Chapter 2: Competitiveness of the UK market
Chapter 3: Licence and service obligations
Chapter 4: Regulatory financial assessment
Chapter 5: Possible regulatory responses
Annex A: Financial information for regulatory purposes
This document is primarily about the progressive transformation of British Telecommunications plc (‘BT’) into a global telecommunications company and a major player in local markets worldwide, and the impact that this may have on BT’s ability and willingness to meet its UK licence obligations.
BT’s overseas strategy is in line with accelerating trends in the industry across the world and reflects the increasingly international nature of telecommunications. It is entirely natural for the company to develop in line with these market changes. Its being at the forefront of such developments is in many ways welcome from the perspective of the UK consumer.
BT’s proposed merger with MCI Communications Corporation (MCI) marks but a further, albeit significant, step in this process. That is why it is appropriate for Oftel to issue this consultative document now. For many customers effective competition in the supply of telecommunication services is already established. Over the next few years, the scope of domestic competition, including network competition, is likely to extend far enough for many more customers to be able to choose between operators. But, for the moment, BT’s maintenance of a high quality infrastructure is essential for the supply of services to its customers – particularly for the lower spending residential users – and for the provision of interconnection network services to enable other operators to compete.
This leads me to ask: with BT’s interests now set to become so diversified, could Oftel’s ability to secure future service levels in the UK be reduced – for example in circumstances where, for whatever reason, BT’s self-interest no longer coincided so fully with the interests of UK consumers?
My assessment, on which I would welcome comment from all relevant quarters, must be driven by my statutory duty to act so as to ‘secure’ that all reasonable demands for telecommunication services are met and that companies providing those services can finance them. That is an onerous test. Against that test, I must consider whether any degree of regulatory reassurance is necessary above that which is already in place.
This is the first time to my knowledge that a regulator has been confronted with this issue at this stage of development of competition in an industry. My view will be conditioned by two main considerations. First, any issue of regulatory reassurance will be relevant only for so long as the transition to fully effective competition across almost all UK telecommunications markets has left to run – probably single figures of years at most. Beyond that, the ability of the markets alone to meet all reasonable customer needs should suffice. Second, even if BT’s global focus were to serve to detract from its willingness or ability to meet its UK licence obligations, would the likelihood or impact of this be significant?
My judgment of these factors is not a commercial one. It does not second guess BT’s view of the financial or other consequences of globalisation or of the BT/MCI merger. Nor is it a market analyst’s judgment. It has primary regard to my statutory duties, and to whether they should lead me to adopt a degree of caution in my approach.
In the light of these considerations, I invite comment on whether I should continue to rely on existing arrangements to secure the interests of consumers, or whether I should seek one of the possible amendments to existing licence obligations which are set out in this document.
The initial consultation period will run until Thursday, 1 May 1997. There will then be a further period up to Thursday, 15 May 1997 during which comments are invited on any submissions made to Oftel during the initial period. Comments are invited in particular on the questions listed at the end of Chapter Five. Written comments should be sent to:
Peter Davies
Oftel
50 Ludgate Hill
London EC4M 7JJ
Fax: 0171 634 8847
Written comments will be made publicly available in Oftel’s Library unless confidential. Respondents are therefore asked to separate out any confidential material into a clearly marked annex. In the interests of transparency, respondents are requested to avoid confidentiality markings where possible. Appointments to view written comments in the Library must be made in advance (tel: 0171 634 8762/8765, fax: 0171 634 8946).
Comments can also be sent to Oftel on the Internet via Oftel’s Web pages or by using the following e-mail address: press.office.oftel@gtnet.gov.uk. Oftel intends to set up a link between this document on Oftel’s Web pages and any comments about it placed on respondents’ own Internet pages. Please contact Cate MacPherson at Oftel on 0171 634 8752 to organise this.
Confidential responses should not be sent via the Internet.
1.1 This consultative document considers the rapid and accelerating development of national telecommunications companies into international or global players. It asks whether and how a national regulator should respond to the implications of this development.
