Joint Committee on Draft Communications Bill

Joint Committee on Draft Communications Bill Report

(II) REGULATION OF NETWORKS AND SERVICES

115. The principal purpose of Chapter 1 of Part 2 of the draft Bill is to give effect in United Kingdom law to the following four EC Directives agreed on 14 February 2002:

Framework Directive , 2002/21/EC

Access Directive, 2002/19/EC

Authorisation Directive, 2002/20/EC

Universal Service Directive, 2002/22/EC.[217]

— David Edmonds rightly saw the transposition into United Kingdom law of these Directives and the economic regulation that followed as "at the core of OFCOM".[218]

116. The British Government was "actively engaged in negotiating, and strongly supports," the new framework established by the Directives.[219] As we have already noted in considering OFCOM's general duties, the duties on OFCOM in fulfilling Community obligations, and most particularly the policy objectives and regulatory principles of Article 8 of the Framework Directive and the European Commission's information requirements, shall have primacy over OFCOM's general duties under Clause 3 when OFCOM is carrying out its functions in respect of electronic communications networks and services.[220] The mandatory character of the Directives and the general support which their provisions appear to command have limited the range of proposals for amendment to the provisions of Chapter 1 of Part 2.

117. Concern was expressed by some organisations about the way in which the terminology and concepts of the EC Directives were to be translated into domestic law.[221] We consider some of these concerns later, but Cable and Wireless raised the broader question of whether the provisions in the domestic legislation or the terms in the EC Directives would represent the ultimate legal authority and whether there was a danger of "two separate, but overlapping obligations" being introduced.[222] The Government has published on its website detailed tables that set out the precise thinking in relation to the translation of the Directives into domestic law.[223] These tables are not always helpful in explaining divergences between the two texts and do not tackle the question of legal authority. Section 60 of the Competition Act 1998 seeks to ensure that domestic competition law is aligned with European competition law. We see merit in a comparable measure in the Communications Bill. We recommend that an additional provision be inserted in Chapter 1 of Part 2 with the aim of ensuring that, so far as is possible (having regard to any relevant differences between the provisions concerned), relevant questions arising under that Chapter are dealt with in a manner which is consistent with the treatment of corresponding questions arising in community law, including in the relevant Directives.

(b) The scope of networks, services and associated facilities

118. The aim of the EC Directives is to replace the existing system of licensing for telecommunications systems with a condition that persons wishing to provide electronic networks and services should be free to do so without prior permission, provided that they notify the National Regulatory Authority (NRA), which will be OFCOM in the case of the United Kingdom, and that they comply with applicable obligations.[224] Clause 108 is designed to repeal the telecommunications licensing system.[225]

119. Although the concept of general authorisation subject to notification and conditions is intended to be less onerous than the licensing regime, it is broader in scope.[226] Microsoft expressed concern that the scope was in fact wider than required or justified by the Framework Directive.[227] Microsoft had four distinct issues of concern.

120. First, Microsoft noted that the definition of "electronic communications network" in Clause 22(1) included "software and stored data" used for the conveyance of signals, but they argued that this inclusion was not justified by the terminology of the equivalent definition in Article 2(a) of the Framework Directive. Microsoft contended that this phrase could extend access regulation beyond its intended scope.[228] It is not immediately evident whether the reference to "other resources" in the Directive's definition could be held to cover software and stored data, nor does the relevant table issued by the Government elucidate the reasons behind the differences in terminology.[229]

121. Second, Microsoft noted that the definition of an "electronic communications service" in Clause 22(2) does not mirror the definition in Article 2(c) of the Framework Directive in making explicit reference to the exclusion in respect of "information society services, as defined in Article 1 of EC Directive 98/34/EC, which do not consist wholly or mainly in the conveyance of signals on electronic communications networks".[230] Microsoft argued that an explicit reference to this exclusion would place beyond doubt the understanding that e-commerce services benefited from the exclusion of content services as defined in Clause 22(7).[231] The Government contended that "any information society services that do not consist in or have as their principal feature the conveyance of signals by means of a network, would be outside the scope of the definition of electronic communications service in any event" and therefore "a specific information society services exclusion is not necessary".[232]

122. Third, Microsoft noted that Clause 22(3) defines "associated facility" as a facility which is "available for use" in association with the use of a network or service, while the parent definition in Article 2(e) of the Framework Directive refers to facilities "associated with" a network or service which "enable and/or support" the provision of services thereby. Microsoft suggested that the draft Bill's definition was too wide, embracing a (hypothetical) facility which is available for such use but is not in fact so used. Microsoft proposed that the phrase "available for use" be replaced by "is used".[233]

123. Fourth, Microsoft contended that the definition of "associated facility" in Clause 22(3) was broader than was warranted by Article 2(e) of the Framework Directive, since the draft Bill's definition includes a facility which is available to support the provision of "other services" provided by means of the network or service - other, that is, than the electronic communications service in question. It is certainly arguable, however, that this term faithfully reflects the reference in the Directive to "facilities … which enable and/or support the provision of services" via the network or service in question.

124. We are not convinced that Microsoft's central contention - that the scope for notification in the draft Bill is wider than that in Article 2 of the Framework Directive - has been established, but Microsoft has performed a valuable function in highlighting in the case of Clause 22 the difficulties of transposing the provisions of the Directives into domestic law. We recommend that, in its response to our Report, the Government reply to the concerns expressed and explain in more detail its reasoning for the way in which it has translated the provisions of Article 2 of the Framework Directive into domestic law in Clause 22.

