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The commercial environment in the United Kingdom and in the countries
in which BT operates or wishes to operate is increasingly competitive
and dynamic. However, we remain subject to extensive regulation,
particularly in the UK, which can materially affect the way in
which the company carries out its business.
Regulation in the UK
The regulatory structure for UK telecommunications is set out
principally in the Telecommunications
Act 1984, which gives regulatory authority to the Secretary
of State for Trade and Industry and the Director General of Telecommunications,
who heads the Office of Telecommunications (Oftel). The Secretary
of State and the Director General are required to ensure, as far
as reasonably practical, that all reasonable demand for telecommunication
services, including certain community services, is met and to
secure the ability of licensed telecommunications operators to
finance the provision of the services which they are licensed
to provide. In addition, they are required, among other things,
to promote the interests of consumers, purchasers and other users
in the prices, variety and quality of telecommunication services
and equipment, and to promote and maintain efficiency and effective
competition among UK telecommunications operators.
With limited exceptions, a licence under the Telecommunications
Act is required to operate a telecommunication system in the UK.
The Secretary of State is responsible for issuing licences after
consulting the Director General.
The BT Licence
BT operates in the UK under a number of licences, the most important
of which is its licence to operate its fixed-line public telecommunications
network (the “Licence”). The Licence remains in force
indefinitely, but the Secretary of State may revoke the Licence
on 10 years’ notice. The Licence can also be revoked at
any time on various grounds, including non-compliance with its
terms.
The Licence contains terms and conditions designed principally
to ensure the widespread provision of telecommunication services
in the UK, to protect the interests of consumers and to encourage
the development of effective competition in telecommunication
services and network provision within the UK.
Under the Licence, BT has to fulfil reasonable requests for access
to voice telephony, low-speed data and fax transmission services,
and reasonable access to public call boxes throughout nearly all
the UK, including rural areas (these being the principal elements
of the Universal Service Obligation).
Under the Licence, the company must allow other licensed operators
to interconnect with its telecommunications systems on cost-oriented,
transparent and non-discriminatory terms.
The company must comply with a variety of fair trading obligations,
such as:
 |  | a prohibition on showing undue discrimination
or unfairly favouring any part of its own business as against
competitors on the basis of price terms or quality of service;
and | | | a prohibition on the unfair
cross-subsidy of certain activities of the company. |
BT must publish audited financial statements
for the regulated “businesses” and “activities”,
in order to support the linkage of costs with interconnect prices
and with a view to providing demonstrable evidence that BT is neither
behaving in a discriminatory fashion nor unfairly subsidising its
activities. If it appears to the Director General that an unfair
cross-subsidy exists between specified parts of its own business,
BT must take such steps as the Director General may direct to remedy
the situation. The regulatory businesses for which separated accounts
are currently produced are access, apparatus supply, network, retail
systems, supplemental and residual services. In addition, for the
first time, BT produced separated financial statements for its mobile
business for the 2000 financial year. The Licence also contains
provisions enabling the Director General to monitor the company’s
activities, including requirements for BT to supply him with information
requested.
The Licence permits the imposition of price control formulae, the
overall effect of which requires the company to reduce, or restricts
the extent to which it can increase, the prices of many of its telephony
services to the bulk of the residential market and also the prices
for its interconnection services. In addition, the Licence contains
certain specific restrictions on the terms on which BT can trade.
In particular, the company is required to publish and adhere to
standard prices and other terms for providing certain services.
The Director General may make modifications to a licence if the
licensee does not object or if the amendment is deregulatory. Alternatively,
he may refer proposed changes to the licence to the Competition
Commission (“CC”). In either case, the Telecommunications
Act requires public consultation before a licence can be modified.
Licences may also be modified by legislation, including legislation
implementing European Commission directives into UK law.
Implementation of Licensing Directive
In September 1999, modifications to the Licence came into force
to meet the harmonisation requirements of the European Community
Licensing Directive (the “Directive”). The intention
of the Directive was to prevent excessive or unjustified regulation
through licensing of telecommunications. The modifications included
the removal, from January 2001, of restrictions that prevented BT
from competing in the conveyance and provision of broadcast visual
services to homes in the whole of the UK.
