Guidelines on the Operation of the Fair Trading Condition

1. Oftel has introduced, or intends to introduce, a Fair Trading Condition into the licences of all operators who provide telecommunications services to a material extent. The Condition has the effect of prohibiting a licensee from engaging, whether by act or omission, in certain anticompetitive practices. It was incorporated into BT's Licence on 1 October 1996 and came in to force on 31 December 1996. It has also been incorporated into the international facilities licences and the class licence for conditional access. Oftel will be issuing a statement in short on the incorporation of the Condition into other licences.

2. The Condition is in the form of a prohibition of activities carried on when providing telecommunication services or running a telecommunications system which have, or are likely to have, the object or effect of preventing, restricting or distorting competition. The Condition catches both abuse of a dominant position and agreements and concerted practices where there is an appreciable effect on competition. The prohibition rests on the economic effect of the behaviour, not its legal form. This means that the Condition does not have the effect of prohibiting particular types of behaviour under all circumstances an assessment of the anticompetitive effects of the behaviour is a necessary step in deciding if a particular action is prohibited. Nevertheless, the treatment of many types of practice will be relatively clearcut, since the Condition reflects existing competition law principles, in particular those contained in the EC Treaty.

3. However, Oftel recognises that on its own the Condition does not provide complete certainty as to what is, and what is not, prohibited. Therefore, licensees and others require guidance about the types of behaviour which are likely to be prohibited. The purpose of these Guidelines is to set out the approach that the Director General of Telecommunications (the Director General) will take in applying the Condition so that licensees, and those who consider themselves to have been affected by anticompetitive behaviour, are better able to assess for themselves the circumstances in which particular types of behaviour are likely to be prohibited.

4. The Guidelines also set out details of the procedures that Oftel will adopt in applying the Condition. They include an explanation of the relationship of the Condition to other licence conditions.

LEGAL STATUS OF THE GUIDELINES

5. These Guidelines are published in accordance with the provisions of the Condition. However, they do not form part of the Condition, and they do not affect its legal scope. The Director General will take them into account in applying the Condition. He would normally expect to follow them and to give his reasons if he departed from them. The Director General cannot legally fetter his discretion in advance and therefore he retains the ability to depart from the Guidelines where the circumstances warrant it. The Guidelines are, therefore, not legally binding on the Director General, and will be updated to take into account developments in the telecommunications market in the future.

6. The telecommunications market and its structure are changing rapidly. This will mean that the potential for particular behaviour to have anticompetitive effects may vary over time as the market changes. Competition in telecommunications is relatively new. The European Court has not yet dealt with competition issues in the telecommunications sector in any detail. The European Commission is only beginning to address competition issues arising from the liberalisation of EU telecommunications markets such as in its recent Draft Notice on the Application of the Competition Rules to Access Agreements in the Telecommunications Sector [COM(96)649] [The Commission did publish Guidelines on the Application of the EEC Comptetition Rules in the Telecommunications Sector in September 1991 but these pre-date liberalisation]. Issues arising under the Condition may, therefore, be novel and/or the effect of certain forms of behaviour may be significantly different in the telecommunications market compared to other sectors. Whether particular behaviour is an abuse of a dominant position or whether particular agreements have an appreciable anticompetitive effect may therefore emerge only as the telecommunications market develops.

7. The Guidelines will be subject to review in the light of market developments, experience in enforcing the Condition, developments in the application of Articles 85 and 86 of the EC Treaty (such as notices from the European Commission), and developments within UK competition law and practice. They will also be revised to ensure consistency with other guidelines such as the International Facilities Licence guidelines, the Conditional Access guidelines, and those on the Operation of Four Conditions Introduced into BT's Licence on 31 March 1995 as part of the Interconnection and Accounting Separation Programme (the 'ICAS guidelines'). The Guidelines will also be reviewed, and be subject to, the forthcoming guidelines and discussion documents on Network Charge Controls and InterOperability.

8. It is Oftel's intention to keep these Guidelines as up to date as possible, following appropriate consultation with the industry. Users of these Guidelines are, therefore, recommended to check that they have the most up-to-date version and for any developments since their publication, by reference to the decisions on enforcement activities which are published in Oftel's Competition Bulletin on a quarterly basis. The latest version of these Guidelines will be kept in the Oftel library and will be available on Oftel's web pages on the Internet at http://www.open.gov.uk/oft/.

PRECEDENTS AND JURISPRUDENCE

9. The Condition is modelled on the concepts and terminology used in Articles 85 and 86 of the EC Treaty. It will however apply to commercial activities in telecommunications in the UK irrespective of whether they have an impact on trade between Member States.

10. Legally the Condition must be interpreted and enforced in the same way as any other licence condition. However, the Condition deliberately adopts the wording of Articles 85 and 86 of the EC Treaty in order to give licensees as much certainty as possible in relation to its interpretation. The Director General is required to determine whether there has been a breach of the Condition "with a view to securing that there is no inconsistency with the general principles having application to similar questions of directly applicable competition law, in particular those laid down by the Court of Justice of the European Communities" and "having regard to" any decision taken, or notice issued, by the European Commission in applying the competition rules and any relevant pronouncement of the Director General of Fair Trading or report of the Monopolies and Mergers Commission.

ENFORCEMENT OF THE CONDITION

11. As explained in paragraph 2 above, the Condition prohibits two types of anticompetitive behaviour: abuses of a dominant position; and the making or implementation of agreements (and concerted practices or compliance with decisions of associations of undertakings) which have an appreciable adverse effect on competition. Such behaviour is a direct breach of the licence. Where the Director General believes that a breach is taking place, or has taken place and is likely to occur again, he must make an Order setting out what the licensee should, or should not, do to restore compliance [Subject to Section 16(5) of the Act]. Two routes are available to the Director General under the enforcement provisions in sections 16-19 of the Telecommunications Act 1984 ("the Act"): the making of a Provisional Order; or the making of a Final Order.

12. Where it appears to the Director General that a Licensee is contravening, or had contravened and is likely again to contravene, any of the conditions of his licence and where there is a risk of immediate loss to a third party then he shall issue a Provisional Order. There is no minimum notice period for a Provisional Order, but it can only last for three months. To make a Final Order, or confirm a Provisional Order, the Director General has to be satisfied that there is, or has been and there is likely to be again, a licence breach. The Director General must give a minimum period of 28 days notice and hear representations from the licensee before a Final Order can come into effect. A Final Order or confirmed Provisional Order remains in force until revoked.

