Joint Committee on The Draft Communications Bill Minutes of Evidence



Examination of Witnesses (Questions 980-999)

THE RT HON PATRICIA HEWITT MP AND THE RT HON TESSA JOWELL MP

MONDAY 8 JULY 2002

  980. On universal service, clause 50 gives you the power to set the notice and say what it is, and you hand everything else over to OFCOM, yet it will be you that gets the flak for when OFCOM gets it wrong. Should there not be a role for the Secretary of State there? There are a number of other examples during the Bill of a similar kind.
  (Tessa Jowell) Let me deal with the general point, because to take your entirely correct observation about the temptation of ministers over the generations to interfere in areas that they have actually handed over to the regulator, that will always happen, just as Members of Parliament will hold Adjournment Debates, and Select Committees will call witnesses. What you describe as interference I think is more properly in parliamentary terms defined as scrutiny, but it is important that it is scrutiny within the context of robust differentiation of the proper role of the Secretary of State, as the elected representative, and the role of the regulator implementing very clearly delegated responsibilities, delegated by Parliament. We have in drafting the Bill and in developing the legislation I think trodden a careful course between first of all making sure that wherever possible, unless there was an overwhelming or strong and compelling parliamentary, democratic case for retaining powers to the Secretary of State, delegating them to OFCOM as the new regulator, but the other important point is to ensure that the legislation, which we hope will be in place for a number of years, and see the communications sector through a period of rapid change, has sufficient inherent flexibility, hence the combination of power to review by OFCOM in order to create flexibility and also the powers to amend the legislation through secondary legislation where that is appropriate. So I think the tension is one that we have been very acutely aware of in the drafting of the Bill, and I think it will be very interesting—and this is one of the areas I am particularly interested in—to look at the results of consultation to see whether or not we have got the balance right. We are both open—and I mean this quite genuinely—to proposals from you as to areas in which further flexibility in the legislation might apply, through sunset provisions or sunrise provisions, all of which would help the deregulatory thrust and could well be appropriate once the legislation is bedded down and OFCOM begins to mature. But I want you to be quite clear that this is a tension that we have thought carefully about and I hope we have got the balance right.
  (Ms Hewitt) Can I come back on the issue of universal service, which is hugely important? It seems to me absolutely right that the Secretary of State should define the services that have to be provided right across the United Kingdom to fulfil our universal service obligation, because that is absolutely a matter of public policy, it relates to our commitment to social inclusion and so on and so forth. Once we have done that, then I think the means of achieving those universal services should properly be left to the independent regulator, whether it is through licence obligations on providers or whether it is through a cost-sharing mechanism imposed on a group of providers in order to do it, and I think that is a proper split between the principle and the public policy objective, and the detailed means of achieving it.

Mr Lansley

  981. I am sure you will recognise how central is the process of a market review and setting of conditions for those exercising significant market power for the economic regulation aspects of the Bill. When we have been taking evidence, quite a number, particularly of telecommunications operators, obviously, in this context, have been stressing to us how difficult it has been to be clear about the circumstances in which OFCOM is going to be using its competition-related powers as distinct from its sector-specific powers. What I really wanted to ask was therefore do you think that in translating the Framework Directive into the Bill, the Bill is currently sufficiently clear about both the requirement for there to be a determination of what is an effectively competitive market, the sort of basis for determining which kind of regulation is going to apply, and is it sufficiently clear also about the desirability, indeed, the necessity under the Framework Directive for periodic market reviews as distinct from market reviews as and when OFCOM thinks fit?
  (Ms Hewitt) We have certainly tried to make the Bill as clear as we can on all of those points, and if there are proposals for improving those provisions further, we will be very happy to look at them, because, of course, the new European framework will indeed require OFCOM to review the relevant markets and then, if it does find that a market is effectively competitive, to withdraw from SMP conditions, which, of course, means withdrawing from price controls within that market. The existing policy of all of our economic regulators in the various sectors is indeed to keep their markets under review and to withdraw from sector-specific regulation as soon as those markets become competitive. I know there are criticisms that perhaps that has not been done vigorously or readily enough and there will always be arguments about how quickly it should be done, but I think that a duty on OFCOM to review the markets and withdraw from sector regulation when competition is operative is quite clear but, as I say, if there are suggestions for strengthening it further, we will be happy to look at them.

