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Joint Committee on Draft Communications Bill Report

(III) SPECTRUM USE AND MANAGEMENT

174. As Patricia Hewitt told us, radio spectrum is a hugely important raw material for the communications sector; it is a valuable economic and social resource; decisions about its management will have a huge impact.[330] Clauses 110 to 139 and paragraph 1 of Schedule 1, Schedules 4 to 6, paragraphs 5 to 25 of Schedule 7, paragraphs 1 to 13 and 22 to 26 of Schedule 11 and Part 3 of Schedule 13 make provision about the use and management of the radio spectrum. We have found these some of the most difficult provisions to examine for several reasons. First, the provisions seek to give effect not only to policy proposals in the White Paper and requirements of the EC Directives but also to some proposals in the independent review of radio spectrum management issued by Professor Martin Cave in March 2002, but we have had to conduct our inquiry in ignorance of the Government's response to that review. Second, the provisions on spectrum use and management are an exemplar of the wider problem of a Bill that proceeds by amending earlier Acts, requiring those seeking to understand the provisions to navigate through a thicket of previous enactments. Third, spectrum management depends for its success on a number of technical considerations relating, for example, to interference management on which we do not purport to have any expertise.

175. The preamble to the EC Framework Directive states:

331

— It is open to question whether the new legislative framework, incorporating as it does elements of the existing framework, provides "a set of harmonised objectives and principles". Clause 3(1)(c) requires OFCOM "to encourage, in the interests of all persons, the optimal use for wireless telegraphy of the electro-magnetic spectrum". We have earlier supported the inclusion of this concept in OFCOM's principal duty. Section 3 of the Wireless Telegraphy Act 1998 and section 3A of the same Act (as proposed to be inserted by Clause 117) require OFCOM to have regard to "the desirability of promoting the optimal use of the electro-magnetic spectrum" in the conduct of auctions for wireless telegraphy licences and recognised spectrum access respectively. This requirement could be read as compatible with the general duty.

176. However, under section 2 of the 1998 Act (as proposed to be amended by Clause 117 and paragraph 22 of Schedule 11) OFCOM is required to have regard to a different set of matters in determining licence fees for wireless telegraphy licences and recognised spectrum access. Under the system of administrative incentive pricing under that section OFCOM is enjoined to have regard to demand and criteria relating to efficiency, economic benefits, innovation and competition.[332] To complicate matters further, OFCOM will be able to have regard to these narrower, economic criteria in making arrangements for auctions, but is not required to do so.[333] OFCOM will thus inherit two sets of criteria, one principally economic - under section 2 of the 1998 Act as amended - and one centred on the phrase "optimal" which is designed to encompass a broader range of social and technical considerations. We recommend that the Government ensure that the final Bill, including amendments to the Wireless Telegraphy Acts, provides OFCOM with a set of harmonised objectives, consistent with the general duty and incorporating the factors under section 2 of the 1998 Act, in undertaking its functions relating to spectrum management and use.

177. In transferring responsibility for spectrum management from the Radiocommunications Agency (and thus in law the Secretary of State) to OFCOM, the draft Bill faces a new problem of seeking to define the distinction between the functions of the independent regulator in this area and the powers of the Secretary of State. With the exception of certain functions relating to spectrum trading, the Framework Directive does not specify which powers have to be exercised by the independent regulator.[334] Clause 112 proposes to grant to the Secretary of State essentially unlimited powers (subject to retrospective approval by both Houses of Parliament) to issue directions to OFCOM to ensure that spectrum management takes place "in the wider public interest".[335] These general powers of direction were welcomed by the Consumers' Association.[336]

178. The Cave review, while accepting that OFCOM's performance of its functions under its own duties might run counter to the wider public interest, contended that the powers of direction ought to be limited in scope, ensuring clear freedom of action for OFCOM in the specifics of spectrum management.[337] Professor Cave restated this view in oral evidence and suggested that a line could be drawn between strategic direction by the Secretary of State and technical functions for OFCOM by the removal of subsection (4) of Clause 112.[338] John Forrest, Chairman of the Spectrum Management Advisory Group, also raised the important issue of what sources of advice would be available to the Secretary of State in exercising these powers, given that the staff of the Radiocommunications Agency would become part of OFCOM.[339]

179. Patricia Hewitt reaffirmed the importance of strategic decisions on spectrum use, including those relating to analogue switch-off, being taken by Ministers. With regard to Professor Cave's concerns, she drew attention to the difficulty in drawing a dividing line between strategic and specific issues.[340] There is a wider public interest in the allocation, assignment and management of spectrum that OFCOM, even with its duty to further the interests of all citizens in its optimal use, may not be best placed to judge. It is important, however, that directions under Clause 112 concentrate on the purposes to be achieved, rather than the details of the means of achieving those purposes, and we recommend that the Government consider carefully whether Clause 112 could be amended to reflect this. We further recommend that any order containing a direction under Clause 112 be laid before Parliament in draft for approval by both Houses before coming into force unless the Secretary of State is satisfied, on grounds such as commercial confidentiality, that the procedure set out in subsection (6) for retrospective approval of such orders needs to be followed.

