A consultation issued by the Director General of Telecommunications

Contents

Chapter 1 – Introduction

Chapter 2 – Proposals for regulation of conditional access under the new regime: background

Chapter 3 – Proposals to set new conditional access conditions

Chapter 4 – Consultation

Annex A – Notification of proposals under Clause 45(2) of the Communications Bill/Regulation 17(2) of the draft Regulations
and draft conditional access conditions

Summary

S.1 A new package of EU Directives regarding electronic communications networks and services are due to be implemented in the UK on 25 July 2003. The government’s proposed method for implementation of four of those Directives is the Communications Bill which is intended to receive royal assent for 25 July 2003. However, should this not be possible, the government has announced its intention to implement the new Directives by statutory instruments. In addition, Oftel is conducting a major programme of work to ensure that implementation will happen to this deadline. This consultation document forms part of that programme of work and considers how the Directives should be applied in relation to conditional access.

S.2 Conditional access services scramble (or encrypt) television signals so that only those who are entitled to see them can do so. The new Directives oblige conditional access providers who come within the scope of the Directives to supply access to conditional access services on fair, reasonable and non-discriminatory terms. Oftel will apply the relevant conditions to suppliers who come within the scope of the Directives. At present in the UK, the only supplier of conditional access services is Sky Subscribers Services Limited.

S.3 Oftel has published guidelines under the existing conditional access regime on how it currently interprets a requirement to supply on fair, reasonable and non-discriminatory terms (Terms of supply of conditional access: Oftel guidelines, October 2002). If regulation is imposed under the new regime in the way that is proposed in this consultation document then those guidelines will continue to have effect to the extent that they are relevant, until such time as new guidelines are issued at a later date.

Chapter 1 – Introduction

New Directives

A new regulatory regime

1.1 A new regulatory framework for electronic communications networks and services will enter into force in the UK on 25 July 2003. The basis for the new regulatory framework is five new EU Communications Directives as follows:

• the Framework Directive (see note one below);
• the Access Directive (see note two below);
• the Authorisation Directive (see note three below);
• the Universal Service Directive and (see note four below);
• the Privacy Directive (see note five below).

1.2 The new regulatory framework is designed to create harmonised regulation across Europe and aimed at reducing entry barriers and fostering prospects for effective competition to the benefit of consumers.

1.3 The Framework Directive provides the overall structure for the new regulatory regime and sets out fundamental rules and objectives which read across all the new directives. As its name suggests, it is the directive that establishes the new framework. Article 8 of the Framework Directive sets out three key policy objectives which have been taken into account in this document. The Authorisation Directive establishes a new system whereby any person will be generally authorised to provide communications services and/or networks without prior approval. The general authorisation replaces the existing licensing regime. The Universal Service Directive defines a basic set of services that must be provided to end-users. The Access and Interconnection Directive sets out the terms on which providers may access each others’ networks and services with a view to providing publicly available electronic communications services. These four Directives must be implemented in the UK in other EU Member States on 25 July 2003. The fifth Directive on Privacy establishes users’ rights with regard to the privacy of their communications. This Directive was adopted slightly later than the other four Directives and has an implementation date of 31 October 2003.

The end of the individual licensing regime

1.4 Changes to the regulatory framework flow from the requirements of the new Directives. The principal change to the present arrangements in the UK will be the ending of the licensing regime under the Telecommunications Act 1984 (the TAct). This is to be replaced by a new authorisation regime. Under the requirements of the Authorisation Directive the obligations in licences will be replaced by a set of general and specific obligations.

1.5 The general conditions will apply to all persons providing certain types of electronic communications networks and services. Additionally, individual operators may be subject to specific conditions, such as those imposed as a result of a finding of SMP, as defined in Article 14(2) of the Framework Directive, or as a result of being designated to be a universal service provider. Oftel is already carrying out a number of consultations in relation to such conditions.

Existing conditional access conditions

1.6 The Advanced Television Standards Directive (95/47/EC) requires providers of conditional access who "produce and market" the services, to supply such services on fair, reasonable and non-discriminatory terms. The Directive was implemented in the UK by the Advanced Television Services Regulations 1996 (SI 1996 No. 3151) and the Advanced Television Services (Amendment) Regulations 1996 (SI 1996 No. 3197). As a result, Oftel regulates the provision of conditional access services through a so-called ‘class licence’ granted by the Secretary of State for Trade and Industry under section 7 of the Telecommunications Act 1984. That licence was first granted on 7 January 1997, but was revoked and an equivalent new class licence granted on 1 August 2001.

1.7 However, as indicated above, the existing licensing regime will end on 25 July 2003 to be replaced by the new authorisation regime consisting of general and specific conditions.

The new conditional access conditions

1.8 Another type of specific condition, in addition to those referred to above, relates to conditional access and these conditions will replace the existing conditions in the conditional access class licence. Article 6 of the Access Directive requires Member States to ensure that the conditions laid down in Annex I, Part 1 of that Directive are laid down. These obligations are in relation to conditional access to digital television and radio services broadcast to viewers and listeners in the Community. In contrast to SMP services conditions, there is no requirement for a market review process before these conditions are set.

1.9 This consultation document deals with certain services, systems and facilities used in the provision of retail digital television and radio services. The document considers the regulation of conditional access, a technology that scrambles (or encrypts) television or radio signals so that only those who are entitled to view or listen to them can do so. This may be because the viewers/listeners are pay TV viewers, or because they live in a specific geographical location.

1.10 Chapter 2 describes the conditional access service in further detail and provides more detailed definitions, drawn where possible from the new Directives themselves. It also considers how the regulation should be imposed. Oftel has not undertaken a regulatory option appraisal since the new Directives prescribe the regulation which has to be applied.

1.11 Oftel shortly intends to publish two separate consultation documents which will address the regulation of access to services and facilities such as interactive functionality in digital television receivers (‘access control’ services) and electronic programme guides (EPGs), and the regulation of broadcasting transmission.