  982. Clearly, we have had to work within the Framework Directive. What was quite interesting was that quite sophisticated telecoms operators had not really seen it in those terms, or understood the Bill as drafted as being quite as definitive as the Framework Directive actually requires us to be. We can make the signposts clearer in that sense. I just wondered how this relates, from your point of view, to the current assumption being made by OFTEL that, with the exception of inter-connection, OFTEL will use Competition Act powers in relation to its functions rather than its sector-specific powers. Does that mean that we might have a period during which Competition Act powers are going to be used, and then after the introduction of this legislation, there will be a further period of market review and it might shift between competition and sector-specific powers back in the other direction?
  (Ms Hewitt) I think that will depend entirely on the outcome of the review, but certainly OFTEL's strategy—quite rightly, in my view—has been to say, "We want to rely increasingly on the Competition Act powers. We will use the sector-specific ones only when we have to"—and I was talking about the local loop unbundling problem earlier on, where indeed we did have to. I think it is unlikely that we will find ourselves going back to the sector-specific powers in the way you are describing, unless, of course, there were a real reduction of competition in the market, but at the moment I do not think that is anticipated in the mobile market, and as I say, we have significantly extended competition in the mobile market with the 5th licence and 3rd generation.

Mr Grogan

  983. We have had a lot of evidence from various public sector broadcasters, and they have not agreed on everything, you will not be surprised to learn, but one thing they did agree on was the importance of "must carry". We have had quite strong evidence from them all asking why this should not apply immediately and why should it wait until analogue switch-off, and indeed, if it is going to come in eventually, whether there are advantages in applying it immediately and having certainty in the market and so on.
  (Tessa Jowell) I hope that we will get to a position where the nature of the contractual arrangements make the implementation of the "must carry" provisions superfluous, but they have been drafted as a failsafe, very specifically, because of the particular importance that we attach to public service broadcasting and its availability across all three platforms. Certainly before switch-over, the public service broadcasters perhaps over-state the risks. The public service broadcasters are available on every platform. They must both offer their channels and we would continue to require them to do so, and we would expect the platform operators to carry them, or in the case of satellite, to distribute them. As things stand at present, and until they do not, the very clear statement of those objectives we hope will be sufficient to guarantee carriage of public sector broadcast channels.

Lord McNally

  984. We have had a lot of evidence asking for statutory limits on the time taken over appeals. Are you satisfied that the Competition Appeals Tribunal will have the expertise to deal in a timely and effective manner with appeals on pricing matters?
  (Ms Hewitt) We are looking at this, but yes, I am clear that the Appeals Tribunal either has already or can certainly obtain the relevant expertise that it would need to discharge the role that is proposed for it in the draft Bill. I know that the Chairman of the Competition Commission has suggested that appeals against regulatory price reviews should be resolved by a different process, and we are looking at his views along with any other relevant points that may be raised either by yourselves or in the consultation process. We will need to talk further to the Commission and to the Appeals Tribunal before we finally decide on what the best process is for dealing with those appeals.

  985. But some of the submissions have been very strong on this. You are in listening mode?
  (Ms Hewitt) Yes.

Mr Lansley

  986. I just wanted to follow up on that, if I may. Do you feel confident that the Competition Appeals Tribunal is the right body? In other contexts, where other utility regulators have set price conditions or indeed other licence conditions similar to SMP conditions, when they are appealable, they are appealable to the Competition Commission. Do you think in principle it makes sense for there to be a different structure for the communications industry as distinct from other sector-regulated industries?
  (Ms Hewitt) We certainly took the view when we looked at this that where you needed a broad review of a particular market, the Commission would be the right place to handle an appeal, but where there is a straightforward issue frankly over price controls, which is not part of a much bigger set of issues around a market review, then I think you want a very straightforward appeals process, and going to the independent CAT seemed to us to be the best place for it to go. But in view of the comments that have been made about that, although I do not share the concern about lack of expertise at all, we will look at that and see whether there is a better route.

  987. The point I was coming to—and I will not labour it—is was it simply that we need to find out what is in effect the legal base of the Community context for appeal in the telecommunications industry, or was there some underlying policy that you were seeking to apply differently in relation to the communications industry than other industries? On the face of it, if you are in the energy market, there may be wider issues, not just pricing issues, but nonetheless, if there were an appeal against a licence condition, it would go to the Competition Commission, who would be able to undertake their function in a way that is not bound by the same rules as apply to the Tribunal.
  (Ms Hewitt) That is perfectly true, but I think here we are creating a framework for the communications sector, and we are doing it within the Framework Directives, which, of course, we ourselves helped to shape. So we are having to look at that.

