Extract of questioning to Ofcom on licensing of existing spectrum – May 2011

Two years ago I asked Ofcom about the licence arrangements for existing Spectrum. Basically the existing regime gives it away for peanuts. The auction announcement now triggers the review mentioned below. In the last two years, the Treasury might have lost tens of millions of pounds of revenue as a result of the delay.

Here’s the extract:

Q60 Mr Watson: We have inherited responsibility for scrutinising Ofcom on spectrum matters. It is devilishly complex. I would like you to treat me like a novice when you answer these questions, if that is okay. I have read your Statement on the Variation of 900MHz and 1800MHz Wireless Telegraphy Act Licences document, dated 6 January. Essentially, what I think you have done there-tell me if I have read this wrong-the old 2G network has been souped up. You have turned it into a hybrid 3G network and, therefore, the value of that network has now increased. Am I right?

Ed Richards: That is one of the things we have done; it is pretty close. I would give it a slightly broader description. So firstly, there was a European requirement that that spectrum should be liberalised, which is the origin of it. Secondly, the Government then passed a direction essentially telling us to do it. We then did it, and the effect of that is to allow the use of the 2G for 3G purposes. That is clearly a consumer benefit because it is a better service, more people want it and you are not restricting the use to one thing.

Your question is about: is the effect of that to increase the value of that licence? In effect it is once it has been fully used for those services, and where we would pick that up, which is probably not in there but it is in the Government direction, is that we would expect to revise the fees paid by the mobile operators at 2G in light of the new market value for that spectrum. That will happen after the auction in the early part of next year.

Mr Watson: That is what I thought it said. Thank you.

Ed Richards: It absolutely is and they know that.

Q61 Mr Watson: The current users of that spectrum are O2 and Vodafone?

Ed Richards: That is correct.

Q62 Mr Watson: What fees do they pay now?

Ed Richards: I think it is about 60 million.

Q63 Mr Watson: Between the two of them?

Ed Richards: No, I think that might be per annum each, but can I come back to you on that?

Mr Watson: Yes, sure.

Ed Richards: Dredging from my memory, it is about 60.

Dr Bowe: That is the kind of order of magnitude, but we had better write to you about that.

Q64 Mr Watson: I also have your Consultation on assessment of future mobile competition and proposals for the award of the 800MHz and 2.6GHz spectrum. That is the recent one in March. Your market value for the 800 spectrum in this document is £200 million. Is that right?

Ed Richards: There are different values associated with different things, so I would have to check exactly which bit you are referring to, but tell me where you are heading.

Q65 Mr Watson: What I am trying to work out is: why haven’t you raised the fees now for Vodafone and O2? Given if there is an equivalent market that is worth about £200 million, those fees seem staggeringly low to me, and there is a taxpayer interest given that this spectrum is a public asset.

Ed Richards: It is a very good question and the answer is that the fees will absolutely rise, but we need a benchmark. We need something to assess how much they should rise by. The most obvious source of that is the auction proceeds, so we will know that-hopefully, if things go well-in the first quarter of next year. We will use that as a benchmark to say, “What is it appropriate for the fees to be?” I would expect it to be a multiple of the fees that they are paying today, so those fees will go up. Then the second-

Q66 Mr Watson: When you say “multiple” you mean at least double but possibly more than that?

Ed Richards: Possibly more than that. It will certainly be substantially higher than is currently the figure. Let me tell you why. We don’t know the result of our auction, but that will be the principal data point to benchmark. If for some reason our auction doesn’t work out in the way that we expect, which I have no reason to believe at the moment but let us suppose that were the case, then we also could refer back to other data from other markets where similar spectrum has also been valued in auctions. So we have a variety of ways of assessing it, and I would be very surprised if those numbers were not substantially higher than they are today.