(c) Designation, notification, condition-setting and enforcement

125. While the definitional issues surrounding Clause 22 are genuine, it is important that they are considered in the context of the provisions that follow in Clauses 23(2) and 24. These require OFCOM to undertake a process of designation, following consultation with those likely to be affected and with the Secretary of State, to describe the types of network, service or associated facility subject to the requirement for notification. Other provisions of Clause 23 require persons intending to provide a designated network, service or associated facility to notify OFCOM before doing so and to provide OFCOM with certain information. These arrangements are based on those in Article 3 of the Authorisation Directive, although there is no direct basis in that Directive for notification in respect of associated facilities.[234]

126. Under Clauses 35 and 36, operators may be made subject by OFCOM to conditions of two kinds - general or specific. General conditions, as the term implies, apply "generally to every person providing an electronic communications network or electronic communications service of a particular description".[235] The scope of such conditions is limited to provisions authorised or required by Clauses 38, 39, 43, 44 and 49. Oftel has begun a consultation process on 23 draft general conditions; it has sought responses to that consultation by 13 September 2002.[236] With the salient exception of proposed "must-carry" and "must-offer" conditions which we consider separately below, the Clauses governing general conditions have attracted relatively little comment during our inquiry. AOL UK was concerned about the potential for duplication between general conditions and consumer protection laws and about the lack of reference in Clause 45 relating to telephone numbering to the policy goal of minimising the costs of routing calls across the telephony network.[237] The Consumers' Association sought reassurance about the grounds for approval under Clause 40 of conditions relating to customer interests.[238]

127. The second type of conditions that can be set by OFCOM falls into four categories:

a universal service condition;
an access-related condition;
a privileged supplier condition;
a significant market power condition.

— We comment later in this chapter on evidence we received on the first, second and fourth types of condition. Privileged supplier conditions under Clause 62 were not the focus of evidential interest during our inquiry.

128. The draft Bill creates (with the exception of information provisions where OFCOM has the additional option of prosecution) a broad common framework for the enforcement of the provisions of Chapter 1 of Part 2.[239] The same basic procedure applies in respect of failure to make a notification under Clause 23, failure to pay a charge fixed by OFCOM under Clause 30, contravention of any condition set under Clause 35 and contravention of restrictions or conditions of the electronic communications code under Clause 85:

stage one: OFCOM sends the person alleged to have committed the breach a notification and requires that person to make representations and remedy the breach and any consequences within a specified period of time (Clauses 26, 31, 74 and 86);
stage two: if full remedy has not been made within the specified period, OFCOM may serve an enforcement notification requiring specified action, which is enforceable in civil proceedings (Clauses 27, 75 and 87);
stage three: OFCOM may, in addition to, or instead of, stage two, impose a penalty for non-compliance with a notification or an enforcement notification (Clauses 28, 32, 76 and 88);
stage four: OFCOM may issue a direction to suspend or restrict entitlement for serious and repeated non-compliance which the use of stages two and/or three has not remedied (Clauses 33, 78, 79 and 89);
stage five: contravention of a direction issued at stage four may be an offence subject to a fine and may be the subject of civil proceedings (Clauses 34, 80 and 81).

129. BT expressed concern at the general severity of the enforcement regime compared with that under the Telecommunications Act 1984.[240] They argued that the nature of the penalties meant that "they should attract the protection of Article 6 of the European Convention on Human Rights as though they were criminal penalties".[241] They contended that the draft Bill, if enacted as it stands, "might be found not to be compatible with Convention rights".[242]

130. The Joint Committee on Human Rights has examined the enforcement provisions of the draft Bill in the light of its extensive previous experience of examining administrative enforcement and charging systems and has concluded that the provisions (taken together with the right of appeal to a judicial tribunal that we examine later) do not give rise to a serious risk of incompatibility with Article 6 of the Convention.[243] The penalties are also analogous to those in the Competition Act 1998. These have been tested and, as BT know, in Napp Pharmaceuticals v DGFT, the Competition Commission Appeal Tribunal (CCAT), in considering this matter observed that the proceedings may be "criminal" for the purposes of Article 6 of the Convention, thereby implying the right to a "fair and public hearing within a reasonable time by an independent and impartial tribunal established by law" (Article 6(1)), to the presumption of innocence (Article 6(2)), and to other rights (Article 6(3)).[244] The burden of proof will rest on OFCOM to prove the infringements which lead to such penalties, given their severity. However, as the CCAT went on to say, and contrary to BT's submission to us, "neither the Convention itself not the European Court of Human Rights has laid down a particular standard of proof that must be applied in proceedings to which Article 6(2) or (3) apply"; and they go on to say "in our view the structure of the [Competition] Act points to the conclusion that under domestic law the standard of proof we must apply in demanding whether infringements of Chapter I or Chapter II prohibitions are proved is the civil standard, commonly known as preponderance or balance of probabilities, notwithstanding that the civil penalties imposed may be intended by the Director to have a deterrent effect". We therefore share the opinion of the Joint Committee on Human Rights.

