Examination of Witnesses (Questions 107-119)
Rt Hon Margaret Hodge MBE and Mr Nigel Hickson
26 FEBRUARY 2007
Q107 Chairman:
Mrs Hodge, thank you very much indeed for coming. We are almost
half way through evidence taking in this particular inquiry. We
are going to Brussels tonight and tomorrow morning we are going
to be taking evidence from Commissioner Reding and others. We
are hoping to produce our report for publication on 27 March,
just before the Easter recess in an attempt to be constructive
and helpful, obviously to ministers here but also the Commission
and the Parliament. We understand that you have up to an hour.
We shall see how we get on. I am going to ask Lord Dykes, if I
may, to put the first question, but before I ask Lord Dykes to
do so, is there anything that you would like to help us with to
begin with?
Margaret Hodge: I usually do not make a statement
at the beginning. I can if you like, but it is probably a better
use of the time if you ask me questions. I am delighted that you
are undertaking this particular inquiry; it is a really important
issue. It matters a lot to individuals who travel, to people who
travel on behalf of their businesses and it is a very timely inquiry
in that I know the German Presidency are anxious to try to get
a conclusion to the negotiations during this Presidency which
means that I am over to Hanover, before you report actually, for
an informal meeting of ministers in the middle of March sometime.
We would hope by the June Council to try to come to a resolution,
but given that it is a decision that is taken both by the Parliament
and us and the Council and the Commission, and we are not all
entirely in the same place, it will take a lot of goodwill on
behalf of everybody to find compromises.
Q108 Lord Dykes: On the assumption that
the calculations the Commission have made in making their suggestions
are correct, on that assumption and on other assumptions connected
with that, do you think there is a strong case for legislation
in this area?
Margaret Hodge: If I may divide that question
up, there is a strong case for legislation in this area. It is
quite interesting, if you look at domestic tariffs, that there
is enormous competition in the market and that has been to the
benefit of consumers and has led to a lot of innovation; those
are the benefits we see out of competition. If you look at roaming
charges, there has been very little movement. I am sure you will
have looked through the history of this issue and the Commission's
attempts to persuade the industry to reduce what are seen as excessive
charges and when I looked back on it, it went back to when Mario
Monti was Commissioner for Competition in 2001 and he first made
a speech arising out of a study that had been made on roaming
charges where he said they were too high. We then had a series
of summer pronouncements just before the summer holidays by commissioners
urging the industry to reduce rates and they failed to do so.
It was only once Commissioner Reding put forward her proposition
from the Commission that rates started to come down. So the market
has not worked; there is a market failure and there is a purpose
for intervention. Our concern is that that intervention should
be appropriate and should not have unintended consequences. We
are particularly anxious that if there is regulation around roaming
charges, it should not inhibit innovation or inhibit competition
and our view is that the tariff set by the Commissioner in her
original proposition was too low, it would not have covered the
costs, it would have then had unintended consequences probably
on other charges by the companies and it was a bit of a stunted
instrument which in our view would have inhibited both innovation
and competition. So we should regulate but we have to look at
how we regulate so that we get the best out of regulation and
do not get a bad outcome out of regulation.
Q109 Lord St John of Bletso: Ofcom commissioned
some research at the end of 2005 which showed that 37 per cent
of mobile users in the UK use their mobiles whilst abroad and
of those, almost 44 per cent were unaware of the cost of using
their mobiles whilst abroad. My question really goes down to transparency
because we have heard a lot about the various charges, but how
realistic is it that the wholesale operators are going to be more
transparent with all these proposals going forward?
Margaret Hodge: There will be complete transparency
on prices. We are now probably in agreement. Nigel Hickson leads
for us in the negotiations at official level in the working party
and it is fair to say that there is now agreement on having a
uniform wholesale price which would be the same for both receiving
calls and outgoing calls. That has been agreed by the Commission
and so far not challenged by Parliament. Is that right?
Mr Hickson: Just to clarify, yes, there is a
transparency article in the regulation and transparency in terms
of push to the consumer, informing them of the charges that they
will have to pay when they enter another Member State, or they
can request a pull. They can have a freephone number or they can
go to a website. As the minister said, transparency is very important
both in terms of the cost for receiving and the cost for making
the call when one roams.
Margaret Hodge: The distinction I was trying
to make was that the wholesale price will be set and known and
then we would come to the charges to consumers; we will have the
system that Nigel Hickson has outlined. There is still a conversation
to be had, an agreement to be reached, as to quite how that will
work; whether you will automatically, as I now do on my phone
if I go abroad, be told the charge rates by the operator. Will
that happen automatically? That is the push system. Or will I
be able to say that I do not want these spam calls coming at me
unwanted and therefore I choose to have a pull system whereby
either I receive a text message or I can ring somebody and ask
what the charges are. If I may just say one other thing on transparency
which I as a consumer feel would be important, it is that when
you roam you find yourself with a particular operator so you are
more frequently nowadays given that operators' charges, but having
the information on whether there is another operator who might
have a different charge regime is still difficult to access. I
hope that in the discussions we have—that will have to be
through the so-called pull system—we shall make it easy
for consumers to make their own personal judgment as to which
charge regime and therefore which operator they wish to use when
they roam.
