Background

  35. Part IV of the draft Bill is wholly unrelated to electronic commerce and has evidently been tagged on to make use of a legislative opportunity. It concerns the procedures by which licences issued to telecommunications operators under the Telecommunications Act 1984 can be modified.[97] At present, modifications to telecommunications licences can only be made with the written consent of each licensee concerned. If any licensee affected by a modification fails to provide written consent then, if the Director General of Telecommunications (DGT) wishes to proceed with the modification, the matter must be referred to the Competition Commission. Implementation of the EC Telecommunications Services Licensing Directive has provided a further spur to reform licence modification procedures. The Directive requires telecommunications licensing to be non-discriminatory, so that it is no longer be possible for the DGT to modify licences on a piecemeal basis. Instead, a modification made to one licence must be made to all relevant licences at the same time. As a consequence, DTI has described the present modifications procedure as "almost unworkable" and has stated that a reformed system would be more efficient and effective and prevent licences from becoming "silted up with out of date requirements".[98]

36. DTI announced in March 1998 that it was considering reforming the procedures for modifying telecommunications licences and published a consultation document in May 1998.[99] A similar procedure to that relating to gas supply licences was initially proposed, whereby telecommunications licence modifications could be made without reference to the Competition Commission even though a small proportion of licensees affected by the change either failed to give their consent or positively objected. It was suggested that if the licensees objecting to a modification accounted for more than a certain proportion — between 10% and 25% — of the total revenue generated by all the licensees' telecoms activities or if those objecting represented more than a similar proportion of the number of telecoms firms operating in the specific market affected by the modification then the modification could go ahead only after a referral to the Competition Commission. Otherwise no such referral would be necessary.[100]

37. The approach in the May 1998 consultation document was rejected by respondents for a number of reasons, including because, in practice, British Telecommunications would always by itself constitute a "significant minority" under the proposed rules.[101] The Government withdrew its proposed tests of the weight of opposition to licence modifications and, in a March 1999 consultation document, suggested instead a "more qualitative approach" which would involve the DGT assessing the significance of objections raised to modification proposals. It was suggested that if, despite objections to a proposal, the DGT wished to proceed with a licence modification he would be required to publish an explanation of his decision and that licensees would be given the right to appeal, to the High Court or, in Scotland, the Court of Session, against the DGT's ruling.[102] These suggestions, like those made in May 1998, were also apparently rejected by many respondents. The draft Bill contains new proposals for the modification of telecommunications licences which have not previously been the subject of consultation.

The Government's Proposals

  38. The draft Bill combines elements of both the May 1998 and March 1999 proposals for reform of the procedures for modifying telecommunications licences. It is now proposed that, in relation to a licence modification, the DGT will explain in advance what would constitute the "significant minority" of relevant licensees which would be able to prevent a modification being made without reference to the Competition Commission. In defining the "significant minority" the DGT must take account of rules and principles prescribed by order by the Secretary of State concerning "the proportion of the total number of relevant licensees represented by the objecting licensees" and "the size of the businesses and the nature and extent of the business activity of, respectively, the objecting licensees and the relevant licensees that do not object".[103] An entirely new proposal has been brought forward, that if the DGT considers a licence modification to be deregulatory then it can be proceeded with regardless of the number of objections made. It will be possible to appeal against the DGT's decisions concerning the definitions of the "significant minority" and deregulatory proposals, described by DTI as on "wider grounds than the normal grounds for judicial review".[104]

Reaction to the Proposals

RATIONALE

  39. Only a small number of telecommunications firms responded to part IV of the draft Bill and most accepted that there was a need for the licence modification procedure to be reformed.[105] Neither the broad outlines nor the details of the Government's proposals were universally welcomed, however. Cable and Wireless Communications told DTI that its proposals contained "fundamental weaknesses" and "cannot be supported in their present form".[106] Orange accused the Government of bringing forward proposals with undue haste and suggested that a simple change — so that the failure of a licence holder to respond to a licence modification proposal would imply consent rather than objection — would suffice to improve the efficiency of the existing modification procedure. Orange also argued that, unless the telecoms market is subject to increasing regulation in future, instead of less regulation as anticipated, then "there will be few occasions when the licence amendment procedure will be needed".[107] We recommend that, if Ministers wish to proceed with part IV of the draft Bill, they explain more clearly, including by reference to practical examples, the reasons why this particular method of reforming the procedures by which telecoms licences are modified is preferable to other, simpler methods.