Competition
Competition Act
In addition to telecommunications industry regulation, BT is subject
to general competition law.
The Competition Act 1998, which
came into effect in March 2000, brings the UK in line with European
Community law by prohibiting anti-competitive agreements and concerted
practices and the abuse of a dominant market position. In the case
of telecommunications, the Director General of Telecommunications
has concurrent investigatory and enforcement powers with the Director
General of Fair Trading. They have significant new investigative
powers. Breach of the relevant prohibitions could lead to fines
of up to 10% of UK turnover for each year of infringement (up to
a maximum of three years) and/or result in claims for damages in
the civil courts. There are powers to order a company to cease an
infringing activity.
There is a new statutory independent appeals mechanism for decisions
under the Competition Act.
The competitive environment
The UK telecommunications market is fully open to entry and highly
competitive. As a result, the UK Government (HM Government) and
Oftel have indicated their expectation that it will be appropriate
to move away from sector-specific (including licence-based) regulation
to greater reliance on the Competition Act.
However, as described above, Oftel currently regulates BT mainly
through the provisions in the Licence. BT has commenced discussions
with Oftel on amendments that BT believes should be made to the
Licence to take account of the introduction of the Competition Act.
Although it is some years since the Telecommunications Act abolished
the company’s monopoly in telecommunications, obligations
placed on BT are generally more onerous than for other licensees.
BT believes the separation of the wholesale and retail businesses
should mean that the retail business will be regulated in a similar
manner to other equivalent businesses.
Pricing regulation
Fixed network
BT is subject to price controls on its fixed-network services in
the UK at two levels: retail and network. Competitors are generally
not subject to price controls.
Retail price controls
BT is subject to two sets of UK retail price controls, one on certain
public-switched telephony call charges and exchange line rentals,
and one on certain private circuits. Each price control is based
on a formula calculated by reference to the UK Retail Prices Index
(RPI) and an efficiency factor, X.
For services covered by the controls, weighted average prices cannot
increase in each year beginning 1 August by more than the annual
change in RPI minus X. In times of low inflation, the overall effect
of this control requires the company to reduce its prices.
The retail price control for public-switched telephony, applying
from August 1997 to July 2001, is RPI minus 4.5. Although it is
measured on services used by the lowest 80% of BT’s residential
customers classified by bill size, controlled prices must be offered
to all customers. The price control formula and the company’s
performance against the formula are set out in the table below.
BT has also given an assurance that a “control” price
package will be made available to business customers. The control
package for small business customers provides that call charges
will be no higher than the prices used for calculating adherence
to the residential price control, and line rental increases will
be no more than the change in RPI.
Under the price controls for private circuits, applying from August
1997 to July 2001, prices for domestic analogue and low-speed digital
private circuits cannot be increased by more than the change in
the RPI in any year. Each discrete international private circuit
price is subject to a safeguard cap of RPI.
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| Price
control formula(RPI-X) |
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| % RPI movement for
the relevant period (a) |
3.52 |
|
2.14 |
|
2.94 |
|
3.75 |
|
1.35 |
|
3.32 |
|
| X in price control
formula(b) |
7.50 |
|
7.50 |
|
4.50 |
|
4.50 |
|
4.50 |
|
4.50 |
|
% required reduction
in
prices (c) |
(1.38 |
) |
(4.92 |
) |
(1.56 |
) |
(0.73 |
) |
(3.15 |
) |
(1.09 |
) |
| % reduction in prices
overall |
(1.82 |
) |
(4.92 |
) |
(1.56 |
) |
(0.73 |
) |
(3.24 |
) |
(1.20 |
)(d) |
|
| (a) |
Annual increase in
RPI to previous June |
| (b) |
From 1 August 1997,
the RPI formula covers the main switched telephone services
provided to the lowest 80% of BT’s residential customers
by bill size |
| (c) |
After permitted
carry forward of any unused allowance or shortfall from previous
years |
| (d) |
Price changes implemented
up to 22 May 2001 |
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Network charge control
The company operates under interconnection agreements with most
other licensed operators.