Implementation of the EC Directives in the UK

1.12 In the UK, it is intended to implement the four main EC Communications Directives through a new Communications Act. The Communications Bill was introduced into the House of Commons on 19 November 2002 and is available at www.communicationsbill.gov.uk. The latest version of the Communications Bill is that which was introduced into the House of Lords on 5 March 2003. Save where otherwise stated references to the Communications Bill in this document are references to that version of the Bill. The Bill may continue to be subject to change as it proceeds through Parliament.

1.13 It is intended that the Communications Bill will receive royal assent by 25 July 2003. However, in the event that the Communications Bill does not receive royal assent by 25 July 2003, the Government has acknowledged that implementation will need to occur by Statutory Instruments made under the European Communities Act 1972 for an interim period until the Bill enters into force. These interim measures have been subject to consultation by the Department of Trade and Industry in its Consultation on the implementation of the European Community Directives on electronic communications networks and services published on 19 March 2003, which can be found at www.communicationsbill.gov.uk/implementation_consultations.html. Further, if the Communications Bill has not received royal assent by 25 July 2003, it is expected that Ofcom will not be ready by the summer to assume all of its duties foreseen by the Communications Bill. Should that be the case, the Communications Bill makes specific provision to enable Ofcom’s functions to be carried out by the Director or the Secretary of State for a transitional period. For these reasons, this document and the proposed conditions refer to the Director rather than Ofcom.

1.14 This document for the most part refers to the clauses in the Communications Bill (rather than the draft statutory instruments) which relate to the conditional access conditions and propose to implement the new Directives. However, any references to the relevant clauses in the Communications Bill should also be seen as references to the relevant regulations proposed if there is implementation on 25 July 2003 by statutory instruments (as set out in the Department of Trade and Industry’s consultation referred to above).

Structure of this document

1.15 Chapter 2 discusses the background to the new regulation of Conditional Access. Chapter 2 also sets how the new regulatory approach will be applied to different digital television platforms.

1.16 Chapter 3 sets out Oftel’s proposals for the new conditional access conditions and also sets out a list of questions for stakeholders.

1.17 Chapter 4 sets out details of the consultation process and provides details on how to make representations on the proposals contained within this consultation paper.

The notification and the conditions

1.18 Annex A contains the formal notification of the proposals made by the Director for consultation. Under the Communications Bill (or the statutory instruments in the event that the Bill has not received royal assent by 25 July 2003) the Director is required to issue a formal notification of his proposals to set new conditions under the new regime. Accordingly, the Director has followed this approach in this document. The notification at Annex A is made in accordance with clause 45(2) of the Communications Bill/Regulation 17(2) of the draft Regulations.

1.19 The conditions refer only to the clauses in the Communications Bill. However, should there be implementation by Regulations, those clauses will be replaced by references to the relevant Regulations.

1.20 The Director expects, following this consultation, to issue a further notification setting conditions in accordance with either the Communications Bill or the Regulations, whichever is in place on 25 July 2003. The Director is required to set the conditions on 25 July 2003. In the absence of the conditions having been set by such date there will be no regulatory framework in place. Thus, even if substantive changes are made to the proposals set out in chapter 3 and the conditions in annex A during the course of this consultation process, the Director will set the conditions without further consultation.

1.21 A copy of the notification has been sent to the Secretary of State in accordance with clause 47(1)(a).

Notes:

1. Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services.
2. Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities.
3. Directive 2002/20/EC on the authorisation of electronic communications networks and services.
4. Directive 2002/22/EC on universal service and users' rights relating to electronic communications networks and services.
5. Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector.

  Chapter 2 – Proposals for regulation of conditional access under the new regime: background

New Directives

2.1 The introduction of the new Directives means that the existing class licence regulating the provision of conditional access services will no longer remain in force. Instead, the new regulatory regime will mean that conditions are imposed on specified providers of conditional access services who come within the scope of the regulation set out in the Access Directive. Under clause 42 of the Communications Bill, the Director will have the power to set different types of conditions. Clause 42(5) provides that an access related condition is one that is authorised by clause 70 and Clause 70(5) provides that an access related condition may be one which is set under clause 72(2). Clause 72(2) of the Communications Bill states that it must be ensured "that access related conditions are applied to every person who provides a conditional access system in relation to a protected programme service." The same clause also provides that it must be ensured "that those conditions make all such provision as required by the provision contained from time to time in Part I of Annex I of the Access Directive."

2.2 Conditional access systems are defined in Article 2(f) of the Framework Directive as "any technical measure and/or arrangement whereby access to a protected radio or television broadcasting service in intelligible form is made conditional upon subscription or other form of prior individual authorisation." In the UK, it is proposed that this will be implemented as defined in clause 72(3) of the Communications Bill to mean "any system, facility, arrangements or technical measure under or by means of which access to programme services requires – (a) a subscription to the service or to a service that includes that service; or (b) an authorisation to view it, or listen to it, on a particular occasion." A Protected Programme Service is defined in the same clause 72(3) of the Communications Bill to mean "a programme service the programmes included in which cannot be viewed or listened to in an intelligible form except by the use of a conditional access system."

2.3 Clause 43(6) provides that Access related conditions (of which conditional access conditions are a particular type) may be applied to a person who provides an electronic communications network or makes associated facilities available. This means that the conditions which are the subject of this consultation must be applied to particular legal persons.

2.4 As set out above, Article 6 and Annex I of the Access Directive set out the obligations that apply to conditional access providers. Annex I, Part I(b) of the Access Directive states that "all operators of conditional access services, irrespective of the means of transmission, who provide access services to digital television and radio services and whose access services broadcasters depend on to reach any group of potential viewers or listeners are to offer to all broadcasters on a fair, reasonable and non-discriminatory basis compatible with Community competition law, technical services enabling the broadcasters digitally-transmitted services to be received by viewers or listeners."

