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Section 2 : Themes for 2005/6

2.1 In this section we set out our three year strategic framework, confirmed following the consultation. We then describe the seven themes which will guide our activities this year and the main work streams which fall within each of them. In doing so, we explain how the responses to the consultation have influenced our work programme. More detail about the issues raised by the responses and Ofcom’s reaction is set out in Annex A.

2.2 This plan looks forward over the next three years, whereas our Annual Report , to be published later this year, will provide a comprehensive account of our activities in 2004/5. At the end of this section, there is a short passage on how our activities will be funded. For more information about Ofcom’s finances , see the Statement of Charging Principles and Ofcom’s Tariff Table 2005/06. Finally, we explain how our activities will be funded.

A three year strategic approach

2.3 In our draft plan we set out a framework which will guide our activities over the next three years. This was widely supported and is reproduced in is set out in figure 2.1. In the coming year our focus will be on delivery, with particular emphasis on implementing the strategic reviews carried out in our first year of operation. 2006/7 will be about sustaining progress, with a target of establishing a benchmark for ‘best practice ’ regulation. In 2007/8 we will evaluate the impact of our first three years of operation , before re-focusing for the next three years.

Figure 2.1 – A three year strategic framework

2.4 In developing our three year approach , the starting point was the statutory framework created primarily by the Communications Act 2003 (the Act). Ofcom’s principal duty is to further the interests of citizens and consumers, where appropriate by encouraging competition. What the Act requires us to do to fulfil this duty falls into six main areas, ranging from ensuring the optimal use of the radio spectrum to providing audiences with adequate protection against offensive and harmful material.

2.5 To provide a consistent means of interpreting the requirements of the Act, we have developed a set of regulatory principles. These principles are set out in figure 2.2 and are designed to ensure a coherent and predictable approach to regulation. Of key importance is the fact that we will operate with a bias against intervention and if a case for intervention can be made, we will choose the least intrusive means of achieving our policy objective.

Figure 2.2 – Ofcom’s regulatory principles
When we regulate	Ofcom will operate with a bias against intervention, but with a willingness to intervene firmly, promptly and effectively where required
	Ofcom will intervene where there is a specific statutory duty to work towards a public policy goal markets alone cannot achieve
How we regulate	Ofcom will always seek the least intrusive regulatory mechanisms to achieve its policy objectives.
	Ofcom will strive to ensure its interventions will be evidence-based, proportionate, consistent, accountable and transparent in both deliberation and outcome
	Ofcom will regulate with a clearly articulated and publicly reviewed annual plan, with stated policy objectives
How we support regulation	Ofcom will research markets constantly and will aim to remain at the forefront of technological understanding
	Ofcom will consult widely with all relevant stakeholders and assess the impact of regulatory action before imposing regulation on a market

2.6 We believe that the benefits for citizens and consumers are potentially largest where markets are open, new entrants can compete against incumbents, investment is encouraged and innovation flourishes. Where possible, therefore, we will seek to achieve our policy goals by harnessing market forces. This will mean continued effort to promote communications markets which are dynamic, open and flexible.

2.7 We recognise, however, that markets will not solve every problem and that action will be needed to protect the interests of citizens and consumers. Whether such intervention is necessary and if so, the form it should take , will often be open to debate . In and in the coming year we will be examining further how best to both identify and further secure the interests of citizens and consumers in the sectors for which we have regulatory responsibility. As our starting point, however, we believe that over time well-informed individuals should One priority will be to ensure individuals have access to the information and tools they need to be able to exercise more responsibility and choice in relation to both the content they watch and listen to and the communications services they consume.

