BT operates in an increasingly competitive
and dynamic commercial environment, both in the UK and around the world.
The
2006 financial year saw the most significant change to the UK regulatory regime
since BT was privatised when, in response to Ofcom’s strategic review of
telecommunications, we proposed a number of legally-binding Undertakings under
the Enterprise Act 2002 (the Enterprise Act). These Undertakings were accepted
by Ofcom and came into force in September 2005. (See
BT’s Undertakings
under the Enterprise Act)
The Undertakings are intended to deliver clarity
and certainty to the UK telecommunications industry, with regulation focused
on the bottleneck parts of the network, and over time rolled back elsewhere,
to the benefit of consumers and others in the marketplace.
This
is mainly being achieved through Openreach’s operations – offering
certain products and services to all communications providers in the same way
– and through other widespread organisational and systems changes. Since
the Undertakings came into force, we have made good progress in delivering our
obligations.
Other
regulatory highlights in the 2007 financial year included achieving deregulation
in wholesale international services markets, the ending of retail price controls
and the ending of our pricing commitments on wholesale calls. Ofcom is currently
carrying out a market review of the wholesale broadband access market and is
expected to carry out three further market reviews in the 2008 financial year.
(See Significant market power conditions)
Regulation in the UK
UK regulation is conducted within
a framework determined by various EU (European Union) directives, regulations,
and recommendations. This framework is currently under review by the European
Commission and proposals for revised EU directives are expected towards the
end of the 2007 calendar year, although they are unlikely to take effect in
the UK before 2010.
Our
policy is to comply fully with the regulatory framework in which we operate,
while competing fairly and vigorously within the rules.
Ofcom
The Office of Communications (Ofcom)
was set up under the Office of Communications Act 2002 to provide a single,
seamless approach to regulating the entire communications market. Its principal
duties are to further the interests of citizens in relation to communications
matters and to further the interests of consumers in relevant markets, where
appropriate by promoting competition.
Regulation
takes the form of sets of conditions, mostly laid down by Ofcom under the Communications
Act 2003 (Communications Act), and directions under these conditions. Some conditions
apply to all providers of electronic communications networks and services; others
apply to individual providers which are designated as having a USO (universal
service obligation) or, following a review of relevant markets, are found to
have SMP (significant market power), which is aligned with the competition law
concept of dominance.
Other
more general types of obligations are set out in the Communications Act.
Conditions applying
to all providers of electronic communications networks or services
General conditions
The general conditions made by Ofcom
under the Communications Act apply to all providers of electronic communications
networks or services. Although these conditions are concerned primarily with
consumer protection, they also address issues such as general access and interconnection
obligations, standards, emergency planning and numbering. A separate condition
regulates the provision of premium rate services.
Electronic Communications Code
conditions
The Electronic Communications Code
applies to communications providers authorised to carry out streetworks and
similar activities for network provision. Its application is subject to conditions
made by the Secretary of State for Trade and Industry.
Other general obligations
Other general types of obligations
contained in the Communications Act include:
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the payment of administrative charges (broadly the equivalent of licence fees under the old framework) |
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the provision
of information to Ofcom when required. |
Conditions applying to BT specifically
Universal service obligation conditions
BT is the designated supplier of universal service for the UK, excluding the Hull area where Kingston Communications is the designated provider.
The services covered by the USO are defined in an order issued by the Secretary of State for Trade and Industry. Our primary obligation is to provide a single narrowband connection to the fixed telephone network – which, in addition to voice services, must support functional internet access (dial-up) – to anyone
who reasonably requests it.
Significant market power conditions
Ofcom is required by EU directives regularly to review relevant markets and to determine whether any communications provider has SMP in those markets. Where Ofcom finds that a provider has SMP in a market, it must impose such additional conditions as it considers appropriate, as specified in the
Communications Act. These may include obligations to meet reasonable requests to supply certain services to other communications providers, not to discriminate unduly and to notify price changes and obligations relating to regulatory accounting. In some cases, extra obligations such as price controls have also been
imposed.
Following a number of market reviews by Ofcom, BT has been deemed to have SMP in certain fixed telecommunications markets, including all or parts of the markets for: fixed narrowband retail services, fixed narrowband wholesale exchange lines, call origination and conveyance, wholesale broadband access and wholesale local access.
During the 2007 financial year, Ofcom determined that we no longer have SMP in any of the wholesale international services markets, and our pricing commitment on wholesale calls ended.
Ofcom is currently conducting a market review of wholesale broadband access markets and is also planning to carry out market reviews of the leased lines market, and fixed narrowband wholesale services and fixed narrowband retail services, in the 2008 financial year.
BT’s Undertakings under the
Enterprise Act
The key Undertakings given by BT are to:
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deliver equivalence
of input for key wholesale products, and increased transparency for others |
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introduce
new rules on access to, and sharing of, certain restricted information |
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restrict the
exercise of influence by other parts of BT on the commercial policy of
both Openreach and parts of BT Wholesale |
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ensure fair
access and migration to our 21CN for other communications providers |
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publish and
make available to all BT people a code of practice explaining what they
must do to comply with the Undertakings |
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create an
Equality of Access Board to monitor, report and advise on BT’s compliance
with the Undertakings and the code of practice. The EAB was established
on 1 November 2005. (The EAB Annual Report 2007 (which does not
form part of this report) is available online at www.bt.com/eabreport) |
The
Undertakings include a number of requirements – some have specific dates
for delivery and others are ongoing. At 31 March 2007, we had met most of the
relevant requirements with a few exceptions, two of which the EAB reported as
‘non-trivial’.