2.5 Oftel considers therefore that in order to come within the scope of this requirement, the operator of the conditional access service must both "provide access services" and broadcasters must also "depend on" these access services to reach potential viewers or listeners. The definition of conditional access services which Oftel has included in the draft conditions attached at annex A to this consultation document reflects these points. The definition states that conditional access services means services, "by means of which, access to Protected Programme Services may be controlled so that only those viewers who are authorised to receive such services do so." This definition includes the broadcast of Protected Programme Services in encrypted form, and also the broadcast of Protected Programme Services which delimit the geographical reception by viewers of those Protected Programme Services depending on where they live – so that, for example, they receive the correct regional variant of a channel. The position of the various conditional access providers in respect of these requirements is set out below.

Application to different digital broadcasting platforms

Digital satellite platform

2.6 The operator of conditional access services on the digital satellite platform is Sky Subscribers Services Ltd (SSSL). This operator currently provides conditional access services to a number of broadcasters including public service broadcasters (PSBs). It also provides conditional access services to British Sky Broadcasting Limited (BSkyB), which provides a pay TV service to subscribers.

2.7 Most broadcasters on the digital satellite platform reach viewers through inclusion in a Sky pay TV package. These broadcasters do not need to purchase technical services such as encryption from SSSL as any necessary arrangements are made by BSkyB, as package provider. Some broadcasters, however, supply their programming to digital satellite viewers outside a BSkyB pay TV package (since it is possible to receive digital satellite broadcasts without simultaneously subscribing to a BSkyB pay TV package). Where such broadcasters encrypt their programming (eg because of contractual agreements with the holders of programming rights or because they are supplying programming which is differentiated by region) they "depend on" conditional access services supplied by the relevant provider in order to reach their designated digital satellite viewers. Oftel therefore considers that SSSL – the provider of conditional access services on the digital satellite platform – comes within the scope of the relevant obligations set out in annex I of the Access Directive. However, for the reasons set in paragraph 3.2 below, Oftel considers that the relevant obligations should be imposed upon British Sky Broadcasting Group Plc including any of its subsidiaries or holding companies, or any subsidiary of such holding companies. Annex A to this consultation document sets out the draft conditions which Oftel is proposing to apply in relation to the provision of conditional access services.

Digital cable and Kingston

2.8 In the UK, cable companies (NTL and Telewest) do not provide network access to third party broadcasters in a form which would allow those broadcasters to enter into direct contractual arrangements for programme supply with cable network customers. In order to reach cable viewers, broadcasters provide their channels to the cable companies who then include them in a TV package provided to their customers. Broadcasters on digital cable networks are not therefore reliant upon conditional access in order to reach cable viewers and listeners. As a result, Oftel does not consider that broadcasters "depend on" the conditional access services of the cable operator. The same also applies to the pay TV service operated by Kingston Communications, which operates using digital subscriber line (DSL) technology. Oftel does not propose to impose regulatory obligations to supply conditional access upon Kingston or the cable companies.

Digital terrestrial television

2.9 Prior to being placed in receivership, ITV Digital was a regulated supplier of conditional access services. The digital terrestrial television platform has since been relaunched as a free-to-air television platform, branded as Freeview. The broadcasters on Freeview do not use conditional access services; hence there will be no regulation imposed in respect of conditional access on the digital terrestrial platform.

Future situation

2.10 If new digital broadcasting platforms are developed in the future which involve the supply of conditional access services, or if existing digital platforms begin supplying conditional access services which broadcasters will "depend on" to reach viewers, then Ofcom will be required to impose conditions upon those providers, following an appropriate consultation process. As noted in paragraph 2.12 below, Ofcom has the scope in the future to review the market to assess which, if any, providers have SMP in the conditional access services market and to impose appropriate conditions on providers in such circumstances.

Regulation of conditional access under the new regime

2.11 The regulation of conditional access under the new regime is applied regardless of the level of market power. This recognises that market power is not necessarily the sole basis for imposing ex ante regulation. As Recital 10 of the Access Directive states, "competition rules alone may not be sufficient to ensure cultural diversity and media pluralism in the area of digital television. Directive 95/47/EC (the Advanced Television Standards Directive) provided an initial regulatory framework for the nascent digital television industry which should be maintained, including in particular the obligation to provide conditional access on fair, reasonable and non-discriminatory terms, in order to make sure that a wide variety of programming and services is available."

2.12 Article 6 of the Access Directive states that the obligations under the Directive can be removed if the relevant operator lacks significant market power (SMP), as defined in the Framework Directive. Oftel has considered whether it would be desirable to conduct a market review to assess which, if any, providers in the relevant market have SMP and subsequent to that, determine if the regulations being applied should be amended or withdrawn. At this stage, however, Oftel does not propose to conduct a market review for conditional access. Instead, as announced in the press release, Oftel confirms conditional access policy (22 October 2002), the existing regime for the regulation of conditional access services will be re-implemented in a similar form under the new Directives. This will give broadcasters and providers greater certainty over the regulation which will be applied to them.

2.13 As described in Oftel's most recent statement on conditional access (The pricing of conditional access services and related issues, May 2002), Oftel considers that the requirement to provide conditional access on fair, reasonable and non-discriminatory terms has proved beneficial and constitutes proportionate regulation. As Annex 1, Part 1 of Access Directive proposes that conditional access provision be regulated in a similar way, it did not seem timely or appropriate to conduct a market review to establish whether that regulatory approach should be amended or withdrawn. However, as with all areas of policy, it is right to keep this regulatory approach under review.

Chapter 3 – Proposals to set new conditional access conditions

The conditions

3.1 The fundamental obligations which must to be applied to a provider of conditional access systems in relation to a protected programme service are specified in Annex I Part 1 of the Access Directive. As set out in paragraph 2.3 above, the conditions that are the subject of this consultation must be applied to particular persons. Oftel proposes, for the reasons noted in paragraphs 2.6 to 2.10 above and 3.2 below, to only apply this regulation to British Sky Broadcasting Group Plc, including any of its subsidiaries or holding companies, or any subsidiary of such holding companies.