2.8 An important feature of our regulatory approach will be a critical evaluation of our effectiveness leading up to the planned major review and in 2007/8. In 2005/6, therefore, we intend to provide more information about the evaluation framework we intend to use. This will cover four areas:

• Stakeholder perceptions – we will seek feedback from stakeholders, for example, on how we have consulted and the quality of our decisions.
• Market developments – this will involve tracking developments to assess our impact on the marketplace.
• Achievement of our objectives – we will evaluate how well we have applied our regulatory principles and whether we have achieved the outcomes we intended.
• Internal efficiency and effectiveness – we will monitor the levels of service provided to the public and to small businesses.

Themes for 2005/6

2.9 Our 2005/6 work plan is organised around seven themes. These are set out in figure 2.3

Figure 2.3 – Themes for 2005/6

Implementing the strategic reviews
Opening up markets and encouraging innovation
Addressing important citizen and consumer issues
International engagement
Taking opportunities to reduce regulation
Working effectively
Understanding future developments

2.10 There was broad support in the consultation for these main themes, although respondents also suggested that a number of additional issues should be included in the plan. We have addressed these with the following new or revised streams of work, which are referred to in more detail under the relevant theme:

• a new consumer strategy project to draw together our existing and planned work for consumers and to define and take forward Ofcom’s role in supporting and protecting consumers;
• an access project which will take the work completed in the strategic reviews and other projects, such as the planned audit of communications in the Nations and Regions, and towards the end of the year identify the issues to be addressed in order to secure widespread access to modern communications services among all the regions and communities of the UK;
• further work on the interests of citizens , to help identify and articulate more clearly how citizens ’ interests should be incorporated in Ofcom’s decision-making process in a transparent and systematic way;
• a strategic review of telephone numbering to pull together a range of work streams on numbering issues and ensure we have a coherent overall framework within which to make critical numbering decisions over the coming years.

2.11 To accommodate the above changes, we will manage several of the remaining work streams over a slightly longer timetable and some will run into 2006/7 and beyond.

Implementing the strategic reviews (Theme 1)

2.12 Our key priority for 2005/6 will be to complete and implement the strategic reviews of telecoms, public service broadcasting, spectrum and radio that we began in our first year of operation. The consultation process indicated widespread support for this work, although some expressed a concern that we might be moving onto implementation before the reviews have been completed. We have reviewed our proposed timetable to ensure this is not the case.

Telecoms

2.13 Our strategic review of telecoms is to preparing the ground for a new regulatory framework which will facilitate the transition from analogue to digital and ; from switched-circuit fixed line networks towards next-generation networks based on Internet Protocol.

2.14 Our initial work programme in 2005/6 will include considering the responses to phase 2 of the review and we will conclude the review by publishing our the phase 3 statement in the second quarter. In the meantime, we will continue carrying out work to prepare for the steps that will follow, with the main options being either making a reference to the Competition Commission under the Enterprise Act investigation or providing BT’s competitors with real equality of access to its network.

2.15 The conclusions of the review will also inform our ongoing work in a number of areas, including:

• ensuring the development of fit-for-purpose wholesale line rental and carrier pre-selection products to increase competition in voice services;
• implementing revised price controls for BT’s network services;
• promoting network competition through further work on Local Loop Unbundling (LLU), including support for the work of the Telecoms Adjudicator in improving LLU processes and resolving disputes, and on BT’s DataStream wholesale product;
• facilitating the migration to BT’s 21 st Century Network;
• facilitating the development of new voice services, such as voice over broadband; and
• developing a framework for analysing markets at a sub-national level which would enable geographic differences to be taken into account.

Public service broadcasting

2.16 In phase 3 of our review of public service broadcasting (PSB) we published our final views on how to maintain and strengthen public service television in the digital age. Since then the Government has published its Green Paper on the BBC Charter review.

2.17 In the coming year we will implement those recommendations which fall within our remit, notably those with a bearing on the Nations and Regions. And drawing on the wider conclusions of our report, we will feed into the Government’s review of the BBC Charter.