1.2 The degree of competition actually and prospectively available for the provision of telecommunication services in UK markets is now creating a genuine multi-operator environment. Further liberalisation in markets across the world will mean that any company which relies too heavily on a single liberalised national market will be under competitive threat, both in that market and by failing to take advantage of other markets available to it. Indeed, much of the UK competition has been financed by diversification of overseas operators which has enriched the UK market. That is why recent years have seen the formation of a number of international alliances and joint ventures. The traditional model of the single, almost purely nationally focused, operator is likely to undergo radical change as the liberalisation process extends. That model may even become the exception rather than the norm in many parts of the world. The recently concluded World Trade Organisation Agreement on Basic Telecommunications, to which the UK is a signatory, is likely to accelerate the globalisation of telecommunications companies.
1.3 This process has often begun by the formation of alliances concentrating on offering services to international corporate customers. Alliances focused on specific customer groups in selected countries enable risk sharing, the rapid development and adjustment of client or product portfolios and rapid changes of market focus. However, local markets overseas have become increasingly the object of such operators’ attentions, for a variety of reasons. One of the key factors is that they may offer higher prospective growth; they may offer a hedge against other constraints, including competition and/or regulation, encountered in the home markets; and they may enable the partners to share the benefits of any synergies which may be got from their combined approach. On the other hand, heavy long term commitments will usually accompany significant moves into local markets, in terms of investment, financing and marketing, operational and management commitment. Setting up in competition with an established local incumbent is therefore a very different proposition in terms both of strategy and of risk.
1.4 Meanwhile, the UK market is moving towards fully effective competition. The rules for that process are set out in the Telecommunications Act 1984 and licences issued under the Act. Many of the rules are in BT’s licence. These rules are aimed at promoting competition at all levels in the value chain from competition between alternative local access networks to the competitive provision of enhanced services. In due course, the expectation is of fully effective competition being achieved. However, in the meantime, and particularly while competitors are still in the process of rolling out their own networks, they rely for their success, in part, on the capacity and performance of BT’s network. This reliance on the former monopolist’s main asset needs to be recognised in this transitional phase. The capacity and performance of BT’s network is thus very important to the success of the UK’s competition policy for telecommunications.
1.5 In recent years, BT, along with other operators, has developed a pattern of international alliances and overseas investments. The best known of these include AT&T WorldPartners (with members in over 10 countries), GlobalOne (Deutsche Telekom, France Telecom and Sprint) and Concert (BT’s joint venture with MCI, in which BT took a 20% stake in MCI).
1.6 BT’s strategy however, goes much wider than a few large deals (to which must now be added the proposed full merger with MCI, following which the merged entity will also be known as Concert). At the beginning of 1997, BT was involved in over 80 alliances, joint ventures and other overseas investments across 23 countries. These other investments become important when seen in the context of BT having signalled its intent to be a serious player in a number of markets around the world. They may thus become much bigger commitments – witness the original £1.1bn investment with Viag which could become materially higher with the award of a mobile telecommunications licence in Germany to BT and Viag.
1.7 Nor may BT’s aspirations be confined to markets in which it already has a presence. BT’s proposed merger with Cable & Wireless, widely reported in early 1996 but not proceeded with, was intended in part to give BT a significant presence in the Asia Pacific market – one frequently cited by analysts as offering strong growth prospects allied to relatively high risk. Some form of venture with NTT of Japan, in addition to their joint bid for Singapore’s second national telecommunications licence, has also been referred to by industry commentators as a possibility. Industry analysts view such alliances as an inevitable consequence of the globalisation of the telecommunications industry and predict that the trend towards such associations will continue. It is worth stressing that, by definition, BT is not the only telecom-munications operator engaged in international alliances and joint ventures. Others, including UK based telecommunications operators such as Cable & Wireless and Vodafone, are also involved in overseas ventures.
1.8 Against this background and with particular, but by no means exclusive, reference to the scale of BT’s proposed merger with MCI, Oftel is seeking to assess whether and how it should respond to these market developments. The Director General has a duty under the Telecommunications Act 1984, which he shares with the Secretary of State, to exercise the functions which the Act gives him in the manner which he considers is best calculated to secure that all reasonable demands for telecommunication services in the UK are met and that those providing such services are adequately financed. Section 3(1) of the 1984 Act sets out these duties as:
“(a) to secure that there are provided throughout the United Kingdom, save in so far as the provision thereof is impracticable or not reasonably practicable, such telecommunication services as satisfy all reasonable demands for them ...; and
(b) ... to secure that any person by whom any such services fall to be provided is able to finance the provision of those services.”