131. Nevertheless, BT have raised a number of important practical concerns about the potential difficulty for a provider in interpreting the requirements of OFCOM under the enforcement procedures in respect of contraventions of conditions, noting in particular that there is an obligation to make representations and to take remedial action in parallel.[245] Clifford Chance have also highlighted respects in which there are fewer procedural safeguards for the enforcement of these sector-specific powers than for the exercise of Competition Act powers.[246] We recommend that the Government clarify whether its intention is that procedural safeguards for the enforcement of sector-specific powers under Chapter 1 of Part 2 should match those in the Competition Act and respond to the particular concerns in this regard raised in evidence.

132. The penalties that can be imposed by OFCOM under its sector-specific powers are set out in Clauses 28, 32, 77 and 88. These derive from the general permission under Article 10(3) of the Authorisation Directive for relevant authorities to "take appropriate and proportionate measures" and for Member States to empower those authorities "to impose financial penalties where appropriate". The text of each Clause reflects the requirement that financial penalties are appropriate and proportionate. The maximum penalty under Clauses 28 and 88 is £10,000, although this amount may be varied by order subject to negative resolution. The maximum penalty under Clause 32 is twice the annual charge levied, although this multiplier may be varied by order subject to negative resolution. The Government's stated intention is that the power to vary penalties under Clauses 28 and 88 "would not represent any change of policy, but simply maintain the effectiveness of the level of financial penalty applicable, principally in order to take account of inflation".[247] We share the view of the House of Lords Delegated Powers and Regulatory Reform Committee that the power to vary maximum penalties under Clauses 28 and 88 either ought to be explicitly confined to changes in the value of money or otherwise ought to be subject to affirmative resolution. We recommend accordingly. We further recommend that the power to vary the multiplier for the purpose of calculating the maximum penalty under Clause 32 be subject to affirmative resolution.

133. The maximum penalty under Clause 77 for contravention of a condition of an enforcement notification under Clause 74 relating to a breach of a general or specific condition under Clause 36 has attracted considerable comment. Under Clause 77, the maximum penalty is 10 per cent of the turnover of the relevant business. It is thus the same maximum penalty as that provided for under section 36 of the Competition Act 1998. This power to fine was seen by David Edmonds as "an important new weapon" for OFCOM in exercising sector-specific powers.[248] BT and the mobile phone operators viewed these penalties as excessive. Vodafone argued that they might serve as a disincentive to innovate. It was also suggested by the mobile phone operators that the availability of powers to fine under sector-specific powers on the same scale as under the Competition Act would serve as a disincentive to use Competition Act powers.[249]

134. We are not persuaded by the arguments that OFCOM should have fewer sanctions available to it in the exercise of sector-specific powers than in the exercise of Competition Act powers. It would anyway seem to us undesirable in principle that the mechanism to be employed by OFCOM might be determined by the different penalties available rather than by the nature of the market. Indeed, we wish to see more precise equivalence between the two sets of penalties. The maximum penalty under section 36 of the Competition Act 1998 cannot be varied by means of secondary legislation. The power to vary the turnover limit in Clause 77(5) is inconsistent with the earlier Act and opens up the Secretary of State to perpetual lobbying by industry to see the limit reduced. We recommend that the order-making power in Clause 77(5) be removed; if it is retained despite our recommendation, it should most certainly be subject to affirmative resolution procedure.

135. We wish to make one further recommendation on this issue, again arising from the principle of equivalence with Competition Act penalties. Under section 38 of that Act, the Director-General of Fair Trading is required to issue guidance as to the appropriate amount of any penalty, drawing in part upon penalties imposed in other EU Member States. In the early days of the operation of the new framework, it will be difficult for OFCOM to use comparators in the same way as the OFT has been able to draw upon European competition law. Nevertheless, potential recipients of penalties are entitled to some prior warning about OFCOM's interpretation of appropriate and proportionate penalties. We recommend that OFCOM be placed under a statutory duty to prepare and publish guidance on the interpretation of appropriate and proportionate penalties in Part 2 of the Bill.

136. Clauses 94, 98 and 99 of the draft Bill empower OFCOM to obtain certain information for certain purposes. The information requirements under Clauses 98 and 99 relate to general enforcement provisions under Chapter 1. The information provisions of Clauses 98 and 99 are themselves supported by enforcement powers, including criminal penalties of fine and imprisonment set out in Clauses 100 to 103. The information requirements under Clause 94 relate to OFCOM's power to give assistance to parties in certain legal proceedings. There are significant variations between the two sets of information provisions.

137. Clause 94(3) provides a person with protection for the privilege against self-incrimination and for items subject to legal professional privilege; this protection is viewed as adequate by the Joint Committee on Human Rights. However, both that Committee and BT have pointed out that there is no equivalent protection for individuals in Clauses 98 and 99, even though OFCOM's enforcement powers could entail legal proceedings.[250] The Joint Committee on Human Rights viewed this omission as "a serious matter".[251] So do we. We recommend that Clauses 98 and 99 be amended to provide protection against self-incrimination and for items subject to legal professional privilege.