180. The current system for spectrum management regulates the use of radio frequencies by the licensing of apparatus for the transmission or reception of wireless telegraphy signals. Clauses 115 to 118 and Schedule 4 provide a framework for giving effect to proposals by the Cave review for a complementary system of spectrum management based on the grant of Recognised Spectrum Access. The Cave review advanced two main arguments for this additional management tool: first, a move away from apparatus licensing would give greater freedom to operators in the choice of equipment and services to deploy in assigned spectrum; second, it might help to resolve issues relating to rights to spectrum shared between terrestrial and satellite systems, in cases where the latter is not subject to domestic licensing.[341] The Government's accounts of these provisions refer almost exclusively to the second issue and to the potential of the proposals to encourage satellite operators to face the opportunity cost of the spectrum they use.[342]

181. The proposals in the draft Bill provide a framework only: the actual value and operation of a system of Recognised Spectrum Access will depend upon secondary legislation which is at an early stage of discussion.[343] The Cave review accepted that a wide range of spectrum use by satellite is the subject of international agreements as a result of which there is no opportunity cost. In the advocacy of Recognised Spectrum Access there is a tension between the approach which emphasises the provision of a voluntary system as a service to users subject to interference from other use of shared spectrum and the emphasis on the potential of this mechanism to overcome the alleged problem that terrestrial operators who pay a licence fee are "at a competitive disadvantage".[344] If the system is indeed intended to be "voluntary", it is worthy of note that some current users of geostationary orbit satellites see no interference problems that the system might tackle.[345] If the system is designed to remedy competitive disadvantages for terrestrial operators, it is worthy of note that, in the case of broadcasting, some costs to a satellite operator might be passed onto organisations that are also terrestrial operators.[346]

182. After we concluded evidence-taking, the Government published, on 15 July, a consultation paper on Recognised Spectrum Access. This paper emphasised that the system could "provide satellite operators with similar assurances about spectrum quality and security as licensees, regardless of whether transmitters are located in space or in the United Kingdom". It noted that such protection from interference was not guaranteed by international agreements. It reaffirmed the non-mandatory character of the system, so that it would only be adopted by operators if the benefits outweighed the costs. Finally, it confirmed the impression that use of Recognised Spectrum Access other than in the context of satellite services was at a much earlier stage of consideration.[347]

183. Clause 119 of the draft Bill provides for the Secretary of State to make payments to OFCOM for Government use of radio spectrum. Payment by Government departments is not new; statutory provision is needed now because responsibility is moving from within Government to an independent regulator. The provisions of the Wireless Telegraphy Acts do not bind the Crown and so Government departments do not require licences for spectrum use.[348] Prior to the Wireless Telegraphy Act 1998, the Ministry of Defence (the principal Government user of spectrum) paid the Radiocommunications Agency for the direct administrative costs of spectrum management.[349] Following the introduction of administrative incentive pricing for licences under the 1998 Act, Government departments agreed to pay a fee on a comparable basis to commercial users, subject to exemptions where no alternative use was available. In consequence, the Ministry of Defence paid £25 million for spectrum use in 2000-01.[350] The Cave review proposed that the Ministry of Defence ought to pay the full opportunity cost for spectrum currently subject to administrative pricing, and charges for radar usage. With payments rising in consequence to over £100 million a year, Professor Cave argued that the Ministry of Defence would have real incentives to use spectrum more efficiently.[351] The Ministry of Defence might engage in leasing Recognised Spectrum Access or could conceivably hand back spectrum use for primary assignment by auction.[352]

184. The precise operation of arrangements for incentivising the Ministry of Defence to use spectrum efficiently will not depend upon provisions in the Bill, although a framework for Recognised Spectrum Access may be a prerequisite for leasing arrangements. One initially disconcerting aspect of the terms of Clause 119, as Professor Cave noted, is that the level and method of payments is to be determined by the Secretary of State rather than by OFCOM.[353] We were told that existing arrangements for negotiation based on comparable charges in the private sector would continue and Professor Cave was satisfied that this system could function effectively.[354] There is, however, a difference in kind between negotiations between two bodies subject to political control by Ministers and negotiations between a Government department and an independent regulator. We recommend that the Government ensure, by means of amendment to Clause 119 if necessary, that there is transparency about the means by which payments by Government departments are calculated.