13. When exercising these Order making powers, the Condition gives additional protection to the licensee through the making of Initial and Final Determinations. These formalise Oftel's current procedure in enforcing any licence condition: the licensee is given formal notification of an investigation, reasons why it appears there is a licence breach and the chance to comment before a Determination can be made. Determinations can be made even where further contravention of the Condition is not likely, for example, where the Director wishes to clarify the scope of the Condition. It is, however, only an Order which creates third party rights for any persons affected by the licence breach.

14. The Director General may make an Initial Determination if it appears to him that any behaviour breaches the Condition (mirroring the test for making a Provisional Order). The Initial Determination must set out reasons for his views and what steps he considers are needed to remedy the breach. The licensee and all other interested parties must be given a reasonable period within which to make representations. The meaning of "reasonable" will depend upon the circumstances of the case. The licensee may then require a Final Determination to be made, requiring the Director General to institute a similar consultative process and state the reasons for his final decision which must now be based on the Director General being satisfied that the Condition is being or has been breached. In addition, a licensee may require the Director General to take into account a report from the Advisory Body on Fair Trading in Telecommunications in making the Final Determination [Further information can be found in the Procedural Notes of the Advisory Body on Fair Trading in Telecommunications]. These processes and the Advisory Body are a safeguard both for the licensee and for other parties who may be affected by the licensee's behaviour.

15. Although the procedures for making Determinations may appear to have introduced delay into the enforcement process, in urgent cases a Provisional Order could be issued simultaneously with an Initial Determination, and a Final Order (or confirmed Provisional Order) could be issued simultaneously with a Final Determination. In certain circumstances, it may be possible that Orders would have to made before or without an appropriate Determination having been made. Further information on Oftel's enforcement procedure under the Condition, and the relationship between Determinations and Orders can be found in a separate guide on the Fair Trading Condition Enforcement Procedure.

Remedies under the Condition

16. As described in paragraphs 11 to 15 above, the Condition will be enforced by the Director General issuing Orders under the procedures laid down in the Act. As with all Orders, these can only require licensees to do what is requisite to remedy the breach of the licence condition. The Condition can only therefore be used to prevent anticompetitive behaviour.

RELATIONSHIP WITH OTHER LICENCE CONDITIONS

17. As the Condition is a general prohibition on behaviour which has a particular kind of effect there will be occasions where the behaviour covered by the Condition is also the subject of other conditions in the same licence or requirements placed on a licensee by some other means. In practice this means that:

(i) the Condition will not prohibit action that:

(a) is a specific requirement of another law or legal obligation; or

(b) another licence condition or a decision made under a licence condition specifically requires (for example, condition 31A of BT's licence which imposes a requirement on BT to provide certain services to deaf users); or

(c) results from an undertaking given by the licensee to the Director General, the Director General of Fair Trading or the Secretary of State under provisions in the Fair Trading Act 1973 or the Competition Act 1980.

(ii) licensees will have to meet any more specific requirements placed on them by other specific licence conditions. The Condition does not therefore remove any obligations that might arise under another licence condition (for example, connection obligations and prohibitions on undue discrimination).

18. This last point, that the Condition does not remove any obligations that might arise under other licence conditions, is an important element in how the Condition fits within the other licence obligations applying to a licensee. In the absence of a specific licence condition providing that the Condition overrides another condition, the licensee will have to ensure compliance with both conditions. For example, all licences to public telecommunications operators prohibit undue discrimination against any person, or any class of person, in the supply of particular services, irrespective of whether or not this is an abuse of a dominant position. This means that for those services, these operators will need to ensure they do not breach the condition prohibiting undue discrimination as well as the Fair Trading Condition. (BT's licence includes a number of other conditions that contain more specific requirements such as: conditions 13, 14 and 15 governing connection obligations; conditions 18 and 20B.15 relating to unfair cross subsidy and subsidy; and condition 24F dealing with the control of retail prices that are below fully allocated costs.)

SCOPE OF THE CONDITION

19. The Condition prohibits behaviour which prevents, restricts or distorts competition within the United Kingdom to the detriment of those involved in commercial activities connected with telecommunications or users of telecommunications services. It catches two types of behaviour:

(i) abuse of a dominant position; and

(ii) agreements (whether formal or informal) and concerted practices, or compliance with decisions of associations of undertakings;

Definition of dominance

20. The standard test of whether a firm is dominant is whether it has the power to behave to an appreciable extent independently of its competitors and customers in terms of pricing and other decisions [case 322/81 Nederlandsche Banden-Industrie Michelin v Commission [1983]ECR 3461, [1985] 1 CMLR 282]. Market dominance is not in itself prohibited, rather it is the abuse of the dominant position which is.

Anti-competitive agreements

21. The Condition applies not only to licensees who are dominant, but also to licensees who enter into agreements or concerted practices, or comply with decisions of associations of undertakings, which have the object or effect of preventing, restricting or distorting competition and that have an appreciable effect on competition in the United Kingdom. Therefore, as far as agreements and concerted practices are concerned, the Condition may apply to licensees even if they do not have market dominance on their own, but are involved in an agreement or a concerted practice which has an appreciable effect on competition.

DEFINITION OF MARKETS

22. In order to establish whether an undertaking is in a dominant position in respect of the supply of certain goods or services or to establish the impact of a restrictive agreement, it is first necessary to define the relevant market and then to set the analysis against the background of the operation of competition in the relevant market.

23. The approach that Oftel proposes to adopt in respect of market definition follows that used by the European Court of Justice in the application of Articles 85 and 86 of the EC Treaty having regard also to decisions and notices of the European Commission and relevant pronouncements of the Office of Fair Trading and the Monopolies and Mergers Commission.

24. The approach to market definition taken by these organisations focuses on the existence of constraints on the price-setting behaviour of firms in the absence of price control [Seee National Economic Research Associates, Market Definition in UK Competition Policy, Office of Fair Trading, Research Paper no 1, February 1993]. A main consideration is the ease with which it is possible to substitute relevant services in response to movements in prices. There are two main aspects to consider: how far it is possible for customers to substitute other services or products for those in question (so-called demandside substitution) and how far suppliers not presently providing the products and services in question can readily do so (so-called supplyside substitution). It is also important to consider the geographical scope for demand-side substitution and supply-side substitution in defining the relevant market as the relevant market needs to be defined in the context of a particular geographic area.