3.2 The Director considers it appropriate to prevent a person to whom a condition is applied which is part of a group of companies, exploiting the principle of corporate separation. That is to say, a person to whom the conditions are intended to apply should not use another member of its group to carry out activities or to fail to comply with a condition, which would otherwise render that person in breach of its obligations. Accordingly, the Director considers it appropriate that the draft obligations detailed at Annex A to this consultation document shall apply to: British Sky Broadcasting Group Plc, whose registered company number is 02247735, including any of its subsidiaries or holding companies, or any subsidiary of such holding companies, all as defined by Section 736 of the Companies Act 1985 as amended by the Companies Act 1989. The current operator of conditional access services on the digital satellite platform is, as noted in paragraph 2.6 above, SSSL. SSSL is a wholly owned subsidiary of British Sky Broadcasting Group Plc.

3.3 The Director has considered all of the Community requirements detailed in Clause 4 of the Communications Bill and considers that the proposed conditions (set out in Annex A to this Consultation Document) satisfy such requirements. In particular, Oftel has given careful consideration to the provisions of Clauses 4(3), (7) and (8). Each condition which Oftel proposes to impose on the Provider must also pass the test set out in clause 44(2) of the Communications Bill, namely that each condition must be:

• objectively justifiable in relation to the networks, services or facilities to which it relates;
• not such as to discriminate unduly against particular persons or a particular description of persons;
• proportionate to what the condition is intended to achieve; and
• in relation to what it is intended to achieve, transparent.

3.4 The Director considers that the proposed conditions contained within annex A satisfy all of these tests set out in Clause 44(2) of the Communications Bill:

• They are objectively justifiable, in that they relate to the need to ensure that competition develops to the benefit of consumers. Specifically, they will ensure that end users (in this case, viewers and listeners) are provided with optimum choice through a wide availability of programme services.

• They do not discriminate against British Sky Broadcasting Group Plc, including any of its subsidiaries or holding companies, or any subsidiary of such holding companies, because SSSL has been found to be the only operator that currently provides conditional access systems in relation to protected programme services.

• The Director considers that they are also proportionate. They apply only to the necessary minimum set of suppliers of conditional access systems in relation to protected programme services. And they represent the minimum set of conditions necessary to implement the requirements of the Directive, in particular that services should be made available on fair and reasonable terms while providing a reasonable degree of clarity and regulatory certainty to all the relevant market players. The conditions ensure that any regulated supplier retains the flexibility to come to a wide range of pricing and supply arrangements for conditional access, which is important in a varied and still developing industry. They are also formulated in such a way that they do not impose an unreasonable burden on such suppliers. Such suppliers will be entitled to set charges designed to recover reasonably and efficiently incurred incremental and common costs of supply, including in particular a reasonable rate of return on capital employed.

• The proposed conditions are set out in a transparent form in annex A of this document, so that the Director considers that they meet the requirement of transparency set out in the Communications Bill. The conditions aim to maximise accessibility for end-users to radio and television broadcasts, and broadcasting channels and services. They also increase the transparency of the supply of conditional access, as they provide for its supply to be on fair terms and with those terms to be published.

3.5 The obligations set out in Annex 1 of the Access Directive closely mirror the regulation for conditional access systems set out in the 1995 Advanced Television Standards Directive. Article 4 of that Directive was implemented in the UK through the Conditional Access class licence. In these proposals for the new regulation of conditional access, overall, the Director’s intention is that the conditions achieve broadly the same effect as the existing Conditional Access class licence. Those existing conditions which the Director considers to be redundant, for example because they duplicate other conditions, have been removed – resulting in a substantial reduction in the number of conditions, leading it is hoped to greater brevity and clarity which should be helpful for all users. Other conditions have been retained. In some cases, existing conditions have been reformulated in order to fit in more naturally with the construction of the Bill or to be more closely analogous with the formulation of conditions in other markets. Where the purpose of conditions in different markets is, in essence, the same, it aids the understanding of market players and promotes legal certainty if the formulation of the conditions is as similar as possible.

3.6 Condition 1 implements, in part, the obligation contained within the first bullet point of Part I(b) of Annex 1 to the Access Directive to provide conditional access services on fair and reasonable terms where a broadcaster reasonably requests such services in writing. In interpreting Condition 1 (and in particular in assessing whether a particular request is "reasonable"), the Director proposes to follow the approach described in his document: Imposing access obligations under the new EU Directives, September 2002. Although this document is not expressly applicable to conditional access, the Director nonetheless considers that it provides a useful basis from which to develop a consistent approach to access issues in relation to conditional access. Under condition 1, in accordance with clause 42(10)(a), the Director also has the power to make directions. This power could be used to deal with issues relating to specific forms of access or the particular terms and conditions on which access is provided – for example to clarify whether a particular service being requested is in fact a reasonable request. Conditions 5 and 6 also implement the first bullet point of Part I(b) of Annex 1 to the Access Directive and these are discussed below.

3.7 The condition appears at first to be more widely drafted than condition 1 of the existing class licence. However, the differences are illusory. Under the present regime, if a broadcaster requested a conditional access service to which there was no significant technical impediment, for which there would be a reasonable level of demand and which could be supplied at a price which would cover the costs of developing and making the service available, the Director would consider that refusal to supply was a breach of the obligation to supply on fair and reasonable terms. This is precisely in line with condition 1 of the existing Conditional Access class licence.

3.8 Condition 2 implements the obligation contained within Part I(a) of Annex 1 to the Access Directive to ensure that conditional access systems marketed in the Community are to have the necessary technical capability for cost effective transcontrol allowing the possibility for full control by network operators at local or regional level of the services using conditional access systems. This means that, where a protected programme service is initially encrypted using one platform’s conditional access service (eg SSSL’s for satellite), it will be possible for it to be retransmitted by another platform (such as cable) using its own conditional access system. The wording of the obligations in this condition reflects the wording of the existing condition 2 of the Conditional Access class licence.