138. Clause 99 restricts the circumstances in which OFCOM can impose information requirements under Clause 98. Clause 104 imposes a further requirement on OFCOM to issue a policy statement on information-gathering under Clause 98. Neither of these constraints apply to information-gathering under Clause 94. The Joint Committee has expressed serious reservations about the absence of conditions constraining the information-gathering power under Clause 94.[252] We share this concern and find the absence of constraints on information-gathering under Clause 94 puzzling in view of the restrictions imposed by Clauses 99 and 104 on the other information-gathering powers under Clause 98. We recommend that information-gathering powers under Clause 94 be subject to restrictions analogous to those under Clauses 99 and 104.

139. The Joint Committee on Human Rights has also raised more fundamental concerns about the power of OFCOM to support a party to legal proceedings relating to the electronic communications code in Clause 93 - the power to which information-gathering under Clause 94 relates. That Committee has argued that the powers as they stand could jeopardise the principle of "equality of arms" in legal proceedings.[253] We urge the Government to give the most careful consideration to that Joint Committee's concerns about Clause 93.

140. In addition to OFCOM's enforcement powers, Clause 106 sets out powers for the Secretary of State to direct OFCOM to require a service provider to suspend or restrict that service; non-compliance is an offence under Clause 107. The Secretary of State's powers can be exercised "to protect the public from any threat to public safety or public health, or in the interests of national security".[254] The Joint Committee on Human Rights has argued that the Secretary of State should be permitted to intervene only where she has reasonable grounds to believe or suspect that it is necessary to do so.[255] We again urge the Government to give the most careful consideration to that Joint Committee's concerns about Clause 106.

141. Finally, on a related matter, the Government's original memorandum on issues on which new or amended Clauses will appear when the Bill is presented referred to further consideration being undertaken on national security issues.[256] We asked the Government to elucidate this opaque reference. It told us that this was a reference to continued consideration on how to "update" section 94 of the Telecommunications Act 1984, which gives the Secretary of State sweeping powers to issue directions of a general character to the regulator or public telecommunications operators if it appears to her "to be requisite or expedient to do so in the interests of national security or relations with the Government of a country or territory outside the United Kingdom".[257] The Government sees the need to update these powers to reflect the removal of the concept of public telecommunications operators.[258] Since that power was enacted, the Government has given itself extensive powers in respect of communications service providers under the Regulation of Investigatory Powers Act 2000 and the Anti-terrorism, Crime and Security Act 2001.[259] Before undertaking a technical revision of section 94 of the Telecommunications Act 1984, the Government should ask itself the prior question of whether such broad powers are either required or compatible with Convention rights. If the provision is retained in an amended form, we recommend that the Government, in its response to this Report, give an account of the use to which the provision has been put and an explanation of how it is envisaged it might be used in future.

(d) "Must carry" / "must offer" / "must distribute"

142. As we have already noted, Clause 36 gives OFCOM a power to apply general conditions to providers of a network or service of a particular description. One such condition relates to the Government's commitment to "ensuring that public service broadcasters are available on all the main platforms, both before and after digital switchover".[260] A single Clause in Part 2 of the draft Bill as published on 7 May related to this policy objective - Clause 49, which enables OFCOM to impose conditions requiring particular services to be carried on broadcasting networks. The Government outlined proposals to make further provisions in this field and stated that "draft Clauses giving effect to these further provisions will be made available shortly".[261] We soon learned that "shortly" meant July and the draft Clauses were not in fact published in time for us to subject them to careful consideration.[262] We have had to make do instead with an account of the policy purposes provided by the Government in early July in response to a specific request by us.[263] Even this document arrived too late to enable us to consider evidence from interested parties on the proposals.

143. We turn first to some of the provisions of Clause 49, since this consideration itself serves to illustrate the difference in kind between pre-legislative scrutiny of Clauses and examination of policy proposals. Subsection (3) lists the public service channels to which "must carry" obligations are initially limited: these are all licence fee-funded BBC public services, any digital Channel 3 service, Channels 4 and 5 in digital form, S4C Digital and any digital teletext service provided on spare digital capacity.[264] Subsection (4)(a) gives the Secretary of State a duty to review this list periodically, in accordance with the provisions of Article 31(1) of the Universal Service Directive. Subsection (5) gives the Secretary of State a power, subject to negative resolution, to modify the list of "must-carry" services.[265]

144. The extension of the "must-carry" list is a matter of considerable public interest, as is the matter of "must-offer" to which we refer later. The Government envisages that this power might be used to include "further channels which may have a general public service remit, or may offer Government or local information services".[266] The latter approach was attractive to the Community Media Association and to community broadcasters who contributed to our online forum.[267] NTL and Telewest, on the other hand, were concerned at the absence of linkage between the power to add to the list and the delivery of public service broadcasting objectives.[268] In response to a request from the House of Lords Delegated Powers and Regulatory Reform Committee, the Government said that it envisaged that the criteria for addition of a service to the "must-carry" list would be as follows:

"its public service remit;
its importance for social inclusion, on a national or a local basis;
its unavailability by other means for a significant proportion of people using the platform".[269]

145. The Government also drew attention to its commitment in the White Paper to consult OFCOM before adding to the list, to take account of capacity constraints, and to ensure that "such obligations are proportionate to the purpose and leave the great majority of capacity for normal commercial uses".[270] The House of Lords Delegated Powers and Regulatory Reform Committee has raised the possibility of the criteria to be employed in exercising the power to add to the list being placed on the face of the Bill.[271] We support this approach. We recommend that Clause 49(4) and (5) be amended to specify a requirement on the Secretary of State to consult OFCOM and affected parties in carrying out a review of the list of "must-carry" services and to have regard to the public service benefit of any service, to capacity constraints and to the principle of proportionality in coming to any decision leading to an order under subsection (5).