25. Demandside substitution focuses on whether there are alternative products that are available to customers and to which they could switch, without significant costs and effort, if the supplier of a particular product tried to implement price increases significantly above competitive levels. The products do not need to be perfect substitutes but alternatives which would fill a similar role to the goods or service in question and to which consumers would be prepared to switch in the event of a price increase. If similar goods or services can be found, then these alternative products should be included in the definition of the relevant product market because they would constrain the pricesetting behaviour of suppliers. A consideration of the choices available to customers is therefore at the heart of this approach. Care must be taken in defining who the customer is in relation to the suitability of alternative products and definition of the relevant market. For instance, the existence of alternative operators in the local loop would be a relevant factor in relation to the retail market for local calls from residential customers. However, it would not be a relevant factor in relation to the wholesale market for call termination in the local loop where the customer is the operator seeking to terminate its calls on a specific exchange line connected to a particular residential property (see paragraph 68 below).

26. In practice, a restraint on the price setting behaviour of a firm can also arise from the potential behaviour of firms in closely related areas (supplyside substitution). In considering the scope for supplyside substitution, it is necessary to assess whether there are firms that, although not currently supplying a particular product, could and would be likely to switch some of their existing facilities to supplying that product. For this reason it is important to take this into account when assessing markets definitions. The related issue of barriers to entry is discussed below in the context of assessing the extent of competition in the relevant market.

Factors in assessing extent of competition

27. There is no unique indicator of a competitive market. When assessing whether a firm is dominant in a relevant market or the impact of a restrictive agreement on that market, Oftel will need to examine a range of factors encompassing not just the structure of the market but also the conduct of firms in that market. Relevant factors include:

(i) the current market shares, together with changes in the pattern of market shares over time (including the degree of concentration in the market);

(ii) barriers to entry and exit, together with the history of the entry into and exit from the market;

(iii) the price history and profitability of firms in the market;

(iv) the degree of excess capacity that competitors possess;

(v) the degree of vertical integration in the market;

(vi) the conduct of competition in the market: for example, whether firms compete on the basis of price, by product differentiation, after sales services or other factors; and

(vii) other issues, such as customer awareness and customer inertia.

The degree of importance attached to each of the factors in the above list will depend on the circumstances of the case. For example, the number of firms in a market, or the market share of each is not, on its own, a reliable indicator of the extent of competition in that market because such data simply gives a "snapshot" of the state of a market at a point in time. It does not reveal the underlying competitive process that resulted in that pattern of market shares. Further guidance on such factors as market shares, barriers to entry, prices and profitability and vertical integration in relation to assessing dominance are set out in paragraphs 28-32 below.

ASSESSING DOMINANCE IN A RELEVANT MARKET

Dominance and market shares

28. Although market shares alone are a poor measure of market power, it is unlikely that a firm without a significant share of a relevant market would have the market power to behave anticompetitively on its own. In the UK, both the Fair Trading Act 1973 and the Exclusions Order under the Competition Act 1980 exclude from their provisions undertakings with less than a 25% market share. A number of competition authorities, including those in the UK, use such a market share threshold as a way of easily distinguishing cases that are unlikely to give rise to a misuse of market power. Oftel would make no presumption of dominance above a market share of 25% but it is unlikely that below 25% a firm would have sufficient market power alone to be abusing a dominant position. It is of course possible for an agreement entered into by an undertaking with a market share of less than 25% to have an adverse effect on competition and be caught by the restrictions on the making of anti-competitive agreements (see paragraphs 34-35 below).

29. It is, however, difficult to develop an equivalent market share threshold above which a firm could be presumed to be dominant on market share evidence alone. For example, if entry and exit are free and easy, then a high market share does not imply that there is dominance in terms of being able to act independently of other suppliers. As far as European precedents are concerned, the European Court of Justice has not examined the issue of market shares and dominance in the telecommunications sector. However, in the AKZO case the Court held that there was a presumption of dominance at or above a 50% market share [Case C-62/86 AKZO Chemie BV v Commission [1991] ECR 1-3359, [1993] 5 CMLR 215]. Above this level the onus would normally be on the firm to demonstrate that the specific market conditions meant it was not dominant.

Barriers to entry

30. The extent to which the actions of existing players in a market are constrained by the threat of new entrants into the market is a significant factor in assessing the degree of competition in a given market [See London Economics, Barriers to Entry and Exit in UK Competition Policy, Office of Fair Trading Research Paper no 2, March 1994]. In examining this issue Oftel will examine the magnitude of barriers to entry as well as the nature of the barriers (for example, regulatory, technical, and financial barriers). In the case of regulatory barriers Oftel will consider whether they are likely to be relaxed in the short to medium term. The recent history of entry to and exit from the market will also be useful in assessing the significance of barriers to entry.

Prices and profitability

31. In looking at the competitiveness of a market and whether an undertaking is dominant Oftel will examine whether there is genuine independent price competition in the market or whether pricing changes are, for example, better characterised in terms of a leader-follower situation. Such an analysis would need to include the impact of price regulation, where relevant, on pricing structures. In addition, the profitability of firms in the market can also be indicative of the extent of price competition - sustained excess profits could indicate not only a lack of effective price competition between existing firms but also that there are barriers to entry which prevent excess profits from being competed away by new entrants. However, Oftel recognises the role of profit in stimulating innovation, from which consumers benefit.

Vertical integration

32. Obviously, vertical integration in itself does not imply that a firm is dominant. However, a firm which is dominant in one market and vertically integrated into upstream or downstream markets around that market may have the ability to affect adversely competition in these markets. Consequently, the scope for vertical integration to lead to an abuse of a dominant position will be a significant aspect of the analysis of market structure and competition in telecommunications. In the case of BT both domestically and internationally, for instance, there are already significant detailed licence conditions addressing these vertical relationships (for example, conditions dealing with accounting separation and internal transfer charging arrangements).

Joint dominance

33. Some market structures may allow two or more firms to behave in an abusive manner without any individual firm being dominant, and without any formal (or informal) agreements and concerted practices between them (see paragraphs 3435 below). In these circumstances the firms may be jointly dominant, and their individual or collective behaviour could be abusive. Such joint dominance is particularly likely to be found where there are economic links between the companies involved [cases T-68/69 etc, Societa Italiano Vetro v Commission [1992] ECR 5 CMLR 302]. Similarly, joint dominance may also arise where there are significant barriers to entry because the incumbents, apart from any economic links, also have special, or privileged, access to necessary inputs and these access rights are limited for example radio spectrum for the provision of mobile services or the control of access to cables for international operators. Issues linked to joint dominance will need to be analysed on a case-by-case basis.