185. The Communications White Paper stated that the Government did not see the broadcast use of spectrum as being exempt from the general pressure to use spectrum efficiently and from the role of the price mechanism in applying such pressure. The Government specifically proposed that spectrum used by broadcasters should be valued, while acknowledging that any payment mechanism would need to take account of the particular circumstances of broadcasting.[355] The Cave review argued that the Government should go further, proposing that market-based spectrum management tools should be applied to the broadcasting sector so that all broadcasters are exposed to the full opportunity cost of spectrum use, and advocating the phased introduction of spectrum pricing for analogue spectrum use by all public service broadcasters - the BBC, S4C and Channels 3, 4 and 5.[356]

186. Witnesses from the broadcast sector were overwhelmingly critical of the proposals in the Cave review. Four main criticisms were levelled. First, it was suggested that the proposals failed to take account of the radically different methods by which public service broadcasters acquire spectrum rights. Second, it was argued that transmission costs already provided broadcasters with every incentive to use spectrum efficiently. Third, it was contended that diversion of costs to meet spectrum charges would further delay the development of digital television. Finally, it was argued that broadcast use of spectrum was determined by public policy considerations relating to universal coverage and the timing of analogue switch-off, over which the broadcasters themselves had no direct control.[357]

187. With respect to analogue broadcasting, we are not persuaded by the arguments advanced by Professor Cave in his review and his oral evidence for the application of spectrum pricing, at least until digital switchover is imminent. There would appear to be only marginal scope for genuine reductions in the public service broadcasters' use of analogue spectrum prior to digital switchover, and there would be difficult transitional issues. For instance, the concept of "compensation" for such costs advanced by Professor Cave would be hard to impose when one public sector broadcaster is directly funded by the taxpayer (S4C), another is funded through a licence fee (the BBC) and the third relies on commercial revenue (Channel 4), while the private sector broadcasters (Channel 5 and ITV) have effectively negotiated, and will be paying, a substantial price for their spectrum access for some years to come.[358] However, we agree with the principle that broadcasters should be expected to pay for the spectrum they consume, in the same way as other spectrum users, and believe that the transitional issues may prove surmountable over the longer timeframe implied by focusing on the transition to all-digital broadcasting and subsequent digital spectrum use.

188. We return in paragraphs 354 and 355 when we consider broadcasting licensing arrangements to the payments which ITV licensees and Channel 5 may be required to pay before and after digital switchover. However, in the case of the BBC, Channel 4 and S4C, we have concluded that early introduction of spectrum charging would provide no clear benefits and might even undermine the Government's efforts to achieve early analogue switch-off. We recommend that no incentive-based spectrum charges be imposed on the BBC, Channel 4 and S4C in respect of spectrum use for analogue transmissions, until at least shortly before digital switchover.

189. The allocation of spectrum for radio astronomy is a use which is effectively without scope for gains in efficiency in spectrum use, or for the application of incentives. Radio astronomers have spectrum allocated by the ITU or, if they need other spectrum, it is dictated by the laws of physics rather than economics. It seems to us, therefore, that this, alongside analogue spectrum for terrestrial television broadcasters, is in a category of spectrum use which should be charged only the costs directly incurred in spectrum management by OFCOM, but not to apply incentive pricing.

190. Perhaps the most significant new element in spectrum management foreshadowed in the White Paper was the introduction of spectrum trading - a system whereby the holder of a wireless telegraphy licence or Recognised Spectrum Access sells rights to the use of spectrum to another business.[359] The principle of spectrum trading was welcomed by respondents to the Cave review consultation process, although some felt that its success would very much depend on the detailed mechanisms at work. The review itself strongly supported early implementation of spectrum trading and the British Government was to the fore in ensuring that it is permitted by the Framework Directive.[360] Clause 124 of the draft Bill provides a basis for the introduction of spectrum trading.

191. Given the crucial role of spectrum trading in the Government's vision of a more market-based approach to spectrum use and management, the provisions of Clause 124 have attracted remarkably little comment during our inquiry, although contributors to our online forum expressed some concerns about the proposals.[361] The Clause provides an enabling power: the capacity of OFCOM and the Government to cope with the real risks associated with spectrum trading which the Government itself has identified will depend upon the regulations made by OFCOM under this power as spectrum trading is gradually phased in.[362] BT argued that the powers granted under Clause 124 were too broad and discretionary and suggested that this Committee ought to revisit this area after the Government's position was clarified by the Government's response to the Cave review.[363]

192. Not only have we been unable to comment on the Government's response to the Cave review, which is still awaited, we have not had an opportunity to examine the Government's consultation document on spectrum trading issued on 15 July. This indicates that trading might be introduced for some licence classes by the end of 2004.[364] We believe that the Government's developing plans for spectrum trading and spectrum management more generally would repay closer parliamentary scrutiny than it has been possible for us to undertake given the limited time available to us and the uncertainty surrounding the Government's policy prior to publication of its response to the Cave review. We envisage that this scrutiny might be undertaken by the Trade and Industry Committee of the House of Commons.

330 Q 978. Back

331 Framework Directive, recital (19). Back

332 Memorandum submitted by Radiocommunications Agency. Back

333 Memorandum submitted by Radiocommunications Agency. Back

334 Framework Directive, Article 9. Back

335 Policy, paras 7.4.1-7.4.4. Back

336 Ev 470. Back

337 Cave Review, pp 92-95. Back

338 QQ 448, 454. Back

339 Q 422. Back

340 Q 978. Back

341 Cave review, pp 95-100. Back