possible? Are the clauses adequate to make that possible?
(Professor Cave) In my viewand I am no expert
465. Yes, but subject to that view, are you
satisfied that what you want can happen under the Bill?
(Professor Cave) Yes, I am satisfied. I believe it
Lord Crickhowell: Thank you.
466. Professor Cave, I am going to put a question
regarding broadcasters and spectrum pricing. You will not be surprised
to hearI do not know whether you were here earlier onthat
the broadcasters did not mince their words earlier on, in that
as far as spectrum pricing was concerned they said that you live
in a theoretical world and they inhabit the real world. In particular,
they said that they did not need spectrum pricing as an incentive
to go towards digital switchover. Indeed, they said that spectrum
pricing, because of the investment side-effects, might be a barrier
or a hindrance ro achieving that. So my first question would be
why do you not accept those sorts of arguments from the broadcasters?
Secondly, if we were to apply spectrum pricing across the board
in the real world, would you at this point in time, here and now,
not agree that this does not actually recognise the different
ways broadcasters are funded, the different financial strengths
at any particular time of a broadcaster, and therefore such application
might in itself not only be harmful to investment but to programme
making or, indeed, public service broadcasting in general?
(Professor Cave) You are right in observing that the
BBC and Channel 4 and I have virtually fought ourselves to a standstill
over this issue and I am glad it has been taken over by some other
people! But broadly my view on this matter is consistent with
an observation made by Lord Crickhowell at the beginningthat
spectrum is a long game. One has to think in terms both of legislation
and also of spectrum management in terms of 10 or 15 years or
more rather than what is going to happen next week, so what I
had attempted to do in relation to all uses of spectrum, including
spectrum use in public service broadcasting, was to set forth
a practicable, I hasten to say, rather than theoretical procedure,
which in my view would have beneficial results from the economy.
Essentially, it springs from the fact that broadcasting spectrum
can be used for other purposes and, therefore, we need to have
a mechanism for balancing its value in broadcasting and its value
in other purposesfor example, with mobile communication
or any other use that might come to light in due course. What
I recommended, therefore, in relation to public service broadcasters
was that, under the analogue regime, they would have an opportunity
to lease spectrum but what concerned me was that if they only
had, as it were, that carrot rather than any kind of spectrum
pricing, they might lack appropriate incentives to invest in the
analogue switch-off. I am not saying they would have no incentives
but they would not have incentives which were, as it were, calibrated
on the value of the spectrum to combine with other uses, so that
is why I propose that there should be built into their arrangements
some kind of incentive which reflected the value of the analogue
spectrum, and we can encourage them to speed up the process of
the analogue switch-off. It is quite right that the government
determines the date but equally it is quite clear that the government
is operating on the footing that lots of stakeholders contribute
to creating the conditions in which the gun can be fired by set
manufacturers and broadcasters, so everybody needs to have some
kind of incentive in this process. That is why I think it is essential
that there should be some expectation on the part of public service
broadcasters that there will be a charge for analogue spectrum.
If they think that if the analogue switch-off does not take place
they will continue to get the spectrum free then I think it will
limit their incentives to a quite substantial and damaging extent.
Now, that does not mean that the incentives cannot be flexed in
various ways because the crux is that there is a belief that analogue
spectrum charging is coming in, so it could be delayed in time;
it could be introduced gradually; there couldI think this
is an important pointbe some kind of compensation for analogue
spectrum charge because, as I said earlier, what the government
is interested in is the public service broadcasting output, and
it does not make sense for it to accept a very large billing post
upon public service broadcasters if it thinks that the current
set of output for public service broadcasters is about right because
clearly an additional large charge is going to diminish what can
be done. So that, in essence, is why I argued with this long term
view in mind that it is important that all broadcasters should
have some kind of incentive. Your question was about the investment
incentives. If you had spectrum charging without compensation,
and that is an outcome which I would rather regret, then the spectrum
charge is going to have two effects. They focused upon one effect
only, which is they have less money to spend so they will be able
to invest less in the digital developments, but there is also
going to be another effect which is that they will have an incentive
to speed up the process because they will be paying for something
which they previously got free so they will want to direct resources
into digital developments in order to speed the date at which
it takes place. Just as, for example, when the price of energy
rises people invest more in energy saving technology, when the
price of spectrum rises people invest more in spectrum saving
technologies. In my view, with appropriate compensation we could
be reasonably confident that the net effect would mean you would
enhance investments in digital, but it is very difficult to say
entirely on an a priori basis which way these two would go in
the absence of that kind of compensation.
467. I am very surprised that the public service
broadcasters did not use that magic word "compensation"
that you have sensibly used, but on the latter point you made,
one of the arguments that was put to us earlier was we do not
need any more incentives than we already have because we are simulcasting
at the moment at twice the cost, and what we need is a date from
(Professor Cave) But my proposition is they are not
actually paying the costs of the simulcasting. They are paying
the cost of the transmission but they are not paying the costs
to the economy in the meantime of occupying spectrum which could
be used for a different purpose which would greatly enhance the
benefit of the economy or of consumers in the economy.
Lord Pilkington of Oxenford
468. Could I ask a question which the Chairman
does not like but there obviously is quite a tough warfare going
on, as we realised earlier when we took evidence, but would the
answer not be to have one body doing the public service broadcasting
and the independent, ie OFCOM, to deal with these sensitive issues?