146. The other main component of Clause 49 relates to the terms of trade of "must-carry" obligations. Subsection (4)(b) requires the Secretary of State to conduct periodic reviews of these terms. Subsections (6) and (7) allow her to impose requirements as to the terms or make provision about how OFCOM is to determine such terms.[272] This Clause is intended principally to cover cable services.[273] At present, public service channels are provided on cable without charge to either party, on the grounds that the cost of carriage is offset by the value derived by the cable operators from carrying those channels.[274] The Government's stated policy is that any new "must-carry" channels will be added "subject to reasonable remuneration for the relevant operator".[275]

147. The main policy aim underlying the proposed new Clauses appears to be that, "after digital switchover, all the [public service broadcasting] channels have a right to be carried on all the main platforms and a duty to secure carriage". It was suggested by BSkyB and the Satellite and Cable Broadcasters' Group that there was no need for "must-carry" rules at all even after digital switchover: the requirement on BSkyB to provide access on "fair, reasonable and non-discriminatory terms" would ensure a successful outcome in commercial negotiations between the public service broadcasters and BSkyB guaranteeing such availability in future.[276] The Government appears unpersuaded by this argument, since a major element of the additional draft Clauses is the creation of a new "must-distribute" obligation upon satellite packagers.[277] This involves the establishment of means of enforcement for such an obligation akin to the enforcement mechanisms that we have already discussed. We have not had an opportunity to examine these provisions in any detail, but we note, however, that Oftel has recently examined these arguments.

148. The Government is also seeking to impose two new duties on public service broadcasters. The first is an obligation to offer their service on the main platforms so as to preclude the levying on viewers of any additional charge for their channels, known as "must-offer".[278] The second is an additional system for the provision to a viewer who cannot satisfactorily view public service broadcasting channels otherwise than by satellite, free of charge, of a device required to allow them access only to the public service channels by satellite - the "solus card". The public service broadcasters jointly are to be required to make arrangements between themselves to fund this provision.[279]

149. The document provided to us on 3 July by the Government fails to clarify its position on two outstanding issues. The first is the terms of trade for the carriage of "must-offer"/ "must-distribute" services on satellite. The Government is still "considering whether, consistent with the European Directives, the Bill could contain provisions to ensure that OFCOM will be obliged to consider the special position of public service broadcasters when regulating the price of access to satellite conditional access systems".[280] This may hinge in part on an interpretation of Article 31(2) of the Framework Directive that permits Member States to determine remuneration for "must-carry" obligations "while ensuring that, in similar circumstances, there is no discrimination in the treatment of undertakings providing electronic communications networks".[281] BSkyB argues that any additional costs for conditional access for public service channels are justified in accordance with the obligation to provide services on fair, reasonable and non-discriminatory terms.[282] The public service broadcasters contend that the current charging system does not reflect the value such services bring to a satellite service and entails a subsidy for aspects of the satellite service that are not related to the distribution of free-to-air services.[283]

150. Second, the latest document does not answer the vexed question of why "must-carry" obligations are only to be imposed at an indeterminate date in the future. At the time of the draft Bill the Government referred specifically to "must-carry" obligations "after digital switchover".[284] The latest document hints at movement in the Government's position by stating that the new provisions

285

— The public service broadcasters were united in arguing that the issue of "must-carry" had to be resolved in the near future as a means of supporting the move towards digital switchover.[286] The ITC also wished to see the provisions engaged "sooner rather than later".[287]

151. The inclusion of "must offer"/ "must carry"/ "must distribute" Clauses is intended to deliver the public policy objective of universal availability of public service broadcasting channels. The broadcasters are not permitted to charge the public for receipt of these channels, and the distributors and packagers do not pay the subscription fee that would usually reflect the value of these channels to their services. We therefore believe it would be appropriate for OFCOM to determine the basis on which payments should be made by broadcasters to distributors, taking into account the nature of the costs accruing to each party to the arrangement. This would be in line with the role currently performed by Oftel in relation to the charges levied on public service broadcasters (and others) for satellite conditional access services. The broadcasters also contend that, in the case of digital satellite, they are being forced unnecessarily to use the conditional access system to provide the regional versions of their services and that there are more cost effective ways to do so.[288] BSkyB argue that this is an entirely incorrect characterisation of the way their sophisticated conditional access system works. As the most successful digital television provider, they argue that this is technically the most effective way regionalisation can be provided. Oftel has recently addressed issues relating to conditional access charges for public service channels in its 8 May report on The Pricing of Conditional Access Services and Related Issues.

152. Tessa Jowell characterised the proposed provisions on "must carry"/ "must distribute"/ "must offer" as "a failsafe".[289] We see no logic in the Government providing itself and OFCOM with a valuable failsafe and then circumscribing the time at which it can be used. We recommend that the final Bill seeks to give effect to the "must-carry"/ "must-offer"/ "must-distribute" arrangements on all platforms and the most effective solution to regional distribution, as determined by OFCOM, at the earliest possible opportunity.

