Joint Committee on The Draft Communications Bill Minutes of Evidence

Examination of Witness (Questions 460 - 477)




  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!

Lord Crickhowell

  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.

Lord Crickhowell

  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 moment—and again I come back to the Bill—is that possible? Are the clauses adequate to make that possible?
  (Professor Cave) In my view—and I am no expert on drafting—

  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 is available.

  Lord Crickhowell: Thank you.

Paul Farrelly

  466. Professor Cave, I am going to put a question regarding broadcasters and spectrum pricing. You will not be surprised to hear—I do not know whether you were here earlier on—that 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 beginning—that 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 purposes—for 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 could—I think this is an important point—be 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 the government.
  (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 report.

Brian White

  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 it?
  (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 these analogies.

  477. Do the Bill team have a view?
  (Mr Susman) Yes. It is the Land Registry; not an estate agent.

  Chairman: Thank you very much, Professor Cave.

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