SIGNIFICANT MINORITY

  40. There was widespread disquiet about the way in which the "significant minority" of objections which would be required to ensure that a licence modification proposal was referred to the Competition Commission would be defined. A point made frequently about the proposals was that, in practice, British Telecommunications would retain its right to insist upon a reference to the Competition Commission, while other, smaller companies would lose that right.[108] The way in which a "significant minority" could be defined in markets containing few participants, such as that for mobile telecommunications, was questioned and there were calls for a weighting system to be used when the "significant minority" was calculated.[109] More fundamentally, respondents argued that the proposals lacked regulatory certainty and gave too much power to the DGT.[110] The role and value of the rules and principles which the legislation proposes the Secretary of State can set out to guide the DGT's decision making was questioned by a number of respondents.[111] We recommend that a consultative draft of the order intended to set out the rules and principles which will guide the DGT's decision about what constitutes a "significant minority" in relation to objections to licence modification procedures is published before second reading.

APPEALS

  41. DTI told us, in answer to our written questions, that the grounds for appeal proposed in relation to licence modifications were broader than those relating to judicial review because the Government's proposals would allow "for appeal on the basis that here has been an error as to the facts relied on in the making of a decision".[112] Respondents were generally not satisfied that this represented a significant addition to the existing right for decisions by the DGT to be subject to judicial review.[113] Vodafone, for instance, told the Government that "the four grounds for appeal are limited, in effect, to those of judicial review" and that "the grounds for appeal should include wider grounds such as where the modification has a discriminatory or disproportionate effect on the licensee as is required by the EU Licensing Directive", although the Government has stated that these wider grounds are included within the right to appeal on the grounds of the decision involving a material error of law.[114] There were calls for appeals to be heard on the full merits of a decision;[115] for the appeal Court to be allowed to award damages or refer a matter to the Competition Commission;[116] for modifications to be stayed until appeals had been decided;[117] and for a small panel of economics and competition policy experts, rather than a Court, to hear appeals.[118] The proposed appeals mechanism relating to telecoms licence modifications lacks support from telecoms licence holders and merits re-examination before it is presented to Parliament.

DEREGULATORY MODIFICATIONS

  42. The Government's proposal that modifications described by the DGT as deregulatory could proceed despite objections, no matter how significant, was rejected by several respondents.[119] Energis argued that this provision would be used to "remove regulatory requirements from BT and those mobile operators with significant market power" and that it should be used only after the DGT had consulted other telecoms firms.[120] Vodafone described the criteria by which modifications would be classified as deregulatory as "unclear" and "potentially inappropriate".[121] DTI told us that the proposal "has precedents in the Gas Act 1995" but admitted that it had not been the subject of consultation prior to its inclusion in the draft Bill.[122] We also note that the DTI has published no explanation of why the power is required, no examples of how it might be used, nor any reason why the DGT should be able to insist on making a deregulatory modification without any reference to the objections made to it. We are unpersuaded of the merits of the Government's proposal for the DGT to be able to make deregulatory modifications to telecoms licences despite objections, no matter how significant. We recommend that a detailed assessment of the need for the deregulatory proposal, taking account of the arguments made against it by respondents to the draft Bill, should be published, if the Government wishes to proceed with the proposal.

OTHER ISSUES

  43. Other points made by respondents to part IV of the draft Bill included that:

• the proposals would lead to different modification procedures applying to class and individual telecoms licences, for reasons described as "unclear" by Orange and, according to Vodafone, likely to have disproportionate effects[123]
• no mention is made of how the additional procedures will be funded, although, at present, the cost of referrals to the Competition Commission is met by the DGT levying additional licence fees on telecoms firms[124]
• licensees defined as not relevant in relation to a licence modification would be unable to register an objection or launch an appeal, even though they may be affected by the modification.[125]

We expect Ministers to deal with these issues if and when the legislation is introduced.

