Ofcom Response to Consultation on Draft Statement of Charging Principles and further consultation

Issued : 6|12|2004
Closing date for responses : 17|01|2005

Summary

1.1 Ofcom assumed its functions from the old regulators on 29 December 2003, which meant that it had a very limited time between publishing its business plan setting out its funding requirements for the first charging year and the setting of tariffs for the 2004/5 charging year on 31st March 2004. Therefore, Ofcom undertook a shortened consultation on the Statement of Charging Principles and based its 2004/5 tariff principles largely on those of the old regulators. During its consultation on these, a considerable number of stakeholders raised issues that they did not believe had been effectively addressed in the old regulators’ principles. Ofcom agreed that many of these issues deserved a further airing and consulted stakeholders in July 2004 on its proposals.

1.2 Having undertaken the promised consultation, Ofcom now presents its proposals and the underlying rationale and sets out a draft Statement of Charging Principles to be applied from the charging year 2005/6 onwards.

1.3 In these proposals, Ofcom has addressed five generic issues:

• the appropriate measure to use as the basis of setting tariffs (e.g. revenue versus audience share or profit);
• what types of revenue should be included for the purposes of setting tariffs;
• the structure of tariffs (including the extent to which tariffs should be flat-rate; in line with the operator’s respective size; or be progressive, such that larger operators pay proportionately more than small operators/ new entrants);
• implementation of transitional relief to moderate the impact of significant changes to the structure of tariffs on individual operators;
• whether individual operators could repay, in one lump sum, their share of the Government loan which funded the outstanding liabilities of the old regulators and the establishment of Ofcom.

1.4 Ofcom is required by law to ensure that its revenues fully cover the costs of regulation; and to raise from each of the television, radio and networks and services sectors its best estimate of the cost of regulating each sector for the year ahead with any under-recovery or over-recovery against the end-year outturn being reflected in the following years’ fees for the respective sector.

Principles of Setting Tariffs

1.5 Ofcom’s objective in setting its tariffs is the effective collection of its funding requirements in a fair and equitable manner and with the minimum administrative burden on stakeholders.

1.6 Ofcom’s proposals for setting licence fees and administrative charges seek to meet, to the greatest possible extent, the following criteria:

• Fairness. The tariff structure should raise Ofcom’s required funding across the regulated sectors in a manner that is equitable;
• Cost-reflectiveness. Charges should broadly reflect the underlying cost of regulating each category of stakeholder;
• Reliability. The tariff base needs to be stable over time, and not prone to erratic movements. Charges should not move substantially in any one year;
• Simplicity. The calculation of charges should be as simple as possible, wherever practicable using data that stakeholders would in any case gather for their own management purposes; and be relatively simple to administer for Ofcom;
• Be easily verified. Information required for the setting of charges should be easily verifiable to ensure industry-wide compliance;
• Adaptable. Tariff principles and structures should be able to adapt to a changing market environment and be consistent with wider policy; and
• Relevance. Charges should cover in full an operator’s activities that flow from the licence or authorisation, but only those activities.

Proposals

1.7 Ofcom’s proposals are set out in detail in this document and are summarised in the following paragraphs.

1.8 Ofcom proposes to retain a revenue measure as the basis of calculating licence fees and administrative charges for the television, radio and networks and services sector. While other methods each have their individual merits, Ofcom believes that revenue most closely matches the criteria set out in paragraph 1.6 above.

1.9 Ofcom proposes that the tariff structure should have a modest degree of progression, so that smaller operators and new entrants pay a lower proportion of their revenues than larger established operators.

1.10 Ofcom intends to continue to keep radio and television as separate regulatory sectors with separate tariffs to reflect the differences between the sectors in terms of industry structure, size of operator and business models.

Further consultation

1.11 Ofcom is consulting in this document on a new designation in the context of administrative charges set out at Section 8 and on Relevant Activity guidelines which are set out at Section 9.