2.18 Key areas of our implementation work will include:

• a statement on the proposals made in our phase 3 report about the Nations;
• work on the role and prospects for local television, particularly via the digital terrestrial platform;
• setting sustainable Tier 2 production and output quotas and assessing compliance with these requirements;
• continuing dialogue with Channel 4;
• further work on the development of a Public Service Publisher;
• working with ITV, Channel 4 and Five to deliver effective self-assessment of compliance with Tier 3 quality of content requirements; and
• developing procedures for assessing and tracking PSB delivery.

Spectrum framework

2.19 We are now considering the responses to the spectrum framework review, in which we set out our strategy for securing the optimal use of the radio spectrum via a market based approach including:

• allowing the market to decide the best use for new spectrum allocations;
• allowing licence holders to trade spectrum in an open market and change the use they make of spectrum rights; and
• increasing the amount of licence-exempt spectrum to allow businesses to develop and bring to market new technologies and services without the need for a licence.

2.20 Taking account of the responses to our consultation, we plan to carry out further consultations in the third quarter of this year. These will focus on:

• technology neutral property rights;
• Ofcom’s role in spectrum harmonisation; and
• increasing power in unlicensed bands in rural areas.

2.21 There will also be specific work to release more spectrum and promote its more efficient use. These areas of work are described in the following section of the plan , – “Opening up markets and increasing innovation” , – and we will ensure this activity is aligned with the emerging, longer term strategic direction outlined in the spectrum framework review.

Radio

2.22 Our review of radio, published in December, proposed a set of strategic aims for regulation in radio , focusing on DAB and new approaches to the regulation of local radio and community radio.

2.23 We will be consulting on phase 2 of the radio review in the first quarter of this year. In this document we will be outlining our view of how best to achieve the “public purposes ” identified as being important for radio and proposing a plan for licensing further digital radio. We will also be implementing a co-regulatory system for monitoring the application of the analogue localness regulations.

Opening up markets and encouraging innovation (Theme 2)

2.24 Our work in this area divides into the three main areas which Ofcom regulates – broadcasting, telecoms and spectrum – and details of the key work streams are described below. A key change following the consultation is that we have decided to conduct a new strategic review of our work on numbering and Number Translation Services.

Broadcasting

2.25 There will be a number of work streams designed to promote increased competition in broadcasting, including:

• reviewing existing competition codes and guidelines;
• introducing new networking arrangements for ITV; and
• reviewing existing competition codes and guidelines;
• developing a transparent, robust framework for assessing the costs of broadcasting transmission.

2.26 In parallel with this work, we will review developments in the sources of funding for commercial broadcasters, including advertising, sponsorship and product placement. This will precede In February 2006 we will begin a to review of the operation of the Contracts Rights Renewal (CRR) remedy and in the broadcast TV advertising market. The review will begin in the fourth quarter of 2005/6 and be completed in 2006/7, after which we expect to reach a final decision on the rules governing on the amount and distribution of advertising.

Telecoms

2.27 In response to the consultation on the draft plan, we will conduct a new strategic review of our work on numbering and Number Translation Services (NTS). The objective will be to develop a coherent strategic approach that will inform our work in these areas in the longer term. In the meantime, work on numbering and Number Translation Services (NTS ) will continue, with a number of specific initiatives planned for 2005/6. For example, we will be introducing a new database to enable the more efficient allocation of numbers.

2.28 Other initiatives to promote competition in telecoms will include:

• a review of mobile call termination, which will affect the cost of calling mobile phones;
• a review of the wholesale international roaming market;
• reviewing BT’s regulatory financial statements for 2004/5 and continuing work to develop a more fit-for-purpose financial reporting regime;
• monitoring the provision of directory enquiry services through mystery shopping and market research conducted with the Independent Committee for the Supervision of Standards of Telephone Information Services ( ICSTIS ) , and facilitating the provision of effective consumer information about the cost and quality of these services; and
• investigating allegations of anti-competitive behaviour by communications providers and resolving disputes.