The second question is: why don’t we levy it today? There are two reasons for that: first, we don’t have the most likely best data; and secondly, once we have that data then we can make a credible assessment. We have to have something to base it on that we believe robustly, and the UK market is the most relevant data. Then the question that would then be asked is: do we levy it retrospectively? Our understanding is that we do not have the power to raise fees retrospectively. That is a legal question as to whether we could or could not do that, and our understanding is that we can’t.

Q67 Mr Watson: I am really sorry about this, because my research has basically been done on Google so treat me like a novice. The Italians liberalised their market and they charge €64 million to each of the phone companies for doing the same thing. What you have just said to me is the value of this market has considerably increased. They will be paying staggeringly more money, perhaps in the region of tens of millions of pounds. They could have done it from January but because we don’t have the data we are going to leave it until the next quarter of next year. So would I be right in saying there is potentially a loss to the taxpayer, as a result of those actions, running into something like tens of millions of pounds?

Ed Richards: You can connect the two in that way. As I said, it is not that they are not paying; it is a question of how much.

Q68 Mr Watson: Not paying a fair rate. Let us face it, Vodafone hardly pay any tax in this country, so I think people would be upset that they are not paying adequate fees for the spectrum, which is the basis that their business is modelled on.

Ed Richards: That spectrum is definitely more valuable as a result of it and they are definitely going to pay substantially more for it. I think the legitimate question you are raising, which is: when does that start? I think in part that is something we would have to discuss with the Government, but we have looked at our own powers and our own powers are clear. We could not create an arbitrary number. We have to have a number that is based in something. The basis for that is obviously the 800MHz auction. Once we have that, we can apply it but our understanding is that we can’t apply that retrospectively. We can have another look at that and adjust it.

Q69 Mr Watson: We will come back to it, but in your document at 3.22 you say, “Ofcom does not consider it would be a good use of its limited resources to undertake a prior review in the interim.” Does that mean because of your cuts to your budget you have not done that assessment to work out what the figure is?

Ed Richards: We make a lot of administrative priority decisions now. I wouldn’t link it to the cuts in the budget, but I would certainly say I only have one team who is qualified and able to prepare that auction. So we are making a judgement about whether they should spend the next six months getting the auction ready and getting the spectrum out for consumers to use, or conducting an exercise that we would have to consult on, we would have to analyse responses on. There would be wildly differing views. O2 and Vodafone would say one thing; Three, Everything Everywhere would say something completely different. It would be a 12-month project and it would delay the auction probably by 12 months. That is a real-

Q70 Mr Watson: So it is not fair for me to say that the fees paid by O2 and Vodafone are tens of millions of pounds less than the market value you could command?

Ed Richards: I think they have only just begun to re-use it, O2 I think. I am not even sure Vodafone have actually begun yet. So it is a very fair question to ask and it is a very fair point to make. I genuinely think that. From our perspective, we face both a resource priority decision in the short term and then we will face a question in relation to whether we could impose it retrospectively. In terms of consumer benefit, the priority for us must be the auction because there is concern already that the UK will not have this spectrum available and for use for consumers quickly enough as things stand.

Q71 Mr Watson: Couldn’t the Treasury help you with a one-off investment in a bespoke assessment, which would ultimately benefit the Treasury probably by tens of millions of pounds?

Dr Bowe: You can see from our demeanour, Mr Watson, as we sit here that we think that is at the unlikely end of the spectrum.

Q72 Mr Watson: Colette, I am very disappointed with you today. You have given a concession to Louise Bagshawe on transparency on local radio, but you have given me nothing so far.

Dr Bowe: Well, when you are suggesting-

Mr Watson: I am trying to help you.

Dr Bowe: I know you are trying to help me and can I say I deeply appreciate it.

Mr Watson: Of course, yes, thank you.

Dr Bowe: I know that you are a very helpful person, but when you say, “Can we go to the Treasury and say, ‘Please can we have a handout so that we can do this?’” I can see a pig flying past the window.

