Summary
1. Because of the brief time between Ofcom assuming its functions from the old regulators and the start of the new financial year, Ofcom 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 undertook to consult stakeholders, during the summer, on its proposals to address them for 2005/6 onwards. This is that promised consultation.
2. Stakeholders have asked us to address 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.
3. 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 out-turn being reflected in the following year’s fees for the respective sector. 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.
4. Ofcom’s proposals to address the issues that stakeholders have asked us to consider 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 anyway 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
5. Ofcom’s proposals which are set out in detail in this document are summarised in the following paragraphs.
6. Ofcom proposes to retain a revenue measure (Relevant Turnover) 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 4 above.
7. Ofcom proposes that the tariff structure should have a small degree of progression, so that smaller operators and new entrants pay a lower proportion of their revenues than larger established operators. Larger operators tend to be more profitable than smaller operators / new entrants and the costs of regulation proportionately less significant in their business plans.
8. 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.
9. In the television sector, Ofcom proposes to change the definition of Relevant Turnover from being based on Qualifying Revenue (-1-), as defined in the 1990 Broadcasting Act, to a new definition as set out in Annex 5 of this document. “Qualifying Revenue” was designed to meet different purposes in the Act; it is not adaptable and can lead to growing inequity between operators as their business models evolve. The proposed new definition of “Relevant Turnover” will include all revenues which flow from the possession of a broadcasting licence including those from advertising, sponsorship, premium rate telephone income, and retail revenue from goods and services. Ofcom proposes that Relevant Turnover should exclude retail revenue earned from the provision of broadcasting platforms (satellite and cable) which is not a licensed activity. It also proposes that Relevant Turnover should replace Qualifying Revenue as one of the components for assessing obligations under the Code on Television Access Services.
10. Ofcom proposes to introduce a simpler tariff table for television licensees, that removes the distortions caused by the caps that have been placed on licence fees in the past and to introduce a consistent set of tariffs for Public Service Broadcasting (PSB) which are platform neutral, rather than (as at present) having different tariffs which depend on which platform the PSB channel happens to be received on. Ofcom also proposes to modify the tariff structure to reflect market developments and consistency across the sectors. This involves reducing the maximum revenue threshold, beyond which the tariff rate is set to zero, from £400m to £300m and implementing less progressive tariffs than is currently the case. Ofcom is willing to consider the use of 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.
11. In the radio sector, the fees for new licence applications do not currently cover the costs of granting new licences. The difference has hitherto been met by income from ongoing 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 fees. This meets the criterion of cost-reflectiveness. Ofcom also 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 5 of this document. A modestly 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). Finally, Ofcom proposes to allow a period of transitional relief for the migration of 2004/5 tariffs onto the proposed new tariffs.
12. 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 existing definition of Relevant Turnover and no alteration to the structure of existing tariffs. Ofcom intends to publish a list of those stakeholders whom it considers to be liable to pay administrative charges.
13. 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 is therefore not currently minded to allow elective lump sum payments.
Responding to this consultation
14. The consultation seeks views on the principles and approach that Ofcom should apply to the continued setting of licence fees and administrative charges for 2005/6 and beyond. A draft revised Statement of Charging Principles will be published in November 2004.
15. Views and comments on any of the matters raised in this document should be made in writing by 30 September 2004 to:
Rona Chester / Alastair Smith
Ofcom
Riverside House
2a Southwark Bridge Road
London SE1 9HA
E-mail: rona.chester@ofcom.org.uk
alastair.smith@ofcom.org.uk
Tel: 020 7981 3483
Fax: 020 7981 3630
16. Ofcom is allowing ten weeks for responses which is the standard period set out in Ofcom’s consultation principles.
Footnotes:
1.- Including multiplex revenue attributable to Digital Programme Service licensees, as defined in section 15 of the Broadcasting Act 1996.