Spectrum

2.29 During 2005/6 we will continue to develop and implement our approach to spectrum awards, trading and liberalisation:

• there will be a series of spectrum awards, including auctions of some bands;
• spectrum trading will be extended to new classes of licences, namely wide area private business radio and digital public access mobile radio; and
• we will develop a more coherent approach to the management of spectrum designated for mobile and broadband services.

2.30 We will continue working towards the switchover to digital television between 2007 and 2012 and in the first quarter of 2005/6 will publish our decision on the appropriate option for optimising the coverage of digital terrestrial transmission post - switchover. We will also consult during the year on the technical and commercial options for the use of the analogue spectrum which will be released by switchover.

2.31 Additional work to promote the more efficient use of spectrum will include:

• consulting on the application of spectrum pricing to broadcasting spectrum;
• consulting on options for the introduction of Recognised Spectrum Access for satellite services; and
• supporting the independent audit of major spectrum holdings being undertaken by Professor Martin Cave.

2.32 Furthermore, we will continue to issue non-discretionary licences. Every week we expect to issue around 150 new licences and assign 200 existing licences.

2.33 An important and substantial task will be to keep spectrum clear of interference through targeted enforcement, making effective use of remote monitoring and unattended monitoring systems. And our Baldock Monitoring Station will continue to provide a round-the-clock service to address national and international cases of interference.

Addressing important citizen and consumer issues (Theme 3)

2.34 Addressing important citizen and consumer issues is another key element of Ofcom’s work. There are two main changes in this area following the consultation. The first is that we intend to take an overview of all our work aimed at promoting more widespread access to communications services. The second is that we will review the elements of our work which are focused on consumers and then before articulateing more clearly our consumer strategy.

2.35 In parallel with Ofcom’s own work, we will provide support for and work with the Consumer Panel, which. This is an independent body which that advises on the consumer interest in the markets Ofcom regulates. The Panel has advised that it will be examining how the consumer interest is reflected in Ofcom’s policy making over the coming year.

Promoting widespread access

2.36 We will carry out work to support widespread access to communications services. This will encompass the following areas:

• work on universal service to ensure that basic telephony services and internet access are available to everybody on reasonable request and at an affordable price feeding into the EU review of the Universal Service Directive;
• an audit of service availability, consumer take up and choice in the Nations and Regions ;
• research on the access issues faced by older and disabled people and those on lower incomes;
• a review of the code on electronic programme guides (EPGs) to ensure that they are sufficiently accessible and give appropriate prominence to public service broadcasters;
• a review of the TV access code to ensure appropriate provision of access services by broadcasters, provide standards guidance and set an audio description target; and
• working with the private and public sector to promote accessible equipment and services for consumers.

2.37 Towards the end of 2005/6 we will take an overview of the various initiatives Ofcom is taking to promote greater access to services and assess what further work is needed. The need to promote wider access to services was an issue raised by a number of respondents to our consultation and we hope that this review will prompt a productive debate.

Protecting citizens and consumers

2.38 We have recognised the need to draw together the various strands of our work which are focused on consumers. We will therefore begin the year by reviewing these areas of work and will then set out clearly Ofcom’s strategy for consumers and identifying key priorities. Alongside this review, we will continue work to:

• improve the information available to citizens and consumers, primarily by encouraging communications providers to supply better information; and
• ensure that consumers are protected from a range of potential nuisances and that they are aware of their rights e.g. we will be addressing the problem of mis-selling through mandatory codes of practice relating to sales and marketing.

2.39 Linked to this work will be action to improve media literacy. In an increasingly converged communications world, people face greater media choice. Media literacy will provide some of the tools they need to make full use of the opportunities offered , and to protect themselves and their families from the risks involved .Ofcom’s work will will be underpinned by comprehensive research to identify areas of concern and establish viewer preferences.