3.9 Condition 3 implements the obligation contained within the second bullet point of Part I(b) of Annex 1 to the Access Directive upon operators to keep separate financial accounts regarding their activities as conditional access providers. Although condition 3 appears to be more detailed than the other conditions, it does not impose a large number of fresh requirements. Instead, the detail provided in this condition will offer greater clarity and an unambiguous breakdown of the Provider’s responsibilities compared to the corresponding condition under the old licensing regime. Moreover, condition 3 has been drafted in a more detailed manner in order that it can give effective practical application to the overarching principles set out in the other conditions.

3.10 However, it is worth noting that there are aspects of the proposed condition 3 which were not included in the earlier condition 5 under the class licence. In particular, the draft condition envisages that the Provider shall be required to prepare Accounting Documents (as defined in the draft conditions at annex A to this consultation document) for the purpose of Condition 3 and produce and deliver them to the Director as soon as reasonably practicable but not later than 24 December 2003. Oftel intends that the Provider would then be required to comply with Conditions 3.6 to 3.19 from that same date. Oftel’s practical intention is that this deadline shall allow the Provider sufficient time in which to organise its accounting practices so as to be able to comply with the condition. From 24 December 2003, the draft condition envisages that the Provider will be required to comply with the condition and the provisions of any directions issued by the Director from time to time in relation to the format and disclosure of the Accounting Documents. The new condition 3 also deals with the appointment of a Regulatory Auditor, and provides for that auditor to owe a duty of care to the Director. The Director recognises that discussion of the duty of care owed to Regulators is currently taking place within various accountancy bodies and that the position adopted by that auditor may change if further guidance on this issue is issued by the accountancy profession. However, notwithstanding this ongoing discussion, the Director considers that it is a vital and indispensable requirement of his role that he is able to rely on the veracity and accuracy of regulatory accounts prepared by the appointed Regulatory Auditor. The reason that this is so important is due to the fact that the Director, as economic regulator of conditional access services, is the primary user of those regulatory accounts. As a matter of public policy, it is not appropriate for the Director to enter into a contractual relationship with the Regulatory Auditor in order to ensure that he can rely on the regulatory accounts. Therefore, the Director proposes that the Regulatory Auditor should owe him a duty of care under the provisions of the Contracts (Rights of Third Parties) Act 1999. This proposal is consistent with the view of other UK regulators. Furthermore, it is also consistent with provisions contained within the accounting conditions that Oftel intends to impose upon other operators in the telecommunications industry.

3.11 Condition 4 implements the obligations contained within Part I (c) of Annex 1 to the Access Directive to ensure that when granting licences to manufacturers of consumer equipment, holders of industrial property rights to conditional access products and systems are to ensure that this is done on fair, reasonable and non-discriminatory terms. The wording of the obligations in this condition reflects that which is used in the existing condition 7 of the Conditional Access class licence.

3.12 Condition 5 imposes an obligation not to discriminate unduly in the provision of conditional access services. The obligation contained within the first bullet point of Part I(b) of Annex 1 to the Access Directive states that conditional access services must be offered to all broadcasters on a non-discriminatory basis. However, it is Oftel’s understanding that the use of the word "non-discriminatory" in the Annex is not intended to suggest that there can be no differentiation at all. Instead, any differences should be objectively justifiable, for example, by differences in the underlying costs of supplying services to different undertakings. Oftel has therefore drafted a condition to implement the first bullet point of Part I(b) of Annex 1 to the Access Directive to reflect the view that the Directives prohibit discrimination which is undue. The main effect of the condition is that the Provider should not differentiate in such a way so as to have a material adverse effect on competition. This is because the Director considers that it is important to ensure that conditional access services are not provided to third party broadcasters on less favourable terms than those on which SSSL provides services to BSkyB. The Director has already outlined how Oftel might treat undue discrimination in its statement Imposing access obligations under the new EU Directives, September 2002. As noted in paragraph 3.6 above, this document is not expressly applicable to conditional access. However, the Director nonetheless considers that it provides a useful basis from which to develop a consistent approach to undue discrimination in relation to conditional access.

3.13 Condition 6 imposes an obligation relating to the publication of charges, terms and conditions. This implements, (with conditions 1 and 5) the obligation contained within the first bullet point of Part I(b) of Annex 1 to the Access Directive). The Director proposes that, where a conditional access system is provided after 25 July 2003, a copy of the notice containing the charges and terms and conditions should be sent to the Director within 28 days of the conditional access system being provided. In the event that any charges, terms or conditions are amended, a notice of such amendments must be provided to the Director not less than 90 days prior to their introduction. This is a notice period imposed on many markets for services regulated by Oftel. In the Director’s view, these notice periods represent the appropriate balance: the Director considers that the publication of charges helps to ensure stability in markets and, without such a notice period, incentives to invest might be undermined and opportunities for market entry may therefore be less likely. Publication of charges, terms and conditions also assists both the NRA and broadcasters in judging the state of the market and enables broadcasters to make a judgement as to whether the terms they are offered are likely to be fair, reasonable and non-discriminatory. It is thus a necessary complement to that requirement. The wording of the obligations in this condition – except for those concerned with the 90 day notice period – reflects that which is set out in the existing condition 14 of the Conditional Access class licence.

Questions for stakeholders

3.14 Do you agree with Oftel’s proposal to implement the obligations contained within Annex 1, Part I of the Access Directive in the manner as set out in the conditions contained at Annex A to this consultation document?

3.15 Do you agree that the conditions proposed are objectively justifiable, do not unduly discriminate, are proportionate and transparent?

3.16 Are there any other issues that you think Oftel ought to take into account when it implements the new Conditional Access conditions?