Q110 Chairman: May I just ask a question
on the wholesale charge and how it is calculated? Is this to be
an average across all countries and across all operators? Does
it give a specific operator the ability in making the charges
to have different tariffs which, when averaged out over the course
of six months or 12 months, come to a specific figure?
Margaret Hodge: I am going to ask Nigel to answer
that because it is pretty technical.
Mr Hickson: The answer to that is basically
yes. The current thinking within the Council and indeed within
some parts of the European Parliament is that you would have a
single average wholesale target that had to be met by each operator
for all their dealings with another operator. So it is an inter-operator
target that has to be met that would be averaged out throughout
the year, so it would take into account busy and slow periods
and also, within that 24-hour period as well, then sometimes charges
will go up and down because of the markets.
Q111 Baroness Eccles of Moulton: I want
to talk about targets or caps, because if you have to stay within
a cap, you can obviously have lower charges, but if you have a
target, then you are expected to meet it.
Margaret Hodge: It is an average cap, so that
means some charges may be slightly higher, some will be lower,
as long as overall you are within the average or below the average.
Q112 Baroness Eccles of Moulton: So long
as you are below the average.
Margaret Hodge: Yes, but individual charges
could still be higher.
Q113 Baroness Eccles of Moulton: You
must end up within the average but if you end up lower than the
average that is okay. Obviously you do not have to hit it.
Margaret Hodge: Yes. Indeed our view is that
having an average, both wholesale and retail, cap is absolutely
crucial to ensuring that competition and therefore differences
in prices emerge because if you had had only what Viviane Reding
was originally proposing, which was a ceiling on price, that maximum
would become a minimum. In that way, you will probably inhibit
competition and then innovation.
Q114 Lord Haskel: We have heard from
Vodafone that they are questioning the whole legal basis of this.
If I may just quote from a letter which we received from them,
they say it is ". . . a core principle of European law that
if a firm enjoys a dominant market position and the ability to
price independently of its competitors or customers then this
freedom will be constrained—but only in these circumstances"
and they claim that those circumstances do not arise and so there
is no legal basis. We wondered whether you had any view on that.
Margaret Hodge: My view is that there are quite
a lot of legal opinions floating around at the moment across Europe
and in the Commission on this issue. The Commission believes that
Article 95 gives them the basis on which they can put forward
this regulation. No doubt they have been well advised and we just
have to leave it at this point to the lawyers and work on the
assumption that there is a legal basis. I have to say that I have
had discussions with Vodafone and we are attempting in our negotiations
in Europe to ensure that we protect consumer interest but we equally
do protect the operators as well. We do not want to end up in
a situation where it just becomes uneconomic; where the rates
are so low that it becomes uneconomic for them to provide the
service. To some extent they had this coming to them, because
if they had listened rather more carefully to what the Commission
had been saying from 2001 onwards, we might have been in a happier
position over the need to regulate. I am expanding on your question
a little bit, but it is worth it. When we originally saw the Commissioner's
proposition, we put down a set of alternative principles which
we worked up with my counterparts in France. One of our thoughts
at that time was whether we could bring in a regulation but have
what we here would term a sunrise clause, so that you would not
implement until six months in, in the hope that industry would
self-regulate and therefore there would be no need for European
Commission regulation. I instinctively would have preferred to
go down that route. Actually the will in Europe is such that they
feel they want to give some certainty to consumers and therefore
want to go for immediate implementation of the regulations, so
we shall not achieve that objective, but in a deregulatory mode,
what we are hoping for is that the regulation will have its three-year
life and if in that period the industry has shown that it will
reduce roaming charges, then there may be no need to continue
that regulation. That is called a sunset clause in the jargon
and that is still within the proposed regulations.
Q115 Lord Haskel: The point that they
made to us was that this kind of rather heavy-handed regulation
and unfair regulation in their terms will discourage investment
in the mobile telephone business. Are you satisfied that, in fact,
that will not happen?
Margaret Hodge: It is precisely for that reason
that, having once accepted regulation was needed, we are trying
to get the regulation framed in such a way that it does not disincentivise
investment. There are three or four elements: one is making sure
that the calculation around the wholesale average price is appropriate,
so that it covers the real costs of both setting up and running
the scheme. The second is this proposition that we have that there
should be an average retail tariff which would allow the packages
which are around at the moment, for example the Vodafone Passport
package and the other packages, to feel that they can differentiate
themselves within the market and therefore compete for a bigger
share of the market and that would enhance their productivity.
With those, having the right level, the right calculation around
wholesale caps, the right calculations and the flexibility of
an average retail tariff will ensure that we provide sufficient
comfort to the industry that there will be incentive for them
to invest and compete in that market.
Q116 Lord Haskel: It is a fine balance.
Margaret Hodge: It is very difficult. There
are still issues that we need to resolve over the coming very
few weeks in the negotiation. We have the average wholesale price
and we so far feel content that we have the basis for the negotiation
in a way that ensures a sensible average wholesale price is set.