2.40 In relation to broadcasting we will be:

• publishing and disseminating the revised broadcasting code, which will establish standards for programmes and sponsorship;
• conducting preparatory work on the revising the rules applicable to the amount and distribution of television advertising, although as mentioned above, a decision about advertising minutage rules will not be made until later in 2006; and
• monitoring the performance and effectiveness of the Advertising Standards Authority in relation to the contracted-out activities of broadcast advertising regulation.

Clarifying the citizen interest

2.41 In our draft plan we set out our intention to carry out work to explore further what is meant by the ‘citizen interest’ and how this should be reflected in our decision-making. There was widespread interest in this area and we will be seeking to stimulate an inclusive debate.

Addressing complaints

2.42 Another important function which Ofcom carries out is the handling of complaints from a broad range of viewers, listeners and consumers of other communications services. We already encourage telecoms suppliers to resolve complaints directly with their customers and at the first time of asking and we plan to consult on a new system of dealing with broadcasting complaints, whereby broadcasters would be the first point of contact for appropriate content complaints.

International engagement (Theme 4)

2.43 Increased attention to international engagement will be a key theme of our work during 2005/6. We will contribute to the UK Presidency of the EU in the second half of 2005, with the hosting of a conference on telecoms and spectrum issues being an important part of this activity. In response to the draft plan, a number of stakeholders expressed a desire for more transparency about our international work. We are therefore considering setting up a quarterly forum to improve visibility of what we are doing and generate input.

Telecoms and broadcasting

2.44 In relation to telecoms and broadcasting our international work will include:

• promoting a more harmonised approach to the implementation of the EU regime governing electronic communications;
• contributing to the development of EU communications policy by strengthening our engagement with the European Regulators’ Group, which during 2006 will be chaired by Ofcom Senior Partner, Kip Meek; and
• contributing to the development of an appropriately revised Television Without Frontiers Directive.

Spectrum

2.45 There will be a range of activity designed to achieve an international framework, both at European and international level, which provides the minimum level of harmonisation needed to facilitate the development of new and innovative services, together with the flexibility to maximise the benefits of spectrum trading and liberalisation. Specifically, we will be:

• seeking decisions at European level, for example, on the 3G expansion band and Ultra Wide Band;
• preparing for the Regional Radio Conference 2006 at which we will be seeking a new International Telecommunications Union (ITU) plan for digital broadcasting; and
• developing draft European proposals for the World Radio Conference 2007.

Taking opportunities to reduce regulation (Theme 5)

2.46 It is very important that we continue to seek opportunities to reduce regulation and adopt a best practice approach to policy making.

Reducing regulation

2.47 Across all projects we will look for opportunities to reduce regulation. The following are examples of areas where it may be possible to reduce regulation:

• the spectrum framework review is expected to lead to spectrum licences being changed to allow more trading and more flexible use;
• if, following consultation, our proposed ‘broadcaster first’ initiative is implemented, there could be fewer broadcasting complaints handled by the regulator;
• implementing the training co-regulation arrangements in broadcasting;
• implementation of the telecoms strategic review may lead to exploration of de-regulation of BT’s large business pricing and retail price controls; and
• our review of public service broadcasting will result in a move away from genre-by-genre quotas to a new approach based on “purposes and values”, with specific obligations on commercial broadcasters also likely to be reduced.

Better policy making

2.48 We will shortly be finalising our guidelines on better policy making , which and they will emphasise the role that effective impact assessments can play in both removing existing regulation and avoiding new the imposition of regulation which is more unnecessarily intrusive than necessary or cannot be justified at all.

2.49 We will also start work on reviewing our longer term developing our approach to regulation. Particular aspects of this work will involve examining regulatory thinking and practice around the world. Linked to this project will be work to develop our understanding of convergence and what it will mean for the future of the communications sector. The aim will be to regulate in a more converged way and identify the opportunities to withdraw from regulation which may be forthcoming.