A network charge control regime, operating until 30 September 2001,
gives BT the freedom to set reasonable charges based on long-run
incremental costs for its standard interconnection services. Depending
on the degree of competition for these services, charges are cap
controlled (presently at RPI minus 8), safeguard cap controlled
(i.e. no increases above RPI during any relevant year), or no longer
subject to direct charge controls. Those services which Oftel considers
unlikely to become competitive in the near future are subject to
charge cap controls; those which it considers likely to become competitive
are subject to safeguard cap controls and those services considered
fully competitive (or which have been introduced by BT since the
start of the network charge control regime) are not subject to direct
charge controls.
We must publish a notification to the Director General and other
licensed operators if we intend to amend existing charges or to
offer new services.
Review of retail price controls and network
charges
In February 2001, Oftel published its Proposals for Network Charge
and Retail Price Controls which included draft licence modifications.
In this Statement, Oftel proposed to extend the current retail price
cap of RPI minus 4.5 by one year until 31 July 2002, rather than
remove controls or introduce the usual new four-year control, and
to consult again to determine whether there is sufficient competition
to remove retail price controls from 1 August 2002. Should Oftel
decide that there is insufficient competition at that stage, then
it would consider renewing price controls and/or introducing other
regulatory measures.
Oftel’s network proposals include retaining the broad structure
of interconnect (network) services for another four years. It proposes
varying levels of “X” within the RPI minus X price-cap
formula of between 7.5% and 13% for each of the five services, compared
to the current level of 8%.
BT has accepted Oftel’s proposals.
Mobile networks
Licence modifications required by the CC led to a reduction of about
25% in the price of calls from a BT line to mobile telephones from
30 April 1999, followed by an annual RPI minus 7 reduction for a
further two years. Specifically, the CC required a reduction in
BT’s average retention (the amount BT keeps to cover costs
and an element of profit after paying a termination charge to the
mobile operator completing the call) from 5.8 pence per minute (ppm)
to 3.09 ppm for the 2001 financial year. Under their latest proposals
for the Price Control Review, Oftel has extended the current controls
by four months until 31 July 2002, and will review them as part
of the broader retail price control review.
The CC also recommended that BT Cellnet and Vodafone made price
reductions on their average termination charges, from 14.8 ppm to
10.9 ppm for the 2000 financial year; this price came under a price
control of RPI minus 9 for three years. Oftel is currently consulting
to determine whether controls on their termination charges should
be extended beyond the present period, which runs out in March 2002.
Oftel has broadened the consultation to also consider the termination
rates for mobile to mobile calls, and whether the two other UK wireless
network operators, One2One and Orange, should fall within any future
controls. Oftel expects to complete the review by July 2001.
Non-UK regulation
In developing its business internationally, BT must take account
of the regulatory regimes in the countries in which it operates
or wishes to operate.
European Union
The European Commission is pursuing a policy of progressive liberalisation
and harmonisation in telecommunications. Since January 1998, the
provision of infrastructure and all telecommunication services has
been liberalised in the European Union (EU). Specific directives
imposed rules for, among other things, voice telephony, leased lines
and interconnection, with particular emphasis on organisations with
significant market power and with a common set of principles for
licensing and enforcement. These have largely been implemented in
national legislation. The European Commission reviewed progress
during 1999 and 2000 and is proposing a simplified regulatory framework,
which will include a more uniform regulatory treatment of different
communications technologies and a revision of the concept of significant
market power to be applied by national regulatory authorities.
United States
In the United States, the Federal Communications Commission has
extensive authority to regulate interstate and foreign services
and services provided by common carriers, as well as the authority
to implement policies that promote competition for all telecommunication
services.
Japan
Japan is taking a staged approach to deregulation. Full liberalisation,
save a 20% ceiling on foreign ownership in Nippon Telegraph and
Telephone Corporation, was implemented in 1998. A move to more effective
regulation, especially in the areas of forward-looking costs for
interconnection, carrier pre-selection and number portability, is
planned.
In April 2000, the Japanese government invited applications for
3G mobile licences. In June 2000, J-Phone was granted a 3G licence,
one of three awarded.
Rest of the world
The World Trade Organisation’s Agreement on Basic Telecommunications,
signed in February 1997, created a framework for the progressive
opening of telecommunications markets in accordance with world trade
standards. The agreement provides assurance that commitments made
by the 73 participating nations can be legally enforced. However,
the commitments themselves provide only limited opportunities in
some markets. Detailed implementation schedules are required in
many of those countries in which BT has an interest. A further round
of World Trade Organisation negotiations on services is due to take
place, although the timetable is unclear.