Competition
Competition
and the UK economy
The growth of mobile telephony
over the past decade has been a major factor in shaping the UK’s telecommunications
landscape and VoIP has also taken off in the past two years. Mobile now accounts
for around 41% of total UK voice minutes. The mobile and fixed-line markets are
currently treated as separate and regulated differently.
Market share was previously modelled using data from internal and external sources. For consistency with the external market and compliance with our equivalence obligations, we are reporting market shares based on the latest available information reported by Ofcom, which is for the period ended 30 September
2006.
On this basis, BT’s share of the residential fixed-voice calls market (defined as including local, national and international minutes) declined to 53% for the quarter ended 30 September 2006, compared with 58% for the quarter ended 30 September 2005. CPS (carrier pre-selection) has been the main contributor to
the loss of share in the fixed-voice market.
BT had 38% of the market for business fixed-voice calls (defined as including local, national and international) for the quarter ended 30 September 2006, compared with 39% for the quarter ended 30 September 2005. We supplied around 71% of exchange lines in the UK for the quarter ended 30 September 2006,
compared with 78% for the quarter ended 30 September 2005, with cable operators being the primary alternative providers.
Competition law
In addition to communications industry-specific regulation, BT is subject to the competition law provisions of the Competition Act 1998 (the Competition Act) in the UK and of the European Community Treaty. Breach of UK or EU rules could lead to fines of up to 10% of a company’s worldwide revenue in its
previous financial year and/or claims for damages in national courts. A company may also be ordered to cease an infringing activity. We are also subject to national competition rules in Europe and elsewhere.
In 2004, Ofcom launched an investigation into allegations that BT had abused a dominant position in relation to its pricing of consumer broadband products. Ofcom sent BT three statements of objection to which we responded, arguing that our pricing does not amount to an abuse of dominance. Ofcom is expected
to issue a decision in 2007.
Pricing regulation
Following a review in 2006 of retail price controls covering public-switched telephony services, Ofcom concluded that the retail price control which ended on 31 March 2006 would not be replaced. BT is therefore no longer subject to retail price controls on these services. Other services continue to be subject to
price controls:
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Network
charge control: We operate under interconnection
agreements with most other operators. Our charges for a range of interconnect
services are controlled by Ofcom, under the NCC (network charge control)
regime. These controls are designed to ensure that our charges are reasonably
derived from costs, plus an appropriate return on capital employed. Depending
on the degree of competition, charges are cap-controlled each year by
RPI minus X for services Ofcom considers unlikely to become competitive
in the near future, and safeguard cap-controlled (ie no increases above
RPI) for services likely to become competitive. (X is a number specific
to a particular market, indicating the permitted change in controlled
prices relative to the rate of inflation.) The current NCC period began
on 1 October 2005 and will last until 30 September 2009. |
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BT
must notify Ofcom and other operators if it intends to amend existing
charges or offer new services. |
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Partial
private circuit charge control: PPCs (partial
private circuits) are leased lines that BT sells to other network operators.
On 1 October 2004, Ofcom introduced a PPC charge control to replace the
annual determinations previously carried out by Oftel. The control is
a four-year, three-part RPI-X formula covering low and high bandwidth
services and equipment. |
Ofcom
is planning to carry out a review of the financial framework of Openreach, which
will include looking at pricing and costs. The review will start during 2007.
Non-UK regulation
BT must comply with the regulatory regimes in the countries in which we operate and this can have a material impact on our business.
European Union
Regulation in each country within the EU is conducted within the regulatory framework determined by EU directives, regulations and recommendations. The manner and speed with which directives have been implemented vary from country to country and national regulators are working together in the European
Regulators Group to introduce greater harmonisation in their approach to the assessment of SMP and the imposition of appropriate remedies.
BT does not have universal service obligations outside the UK, although in certain member states we may be required to contribute towards an industry fund to pay for the cost of meeting universal service obligations in those countries.
Following the European Commission’s formal investigation into the way the UK Government set BT’s property rates and those paid by Kingston Communications, and whether the Government complied with European Community Treaty rules on state aid, the Commission concluded that no such state aid had been
granted. The Commission’s decision has now been appealed, but we continue to believe that any allegation of state aid is groundless, and that the appeal will not succeed.
Rest of the world
The vast majority of the markets in which we operate around the world are regulated, and in most of these we have to meet certain conditions and obtain licences or other authorisations. The degree to which these markets are liberalised varies widely. Our ability to compete fully in some countries is therefore
constrained.
We continue to press incumbent operators and their national regulatory authorities around the world (including the EU) for cost-related wholesale access to their networks where appropriate.
Other significant changes and issues
Wholesale broadband pricing
We have had discussions with Ofcom about how we might ensure price-related protection for broadband consumers in parts of the UK where wholesale broadband competition is less likely to develop in the next few years. The aim is to balance our need to be competitive in the wholesale broadband market while
recognising that emerging LLU operators require a period of stability in order to establish a sustainable business. As a result, we have agreed a series of detailed ceiling and floor pricing commitments for certain mass market wholesale broadband products – BT IPStream and the proposed Wholesale Broadband Connect
service. The commitment on price floors ends on 1 July 2009, and on 31 December 2010 for price ceilings.
Funds for liabilities
Under the terms of the Electronic Communications Code, an electronic communications provider with apparatus on or in the public highway is required to make financial provision to cover any damage caused by work it carries out, and for the removal of its network in the event of liquidation or bankruptcy.
The conditions require the company to provide Ofcom annually with a certificate that, in the opinion of its board of directors, it has fulfilled its obligations to ensure the availability of the required funds. This has been done by BT.
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