(e) Universal service conditions

153. Clause 35(4) of the draft Bill provides for the setting of conditions for the purpose of ensuring that certain minimum electronic communications services are available at all times throughout the United Kingdom. These conditions generally apply only to persons designated by OFCOM as universal service providers under Clause 51.[290] The provisions of Clauses 50 to 54 essentially update and carry forward the requirements currently imposed on certain public telecommunications operators - BT, and Kingston Communications in Hull - under which there is a uniform pricing system for fixed narrowband telephony and associated services, such as public call boxes and directory enquiries, throughout their areas of operation.[291] According to the Government, "the objective behind 'universal service' obligations is to ensure that the basic communications services which are used by the majority, and which are essential to full social and economic inclusion, are made available to everyone who reasonably requests them at an affordable price".[292]

154. Clause 50 requires the Secretary of State to publish a notice defining the obligations to be secured by universal service conditions. This notice is to be "for the purpose of securing compliance with Community obligations", namely the obligations set out in Chapter II of the Universal Service Directive.[293] AOL UK queried why the Secretary of State was being given a power to specify the obligations by notice when they are set out in the Universal Service Directive.[294] We presume that the arrangements in Clause 50 are being made to enable the Secretary of State to give effect to any revision of universal service obligations arising from a review by the European Commission under Article 15 of the Universal Service Directive, although we consider both the Bill and the Explanatory Notes could be clearer on the linkage between the definition in that Directive and the Secretary of State's powers under Clause 50.

155. Clause 51 provides for designation of universal service providers by OFCOM; Oftel will be consulting in due course on the designation of appropriate providers to ensure the provision of the universal services.[295] Clause 52 provides for universal service conditions generally. Clause 53 relates to the tariffs and pricing structure for universal services. Clause 54 covers directory and directory enquiry facilities. In general terms, we are satisfied that these provisions give faithful effect to the relevant articles of the Universal Service Directive.

156. Our one concern relates to the balance of responsibilities between the Secretary of State and OFCOM with respect to pricing issues. Patricia Hewitt thought that the balance in the draft Bill was right.[296] We are not convinced. As the draft Bill stands, the Secretary of State may include guidance about pricing matters in the universal service notice.[297] OFCOM is required to "have regard to any guidance about matters relating to pricing" contained in that notice.[298] Nevertheless, after the initial notice is issued, all matters relating to pricing structures are matters for OFCOM. This does not mirror a comparable division of responsibility between NRAs and Member States in Articles 9 and 10 of the Universal Service Directive, since some of the functions assigned to OFCOM under the Clauses are ascribed to "Member States" under the Articles.[299] We consider that, given the wide political and social significance of pricing for universal services, the Secretary of State should play a more direct and politically accountable role in the matter. We recommend that this aim be secured by amendments along the following lines: the Secretary of State should be required under Clause 50(3) to give guidance about relative pricing for the same service among different customers; OFCOM should then be obliged to publish proposals relating to pricing in respect of universal service conditions, including the anticipated effects on the market of the universal service in question and the arrangements (if any) proposed for recovering the relevant costs; the Secretary of State should then make a final determination.

157. Clauses 55 to 57 provide for the establishment of a mechanism for "burden-sharing". They reflect Article 13 of the Universal Service Directive which states that, where an NRA decides a universal service provider is subject to an unfair burden, Members States shall, upon request from that provider, introduce a mechanism for public funding and/or an arrangement for burden-sharing between providers of electronic communications and networks. Clause 55 allows for a review of the costs of complying with universal service conditions. Clause 56 enables a burden-sharing scheme to be established upon an application by the provider involving contributions by communications providers to whom general conditions apply. AOL UK expressed concern about the possible deterrent effect of such charges on new market entrants and argued that any future universal service obligation relating to broadband ought to be funded from the public purse.[300] We recommend that, in its response to this Report, the Government clarify whether it considers that public funding of the kind permitted under Article 13(1)(a) of the Universal Service Directive could be made available without explicit legislative provision. We also note that the Government has not made direct provision for the exemption of undertakings with limited turnover, as permitted by Article 13(3). We recommend that the Government should either confirm that such exemption would be possible under Clause 56 as drafted or, if not, make such provision in the final Bill.

(f) Access-related conditions

158. Clauses 35(5) and 58 to 61 provide for the setting of access-related conditions, applying principally, although not exclusively, to providers of networks or associated facilities in a position to control access to networks by other providers. OFCOM is enabled to set such conditions "for the purpose of ensuring a level of network access and interoperability that will promote efficiency, sustainable competition and benefit to customers".[301] Although the process of condition-setting under Chapter 1 of Part 2 of the draft Bill is generally permissive, OFCOM is placed under a duty by Clause 60 to ensure that access-related conditions are applied to every person who provides a conditional access system for an encrypted programme service.[302] Patricia Hodgson of the ITC and David Edmonds of Oftel saw the effective regulation of access to networks characterised by control by a few large players as being at the heart of OFCOM's regulatory work and crucial in determining its success.[303]

159. The importance of future success in regulation of access by OFCOM is thrown into sharp relief by the experience of Oftel in the regulation of Local Loop Unbundling. This is the process whereby BT's competitors should have been given access to BT's exchanges in order to deliver their own high-speed services via BT's local telephone wires.[304] The slow process of providing access for BT's competitors was characterised by some witnesses as a regulatory failure: it was suggested that BT had placed hurdles in front of its competitors while developing, at its own pace, its own high-speed product. Some contended that there had been a regulatory presumption that BT did not have a dominant position in what was a relatively new market. They argued that this presumption, coupled with the complexity of the information that Oftel had to obtain from BT itself before being able to act, had crucially inhibited regulatory action at the key stage in the potential development of an open and competitive market.[305]