Other significant changes and issues
Local loop unbundling
In April 2000, following consultation, BT accepted an amendment
to its Operating Licence which required it to provide unbundled
local loops to other operators, to enable them to provide telecommunications
services, including broadband DSL-type services, to end customers.
The amendment came into force in August 2000, with local loop unbundling
(LLU) to be available from July 2001.
The EU thereafter passed a regulation requiring LLU, line sharing
and sub loop unbundling to be offered from December 2000, thereby
bringing forward the implementation date. BT published a revised
standard reference offer on 29 December 2000.
During 2001, BT will introduce line sharing as required by the EU
regulation. Oftel will determine the prices for the broadband frequency
band of a shared loop after consultation and input by BT of relevant
cost calculations.
Carrier pre-selection
From 1 January 2000, the European Commission required the provision
of carrier pre-selection (CPS) by Member State operators with significant
market power. CPS allows customers to opt for certain classes of
call to be carried by an alternative operator, selected in advance,
without having to dial additional access codes.
Software changes to BT’s local exchanges could not be introduced
before January 2001 (for national and international calls) and January
2002 (for all other calls) and HM Government applied to the European
Commission for a deferment of BT’s obligation. The European
Commission granted a limited deferment until 1 April 2000, but decided
that CPS should be provided in the interim by means of auto-diallers
on customers’ premises.
BT introduced permanent CPS service (for national and international
calls) ahead of schedule on 12 December 2000.
Leased lines
Oftel published a Direction in respect of partial private circuits
(PPCs) on 29 March 2001. This resulted from a review of the competitiveness
of the national leased lines market in the UK and the need for regulation
in this sector. The Direction followed a consultation in August
2000 and an Oftel statement in December 2000. Oftel has concluded
that more competition is needed in the provision of wholesale “terminating
segments” and has proposed that BT offer PPCs to other operators
at cost-based prices. Oftel has given time limits for the conclusion
of negotiations. It is expected that the proposals will be implemented
during the second half of 2001.
Mobile services
BT Cellnet operates under its own Mobile Public Telecommunications
Operators licence that authorises provision of a range of mobile
telecommunications services.
The Director General has previously determined, and is in the process
of re-determining, that BT Cellnet and Vodafone have “market
influence”. A determination of market influence triggers,
among other things, an obligation to supply independent service
providers with wholesale airtime on their networks on fair and non-discriminatory
terms for resale.
As a pre-condition to eligibility for bidding in the 3G licence
auction, BT Cellnet and one other existing second generation (2G)
mobile operator, Vodafone, were required to agree to amendments
to their licences to incorporate a “roaming condition”.
This obliges BT Cellnet and Vodafone to allow the one new 3G entrant
to roam onto their networks. The roaming condition will come into
effect at the latest once this new entrant has rolled out its network
to cover an area in which at least 20% of the UK population live.
BT Cellnet and Vodafone will be expected to negotiate roaming agreements
with the new 3G entrant. If they are unable to agree, the matter
may be referred to the Director General for resolution. The roaming
condition will remain in force until 31 December 2009.
In addition to the consultation on termination charges for calls
to mobiles, Oftel has issued a consultation document assessing the
state of competition in the mobile market and the form of regulatory
regime going forward. Oftel has indicated that its initial view
is that the mobile market is not yet effectively competitive and
that two or more of the mobile operators in the UK are likely to
be subject to some regulation to promote competition.
Universal service
In September 2000, Oftel issued a further consultation on BT’s
Universal Service Obligation (USO). BT endorses Oftel’s view
that, at this point, BT’s USO should not be extended to cover
broadband services. Whilst BT welcomes Oftel’s revision of
costs and benefits set out in the previous consultation, BT is disappointed
by Oftel’s failure to acknowledge the strong case for industry
funding of the significant net costs that fall on BT in providing
universal service. BT still believes social telephony would be better
funded through an industry-wide fund. BT awaits Oftel’s final
conclusions.