Working effectively (Theme 6)

2.50 A key part of working effectively will involve gathering the evidence we need to make soundly-based decisions. Our 2005/6 plan contains several initiatives which will help improve our operational effectiveness. These range from our continuing research programme to more effective communications with a range of different stakeholder groups. A recurring theme in the responses to our consultation was a desire for us to reflect in our work the differences between the Nations and Regions of the UK. We plan to do this by conducting an audit which will analyse the current state of the communications sector by Nation and by Region and assess the extent to which our regulatory approach should be tailored as a result. There will be a series of seminars and work shops as part of this initiative so that we can hear the views of our stakeholders. In the final quarter of 2005/6 we will also be holding another Rural, Regional and Remote Seminar.

2.51 We will continue to carry out technology-based analysis and fund external research. Through this work we intend to:

• understand the current state and likely evolution of communications networks in the UK;
• understand emerging technologies and platforms;
• minimise spectrum interference and maximise spectrum availability; and
• resolve technical issues associated with network resilience and interoperability.

2.52 Further work to improve the spectrum licensing process will also be important. We will simplify products and services, deregulate where we can and put services online.

2.53 Market research will be another important area of activity. We will seek to gain a greater understanding of the attitudes and behaviour of both consumers and SMEs. This work will include two reports, which will be published later this year, on the Digital Consumer and the Digital Small and Medium-sized Enterprise (SME ). We will also continue to gather and interpret data about the communications market. There will be an annual report in June of this year and quarterly updates thereafter.

2.54 Another feature of working effectively will be effective engagement with Ofcom’s Consumer Panel and our other advisory committees. We will also manage and implement a programme of engagement with our political and industry stakeholders.

2.55 We acknowledge the need for Ofcom to ensure that are equal opportunities to work and progress at Ofcom. This issue has been raised by a number of our stakeholders, who expect Ofcom, as the regulator of the communications sector, to set a good example. We are placing diversity at the heart of Ofcom by developing and implementing an integrated diversity policy. We oppose and will seek to overcome all forms of unlawful or unfair discrimination on the grounds of a person’s race or ethnicity, gender, sexual orientation, disability, religion , or belief and age in all aspects of our work.

2.56 Finally, we recognise that working effectively includes communicating effectively with our stakeholders, particularly citizens, consumers and SMEs. An important piece of work will therefore be to improve Ofcom’s website, something which many of the respondents to the consultation said they would welcome.

2.57 Finally, we note that Ofcom’s policy-making and operational services need high quality support if our their outcomes are to be delivered efficiently. There are a range of internally focused initiatives which seek to provide value-added support services to underpin our external activities and to ensure we exercise necessary appropriate controls over our use of resources to ensure value for money.

Understanding future developments (Theme 7)

2.58 Finally, During 2005/6 we will undertake further analysis of evolving markets so that we can anticipate and respond to the changing environment. This work will cover three main areas:

• second generation broadband;
• digital multi-media platforms; and
• broadcasting content production.

2.59 Consultation responses generally supported these proposals, but identified the need for a wide-ranging debate on the emerging issues. Each review will therefore result in published research and proposals for consultation and will focus, in particular, on the scope for helping competitive markets to develop and exploring opportunities to reduce regulation.

Second generation broadband access

2.60 Our telecoms strategic review has identified measures to promote competition in the current generation of broadband networks and services. This review will identify the incentives and barriers associated with the roll-out in the UK of second generation broadband and map out the implications for Ofcom. In particular, we will look at the:

• structural options, taking account of experience from the gas and electricity markets, civil infrastructure utilities and lessons from abroad;
• the business case for second generation broadband access, including major risks and sensitivities, barriers to entry and the wider value chain, such as the role of digital rights management;
• a study of the feasibility of sharing ducts and plant;
• the costs and benefits for the UK of deploying second generation networks and whether there is evidence of market failure; and
• the extent of likely commercial roll out in rural areas and policy options to address a potential digital divide.