Definition of Relevant Turnover in Television

1.12 In the television sector, Ofcom proposes to change the definition of Relevant Turnover from being based on Qualifying Revenue, as defined in the 1990 Broadcasting Act, to a new definition as set out in Annex 1 of this document.

1.13 The definition of Qualifying Revenue was designed to meet different purposes in the Broadcasting Acts, it is not adaptable and can lead to distortions in the treatment of different operators as their business models evolve.

1.14 The proposed new definition of Relevant Turnover will include all revenues which flow from the possession of a broadcasting licence, including those from subscription, advertising, sponsorship and interactive services/applications (including, for example, revenue deriving from premium rate telephone lines, betting and gaming services and interactive advertising).

1.15 Ofcom proposes that, as a general rule, Relevant Turnover should exclude revenue earned by the operator of any television platform in respect of the retailing of television channels (i.e. retail subscription revenue). This is not an Ofcom licensed activity. Instead, all revenue earned by an Ofcom licensee from the wholesaling of a channel to any television platform operator shall be included within Relevant Turnover. However, in certain limited instances where wholesale revenues attributable to a channel cannot be easily ascertained, retail revenues will be used as the starting point for determining the level of subscription revenues which will fall within Relevant Turnover.

1.16 One specific exception to the general approach described above relates to shopping channels. Since the main regulatory functions relating to such channels have passed to the Advertising Standards Authority with effect from 1st November 2004, Ofcom proposes to introduce a simple flat fee for such channels in order to cover the cost of Ofcom’s residual regulatory duties. It is expected that this flat fee will be equal to the minimum fee. Ofcom also proposes to put teleshopping channels into a new regulatory category, Category E, for this purpose.

1.17 The underlying principle in determining Relevant Turnover is that only those revenues deriving from the broadcaster's licensed activities should be included. Accordingly and by way of example, revenues earned pursuant to a Gaming Act Licence will be excluded. However, any revenues earned by the broadcaster from the provision of access to such betting and gaming activities (whether from the broadcast stream or from a stand-alone interactive service) will be included.

1.18 Ofcom also proposes that Relevant Turnover should replace Qualifying Revenue as one of the components for assessing obligations under the Code on Television Access Services.

Collection of Revenue Data

1.19 Following on from responses received from stakeholders, Ofcom has decided to use revenue data from the last but one calendar year’s revenues. Therefore the relevant revenue data for fees payable in 2005/6 will be those for the calendar year ended 31 December 2003.

1.20 It is proposed that the changes to the definition of Relevant Turnover will be introduced for the charging year 2005/6 with the exception of the Television Sector, where the inclusion of interactive, betting and gaming revenues will be delayed until tariffs are set for 2006/7 based on 2004 calendar year revenues. Therefore, in general, Ofcom will not require licence holders (or those who pay administrative charges) to resubmit their revenue data for 2003.

1.21 However, licensees who are also television platform operators and retail their own channels will be required to resubmit their 2003 subscription revenue data. Since any reduction in revenues by moving from retail to wholesale subscription revenues will tend to reduce the licence fees paid, we do not consider this an undue administrative burden.

Tariff Structure

Television

1.22 Ofcom proposes to introduce a simpler tariff table for television licensees that removes the distortions caused by the caps set previously by ITC. Ofcom will also introduce a consistent set of tariffs for Public Service Broadcasting (“PSB”) which are platform neutral, rather than having different tariffs which depend on the type of platform the PSB channel is broadcast on.

1.23 Ofcom also proposes to modify the tariff structure to reflect market developments. This involves reducing the maximum revenue ceiling beyond which the tariff rate is set to zero, from 400m to 300m and implementing less progressive tariffs than is currently the case.

1.24 To ensure consistency across the Broadcasting sector, Ofcom proposes to use transitional relief for the migration of television licence fees onto the new tariff basis, where proposed changes to the tariff structure would produce a significant impact on any individual licensee.