Paul Farrelly

  988. Strangely enough, the idea of foreign, particularly US, ownership has caused a bit of a stir during the proceedings of this Committee. I note from all the documents that have accompanied the Bill, of which there are many, the regulatory impact assessment quotes some economic efficiency gains from US ownership, but we have received quite a bit of evidence that there are fewer, if no gains in the broadcasting sector because the audience frankly prefers home-produced programmes. How would you react to that sort of comment? Indeed, when you talk of foreign ownership, removing barriers to investment, how would US ownership in particular strengthen the investment in UK-produced programming?
  (Tessa Jowell) This was one of the proposals for changing the existing media ownership rules that was subject to extensive consultation before we developed the policy that we announced at the time that we published the draft Bill. Broadly speaking, across almost all of those who responded to the consultation, there was general support for lifting the restriction on foreign ownership, and there were those who argued that lifting foreign ownership should be contingent on the negotiation of reciprocal agreements. The fact is that at the moment Berlusconi, Vivendi, Bertelsmann, any of the major European media companies could own any of our terrestrial channels, because that is what we are talking about at the moment, and let us focus very specifically on television, because we have newspapers owned by Canadians, Australians and Americans already. That pattern has been set. So we consulted, and we both felt that there was no intellectual or indeed economic case for maintaining the ban on non-EAA ownership, particularly against the background of the diversification of newspaper ownership, nor did we feel that there was a case for holding out for reciprocal agreement. On the day that we published the proposals to amend the media ownership regime in fact we opened up negotiations with the Americans in order to seek to establish reciprocal agreement. We think that change in the near future, particularly post September 11, is highly unlikely. But what we are doing is lifting a restriction that applies at the moment and which constrains potential inward investment from America or Australia, investment which can perfectly freely flow from Italy, France or Germany. In relation to the UK viewers' preference for home-grown production, of course that is right, but I think it is important to separate the source of the investment or the nationality of the investment from the quality of the content. We are absolutely determined—this is a point I made earlier—that in deregulating ownership rules in this way, we will ensure that the content regime is robust and is sufficiently robust to secure the levels of home-grown production, UK-originated programming that people want to see. For those who make claims about this—meaning that all we will have on our screens in this country is low-cost, American dumped production—is absolute nonsense. That could be the case if we did not have the tough content control regime in place, were we not perfectly open to racking up the quantitative aspects of regulation under Tier 2, and if the good sense of the British viewing public did not always, invariably insist on quality. After all, broadcasters want to put on the screens what people are going to watch. So we are quite confident that the safeguards are there in the content regime, and that the industry generally will benefit from a potential new source of investment. We do not know how much money that will bring but it seems ridiculous to maintain an obstacle to that money where it might flow into the UK market.
  (Ms Hewitt) Can I add two very brief points? One is that I think across a very large part of our economy we have seen the enormous benefit of foreign direct investment, and I am not for a moment suggesting that the creative industries, specifically television broadcasting, are identical in nature to motorcar manufacturing, for instance, but what I would say is that we have seen in many sectors the huge benefits, the innovation, the different management approaches and so on that come with foreign direct investment. The second point I would make, which is specific to the communications sector, is that, of course, radio investment from all around the world is freely permitted at the moment, and we would not be able to enjoy Classic FM if it were not for foreign investment. If you listen to the owners of Classic FM, they will tell you that they had about 100 meetings in the City trying to raise investment for this new station, and they could not get any financial interest at all. At the end of the day, it was because Time Warner came in with a very significant minority stakeholding that we now have one of the most successful new format stations in commercial radio.

  989. You have just mentioned reciprocity as a test. This was something that was mentioned in the response to the consultation. Clearly, with newspapers, there is not a problem with respect to the US. The Financial Times can set up and has set up a very successful newspaper. But in broadcasting the US bars foreigners from owning broadcasting licences and Tessa, you have just said what the European Commission has also said, that there is very little prospect of reciprocity in the future, yet talks continue, so why would you both choose to walk, to use a time-honoured phrase, naked into the negotiating chamber?
  (Ms Hewitt) I do not think either of us is prepared to go naked anywhere. If you look at radio, there is no reciprocity there, and that is a real pity because there is no doubt there are British-based companies with real expertise in radio who would make a contribution and would want to make investments in US radio stations if they were able to do so, but I feel it would have been a great pity if we had had restrictions on non«European investment in radio stations, and as a result, as I say, we would have missed out on Classic FM. So I think the way to approach the reciprocity issue is to keep pursuing that in bilateral talks, and also as far as possible pursue it in the context of the World Trade Organisation, rather than deny ourselves something that we know has been valuable in other sectors, that we know has been valuable in radio, and we believe can be valuable in television broadcasting as well.