HM Government’s review of telecommunications
and broadcasting regulation
HM Government has initiated a review of telecommunications and broadcasting
regulation. HM Government published a White Paper in December 2000
proposing regulatory reform concerning the convergence of the communications
industries. A new regulatory body is proposed, to be called the
Office of Communications (OFCOM), that will amalgamate the roles
of five existing regulatory agencies: Office of Telecommunications;
Independent Television Commission; Broadcasting Standards Commission;
Radio Authority and Radiocommunications Authority. OFCOM will be
headed by a chairman and chief executive supported by executive
and non-executive board members.
The main change for telecoms would be the proposed introduction
of fines for breach of regulatory obligations. BT supports HM Government’s
vision for the converging sector and welcomes the intention not
to apply broadcasting rules to internet content. However, BT, along
with many others, is seeking full rights of appeal against regulatory
decisions and the incorporation within OFCOM of incentives to reduce
the level of regulation when appropriate.
Oftel strategy statement
In January 2000, Oftel published a strategy statement based on the
principle that regulation should go no further than the minimum
necessary to protect consumers. The two key features of the strategy
are increased use of industry self- and co-regulation, and reviews
of the effectiveness of competition in major market sectors. BT
supports the proposal for an extension of self- and co-regulation,
which has the potential to result in regulation which is more flexible,
more responsive and more pragmatic. BT is discussing with other
stakeholders how this can best be put into practice, especially
in consumer-related areas.
BT also supports the aim of the effective competition reviews, which
are intended to ensure that the regulatory framework responds to
changed competitive conditions. The reviews will be carried out
over the next few years according to a schedule which Oftel has
published: where it is found that competition is delivering benefits
to consumers in the sectors reviewed, regulation will be reduced
or withdrawn, as appropriate. Sectors for which reviews have already
been initiated or completed include national leased lines and mobile
telephony. BT supports Oftel’s plans to review the duplication
between licence conditions and the Competition Act during the current
financial year.
Interconnection product
On 26 May 2000, Oftel issued a determination stating that BT should
provide an interconnection product under its licence for flat rate
internet access call origination (FRIACO). The determination requires
BT to provide call origination for internet access, not on the standard
pence per minute basis but with charging based upon network capacity
purchased. The determination directed BT to offer FRIACO at the
local exchange level from 1 June 2000. BT complied with this direction.
BT had concerns at potential network congestion should FRIACO have
to be made available at the next level up from the local exchange
(DMSU). Oftel has acknowledged these concerns and, on 13 November
2000, began consulting on proposals that would make FRIACO available
at the DMSU level, although with safeguards in place for one year
to ensure the network does not become congested. A final determination
on DMSU FRIACO was issued on 15 February 2001 requiring BT to offer
such a product but with safeguards, including requirements on other
operators to re-arrange traffic, to prevent network congestion.
The charges for both FRIACO services are to be incorporated in the
network charge control regime.
Office of Fair Trading review of Yellow
Pages
On 11 May 2001, the Director General of Fair Trading issued a statement
that, at the request of the Secretary of State for Trade and Industry,
the OFT is to seek further undertakings from BT in respect of Yell’s
fees for advertising in its printed UK consumer classified directories
(Yellow Pages). BT is being asked, amongst other things, to cap
the fees at RPI minus 6 for four years from January 2002.
The decision follows a review by the OFT of undertakings entered
into by BT in 1996. The existing undertakings were given following
a 1996 Monopolies and Mergers Commission (now Competition Commission)
report on the supply of classified directory advertising services.
They cap Yell’s advertising rates at RPI minus 2. They also
require Yell to publish a rate card, ensure that directory areas
do not overlap and to provide financial statements to the OFT.
Had the revised price cap been in effect during the 2001 financial
year, it would have applied to around 65% of Yell’s group
turnover and we estimate that, assuming no change in advertising
volume, Yell’s revenues would have been reduced by approximately
£20 million.
Domestic obligations in a global market
As a result of BT’s international interests, a Licence condition
prohibits BT from doing anything, by act or omission, that would
detract materially from its ability to meet its Licence obligations
to provide UK telecommunication services, and to do so to any specified
standards. BT’s directors are required to submit an annual
compliance certificate to the Director General.
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