Digital multi-media platforms

2.61 The purpose of this review will be to ensure that Ofcom understands likely developments in digital platforms and services and produces a framework to address the emerging policy challenges, including content delivery across different platforms, business models and consumer demand.

2.62 We hope this review will facilitate a wide-ranging public debate about the future development of content and the implications for regulation, if any. It will also help inform our contribution to the EU’s review of the Television Without Frontiers Directive. The review need address important questions such as:

• whether the current model of regulating broadcasting content is sustainable;
• whether a consistent or platform-neutral approach to content regulation , – looking beyond traditional broadcasting, is desirable or indeed practicable;
• how consumer protection can be balanced against the need to protect the rights of others;
• the extent to which citizens and consumers will be able to control access to content themselves using tools such as parental controls; and
• what is the role of Ofcom vis-à-vis Government and other regulatory bodies.

2.63 Linked to this review will be work on digital rights to investigate how premium TV, film and music are likely to affect the development of digital platforms. We will also be tracking key technological developments, such as high definition TV, and identifying their potential impact on the consumer and the marketplace.

Broadcasting production

2.64 This review will examine the UK market for broadcasting content production, how it has evolved, its structure, value and growth. We will also look at the likely future direction of the market, including changing methods of distribution and payment methods, and the implications for regulation. Towards the end of the year we will focus on the key issues of relevance to the independent production sector. First, we will review the current definitions of “qualifying independent” and “qualifying programmes” and how the quota requiring 25% independent production is operating. Secondly, we will review progress to date with the codes of practice which govern the terms of trade for transactions between independent producers and broadcasters.

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Funding

2.65 Ofcom’s intention is to be an effective and professional regulator and to provide value for money for our stakeholders. To this end, we plan to reduce our costs each year. In other words, we will be an ‘RPI minus x’ regulator.

Comparison with 2004/05

2.66 For 2004/05 Ofcom set an Operating Budget of £140 million. In setting that budget Ofcom built in the 5 per cent efficiency savings it had already achieved from merging the functions of the five former regulators and the headcount reduction of 25 per cent.

2.67 Ofcom also publicly made a commitment to seeking a further 5 per cent efficiency gain during the 2004/05 year; a target of a further 5 per cent efficiency gain during 2005/06 and of continuing to seek further efficiencies thereafter to be an RPI-m inus x r egulator.

2005/06 Budget and end-year out-turn

2.68 Ofcom’s Operating Budget for 2005/06 is therefore £133 million. This is 5 per cent lower than the 2004/05 budget (8 per cent lower in real terms compared with the 2004/05 Operating Budget plus RPI).

2.70 Recognising the impact of this re-phasing and of projected RPI increases in 2005/06, Ofcom believes that the £133 million operating budget is a prudent figure. Of this budget, it is expected that £6.4 million will be capital expenditure. The budget is based on an adjusted cash basis, which includes capital expenditure but excludes depreciation.

2.71 We recognise, however, that stakeholders are still meeting the cost of setting up Ofcom. These costs were initially met with the help of a loan from the Department of Trade and Industry of £52.3m. Ofcom is required to repay this loan, together with interest, and the burden of doing so falls on our stakeholders. In 2005/6 we will have to repay £19m, only marginally less than the £20m payable in 2004/5. The amount payable in 2006/7 will be considerably less and the loan will have been repaid in full by the end of 2007/8, leading to a significant reduction in the financial burden on stakeholders.

2.72 We realise that stakeholders are also interested in how the cost of Ofcom is funded between different sectors, not least because this is the basis for setting the tariffs they have to pay. The breakdown of our costs depends on the amount of work we do in relation to each sector and the methodology is explained in more detail in Ofcom’s Statement of Charging Principles. The funding requirement by sector was published on 31 March 2005 as part of Ofcom’s Tariff Table 2005/06 (see Annex 1 of that document).

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