Chapter 4 – Consultation

4.1 The purpose of this consultation is to seek views on the Director’s proposals for regulation of conditional access services in the UK. The Director will consider all relevant comments before making the final Notification.

4.2 In addition to comments respondents may wish to make on the Director’s proposals, the Director would like respondents’ views on the specific questions raised.

4.3 The Director is publishing the draft conditions together with this explanatory document so that interested parties may have a reasonable opportunity to make representations. Having considered any such representations, the Director will make any changes he thinks appropriate and then publish a final version of the new conditions.

4.4 In accordance with Clause 45(3) of the Communications Bill/Regulation 17(3) of the draft Regulations, a consultation period of 1 month has been permitted for Representations.

4.5 Representations must arrive at Oftel no later than close of business on Monday 7 July 2003. Representations received after this time will not be taken into account, and no extensions of the deadline will be permitted.

4.6 Where possible, comments should be made in writing and sent by e-mail to margaret.doherty@oftel.gov.uk. However, copies may also be posted or faxed to the address below. If any stakeholders are unable to respond in one of these ways, they should discuss alternatives with:

Margaret Doherty
Oftel
50 Ludgate Hill
London
EC4M 7JJ

tel: 020 7634 8828
fax: 020 7634 8731

Further copies of this document

4.7 This document can be viewed on Oftel’s website, www.oftel.gov.uk. Paper copies and more accessible formats such as large print, Braille, disc and audio cassette can be made available on request. Please contact Oftel’s Research and Information Unit by telephoning 020 7634 8761 or by sending an e-mail to infocent@oftel.gov.uk.

Publication of representations made by stakeholders

4.8 On this occasion, the Director is not inviting stakeholders to comment on the representations made by others. However, in the interests of transparency, all representations will be published, except where respondents indicate that a response, or part of it, is confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex that is clearly identified as containing confidential material. Oftel will take steps to protect the confidentiality of all such material from the moment that it is received at Oftel’s offices. In the interests of transparency, respondents should avoid applying confidential markings wherever possible.

4.9 Non-confidential representations can be viewed on Oftel’s website in the Publications section under Responses to Oftel consultations. They can also be viewed at Oftel’s Research and Information Unit. Appointments must be made in advance by telephoning 020 7634 8761 or by sending an e-mail to infocent@oftel.gov.uk.

Annex A – Notification of proposals under Clause 45(2) of the Communications Bill/Regulation 17(2) of the draft Regulations

Proposal for setting access-related conditions under Clause 42(5) of the Communications Bill/Regulation 14(4) of the Draft Regulations as authorised by Clause 70(5) of the Communications Bill/Regulation 30(4) of the Draft Regulations

1. The Director General of Telecommunications (‘the Director’) hereby makes the following proposals for setting access-related conditions to apply to the Provider as defined in the Schedule to this Notification who provides a Conditional Access System in relation to a Protected Programme Service as set out in the Schedule to this Notification.

2. The Director is proposing to set access-related conditions under Clause 42(5) of the Communications Bill 2003 or Regulation 14(4) of the Draft Regulations (whichever comes into force first), as authorised by Clause 70(5) of the Communications Bill/Regulation 30(4) of the Draft Regulations.

3. The effect of the Conditions would be to impose all such provisions as required by Part I of Annex I of the Access Directive on to the Provider as defined in the Schedule to this Notification who provides Conditional Access Systems in relation to Protected Programme Services as required by clause 72(2) of the Communications Bill or Regulation 32(2) of the Draft Regulations.

4. Further details of the effect of, and the Director’s reasons for making, the proposals to set the Conditions are set out in the consultation document accompanying this Notification.

5. In considering whether to make the proposals set out in this Notification, the Director has complied with all relevant requirements set out in clauses 42 to 47 and clauses 70 and 72(2) of the Communications Bill/Draft Regulations 14 to 19 and Regulations 30 and 32(2) of the Draft Regulations.

6. Representations may be made to the Director about any of the proposals set out in this Notification and the accompanying explanatory memorandum by close of business on Monday 7 July 2003.

7. A copy of this Notification has been sent to the Secretary of State.

8. For the purposes of this Notification the following definitions shall apply:

9. Except insofar as the context otherwise requires, words or expressions shall have the meaning assigned to them and otherwise any word or expression shall have the same meaning as it has in the Communications Bill.

DAVID ALBERT EDMONDS
DIRECTOR GENERAL OF TELECOMMUNICATIONS
5 June 2003

SCHEDULE

PROPOSED CONDITIONS APPLICABLE TO PROVIDERS OF CONDITIONAL ACCESS SYSTEMS

PART 1: Definitions and Interpretation relating to the Conditions in this Schedule

Definitions

In this Schedule, except in so far as the context otherwise requires:

"Accounting Documents" means together the Regulatory Accounting Principles, the Attribution Methods, the Transfer Charge System Methodology, the Accounting Policies, the Detailed Attribution Methods and the Detailed Valuation Methodologies;

"Accounting Policies" means the manner in which the requirements of the Companies Act 1985 as amended by the Companies Act 1989, the Accounting Standards and the accounting policies whenever not superseded by the Regulatory Accounting Principles, that would be applied in the preparation of each of the Financial Statements, as produced and delivered to the Director by 24 December 2003 and as amended from time to time in accordance with Condition 3 as the case may be;

"Accounting Separation Activities" means services, facilities or arrangements used directly or indirectly in the course of supplying Conditional Access Services, that are individually identified by the Provider and agreed between the Provider and the Director and/or as directed by the Director from time to time;

"Accounting Separation Attribution" means, in relation to Conditional Access Services, the totality of all apparatus, data, procedures and activities which the Provider uses or holds for use to determine the costs, revenues, assets and liabilities to be attributed to an activity, either based upon data recorded by an Accounting Separation Measuring System or otherwise;

"Accounting Separation Measuring System" means the totality of all apparatus, systems, data, procedures and activities which the Provider uses or holds for use to determine the extent to which costs, revenues, assets and liabilities are to be attributed to activities related to Conditional Access Services;