160. BT did not accept this characterisation of Local Loop Unbundling; it contended that the main constraint upon the process had been the costs involved in relation to the market available, rather than any endeavour by BT to drag its feet.[306] David Edmonds argued that Oftel's actions had been broadly successful in establishing a competitive market, although he accepted that "it has taken a year longer than I would have hoped".[307] AOL UK endorsed the view that Oftel's regulatory actions had eventually been effective, but considered that the slowness of those actions had inhibited the development of a broadband market in the United Kingdom.[308]

161. One of the central lessons of Local Loop Unbundling relates to the speed of regulatory action; we have already made specific recommendations (in paragraph 85) designed to tackle this problem. More generally, between March 2000 and February 2002, at a time when Oftel had Competition Act powers, it chose to apply ex ante rules, in the shape of 37 directions and determinations, showing that the risks of "foreclosure" by an operator with significant market power are not necessarily offset by the setting of conditions. Competition rules may have to be more aggressively applied to remove barriers to entry rather than simply to prevent abuse; dominance per se can be the problem. This is a matter which may be addressed by Enterprise Act powers, which will be available to OFCOM and to which we return.

162. Given the key importance of access-related conditions to the future of regulation, the provisions of the draft Bill to provide a new unified framework for such regulation have attracted surprisingly little comment. The BBC was almost alone in finding a fault concerning access-related conditions. Clause 59 allows for conditions to be set relating to electronic programme guides. Clauses 209 and 210 require OFCOM to prepare an enforceable code for providers of such guides. Clause 209(2) and (3) requires OFCOM to establish practices in that code relating to prominence for public service television channels. The BBC regretted the absence of equivalent provision for public service radio channels.[309] BSkyB viewed such specific provision as unnecessary given the current prominence accorded to BBC radio channels.[310]

163. The provisions of Clauses 59, 209 and 210, taken together, appear to us to provide ample provision to enable OFCOM to secure appropriate prominence for public service radio channels if it is satisfied that there is evidence that such regulatory action is proportionate and necessary. It is important that OFCOM, in preparing the Code, should have regard not only to the interests of public service broadcasters, but also to the interests of commercial broadcasters, whose classification by genre, listing and degree of prominence in programme guides may be instrumental to their business and who will need transparency in determining these matters; and, if they are dealt with unfairly, a right to appeal for independent determination by OFCOM.

(g) Significant market power conditions

164. Clauses 35(7) and (8), 36(7) and (8), and 63 to 73 relate to the procedure for imposing "significant market power" (SMP) conditions where an undertaking has SMP in a specific, defined market. SMP is defined in Clause 63 as equivalent to dominance, where dominance implies a position in which an operator can, to an appreciable extent, act independently of competitors, its own customers and other potential customers. This definition broadly reflects that in Article 14 of the Framework Directive, while maintaining the aversion to the concept of "consumers" (used in the Directive) that we remarked upon earlier. Where there is any doubt as to interpretation of SMP, the Framework Directive makes it clear that the definition of SMP is equivalent to the concept of dominance as defined in the case law of the European Court of Justice and the Court of First Instance of the European Communities.[311]

165. The concept of dominance as established by European Community law and jurisprudence is already transposed into United Kingdom law in the Competition Act 1998. The OFT has reflected Commission procedures in its own guidance on Assessment of Market Power.[312] However, procedures under the Competition Act and those proposed under the draft Bill are quite distinct. The OFT (and, in future, OFCOM) exercise powers under the Competition Act in relation to abuse of dominance. The procedures of the Framework Directive and the draft Bill are engaged by the mere existence of dominance and are thus pre-emptive in character.

166. Unlike the procedures for the other conditions that we have examined in this chapter, a crucial role in SMP procedures is played by the European Commission. Under Article 15 of the Framework Directive, the European Commission, after consultation with the public and NRAs, will issue guidelines on identifying markets, analysing markets and determining what constitutes SMP. David Edmonds acknowledged that a more harmonised approach was being sought across the European Union and that there would be more centralised direction, but was confident that proper discretion for decisions about markets would remain with OFCOM, rather than such matters being decided in Brussels.[313]

167. The next stage of the process is the identification by OFCOM of markets, which may or may not be national markets, in which the procedures may be engaged, taking account of the Commission guidelines.[314] According to the Government, "Oftel will be embarking as soon as possible (once the Commission guidelines have been published) on the necessary market reviews envisaged by the Directives".[315] Initial decisions on notification of SMP conditions are to be made at this stage. Notification sets out the market OFCOM is proposing to identify for the purpose of a market power determination, the market power determination that they are proposing to make and the reasons for these proposals. Notification is passed both to the undertaking concerned and to the European Commission.[316] At this stage, during the consultation process, the European Commission can require OFCOM to withdraw its proposal, either because the market identification does not comply with the Commission recommendations or on internal market grounds.[317] At the conclusion of the consultation period, OFCOM may make a market power determination under Clause 64.