AGREEMENTS AND CONCERTED PRACTICES

34. As with market dominance, there is no simple rule of thumb that can be applied to all cases in judging whether the effect of an agreement or concerted practice on competition is appreciable. However, there are some types of agreement where the only plausible rationale for them is that they are likely to have an appreciable anticompetitive effect: for example, horizontal price fixing agreements, agreements to limit production or investment and agreements to share markets would fall into this category. Other kinds of horizontal agreement will require analysis on a casebycase basis to establish whether they have any anticompetitive effects.

35. The Condition does not apply to any provisions of an agreement which constitute what are termed "relevant restrictions" thereby causing the agreement to be registerable under the Restrictive Trade Practices Act 1976 (the "RTPA"). However, the Condition shall still apply to:

(i) those provisions of agreements which are not "relevant restrictions";

(ii) agreements under which relevant restrictions are only accepted by one party to the agreement;

(iii) agreements where only one party to it carries on business within the UK; and

(iv) agreements which benefit from one of the exemptions in Schedule 3 to the RTPA (although in practice agreements meeting the terms of these will almost always fall outside the Condition anyway because they are of overall benefit to efficiency and the consumer).

In practice, the provisions of many so called "horizontal" agreements between competitors will be relevant restrictions under the RTPA; and thus fall outside the Condition. Vertical agreements are considered in paragraph 87 below.

APPLICATION OF THE CONDITION TO SPECIFIC ISSUES

36.The purpose of the following paragraphs is to give guidance on the application of the Condition in the light of some of the specific characteristics of the telecommunications industry. It constitutes a nonexhaustive list of the factors which the Director General would be likely to consider when deciding whether certain practices will fall within the scope of the Condition.

37. Anti-competitive behaviour can take one of two forms under the Condition: abuse of a dominant position; or the making of anti-competitive agreements or concerted practices. In fact, in some cases the behaviour in question may take both forms. Many of the examples referred to below concern the abuse of dominance, but it may be that such behaviour by an operator, whether dominant or not, would be caught by the restriction on anti-competitive agreements and concerted practices.

Pricing issues

38. The telecommunications industry has economic, technological and regulatory characteristics which make the analysis of the structure and competitive effect of specific pricing policies particularly complicated. The supply of telecommunication services is characterised by economies of scale (stemming from large fixed costs, among other reasons) and economies of scope (giving rise to common costs) which means that telecommunications companies tend to be multiproduct firms and that their pricing policies need to take into account the recovery of these fixed and common costs.

39. The incidence of low marginal costs and the existence of substantial common costs between products means that a dominant firm potentially has a great deal of pricing flexibility both in the range of prices it can offer and the freedom it has to choose from which markets to recover its costs. This can put the firm at a significant advantage over its competitors who, because of their size or because of the more limited range of products they produce, do not have the same degree of freedom. There is nothing wrong with a dominant firm having such advantages provided it does not abuse its dominant position. Paragraphs 59-61 below give further information on pricing discrimination and the recovery of common costs.

40. In examining prices a distinction needs to be made between wholesale and retail pricing. Wholesale charges have particular scope for significantly affecting competition because by increasing the wholesale charges for inputs required by its competitors a vertically integrated company may be able to raise rivals' costs anti-competitively. For example, an integrated firm might increase its wholesale charges and seek to use the increased revenues to allow it to reduce its retail prices. An increase in wholesale charges together with a reduction in retail prices could mean that rival firms no less efficient than the integrated firm were subject to a prices "squeeze" rendering them unprofitable. There is also a possibility that operators may collude in charging one another excessive prices for wholesale services.

41. Pricing issues also need to be considered in the context of any regulatory restrictions on price movements. First, a particular price should not be judged as anti-competitive if that price were required as a result of other licence conditions (see paragraphs 57-58 below). Second, the effect of regulatory restrictions may need to be taken into account when examining the acceptability of price changes. For example, where charges are controlled within an overall price cap a reduction of charges in one area may be offset by an increase in charges in another area. In the absence of other safeguards, this might increase incentives for predatory behaviour. More generally, regulation may cause pricing behaviour in one market not to be independent of pricing in another market. Further pricing issues are examined in paragraphs 42- 63 below; these should be treated as guidance rather that strict pricing rules as the merits or otherwise of a specific pricing strategy can properly be determined only on a case-by-case basis. Guidance on Oftel's policy in relation to specific cases is published in its quarterly Competition Bulletin.

Pricing and cost concepts general

42. Currently, as a dominant operator, BT is not generally allowed to set its charges to network operators lower than the fully allocated historic costs of its different businesses. This obviously requires BT to allocate overheads between different parts of its business. Charges derived from fully allocated costs are unlikely, however, to provide efficient signals capable, inter alia, of guiding other operators to make efficient investment and entry decisions and so may not be the most appropriate basis for setting prices.

43. In principle, prices derived from marginal costs are likely to be economically efficient and to reflect the resource costs of meeting customer demand. However, the economic characteristics of telecommunications networks, especially the need to recover fixed costs, mean that the marginal cost concept may be of little use in arriving at sensible pricing decisions. An alternative and more satisfactory cost basis is that of the long run average incremental cost of output which looks at the long run costs of a discrete increase in output. If a new service is able to cover its incremental costs through charges (with common costs being recovered from other services) then it will be sustainable, at least in the medium term to long term.

44. However, the presence of economies of scope means that if all prices are set equal to long run average incremental cost they will not result in full cost recovery for the firm: certain common costs will not be remunerated and there will need to be some sort of cost markups in addition if the firm is to be able to sustain its existing level of operation in the long term. Economic efficiency would be achieved by relating the size of mark-ups to demand conditions for different service (or even different customers), so that mark-ups are higher where a service exhibits relatively inelastic demand. However, the information necessary to generate such prices is not generally available.

45. Under the new interconnection charging arrangements which Oftel is proposing will be in place by August 1997, BT will set charges for interconnection services derived from the long run average incremental costs of conveyance (with an appropriate mark up to cover common costs). In the case of interconnection, Oftel has argued that charges derived from incremental costs are better able to reflect the economic costs of providing a given service. Incremental costs are "forward looking" and are based on current valuation of assets. To inform future investment and pricing decisions, costs based on historic valuation of assets are unlikely to be relevant. Interconnection charges should be derived from current valuation of assets so that they will provide appropriate signals to new entrants (especially those providing infrastructure investment) and for investment decisions. Oftel has developed a methodology for establishing incremental costs for wholesale services.