"Accounting Separation System" means the Accounting Separation Attribution and Accounting Separation Measuring System taken together;

"Act" means the Communications Act 2003;

"Attribution Methods" means the practices used to attribute revenue, costs, assets and liabilities to activities as produced and delivered to the Director by 24 December 2003 and as amended from time to time in accordance with Condition 3 as the case may be;

"Auditing Standards" means United Kingdom auditing standards and guidelines issued from time to time by the Auditing Practices Board or its predecessor body the Auditing Standards Body, or by its successor(s);

"Auditor" means any auditor which could be appointed as the Provider’s auditor in accordance with the requirements of the Companies Act 1985 as amended by the Companies Act 1989;

"Broadcaster" includes the British Broadcasting Corporation, any person to whom a licence has been granted to provide, deliver or diffuse television services under one or more of the Wireless Telegraphy Act 1949, Cable and Broadcasting Act 1984 (as continued in force by the Broadcasting Act 1990), Broadcasting Act 1990, Broadcasting Act 1996, or any person acting on behalf of such a person;

"Conditional Access Services" means services, facilities or arrangements by means of which access to Protected Programme Services may be controlled so that only those viewers who are authorised to receive such services do so and includes:

(i) Encryption Services that is to say:

(ii) Subscriber Authorisation Services that is to say:

(iii) Subscriber Management Services, that is to say:

or both;

"Detailed Attribution Methods" means the document with that title (along with the Detailed Valuation Methodology') containing details of the systems and processes for deriving or calculating the costs, revenues, assets and liabilities which are used by the Provider to prepare the Financial Statements;

"Detailed Valuation Methodology" means the document with that title (along with the Detailed Attribution Methods) containing details of the systems and processes for deriving or calculating the costs, revenues, assets and liabilities;

"Director" means the Director General of Telecommunications as appointed under section 1 of the Telecommunications Act 1984;

"Essential Component" means the smart card or other technological component in electronic or tangible form which is necessary for the reception of authorisation signals and thus to enable customers to view Protected Programme Services in or upon which is mapped the Customer's viewing entitlements for insertion or incorporation into or other interoperation with the decoder;

"Financial Statement" means any financial statement that is required under Condition 3.11;

"Industrial or Intellectual Property" includes, without prejudice to its generality, patents, designs, know-how and copyright;

"Process" means the series or inter-related activities or actions to obtain, record or hold data or information or to carry out any operation or set of operations on the data or information, including:

(i) organisation, storage, adaptation, or alteration of the data or information;

(ii) retrieval, consultation, computation or use of the data or information;

(iii) disclosure of the data or information by transmission, dissemination, or otherwise making available; or

(iv) alignment, combination, blocking, erasing or destruction of the data or information;

"Product" includes any item which is used for the provision of a Conditional Access Service;

"Provider" means British Sky Broadcasting Group plc, whose registered company number is 02247735, and any British Sky Broadcasting Group plc subsidiary or holding company, or any subsidiary of that holding company, all as defined by Section 736 of the Companies Act 1985 as amended by the Companies Act 1989;

"Regulatory Accounting Principles" means the high level general principles and rules to be followed in meeting the reporting requirements of Condition 3 as produced and delivered to the Director by 24 December 2003 and as amended from time to time in accordance with Condition 3 as the case may be;

"Regulatory Auditor" means the Auditor for the time being appointed by the Provider in accordance with Condition 3 as the case may be;

"Relevant Intellectual Property Right" means any right, which is wholly or partly controlled by the Provider, in Industrial or Intellectual Property or is subject to an agreement, an arrangement or concerted practice to which the Provider is a party;

"Standard Audit Opinion" means an audit opinion in accordance with Condition 3.15 as the case may be; and

"Transfer Charge System Methodology" means methodologies used in deriving and accounting for transfer charges from and to the Provider’s activities as a provider of Conditional Access Services as produced and delivered to the Director by 24 December 2003.

1. Except insofar as the context otherwise requires, words or expressions shall have the meaning assigned to them and otherwise any word or expression shall have the same meaning as it has in the Act.

2. The Interpretation Act 1978 shall apply as if each of the conditions were an Act of Parliament.

3. For the purpose of interpreting the conditions set out in Part 2 the headings and titles shall be disregarded.

PART 2: The Conditions

Condition 1 – Requirement to provide Conditional Access Services

1.1 Where a Broadcaster reasonably requests in writing Conditional Access Services, the Provider shall provide those Conditional Access Services. The Provider shall also provide such Conditional Access Services as the Director may from time to time direct.

1.2 The provision of Conditional Access Services in accordance with paragraph 1 shall occur as soon as reasonably practicable and shall be provided on fair and reasonable terms, conditions and charges and on such terms, conditions and charges as the Director may from time to time direct.

1.3 The Provider shall comply with any direction the Director may make from time to time under this Condition.

Condition 2 – Transcontrol Requirements Imposed On The Provider Of Conditional Access Services

2.1 Where a Provider provides to a Broadcaster any Conditional Access Services in relation to the provision of Protected Programme Services and that Broadcaster's Protected Programme Services are provided to another provider of Electronic Communications Networks for the purpose of retransmission, the Provider shall co-operate with that provider of Electronic Communications Networks, including providing it with any necessary assistance and information, so that other Provider is able to transcontrol and re-transmit the Protected Programme Services cost-effectively using its own Conditional Access System, without incurring unnecessary or unreasonable expense.

2.2 Nothing in 2.1 above shall prevent the Provider charging and being paid for the assistance and information so provided.

Condition 3 – Obligation To Keep Separate Financial Accounts

3.1 Except in so far as the Director may consent otherwise in writing, the Provider shall keep separate financial accounts regarding its activities as a provider of Conditional Access Services in the manner set out below.

3.2 The Director may from time to time make such directions as he considers appropriate with respect to the Provider’s obligations to maintain a separation for accounting purposes under this Condition.