168. In general terms, and subject to remarks we make shortly about Clause 67 that may affect earlier provisions, the provisions of Clauses 64 to 66 appear to establish satisfactorily the requirements of the Framework Directive and the roles of OFCOM and the European Commission in these activities. BT raised one concern. In reaching decisions on market identification and on market power determination under Clause 64, OFCOM is required "to have regard, to such extent as they consider appropriate," to Commission guidelines and recommendations. Under Article 15 of the Directive, NRAs are enjoined to take "the utmost account" of these documents.[318] Given the Commission's power of veto, it would be strange indeed if OFCOM did not take full account of the Commission's position. Nevertheless, we recommend that the Government consider whether it is satisfied that the current drafting of Clause 64 fully reflects the spirit of OFCOM's obligations in respect of European Commission recommendations and guidelines.

169. We have slightly broader concerns about the terms of Clause 67. This seeks to give effect in United Kingdom law to requirements arising from Article 16 of the Framework Directive, Article 7 of the Access Directive and Articles 16 and 18 of the Universal Service Directive.[319] We are not convinced that the Clause does so effectively. The kernel of most of the Articles that we have listed is the onus they seek to place on NRAs to review markets to see whether sector-specific controls are still necessary or whether a market is "effectively competitive". This is to be read in the context of the preamble to the Framework Directive which states:

ex ante

320

— Patricia Hewitt summarised this policy herself concisely and clearly and thought that there was a clear "duty on OFCOM to review the markets and withdraw from sectoral regulation when competition is operative".[321] The mobile phone operators did not agree. They expressed concern that this underlying principal purpose of market analyses was not reflected in the draft Bill.[322] This was understandably linked to their view, endorsed in some measure by the Better Regulation Task Force, that the market in which they operated was "effectively competitive" and not in need of sector-specific regulation.[323]

170. The draft Bill does make reference to "the need to secure effective competition in the long term", but only in the more specific context of SMP conditions about access.[324] We recommend that Clause 67 be amended to place it beyond doubt that the aim of market analyses is to determine whether a specific market is "effectively competitive" and to ensure that SMP conditions are only imposed where there is not effective competition. We further recommend that other provisions on SMP and sector-specific regulation more generally be reviewed to ensure that they reflect the same principle.

171. We have two further points about Clause 67 as it stands. Article 16(1) of the Framework Directive requires NRAs to undertake market analyses as soon as possible after Commission recommendations are adopted or updated and this is properly reflected in a duty on OFCOM under subsection (4). However, Article 7(3) of the Access Directive imposes an additional requirement as follows: "Member States shall ensure that, as soon as possible after the entry into force of this Directive, and periodically thereafter, national regulatory authorities undertake a market analysis".[325] Subsection (2) merely states that OFCOM "may from time to time, as they think fit, carry out further analyses of the identified market". This does not appear to us to be a proper translation of the provision of the Access Directive we have just quoted, since subsection (2) implies a discretion in undertaking periodic reviews.[326] We recommend that Clause 67 be amended to make clear the mandatory character of periodic market analyses.

172. BT has pointed out that Article 16(1) specifies that "Member States shall ensure that this analysis is carried out, where appropriate, in collaboration with the national competition authorities". It expresses concern that the draft Bill does not make reference to this duty, given the value of involvement by OFT in market analysis.[327] A clue to the Government's intentions is provided by two letters in its Table on the transposition of the Framework Directive - "SI".[328] We presume this means that the Government intends to give effect to this duty by statutory instrument. We recommend that the Government clarify this matter in its response to our Report and ensure that the main terms of any secondary legislation giving effect to this provision are made known to Parliament at an early stage of the Bill's passage.

173. Clauses 68 to 73 make more detailed provision about SMP conditions relating to access, pricing, services for end-users and leased lines. As we noted before in the context of access-related conditions generally, these provisions have attracted surprisingly little comment given their crucial importance in OFCOM's regulatory toolkit. Freeserve was concerned that Clause 69 was couched in terms of circumstances when obligations are not to be imposed, rather than requiring their imposition to prevent price distortions arising.[329] We remain to be convinced either that there is a substantive difference between these positions or that Clauses 68 and 69 fail to mirror the provisions of Article 13 of the Access Directive. Although the provisions of Clause 68(4) very closely follow those of Article 12(2) of the Access Directive, we are concerned at the adequacy of the concept of "feasibility" in paragraph (b) of both provisions. We recommend that the Government (a) consider whether it would be compatible with the terms of the Access Directive to enable OFCOM to have regard to the costs of provision of the proposed network access, as an explicit aspect of feasibility under the terms of Clause 68(4), (b) report on the outcome of that consideration in its response to this Report, and (c) reflect that factor in the final Bill if it considers it possible and appropriate to do so.

217 OJ 108 vol 45, 24 April 2002. Back

218 Q 77. Back

219 Policy, para 6.1.1. Back

220 Clauses 3(4), 4 and 15; EN, para 20. Back

221 Ev 135; Ev 112. Back

222 Ev 88. Back

223 www.communicationsbill.gov.uk/european_directives_tables_htm. References to these tables in this Report refer to the short title of the Directive, followed by Table, followed by the Article and Clause to which the comment relates. Back

224 Policy, para 6.3.1. Back

225 EN, para 211. Back

226 Q 84. Back

227 Q 320. Back

228 Ev 135; Appendix 108. Back