Q73 Mr Watson: I am going to go to George Osborne and say, “Ofcom have told me they are losing tens of millions of pounds as a result of not charging Vodafone what they deserve to pay for their licence, because they don’t have the money because they are focusing on the auction”.

Ed Richards: We are focusing on the auction, but if O2 and Vodafone were here they would say, “We have scarcely got this going. It will not be fully operational for”-anyway, they can speak for themselves. It is an absolutely reasonable point to make. We have a range of choices we have to make, and you have highlighted the point in our document where we make the choice that the priority is to get the auction ready and get the spectrum out. That is absolutely correct and the consequences are the consequences.

Dr Bowe: Can I just add one point here in a very serious vein, which is: what Ed has described is something that we have to do all the time. You have to make choices about how you use your resources. This has nothing to do with the cuts we have had to make to our budget. We have always had to do that. There is an enormous number of things you could potentially do, and one of the things that Ed and his team and one of the things that the board has to do is constantly be thinking, “Where can we best use our resources, which have always been limited, to get the best results for consumers?” We have always had to do that.

Q74 Mr Watson: Would you ever ask the question: what is the taxpayer interest?

Dr Bowe: Sorry, say that again?

Mr Watson: Do you ask the question what is the taxpayer interest?

Dr Bowe: We ask the question: what is in the interests of consumers? Because that is what our primary statutory duty is, which is not the question that, as Ed says, the Treasury always asks. Mr Chairman, this is almost the first time I have had a chance to say this, this morning, our primary statutory duty is to consumers. So when we are thinking about these kinds of issues, about: where do we put resources, we have to put them in the place where consumers and citizens are likely to get the most result.

Mr Watson: I am looking forward to working with you on this, representing the interests of the taxpaying consumer, Colette. I won’t ask any more questions, but thank you.

Dr Bowe: Can I just mention, Chairman, there may well be other questions on spectrum, but you and I had a word about spectrum previous to this meeting. As a result of that we have arranged for a briefing for the Committee on spectrum issues, which I hope the Committee will find helpful. It is simultaneously somewhat complex but exceedingly important for the infrastructure of the country.

Chair: We are grateful for that and looking forward to it. In return, you may be aware that we are likely to have a formal inquiry into spectrum allocation.

Dr Bowe: We would welcome that, Chairman.

Q75 Chair: I expected no less. One other small question. You were talking about the balance of your interest being representing the consumer rather than the Treasury. Another aspect of this is that one of your prime purposes is the creation of a competitive market. We have already seen a reduction in the number of operators with the merger. When you come to conduct the auction, to what extent is the need to maintain four operators in this country, or maybe even more than four operators, one of the considerations?

Ed Richards: It is in many ways the most fundamental because I think only when you have made a judgement about that can you make a judgement about the auction design. We have said very clearly in our proposals that, in our view, the UK will be better off if we have four wholesale competitors as opposed to, say, three or two. Now, that is a view that is not universally held. There are many other countries with only three and some with two, but when we looked at the evidence on this we think that the UK consumer over the last 10 years has done pretty well on a comparative basis. Everybody has complaints of some sort about their contract or not-spots, and so on and so forth, but if you look at: availability, take up, pricing, innovation, a range of criteria, the UK mobile market delivers pretty well for the consumer on a comparative basis.

Our view is that one of the key reasons for that is that we have had more competition than some of the other markets. It is true we went from five to four and there were some reasons-we can go into that in more depth, if you would like to-but our view was that we should absolutely try and keep four. We should design the auction to support four and we should let competition unfold from there, but it is absolutely at the heart of how we were doing things. If you didn’t do that, in a sense, you might as well just have a spectrum free-for-all, but the consequence of a spectrum free-for-all, it is almost a racing certainty that you would move to three quite quickly and possibly to two in due course. I think consumers, both ordinary individuals and businesses, would pay for that in the long term.

Chair: We shall look forward to exploring these in more depth in due course.

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