There is an argument over the consumer protection tariff as to
whether that should be opt-in or opt-out and we very, very strongly
feel it has to be opt-in, otherwise there is a massive, massive
cost to the operators, up to £2 billion. I am just converting
everybody to that. We need that average retail tariff and we need
to convince everybody that that is a good idea and that the basis
for the calculations, both on consumer protection tariff and the
average retail tariff, is right. We do need two other: one is
the sunset clause, where we think nobody has raised anything so
we hope that is okay; then the final thing we want, and we are
raising at the working parties which are meeting weekly, is the
concept of a punitive tariff which we think is quite a powerful
lever which would help us keep that regulation in place for about
three years so that, if an operator fails to meet either the wholesale
tariff, the average wholesale tariff or the average retail tariff
or the consumer protection tariff, they are punished by then in
the ensuing year having to lower their tariff even more than others
have to.
Q117 Lord Lee of Trafford: Minister,
on the debate over wholesale and retail regulations, do I get
the impression from what you said that the Government's focus
is very much on the wholesale aspect rather than the retail or
is it just one first and then the other?
Margaret Hodge: It is both. The only thing is
that we are further forward in arriving at a consensus which meets
consumers' needs and industry's needs on the wholesale price.
We have yet to reach that consensus which we would be happy with
around retail prices.
Q118 Lord Lee of Trafford: Has it been
deliberately tackled in that way, wholesale first and then retail?
Is that the way you tend to approach it?
Mr Hickson: Yes, you are right. There is a logical
process, that you cannot really decide on exactly what you are
doing at the retail level until you have the wholesale level sorted
out, so the wholesale charge is very important because that ensures
that no operator can charge another operator above a certain amount
for the capacity they buy and then above that, you build in your
retail controls, as the minister has outlined. Yes, wholesale
is the first block you have to get right.
Q119 Chairman: It would be helpful if
you could describe what support you think there would still have
been for the UK approach, which was that after six months regulation
at a retail level should be introduced, whereas now we seem to
have reached the stage where you said that pressure amongst other
ministers was such that they want immediate action at the retail
level as well with a review perhaps after 18 months to see whether
a three-year period was still justified before the regulations
might be modified or removed. Are we a lone voice saying "Let's
just try wholesale regulation first and then consider retail later"?
Margaret Hodge: Can I just give you a little
bit of context and then, as Nigel has been leading for us on the
negotiation, he can probably speak about the detail. I have been
discussing these issues with the Commissioner and one of my very
first meetings as Minister for Industry was with her around these
issues; so I have been talking to her for some time. She was pretty
fixed in her view as to how that regulation should be framed,
although we discussed a number of these items with her right the
way through the informal negotiations around these issues. When
she put her proposition to the Council of Ministers last October/November
and we put forward this concept of sunrise clauses, she was rather
quickly able to say that our proposition would delay the lowering
of prices to consumers and that view that she put forward gained
quite a lot of popular credibility. Where we now are with the
sunset clause, so that the regulation falls in three years unless
there is a good justification for it continuing, is that we have
been able actually in a way to demonstrate that we could bring
in the regulation more quickly so that from the day the regulation
is agreed there will be two months until a wholesale average price
comes in and then three months before the average retail tariff
comes in. We are actually able to demonstrate that we can do it
more quickly. We wanted to be in the position where we were both
seen to be promoting the interests of consumers, which of course
we wish to do, but at the same time protecting the interests of
the industry so that we did not harm either competition or innovation.
That is where we have ended. It might have been more sensible
to have a six-month sunrise clause but Nigel can perhaps talk
a little bit about how that debate actually went in the group.
Mr Hickson: Yes, it has been a process. Essentially,
and I debate this with the minister, we still have what I would
call a weak sunrise clause. Essentially what we have now in the
presidency text—and of course we appreciate there are several
different texts that are being brought to your attention but the
text in the Council we call the presidency text, because that
is what the German Presidency have brought forward—is this
concept of the consumer protection tariff, and we favour the opt-out
version. This is a tariff that everyone will be offered. It is
a particular tariff that perhaps you would recommend to someone
who does not travel much, someone who is unsure about what rates
they will pay when they go abroad, perhaps a daughter or a son
or somebody and you do not want them to pay too much or whatever
and that is a purely optional tariff, a tariff that has to be
offered but is purely optional. The second element is this average
target that has to be met by an operator, but across all the different
packages that they offer. To an extent that has some elements
of a sunrise clause because they have the freedom to innovate
around that average figure and it is only if they do not meet
that average figure measured over a period of a year that they
will then face the penalties that the Minister has outlined; so
it is a significantly better place to be in than the 30 per cent
absolute Commission proposal. To fully answer your question, it
has been a process of negotiation. Perhaps we would at one point
have favoured a more definitive sunrise where we would not have
had any retail controls at all unless a certain trigger had been
met, but we are faced with what we are faced with which we think
will balance consumer protection with innovation.
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