Because at the moment one side is saying one thing and another
is saying another. As you said, there are all sorts of complex
issues. We are setting up a combined communications body. Why
should we not swallow the toad, clause and all, and say they are
in charge of the whole thing? What do you feel about that, dealing
with these very difficult issues?
(Professor Cave) I think it is an appropriate duty
for OFCOM to ensure that spectrum is used efficiently across the
board, not only in telecommunications and broadcasting but everywhere.
469. You are agreeing with me?
(Professor Cave) I am very pleased that that element
is in the duties, although I find the wording rather bland. As
for whether the process should go further, as I think you are
inviting me to agree, and OFCOM should take over the whole regulatory
process for the BBC, if that were your question, I think I should
try and duck it.
Lord Pilkington of Oxenford: Everyone does,
I am afraid.
470. Clause 3 of the Bill gives OFCOM's duty
as, "to encourage, in the interests of all persons, the optimal
use for wireless telegraphy of the electro-magnetic spectrum".
Does that short, sharp objective meet the aims of your review
for precisely the same objective?
(Professor Cave) I am pleased that it says "of
all persons" because clearly, in respect of spectrum, OFCOM
has a duty which goes way beyond the communication sector, including
emergency services, aeronautical radar, and a whole range of extremely
important and very spectrum-intensive activities which, in fact,
receive rather little attention. I am a little bit concerned about
the interpretation of the word "optimal". There is a
test for mission statements and duties which is that you reverse
it and say could anybody conceivably adhere to the reverse proposition,
which is here that OFCOM should behave in a way which produced
the worst outcome for all users. I think that demonstrates to
me that perhaps this particular form of words does not have much
bite, and the form of words which I have used in my report tries
to incorporate the fact that when we are dealing with spectrum,
we are dealing just with an input into the production process.
It is one that has certain mystical values and associations but
basically it is nothing more exciting than electricity and, in
relation to spectrum as in relation to electricity, I think we
should be thinking of the question, "What is the best way
to use the spectrum that we have at our disposal in order to meet
private sector needs such as mobile phones and also public sector
needs such as defence and public service broadcasting", and
I think the use of the word "efficient" captures that
sense rather better than the current wording.
471. May I ask the Bill team whether you had
that debate yourselves in arriving at the formulation you have?
(Mr Green) The use of the word "optimal"
we took initially from wording in the European directives that
seemed to chime in with the way the European legislation was going.
Clearly we would be very interested to hear the views of the Committee
on how that duty should be formulated precisely, and also we are
also aware of the wording Professor Cave has put forward in his
472. Let's say we have this magic world where
spectrum is traded all over the place. Should OFCOM be using its
licence conditions to control that? Or its competition powers?
How should OFCOM be reacting in this magic world that you foresee
of the future?
(Professor Cave) OFCOM is interested in users of services
which employ spectrum, whether they be firms or households, so
OFCOM, in my view, should be concerned with whether there is a
feature of the market for spectrum which is producing bad effects
for consumers of spectrum. If somebody were, for example, to corner
the market in a particular type of spectrum and use that as a
means of raising prices of the services for the producers or the
final users, then that is clearly an adverse effect, but in my
view it is an adverse effect which could quite adequately be taken
care of by the Competition Act which contains quite strong powers
for the fining of people who are found to have abused their position.
473. The regulatory impact statement identifies
five different downsides. Do you think the Bill is right to identify
those, and is it the right wording in the way the Bill deals with
(Professor Cave) I acknowledge that the government
is proposing with this Bill to move into territory which has been
explored before by some countries but not by many and there is,
therefore, an element of concern about what the effects could
be. At the same time I think it is quite clear that OFCOM is likely
to use its powers in, for example, the creation of spectrum products
that can be traded initially in an experimental way so that glitches
can be ironed out. The notion of creating property rights in spectrum
and defining them in a way which solves problems of interference
and creates opportunities for users of spectrum to use that spectrum
for a variety of different purposes is quite a novel one: it is
not an area where the UK would be the world leader, but perhaps
it would be the world leader in such a congested area of spectrum
as we have in north western Europe. So I think it is appropriate
that those dangers should be recognised and that care should be
taken to ensure that excessive risks are not assumed.
Lord Hussey of North Bradley
474. It is not clear to me, probably because
I am very stupid, who you think should be doing this and why you
think it would be better than OFCOM, who are going to be hugely
involved in this anyway?
(Professor Cave) Forgive me, my understanding was
that it would be OFCOM which would be supervising the process
of spectrum trading and formulating the rights associated with
the licences which would then be subject to trading, or creating
new forms of property rights such as recognised spectrum access
or spectrum access licences or things of that kind. So OFCOM would
be absolutely the centre of this process.
475. Including the prices?
(Professor Cave) Yes.
476. They would be the estate agent?
(Professor Cave) That is an interesting question.
In the case of primary sales, when they auctioned it, they would
be the equivalent of beneficial owner. In the case of secondary
trades I do not think they would be the estate agent. They would,
in effect, be the Land Registry but I am always rather wary of
477. Do the Bill team have a view?
(Mr Susman) Yes. It is the Land Registry; not an estate
Chairman: Thank you very much, Professor Cave.