46. The arguments in favour of using incremental costs as a basis for regulatory decisions on interconnection prices apply equally to retail prices. The incremental cost approach should form the basis of an analysis of unfair subsidy of retail services. However, it should be noted that there is likely to be a continuing role for the use of Fully Allocated Costs (FAC) in the near future, in that Oftel recognises that the accounting information available on incremental costs is currently limited.

47. By establishing a series of reference points, for general guidance only, the cost concepts discussed above help to define the framework within which Oftel will analyse the effect on competition of any particular pricing strategy for the purposes of applying the Condition.

Predatory pricing

48. Low prices or price reductions are normally seen as a benefit from, and the successful result of, the process of competition. However, it is an established principle of competition law that not all price competition is legitimate. In particular, predatory pricing - where the predator deliberately sacrifices short term profit by setting excessively low prices to eliminate or weaken competitors so that longer term profit will be enhanced - is anti-competitive because it seeks to exclude competition.

49. In relation to predatory pricing, as elsewhere, Oftel will have regard to the statements, decisions and rulings of the EU and UK competition authorities. In upholding the European Commission's decision in its 1991 ruling on the AKZO case, the European Court of Justice held that prices below average variable cost (that is to say those which vary according to the quantity produced, not including fixed costs) would be presumed to be predatory, and that prices above average variable cost but below average total cost would be predatory if fixed in the context of a plan aimed at eliminating a competitor.

50. More generally, a threepart approach to the assessment of predatory behaviour, which is not tied to a particular cost base, has been developed within the Office of Fair Trading [G Myers, Predatory Behaviour in UK Competition Policy, Office of Fair Trading Research Paper no 5, October 1994]. It involves examination of:

(i) the structure of the market and the characteristics of the alleged predator in order to establish whether predation (including recoupment of profit once rivals are driven out or weakened) is a feasible strategy;

(ii) the effects of the alleged predatory action upon the profitability of the alleged predator (e.g. a net revenue test); and

(iii) whether the alleged predator intends to drive a specific competitor out of the market.

51. However, criteria for predatory pricing, such as those outlined above, need some further exploration. This is particularly true in the case of telecommunications markets, where sunk costs and economies of scale and scope can mean that variable costs are very low. Oftel's approach to predatory pricing will therefore be based on rebuttable presumptions rather than cost based rules [Although, prices below average variable costs will always be regarded as predatory unless they are required prices (see paragraphs 57-58)]. Oftel will start from the presumption that prices below long run average incremental costs (LRAIC) are predatory. There is no absolute bar to prices below this level but where a dominant operator wishes to price below LRAIC it would need to justify that the price did not have an anticompetitive object or effect (for example, by providing information to demonstrate that predation, including subsequent profit recoupment, was infeasible in the specific circumstances). To this end, Oftel is aware that circumstances may arise where pricing below LRAIC would be a rational strategy for a licensee, reflecting competition, in addition to being good for customers. An example of this might occur in the future where there is a degree of excess capacity as competition in telecommunications markets becomes established. Such a pricing strategy would need careful analysis and a licensee would need to be able to demonstrate that it was not behaving anti-competitively. Prices above LRAIC would not normally be predatory but might nevertheless be viewed as anti-competitive for other reasons. Although the use of such presumptions will be a very important part of Oftel's analysis of predatory pricing, it will not be the sole determinant. Oftel will take into consideration all other relevant factors in making its final decision in any particular case.

52.A net revenue test examines whether the action taken by the alleged predator to reduce its prices, worsens its profitability in comparison with an alternative "benchmark" strategy (for example, a strategy where prices are not reduced). If profitability were not adversely affected by the reduction in price because the demand increased sufficiently to offset the price reduction and at the same time the price remained sufficiently high to cover the incremental costs of the increase in output then the price reduction may be viewed as legitimate competitive behaviour. There will, of course, be the need to define the output increment that is relevant to the case under consideration.

53. The net revenue test can also provide an indication of intent: if a firm had no realistic expectation that a profit would be made (or made no attempt to assess profitability) and, having incurred an incremental loss made no attempt to correct it, then that would at least be an indication of intent. The net revenue test also has the advantage that it is a concept which has already been used in the telecommunications sector.

Anticompetitive pricing and packages of services

54. An additional factor that will need to be taken into account when assessing predatory pricing is the extent to which there is strong complementarity between two or more services with different economic characteristics (both in supply and demand), for example, the provision of exchange lines and calls across the network. Where there is strong complementarity, it may be more appropriate to conduct the tests on the comparison between costs and revenues for all the services together. Similarly, where there are economies of scope the long run incremental costs test will need to be carried out on combinations of services (where these costs will include any common to the combinations) as well as on individual services (where these costs will not be included).

Excessive pricing

55. It is possible that excessively high prices would be an abuse of a dominant position. This is of particular relevance in wholesale markets if the excessive charges were for a necessary input supplied to rivals of the dominant supplier in a downstream market and on which they were dependent. Oftel would be concerned if prices which were claimed to be excessive were part of a pricing strategy by a dominant operator which appeared to be abusive (see paragraph 40 above). However, there are no rules of thumb that can easily identify when a price is sufficiently excessive to constitute a breach of the Condition. The cost characteristics and the pattern of prices (both through time and across products which share the same cost base) will be important considerations. However, where prices are above the stand alone cost [Whereas LRAIC calculates the additional cost of producing an increment given that the same level of output is produced, stand alone costs capture all costs of producing an output independently from any other outputs] the licensee would be expected to be able to show that these prices were not an abuse.

56. It should be noted that pricing by a licensee may be subject to specific licence conditions. For example, conditions 24A, 24B, 24C and 24F of BT's licence cover retail price control and condition 13 covers charging to other network operators. In this context, it should be remembered that, as referred to in paragraph 7 above, the Guidelines will be reviewed, and be coordinated with the forthcoming guidelines and discussion documents on Network Charge Controls and InterOperability.

Required prices

57. Specific prices which a licensee is required to offer as result of other licence conditions will not be caught by the Condition; nor will prices that are required to be offered by law. This arises from the general exemption from the Condition of behaviour which is required by some other obligations (see paragraph 16 above). For example, BT's licence requires it to offer a Light User Scheme and special services for the hearing impaired.

