September 1996
1 This statement sets out the Director General's views on the control of prices for the provision of broadcast television transmission services to the Channel 3 companies, Channel 4 and S4C, for the period starting 1 January 1997 to 31 December 2002.
2 This statement follows the consultative document of the 24 January 1996 and the Interim Statement of the 23 May 1996. The Interim Statement indicated that the Director General was minded to set the initial combined price for all three companies for that period ('P0') at £53.4m. The maximum amount by which this price could be increased will be the increase in the retail price index minus a constant ('RPI-x'). In the Interim Statement the Director General indicated that he expected to propose a value for x of between 4 and 4.3%.
3 This statement therefore sets out the Director General's conclusions and his proposals for the price control. The proposed licence modifications are included at Annex 1.
4 The publication of this statement has been delayed owing to the fact that, following the publication of the Interim Statement, Oftel began discussions with the BBC in preparation for the sale of its transmission network about the level of the price control for the transmissions services it receives. During this process the BBC provided Oftel with detailled accounts information on its transmission business.
5 Oftel has sought to reconcile the information provided by the BBC with that used in setting the NTL price control. The comparison has been made more difficult in that the BBC has a substantial radio business and in order to achieve a like-for-like comparison with NTL it is necessary to estimate the stand-alone costs of running the television business. There are also differences in accounting practices. However, Oftel's view is that the present information does not provide evidence of potential additional efficiency savings on a scope sufficient to justify reopening the price control review.
6 The Director General's final proposal for the price control for the provision by NTL of broadcast television transmission services is that the initial price ('P0')should be £ 53.4 million and that the maximum price increase in any year should be RPI minus 4 per cent.
7 The scope of the price control has also been widened to include the costs of Super High Frequency (SHF) and the inter -transmitter links which make up part of the overall transmission service supplied by NTL. It also takes account of Channel 4's intention to move to 24 hour transmission.
8 The initial prices payable by each of the channels is as follows (1996 prices are shown in brackets):
Channel 3 £26.78m (£29.71m)
Channel 4 £22.82m (£23.37m)
S4C £3.80m (£4.1m).
9 The Director General has taken the view that the appropriate nominal post-tax cost of capital is 8.5% per annum (equivalent to 12% pre-tax assuming an effective corporate tax rate of 30%). This figure is based on a beta of 0.7 (please see the consultative document and Interim Statement for further discussion).
10 The Interim Statement indicated that a major outstanding issue was that of the proposal by NTL to reduce the number of Customer Service Centres from four to one. The Director General indicated that he wished to allow time for further discussions between NTL and the television companies before proceeding to finalise his proposals for the price control.
11 NTL and the television companies have met to discuss further the proposal to move to a single Customer Service Centre ('CSC'). Following those discussions Channel 4 has argued that it would be prepared to pay more for a second CSC to operate for 16 hours per day and that the proposed price control should be modified to include provision for this. The view of the C3 companies however is that such additional provision should be subject to a separate agreement and priced separately. The Director General's view is that it would only have been possible to adopt the Channel 4 proposal if all the companies had supported it. The Director General has therefore not modified his original proposal.
12 NTL and BBC transmission have for some years been undertaking a programme for the construction of relay transmitters in areas where there is poor reception. The expected capital costs of this programme where included in the last NTL price control. The programme is currently under review, and we understand there is discussion of a more limited programme in the future. In view of the uncertainty over this, no provision has been made for this work in NTL's capital expenditure programme. Should the programme be continued it will therefore be necessary for the costs of this to be identified and charged for separately.
13 The Director General also stated in the Interim Statement that, in the light of representations from Channel 4, he wished to give further consideration to the apportionment of charges between Channel 4 and the other channels.
14 The combined total P0 price of £53.4m was apportioned between C3 and Channel4/S4C in line with the breakdown of costs. In general these are shared equally. However there are certain costs associated with the regionalised nature of the C3 network which means that it pays slightly more than 50 per cent. The apportionment between Channel 4 and S4C similarly reflects underlying costs. The resulting revised apportionment is as follows:
C3 50.14%
C4 42.75%
S4C 7.11%
15 Under the proposals for the new price control Channel 4 will pay a higher share of the P0 - increasing from 40.87% at present to 42.75%. Channel 4's representations have been carefully considered however, the Director General has come to the conclusion that a reduction in the amount of Channel 4's share, or a phasing in of the increase, would not be justified by the difference in the cost of providing the service to the different companies and would therefore constitute an unwarranted transfer between the companies. It should be noted that even after the effects of this reapportionment have been taken into account, Channel 4 will see its prices reduced by £551 thousand next year.
16 The Interim Statement reaffirmed Oftel's intention to bring forward proposals on unbundling of transmission services. Oftel's proposals on this are set out in the consultative document Competition Issues in Terrestrial Broadcast Transmission which will be published shortly.
17 Copies of the proposed licence modification are attached at Annex A. Oftel intends to begin the statutory consultation on these in the near future.
Condition 8 of the Licence shall be modified as follows.
1. In paragraph 8.2 the number 1 (one), in the penultimate line, shall be replaced by the number 4 (four).
2. Paragraph 8.9 shall be replaced as follows
"The value of Relevant Prices in respect of the calendar year 1997 shall not exceed the sums in the table below:
R(a) £26.78 million (Channel 3)
R(b) £22.82 million (Channel 4)
R(c) £ 3.80 million (S4C)"
3. Paragraph 8.10 is deleted and paragraph 8.11 is renumbered 8.10.
4. In what becomes paragraph 8.10 the appropriate definitions are replaced as follows:
- "Relevant Price" means the total annual price charged [in particular] for the next calendar year, for [any one of]:
(a) Operations Services and Required Site Rentals supplied for Channel 3;
(b) such services supplied for Channel 4;
(c) such services supplied for S4C.
- "Relevant Year" means any one of the five calendar years starting with 1996 and ending with 2001.