Chairman

  990. One of the most dispiriting things in terms of radio has been the incredible lack of interest we seem to have in investing in the United States, but the almost passionate interest in the notion that the share prices might be driven up by inward investment from the United States. That is not the most effective piece of evidence we have received.
  (Tessa Jowell) But, of course, we have written on to the face of the Bill a duty for OFCOM to have strengthened powers in relation to protection of the localness of local radio.

Lord Pilkington of Oxenford

  991. The independent producers did not share the Secretary of State's optimism, because, of course, there is a great difference between Berlusconi and America; we speak the same language as Americans. There is a large output. For example, last night I watched Stargate, which is very popular, and there are various other American programmes that are popular. You assume that even with Time Warner or Disney, with their own production teams, our independent producers will prevail. All the evidence we have had from the independent producers contradicts you. Is the next ten years going to prove your optimism is right, or that the independent producers are right, that the market will prevail, we will love Pride and Prejudice rather than Stargate, that only philistines like me will look at Stargate—but there are a lot of philistines like me. Does the Secretary of State feel that intellectuals like herself are going to prevail?
  (Tessa Jowell) No, I would not establish that as the overriding distinction between us at all, but what I would say is that the independent sector is protected throughout the EU by the 10 per cent quota,- increased for all our public service broadcasters to 25 per cent. It is important to remember, although there are no plans to do this, that that is a quota that could be increased at any time if it were felt that both the volume of UK-originated production or UK independent production was under threat.

  992. And you do agree that reciprocity has grown to almost mythical proportions in relation to the American government?
  (Tessa Jowell) No. I would re-state that reciprocity is a negotiation in train but our overriding concern is to maximise the opportunity for foreign investment in the United Kingdom media market, and to maximise that investment in an environment where content regulation will safeguard the distinctive nature of Britain broadcasting.

  Lord Pilkington of Oxenford: I admire your optimism!

  Lord Crickhowell: I have the permission of the Chairman to pursue this one a little because it is such an important issue. Of course I see the attractions of inward investment: I spent eight years as Secretary of State for Wales trying to get inward investment and I do not think you are going to get reciprocity so I am not going to worry about that, but I have taken the precaution of reading my Chairman's book over the weekend on the history of the film industry and, if I get a picture, it is one of an American industry which is hugely successful, puts enormous emphasis on marketing and has enormous libraries—not of junk and rubbish but enormous libraries that they want to maximise the economic value of. I also get a picture that the attempts to put quotas on by other countries, and Europe in particular, against the film industry over the last 50/60 years have not been noticeably successful, so I really do wonder whether you are right in being so confident that we will all finish up with a nice share and quality that you say we will get as a result of the investment. I think there is a possibility that the investment will come: that we may get some talent but we will find that the picture changes and that we have much more of the imported content than you are suggesting, but I really am taking it all from David's book.

Chairman

  993. Before you answer, nearly all the books have been pulped, so you really do not have to worry!
  (Tessa Jowell) But the idea and the vision lives on! I would just simply underline what I already said which is that we have a very tough regime which certainly the broadcasters regard as being a tough regime for regulating content. We also in this country have the BBC which is a very important standard-setter and, if you like, cultural determinant for the other channels and that should not be underestimated. I would also add that in addition to increasing the tier 2 requirements if necessary, if we felt that purchase by a non EEA owner of Channel 5, for instance, led to a reduction in its public service broadcast remit, then we could strengthen its public service broadcast remit. So we have these regulatory remedies to deal with the nightmare scenario that you predict, and we are quite confident that they are robust enough in order to deal with those risks.