58. Moreover, where there is a removal of a regulatory requirement to price below (or above) a level that would otherwise be caught by the Condition, Oftel would have regard to the possible undesirability of sharp price movements for consumers, and would not necessarily regard a failure by a licensee immediately to raise prices above (or reduce them below) such a level as anticompetitive.

Price discrimination

59. Price discrimination can be defined in economic terms as a situation in which different units of the same good or service are sold at prices not directly corresponding to differences in the cost of supplying them.

60. In common with other regulatory authorities, Oftel makes no presumption that price discrimination by a dominant telecommunications operator is an abuse of a dominant position. Where substantial common costs have to be recovered, Oftel recognises that price discrimination (as broadly defined in paragraph 59) might be involved in their efficient recovery. Because there can be important economic reasons why an operator might practice price discrimination, Oftel cannot be too prescriptive: it needs to retain the flexibility to examine price discrimination issues according to the circumstances of the case. As a general principle, in examining price discrimination, Oftel will have regard to the effect of the discrimination on competition. This approach is in line with that taken by the EU and UK competition authorities.

61. Furthermore, Oftel would not regard price discrimination required by regulation as an abuse of a dominant position (for example, geographic averaging requirements which are discriminatory according to the definition in 59 above insofar as costs vary geographically). However, specific licence conditions in operators' licences which prohibit undue discrimination and undue preference will still apply (for example, condition 17 in BT's licence). These conditions may impose a more stringent rule as to what price discrimination is prohibited than the Fair Trading Condition; they apply irrespective of dominance nor is it necessary to assess their affect on competition, although in practice this is one of the factors which the Director takes into account.

Discounting

62. In a fully competitive market, discounting is a sign of healthy competition. However, in those markets where competition is not fully established discounting of prices may be a form of anti-competitive behaviour. In general, discounts which reflect real underlying differences in costs of supply, depending on the basis of the discount, would not be seen as anti-competitive. Some forms of discounts are likely to have significant adverse effects on competition. In particular, the following forms of discounts are likely to raise significant concerns:

(i) loyalty rebates, where the discount (or its level) is dependent on the customer not taking (or restricting) supplies from competitors whether this is de facto or by agreement;

(ii) volume rebates that are calculated on the basis of total telecommunications expenditure across a range of competitive and regulated markets but the discount is only applied to spending in a competitive market;

(iii) volume rebates that are calculated on the basis of total telecommunications expenditure but are then applied selectively to certain customers; and

(iv) discounts which are targeted at an excessively narrow group of customers, which approximates to only those customers who have the potential to take alternative suppliers.

Discounts are often linked to the issue of bundling which is discussed in paragraphs 89-90 below.

Parallel pricing

63. Parallel pricing (competitors varying prices by the same amount and at the same time as each other) alone is unlikely to amount to a breach of the Condition, as long as there is a justifiable and rational explanation consistent with firms behaving independently. However, parallel pricing may well be indicative of other types of behaviour which would be caught; for example, tacit collusion between suppliers to avoid effective price competition to the detriment of consumers. Under these circumstances it is likely that such collusive behaviour between undertakings that resulted in parallel pricing would be caught by the Condition unless the relevant provisions of the agreement were caught under the RTPA (see paragraphs 34-35 above).

Non-pricing issues

64. As referred to in paragraph 16 above, the Condition is a general prohibition on behaviour which has a particular kind of effect and there will be occasions where the behaviour covered by the Condition is also the subject of other conditions in the same licence. This is particularly true in the case of interconnection and the condition in licences concerning the connection of systems providing connection services (for example, condition 13 in BT's licence). The following text gives examples of possible areas where the Fair Trading Condition may be relevant. In needs to be read with due consideration to the effect of other relevant conditions and to the forthcoming guidelines and discussion documents on Network Charge Controls and InterOperability.

Refusal to supply or connect: general

65. This section is concerned with the 'wholesale' supply of telecommunications services to competing operators. Interconnection services are at the heart of a competitive market in telecommunications services and infrastructure, being crucial inputs to the operations of all licensees but particularly those who are not in a dominant position. Examples of where refusal to supply such services is likely to raise significant concerns include:

(i) refusal to supply information generated by the network (for example, calling line identification information) across network boundaries, thus making services based on the availability of such information impossible to launch except by the dominant operator;

(ii) refusal to share or provide access to scarce resources which are economically essential to competitors such as submarine cables; and

(iii) refusal to interconnect to allow calls from one network to access a terminating point on another network or to access a service that requires a particular network capability being provided from that terminating point.

66. In cases such as those above, a refusal by a dominant operator to supply the input required by the competing operator might jeopardise its commercial position, and prevent, restrict or distort competition. Likewise, a refusal to supply resulting from agreements or concerted practices between undertakings might have similar anticompetitive effects.

67. One element of any analysis of the effect of a refusal to supply will be whether or not the supply of that service by the licensee is strictly necessary for other operators to be able to compete (and we would expect others operators to be able to provide objective justification for this). What would be considered strictly necessary would be determined on a case- by-case basis. A service which was considered necessary in one case may not be considered necessary in another case. Particular problems are likely to arise where the refusal relates to a service with one or more of the following characteristics:

(i) the service requires end to end capability across the network;

(ii) the service requires the potential to access all/most terminating points to be economically viable; and

(iii) the service requires customer premises equipment capability to interact with the network.

68. Oftel is likely to regard outright refusal to supply such services by a dominant operator as strong prima facie evidence of abuse of dominance. However, there is no absolute rule that refusal to supply by a dominant operator would in all circumstances be found to be abusive. Consistent with judgements of the European Court of Justice, a refusal to supply may not be held to be an abuse if an objective justification for the refusal can be demonstrated, provided that the conduct was proportional and necessary for achieving its objectives. Relevant considerations might include safety and network integrity. However, as regards objective justifications, Oftel's view is that it would be for the dominant operator to provide or show the objective necessity for any such refusal. In the context of defining whether an operator has a dominant position due care must be given to defining the relevant market (see para 25 above). For instance, a new entrant in the local loop would not have a dominant position in relation to the market for local calls but could have a dominant position in relation to call termination for its customers in the local loop.