3.3 The Provider shall comply with any direction the Director may make from time to time under this Condition.

3.4 The Provider shall prepare Accounting Documents for the purpose of this Condition and produce and deliver them to the Director as soon as reasonably practicable but not later than 24 December 2003.

3.5 The Provider shall comply with Conditions 3.6 to 3.19 from 24 December 2003 as appropriate.

3.6 The Provider shall ensure that its accounting and reporting arrangements (including Accounting Separation Systems) are sufficient to enable the Provider, at all times, to be capable of preparing in relation to any period a financial statement in accordance with the Accounting Documents. These accounting and reporting arrangements shall be, in the opinion of the Director, suitable to demonstrate at any time and in relation to any period that its charges for Conditional Access Services are transparent, non discriminatory, fair and reasonable.

3.7 The Provider shall maintain a separation for accounting purposes of Accounting Separation Activities from other activities, so as to:

3.8 The Provider shall maintain accounting records in a form which, on a historic cost basis and on a current cost basis:

3.9 The accounting records referred to in paragraph 3.8 shall be kept in a form which enables the Provider to prepare Financial Statements both on a historic cost basis and on a current cost basis.

3.10 The accounting records referred to in paragraph 3.8 and all associated documentation shall be:

3.11 The Provider shall,

3.12 The Provider shall publish and deliver to the Director copies of Financial Statements and any corresponding audit opinion each and all of which shall be in the form in which they are ultimately to be published, as directed by the Director. The Provider shall publish with the Financial Statements a written statement made by the Director and provided to the Provider commenting on the data in, the notes to or the presentation of any or all of the Financial Statements and/or the Accounting Documents.

3.13 The Provider shall make such amendments to the form and content of the Financial Statements as are necessary to give effect fully to the requirements of this Condition. The Provider shall provide to the Director particulars of any such amendment, the reasons for it and its effect, when it delivers the Financial Statements to the Director.

3.14 Where the Director has reasonable grounds to believe that any or all of the Financial Statements and/or Accounting Documents are deficient and/or where the Provider has been found to be in breach of one of its Conditions, the Provider shall, where directed by the Director:

3.15 The Provider shall secure in respect of each Financial Statement an expression of an audit opinion by the Regulatory Auditor, which shall conform to Auditing Standards and to the requirements as directed by the Director from time to time for this Standard Audit Opinion.

3.16 To the extent the Director is satisfied that the requirement to secure an audit opinion on a specific Financial Statement is not proportionate, the Provider shall secure an audit opinion by the Regulatory Auditor which shall conform to Auditing Standards and to the requirements as directed by the Director from time to time for this lesser audit opinion.

3.17 The Provider shall use its best endeavours to obtain from the Regulatory Auditor any further explanation and clarification of the reports required under Condition 3.15 and/or 3.16 and any other information in respect of the matters which are the subject of those reports as the Director shall reasonably require.

3.18 The Regulatory Auditor that the Provider from time to time appoints shall at all times be satisfactory to the Director having regard to such reasonable matters as the Director considers appropriate. The Provider shall notify the Director in writing of the Auditor appointed to secure compliance with this Condition before the Auditor carries out any work for that purpose. The Provider shall notify the Director of any proposed change of Regulatory Auditor 28 days before effect is given to that change.

3.19 The Provider’s letter of engagement appointing the Regulatory Auditor shall:

3.20 The Provider shall secure that sufficient checks, controls and reconciliations are performed between figures contained in the Financial Statements and the accounting records to enable the Financial Statements to be audited and an audit opinion expressed upon them in accordance with paragraphs 3.15 (or where the Director so consents, 3.16).

Condition 4 – Intellectual Property

4.1 Where it appears to the Director that any Relevant Intellectual Property Right has been, is being or is likely to be exercised (whether by the Provider or by any other person in pursuance of an agreement, arrangement or concerted practice to which the Provider is a party) so as to prevent:

he may direct the Provider in accordance with paragraph 4.2 or 4.3.

4.2 Where the exercise of the Relevant Intellectual Property Right prevents a Product from being made available either at all or on reasonable charges, terms and conditions to the person wishing to make such a connection or to provide or obtain a Conditional Access Service, the Director may direct the Provider to take such steps as are within the power of the Provider and are, in the opinion of the Director, reasonable and necessary in all the circumstances to secure that the Product is made available to that person on charges, terms and conditions acceptable to that person or which (in default of agreement) are, in the opinion of the Director, reasonable to enable such connection to be made or such service to be provided or obtained.

4.3 Where paragraph 4.1 applies in circumstances other than those described in paragraph 4.2, the Director may direct the Provider to take such steps as are within the power of the Provider and are, in the opinion of the Director, reasonable and necessary in all the circumstances to secure that the person wishing to make such a connection or to provide or obtain such a Conditional Access Service is enabled to make use of the Relevant Intellectual Property Right for the purpose of making the connection or of providing or obtaining the service, upon charges, terms and conditions acceptable to that person or which (in default of agreement) are, in the opinion of the Director, reasonable for such purpose.

4.4 The Provider shall comply with any direction made by the Director pursuant to this Condition.

Condition 5 – Requirement not to unduly discriminate

5.1 The Provider shall not unduly discriminate against particular persons or against a particular description of persons, in relation to matters connected with the provision of Conditional Access Services.

5.2 In this Condition, the Provider shall be unduly discriminating where the discrimination has a material adverse effect on competition and has no objective justification.

Condition 6 – Publication Of Charges, Terms And Conditions

6.1 The Provider shall except in so far as the Director may otherwise consent in writing:

and

6.2 Publication of the notice shall be effected in the following way:

and, in any and all of these circumstances, by:

(d) placing a copy of the said notice on any relevant website operated or controlled by the Provider; and

(e) sending a copy thereof to any person who may request such a copy at that person’s written request (or such parts which have been requested).