Conclusion

  44. The notes on the draft Bill record that there have been two formal consultations on the revised licence modification procedure and that "responses to...these consultation exercises have contributed to the measures set out in the Bill".[126] The present proposals have been consulted on by the fact of their publication as a part of a draft Bill, with a reasonable period of consultation allowed for. We understand, however, that telecoms licence holders were not sent copies of the draft Bill by DTI and many may have been unaware of its publication, and therefore failed to respond to it, because the proposals relating to telecoms licence modifications were not widely publicised. The latest proposals do little to meet the concerns reported as having been expressed during the other consultations. The question of the definition of a "significant minority" in any case is left to "rules and principles" to be laid down in secondary legislation. Those rules and principles will be the subject of further consultation and will require affirmative resolution of both Houses of Parliament.[127] In essence, the Government is putting off the evil hour of establishing acceptable criteria for identifying a minority significant enough to require reference to the Competition Commission, two successive formal consultations having failed to do this. The inadequacy of the consultation on part IV of the draft Bill, and the adverse reaction to the detail and, in some cases, the overall approach of part IV by those firms which did respond, cause us some unease and we will be pursuing the matter further.

98   Licence Modification Procedure: Proposed Changes to the Telecommunications Act 1984, DTI, May 1998, URN98/1049 (hereafter May98), paragraph 12; Cm4417 p27 Back

99   A Fair Deal for Consumers: Modernising the Framework for Utility Regulation, DTI, March 1998, Cm3898, proposal 7.16 Back

100   May98 paragraphs 19-23 Back

101   Licence Modification Procedure: Updated Proposals for Changes to the Telecommunications Act 1984, DTI, March 99, paragraph 5 Back

102   Ibid, paragraphs 13-18 Back

103   Proposed s12A(9) of the Telecommunications Act 1984, in s20(4) of draft Bill Back

104   Cm4417, p30 Back

105   For instance, responses to Government from ntl p1, Vodafone p4, Cable and Wireless Communications p4, One2One section 1.0 Back

106   Response to Government from Cable and Wireless Communications p4 Back

107   Responses to Government from Orange pp1-2, Thus Ltd p7 Back

108   Responses to Government from British Telecommunications paragraph 27, Orange p4, Energis paragraph 4, Thus Ltd p8 Back

109   Responses to Government from British Telecommunications paragraph 27, ntl annex paragraphs 3.1 and 4.3.1, One2One pp2-3  Back

110   Responses to Government from Vodafone p4, Orange p3, Cable and Wireless Communications p4, Telewest p2 Back

111   Responses to Government from British Telecommunications paragraph 28, Orange p3, BT Cellnet p4 Back

112   Ev, p7, part IV, Q7 Back

113   For instance responses to Government from ntl annex paragraph 3.3, Telewest p2, One2One p4 Back

114   Response to Government from Vodafone p4; also Ev, p7, part IV, Q7 Back

115   Responses to Government from British Telecommunications paragraph 27, Orange p5; and see BT Cellnet p2 Back

116   Response to Government from BT Cellnet p3 Back

117   Responses to Government from BT Cellnet p3 and Orange p6 Back

118   Response to Government from ntl annex paragraph 4.3.3; and see response from Telewest p2 and One2One section 1.3 Back

119  For instance response to Government from BT Cellnet p3; One2One offered support, p2 Back

120   Response to Government from Energis p7 Back

121   Response to Government from Vodafone p4 Back

122   Ev, p6, part IV, Q5 Back

123   Responses to Government from Orange p3 and Vodafone p4; also Ev, p6, part IV, Q3 Back

124   Response to Government from ntl p2 Back

125   Responses to Government from BT Cellnet pp2-3, ntl annex paragraphs 3.1-3.2, Orange p4, Cable and Wireless Communications p2, Telewest p1 Back

126   Cm4417, p19 paragraph 16 Back

127   Proposed s12A(10) of the Telecommunications Act 1984 in s20(4) of the draft Bill Back