Refusal to supply new services

69. The problems relating to refusal to supply are particularly acute where a nondominant operator is introducing, or would like to introduce, a new service. The scope for anticompetitive behaviour by dominant operators is considerable if the introduction of the service to the nondominant operator's customers requires the cooperation of the dominant operator. But this is also an area where it is legitimate for different companies to differentiate their products in ways that are not anticompetitive. It is also important that innovation is rewarded because considerable benefits to both customers and suppliers flow from the introduction of new or improved services. Because of the complexity of the issues involved, Oftel has consulted with the industry in the Interconnection Policy Forum to look at this problem in terms of defining conditions covering the interconnection of new services. As a result, Oftel will be producing further discussion documents on InterOperability (see paragraph 64 above) and the Guidelines will then be updated to take account of such developments. Both before and after the issue of these documents a casebycase approach will be necessary.

Refusal to supply an embedded network capability

70. Where a service exists on the dominant operator's network, outright refusal to provide the necessary functionality across the network interconnect is likely to be regarded as anticompetitive in most circumstances. It is likely that there would need to be strong objective reasons for the refusal to be acceptable. However, Oftel would expect the class of services that would, in practice, fall into this category of an embedded network capability to be quite small. The crucial characteristic of such a capability is that it would be impossible for an interconnecting operator to provide some service to its customers practicably without the supply of the network capability from the dominant network. As with new services, this issue will be considered in the forthcoming InterOperability discussion documents.

Refusal to share scarce physical resources

71. Any analysis of a refusal to share (supply) where there are capacity constraints would need to take into account the nature of those constraints (for example, whether they were absolute, the costs of duplication, the reasons for the constraint arising, whether access to the capacity is economically essential, and the extent to which the capacity is shared, or could be shared, with other licensees).

Refusal to supply licences of intellectual property rights

72. The operation of one telecommunication service often requires access to technical information for example, concerning interfaces about other telecommunication goods or services. Intellectual property rights (IPRs) might exist in relation to such information, and there are circumstances in which an IPR might be exercised in a manner that would constitute an abuse of a dominant position. For example, a dominant network operator might refuse to supply interface information with the objective, or effect, of distorting competition in the supply of customer equipment designed to take advantage of the new interface. On the other hand the rights given to holders of IPRs are an important element in creating incentives to innovate, and the exercise of these rights should not be diminished without establishing precisely how dominance arises and without clear evidence of abuse. This problem is one which applies to other markets as well as telecommunications and Oftel would expect to follow the judgments of the European Court of Justice and other competition authorities closely when coming to decisions in this area.

Refusal to supply technical information

73. Where a dominant operator withholds technical information which is a necessary input into its competitors' operations, the refusal to make that interface information available, whether or not it is protected by intellectual property rights, may be an abuse. This would be especially true where the competitors' need for such information arose from a position of dependency on the other operator (for example, where a new voice telephony operator needs to interconnect with BT but in order to do so it needs to know where it can physically make such interconnection).

Behaviour short of outright refusal

74. Outright refusal to supply by a dominant operator is perhaps the clearest kind of anticompetitive behaviour relating to the supply of inputs to competitors. However, similar anticompetitive effects may be achieved by means other than outright refusal to supply, for example, unreasonable terms as a condition for supply and unreasonable delays in or refusal to allow testing (for example, of compatibility).

75. The general approach Oftel will adopt in looking at these issues is whether or not the relationship between the dominant operator and those seeking supply is unduly biased in favour of the dominant company, for example, not providing connection in a timely manner. Such a bias would not of itself be evidence of an abuse of that dominance and Oftel recognises that there may be objective reasons for it. However, Oftel would expect the dominant operator to be able to justify the objective reason for any behaviour falling short of outright refusal to supply.

Unreasonable delay in supply

76. A particular problem arises in relation to the time taken to supply new services. There may be a significant, but necessary, delay between the specification of a functionality and the implementation of that functionality on any particular network. That necessary and reasonable delay will depend on a number of complex factors (including, for example, the degree of new network capability needed). It is, therefore, impossible to give a simple rule of thumb as to when delay ceases to be "reasonable", and becomes "unreasonable". In essence a casebycase approach will be necessary and Oftel has been working with the industry (in the Interconnection Policy Forum) to try to develop more detailed guidance in this area. The issue will be addressed in the forthcoming InterOperability documents (see paragraphs 64 and 69 above).

77. A related issue is the refusal to supply information needed to enable an interconnected network to use the service, once supplied. Again, there is likely to be a necessary time delay between knowing what is technically necessary to be able to use the service and being able to implement that technical requirement. If the information is not supplied in advance of the service the effective date at which the service can actually be used is put back. In this case, how much notice is reasonable, and in the case of a service about to be launched, how much notice is "too short" will depend on the complexity of the service requirements and a casebycase approach will again be necessary.

Wiring issues

78. It is possible to bundle some telecommunications products or services by physical means (as distinct from contractual means). In particular, this can occur in wiring associated with different products and/or markets (for example, if wiring for a customer's branch system is put in the same cable as wiring forming part of the public network only the PTO can maintain the customer's wiring, excluding other players from this market). The considerations set out in paragraphs 8889 concerning contractual bundling would also apply to physical bundling. Oftel has set out in its wiring code a set of "rules" that would, inter alia, ensure that competitive problems are not likely to arise in relation to telecommunications wiring on customers' premises. Oftel would expect an operator to be able to show an objective reason for not following the code. (Please see below)

79. The placing of wiring in customer's premises can also be done in such a way so that it makes existing wiring belonging to competitors difficult, or impossible, to access for maintenance and other purposes. Similar considerations apply to this type of behaviour.

Oftel Guidelines on Wiring (2/98)

The guidelines set out the principles to be observed where private network wiring is under the ownership or control of a Public Telecoms Operator (PTO) and are derived from the Oftel Wiring Code, which has now been withdrawn.

Detailed information on wiring is now available from the British Standards Institute (BSI) on 0181 996 7000.

Denigration and misleading claims

80. Public statements (for example, advertising and speeches) by a dominant operator about its competitors will be covered by the general laws and rules on such activity (for example, advertising standards and the law of libel and slander). The Condition is unlikely to be applied to those situations.