Radio

1.25 In the radio sector, the fees for new licence applications do not currently cover the costs of granting new licences and the difference has hitherto been met by the fees from existing licensees. Ofcom proposes to rebalance this so that income from application fees more closely relates to the cost of granting new licences. Application fees will therefore rise but there will be a corresponding reduction in ongoing licence fees, better reflecting the actual costs of applications.

1.26 Ofcom also proposes to change the definition of Relevant Turnover in the Radio sector from being based on Qualifying Revenue, as defined in the 1990 Broadcasting Act, to a new non-statutory definition as set out in Annex 2 of this document. A progressive tariff structure is also proposed. In the interests of simplicity, Ofcom proposes that licensees whose annual fees would be 100 or less, will not be charged (that is, their tariff rate will be set at zero per cent).

1.27 Finally, Ofcom proposes to allow a period of transitional relief for the migration of 2004/5 tariffs onto the proposed new tariffs where changes to the tariff structure would produce a major impact in the fees for an individual licensee.

Networks & Services

1.28 In the networks and services sector, Ofcom has analysed the possibility of deducting wholesale costs from Relevant Turnover, but considers that the benefit of this change is outweighed by its complexity, administrative cost and difficulty of verification. Ofcom therefore proposes no alteration to the structure of existing tariffs. Ofcom intends to publish a list of those providers of networks and services whom it considers to be liable to pay administrative charges.

Start-up Loan

1.29 Ofcom has considered whether individual stakeholders should be able to elect to pay their share of the Government loan in a lump sum rather than spread over five years. To do so, however, would require a forecast of that stakeholder’s likely Relevant Turnover over the next five years. More important than the administrative complexity is the risk that this forecast could prove to be significantly adrift, which could bear inequitably on other stakeholders. Ofcom does not, therefore, propose to allow elective lump sum repayments of the start-up loan.

Notice of Designation under Section 38 and 34 of the Communications Act 2003

1.30 Under section 38 of the Act, Ofcom can only charge those providers of electronic communication networks, services or associated facilities of a description that have been designated. Ofcom’s draft designation is produced as Chapter 8 of this document and Ofcom welcomes comments on this notice of designation.

Relevant Activity guidelines

1.31 Ofcom has taken this opportunity to amend Oftel’s guidelines “The definition of ‘relevant activity’ for the purposes of administrative charges” dated 29 July 2003, primarily to clarify how it will interpret public electronic communication services to end-users.

1.32 The guidelines, including Ofcom’s amendments are set out at section 9 of this document. Ofcom welcomes comments on the guidelines and Ofcom’s amendments in this consultation.

1.33 Without fettering its discretion, Ofcom is proposing to normally expect to follow the guidelines in determining what is a relevant activity for the purposes of administrative charges.

Responding to this consultation

1.34 The consultation seeks views on the draft Statement of Charging Principles that Ofcom will apply to the continued setting of licence fees and administrative charges for 2005/6 and beyond. This is contained within Chapter 7 of this document. In arriving at this draft Statement of Charging Principles, Ofcom has taken the views of its stakeholders into consideration and is therefore seeking comments on matters which have not already been covered by the previous two consultations on this issue, and points on the drafting of the draft Statement of Charging Principles, the definitions contained within Annex 1 and 2 and the draft Designation under sections 38 and 34 of the Act.

1.35 It is now seeking comments on:

• matters which have not already been covered by the previous two consultations on Charging Principles;
• points on the drafting of the draft Statement of Charging Principles;
• the definitions contained within Annex 1 and 2;
• the draft Designation under sections 38 and 34 of the Act at section 8; and
• the draft Relevant Activity guidelines at section 9.

1.36 Views and comments on any of the matters raised in this document should be made in writing by 17 January 2005 to:

Alastair Smith
Ofcom
Riverside House
2a Southwark Bridge Road
London
SE1 9HA

E-mail: alastair.smith@Ofcom.org.uk

Tel: 020 7981 3483

Fax: 020 7981 3630

1.37 Ofcom is allowing six weeks for responses which, although less than the standard period set out in Ofcom’s consultation principles, is considered sufficient considering the responses received already regarding this issue.

The full document is available via the link below.