Lord Hussey of North Bradley

  994. You propose to make legislative provision for nominated news provider rules to extend to Channel 5 in the same way as Channel 3, if Channel 5 grows in audience share. If you can conceive of such a development, what is the logic behind permitting cross-media ownership of Channel 5, but prohibiting it for ITV?
  (Tessa Jowell) The important difference between Channel 3 and Channel 5 at the moment, as you will be aware, is the size of audience and coverage. Channel 5 has an audience share of about 6 per cent and covers 80 per cent of the country: ITV Channel 3 is universally available, is a major source of news information, and is a major broadcaster on a par with the BBC, so they are quite different. Comparing Channel 5 and Channel 3 at the moment is comparing a mature universal broadcaster with a much smaller enterprise. This is why the potential for flexibility and change in the course of the development of the legislation is important because if, as a result of purchase by another owner—and there is no indication that the present owner at the moment wants to sell Channel 5 so we are talking wholly hypothetically but if Channel 5 were bought by another owner—and if the level of investment in Channel 5 increased its audience share over a period of time and the audience share of ITV would almost certainly fall, then of course there would be a time, consistent with our provision to review the media ownership rules, to take stock of that. But it is precisely because we want to be able to drive dynamic change in the market that we have (a) introduced that flexibility and (b) provided the important safeguard, now and for as long as ITV is dominant, that it is protected, or rather the share of voice in the market is protected, which we believe would be at risk, were at its present penetration of the market the cross media ownership rule lifted.

  Lord Hussey of North Bradley: I think that is certainly fair. We all think it is rather unlikely that that possibility will arise. It makes it necessary to make a judgment.

Lord Pilkington of Oxenford

  995. We have been bombarded by various religious groups about the religious ownership issue, and as you know the traditional argument was the limitation on the spectrum. Of course with digital the limitation goes. Do you think there is any justification for keeping the old rules of the previous Broadcasting Act restricting religious ownership? Do you think this is a defensible position any longer, in view of the digital revolution?
  (Tessa Jowell) Because we have, I hope clearly, set out our policy in relation to this, certainly in relation to the present situation the balance that we have set on access by religious organisations to local digital licences is absolutely right and proper, and there is certainly scope in the future, dependent on the availability of spectrum for access by religious groups to the sort of restricted service licences that will enable them to run community television and so forth. But the issue is essentially one of spectrum scarcity and, while we are operating in an environment of spectrum scarcity, we believe that the level of prohibition in relation to national radio licences and terrestrial television licences is right simply because, in practice, spectrum scarcity means that we would not be able to provide the opportunity for every religion that might want to have its own channel to be able to have that spectrum space. That does not, of course, set limits on the level of religious broadcasting more generally.

  996. But do you not think, and I repeat again the digital point, that you are fighting a rearguard action and in the end it will go to the European Court and you will be forced into it? Do you think it is worth fighting the battle of Waterloo when we are at the Somme?
  (Tessa Jowell) I know how vociferous and what a well-organised campaign some of the religious groups—

  997. Believe me, if you saw the correspondence I have had—
  (Tessa Jowell) Quite. I have received quite a lot of it too. They have run a very vigorous campaign but a campaign which generates 6,000 letters does not necessarily deal with what I think are the sound points I have made. This is a policy shaped first and foremost by spectrum scarcity, by the extent to which spectrum scarcity limits the opportunity for all religions to exercise what might be their preference to run a radio or a television station. We do believe that the position that we have taken is compatible with the ECHR and yes, after switchover, circumstances may well change.

Paul Farrelly

  998. I have a few quickfire questions on radio ownership. This Bill seems to have caught the radio sector completely off guard because they appear not to have taken into account how deregulatory you wanted to be with other parts of the communication industry, and have since changed their stance from having agreed a system last year but are now saying, "Well, hold on, this is now treating us much more restrictively than television". How would you respond to criticisms from a commercial radio sector that there are now going to be much tighter restrictions on radio than other parts of the media?
  (Tessa Jowell) First of all by saying that the proposals that we have made in the Bill broadly adhere to the position that was reached, and we congratulated them on this, last summer by the Commercial Radio Association and the Radio Authority. You are absolutely right to say that the Commercial Radio Association have re-examined their position in light of the scale of deregulation that we have proposed in the draft Bill and what I said when I spoke to the Commercial Radio Association the week before last was that this is a consultation: that we are more than willing to consider the case that they make, but that the proposal that we put on the face of the draft Bill was their proposal, and if they now have an alternative argument they must make that alternative argument and we will take it into account.

  999. Nick Harvey is going to come in later on what is or is not on the face of the Bill in respect of radio ownership and other matters but some of the radio operators seem to be a bit concerned, Capital in particular, that now you are laying out the three plus one scheme or the three independent media voices scheme, somehow it is going to be overlaid by the points scheme that they agreed last year. As a matter of information, is that scheme of last year now effectively dead in the water, and superseded?
  (Tessa Jowell) No. What they proposed last year was three plus one with an underlying points scheme which is more transparent than the points scheme that it was replacing, and three plus one as recommended by the Radio Authority and the Commercial Radio Association is the scheme that we adopted.

 


 
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