81. However, the employees of a dominant firm will necessarily interact with the customers (and potential customers) of its competitors. This interaction can come about because, for instance, the dominant operator is the supplier of a necessary input, or because in order to exercise choice the customer must first "disconnect" from the dominant supplier. The behaviour of a dominant operator evidenced by the operator's policies, and/or its staff's behaviour in relation to such interaction could, under certain circumstances, be subject to the Condition. A pattern of unjustified negative statements about competitors' behaviour, services or products may be a breach of the Condition. Systematic unjustified statements by a dominant operator about its own services or products where they have an anticompetitive effect (for example, statements that price falls are "just around the corner", or that a product launch is imminent, when it is not) might also form part of the evidence of an abuse.

82. A pattern of such behaviour, having a material effect on competition, is likely to be the subject of action under the Condition.

Unreasonable delay in fulfilling licence obligations

83. Where a licensee is under an obligation under a licence condition to do specific things (for example to provide service, to connect other operators, to declare interfaces or to publish tariffs) Oftel believes it is a necessary requirement, among other things, to do so in a reasonable and timely manner. Oftel will therefore include such aspects of its behaviour in the market place when considering whether a firm is abusing a dominant position. Thus unreasonable delay (including unreasonable delay in providing information) and negotiating tactics that unreasonably exploit or strengthen a company's dominant position are likely to influence the Director General's assessment of what constitutes anti-competitive behaviour.

Anti-competitive agreements

84. Much of the above analysis concerns behaviour that might be an abuse by a dominant operator. The Condition does apply equally to agreements entered into by suppliers of telecommunication services which are not dominant, except where the relevant provisions of the such agreements were caught under the RTPA (see paragraphs 34-36 above). The application of the principles of Article 85(1) (and 85(3)) of the EC Treaty to agreements in the telecommunications sector should be more straightforward.

85. Oftel will adopt a similar approach to that of the European Commission and European Court as to whether a restriction in an agreement has an appreciable effect on competition: in general where the undertakings involved together have a market share of less than 5% in all markets likely to be relevant, it is unlikely that the Condition will apply to the agreement or restrictions in it.

86. In looking at the application of the Condition to so-called horizontal agreements between competitors, there are many types of anti-competitive behaviour which would be prohibited: the fixing or setting of prices; collusion in the timing of price increases; or the exchange of commercially sensitive information (including cost information). Although of course, the relevant provisions of such agreements may be caught under the RTPA and so fall outside the Condition.

87. The Condition will of course also apply to agreements of a customer/supplier nature (so called "vertical agreements") where both parties are commercial undertakings. In these cases Oftel will be looking inter alia at any exclusionary effect of such agreements. In doing so Oftel will also have regard to such exclusionary effect where that type of agreement is common to all customers or replicated across the industry as a whole. The following are examples.

Longterm contracts

88. Excessively longterm supply arrangements may also create a significant distortion of competition. Such contracts might occur in the wholesale markets or in retail markets (to the extent that supply is to commercial undertakings). Whether or not a particular contract for the supply of services is unduly long will depend on its impact on competition in that segment of the market, the economic characteristics of the service contracted for and the availability and terms and conditions of shorter term contracts for the same service. Where products are standard and require little dedicated resources, fairly short contracts would be expected and their absence, or apparent excessive cost over longer terms contracts, is likely to raise significant concerns. Where significant sunk or dedicated costs are involved, or where the price differential between long and short term contracts reflect real cost differences, less concern will arise. The facility for tying in customers and therefore preventing development of competition to some extent depends on the terms and conditions of the contract: for example, strong penalties for early termination might be a cause for concern.

Bundling

89. Bundling can affect competition in both the retail market (where customers are commercial undertakings) and wholesale markets. In telecommunications the issues that are likely to be of particular importance will include the technical bundling of different telecommunication services together (so that the individual elements are not supplied separately) and the bundling of services by contractual means. Bundling generally means the tying of the supply of one service or product to the supply of others but may also include situations where the supply of services are linked through the use of discounts (paragraph 62 above discusses discounting in greater detail). Although in many cases bundling may have anticompetitive effects, the issues are likely to be complex. Factors that will need to be taken into account in considering whether such a particular agreement is anti-competitive include the technical and economic feasibility of unbundling and whether there is any exclusionary effect.

90. There are certain forms of bundling that may be similar in effect to refusal to supply (as discussed in paragraphs 65-69 above). Prima facie they are unlikely to be justifiable and are likely to result in the distortion of competition. In particular:

(i) where a dominant operator ties the sale of a service where it has market dominance to one where it faces competition. For example the tying of "own brand" equipment to the supply of the local access loop;

(ii) where the services that are tied are partially in a price regulated market and partially in an unregulated market; and

(iii) where the inputs required to provide services in a competitive market are bundled so that inputs for which the operator has a dominant position are combined with those inputs that can be supplied by third parties.

INFORMATION REQUIREMENTS RELATING TO THE CONDITION

91. The above guidance describes how Oftel is likely to deal with questions of anticompetitive behaviour. In order for Oftel to do this it is obvious that information to underpin the analysis will need to be available from a dominant operator's accounting system and from other sources available to the licensee. The information requirements implicit in the analysis and approach outlined above will be an integral part of the application of the Condition. Oftel would expect a dominant operator to have available to it information that would demonstrate that the tests outlined above would be satisfied in order to assure itself that it was compliant. Therefore, Oftel would also expect such an operator to be able to meet such an information request in relation to the Condition in a timely manner. As far as BT is concerned, Oftel is discussing with BT exactly what this would entail. Such discussions will be tied into discussions on information requirements under other licence conditions dealt with in the draft ICAS guidelines and, as appropriate, the licence modifications to accompany the introduction of the network charge controls. In general, Oftel will be aiming at a two week response period for most information requests and a maximum of four weeks for almost all others. Where a licensee is unable to provide the information required in a case, Oftel will need to consider whether the licensee should have such information available to it to demonstrate compliance with the Condition and what the licensee should do to ensure such information is available.

DISAPPLICATION OF THE FAIR TRADING CONDITION

92. The Condition shall cease to apply to any behaviour prohibited by or any prohibition enforceable under new legislation (primary or secondary) which -

(i) contains a prohibition enforceable by the Director General, or gives to the Director General the power to enforce an existing prohibition, of any behaviour prohibited under the Condition;

(ii) gives to third parties in respect of a breach of that prohibition at least the rights they have under section 18 of the Act in respect of a breach of a Provisional or Final Order; and

(iii) permits the imposition on the licensee of monetary penalties in respect of the breach of that prohibition

93. Licences containing the Fair Trading Condition are also worded in such a way that the Condition (and/or the licence itself) shall no longer have effect after 31 July 2001.