The best way of securing these objectives is, in the view of the Director General, by ensuring so far as possible that a market exists in which consumers have available choice, quality and value for money, and in which effective competition can be maintained and fostered.
1.9 For many customers effective competition in the supply of telecommunication services is already established: there are a number of telecommunications operators vying for their custom, and BT’s success or otherwise in retaining or winning them is primarily a matter for the market within the framework of fair trading principles. The more BT is exposed to international competitive pressures the more success it is likely to have in the domestic market. Over the next few years, the scope of domestic competition, including network competition, is likely to extend far enough for many more customers to be able to choose between operators. But, for the moment, BT’s maintenance of a high quality infrastructure is essential for the supply of services to its customers – particularly for the lower spending residential users – and for the provision of interconnection network services to enable other operators to compete.
1.10 The continued maintenance and development of BT’s network is thus not only essential in order to provide services to customers in markets where competition has yet to develop; it is also a critical factor where competition is already becoming established, since it is the provision of interconnection by BT to other operators through its national comprehensive network that enables those other operators to offer competitive services to their customers. BT’s network is therefore pivotal to the maintenance and development of competition within the UK. It is in this context in particular that the Director General is considering what, if any, steps he needs to take, including possible licence modifications, in order to ensure that BT’s systems business, particularly its network, continues to deliver high quality service to customers and to other operators.
1.11 UK customers wish to continue to enjoy among the best, and best value for money, services available worldwide. It is encouraging to this cause that one of the main providers of these services can now contemplate a major role on the world stage. The Director General does, however, consider that his statutory duties place him under an obligation to ensure that BT’s entirely understandable strategic focus on global markets provides no basis for conflict to arise with its licence obligations in the UK. This could happen if, for example, BT’s investment in the UK network were to be reduced such that the performance of the network suffered either in absolute or relative terms. The possibility that this might happen and, if it did, whether that would matter, both depend on a number of circumstances which are highly uncertain.
1.12 Important as the BT/MCI merger is, it is merely one manifestation of a much wider trend of international market developments. In this consultation the Director General is therefore focusing only on those aspects of the new situation which raise potential questions about BT meeting its existing UK licence obligations.
1.13 The factors which the Director General is seeking to balance, given his statutory duties to secure that all reasonable demands for telecommunication services in the UK are met and that those providing such services are adequately financed, include:
1.14 This consultation is completely separate from the merger control process through which the BT/MCI merger must pass and the following analysis, which makes no assumptions about whether conditions will be imposed by the merger control authorities, is without prejudice to the outcome of that process. Comments relating to the merger should, therefore, not be directed to Oftel but to the appropriate authorities whose jurisdiction encompasses the merger control process:
the United States Department of Justice who are responsible for merger regulation and the Federal Communications Commission who are responsible for telecommunications regulation in the USA; and the European Commission, Directorate General IV-B (Competition; Merger Task Force) in the European Union.
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2.1 The previous chapter explained how the increasingly global outlook of the main telecommunications operators serving UK customers – especially BT – may change the nature of the UK market. Whether, and if so the degree to which, this may represent an incremental risk to BT’s continued ability to meet its licence obligations in the UK is assessed in Chapter 4. This chapter explains why these matters are of concern to Oftel.
2.2 Oftel’s goal is to provide the best possible deal for UK customers in terms of quality, choice and value for money. This goal derives from the Director General’s primary duties under the Telecommunications Act, which have been set out in paragraph 1.8 above and which the Director General shares with the Secretary of State. In practice these duties apply to the Director General in relation to the modification and enforcement of licence conditions, although the ultimate power to revoke licences is vested in the Secretary of State. In addition to the duties in Section 3(1), the Director General has a number of duties under Section 3(2), including in respect of competition. These duties are, however, subsidiary to the principal duties in Section 3(1) relating to the provision of telecommunication services in the United Kingdom.
2.3 These principal duties impose a very strict obligation, requiring the Director General to exercise his functions in the manner he considers is best calculated to secure the provision and funding of telecommunication services (except, in the case of provision of services, where this is impracticable or not reasonably practicable). To ‘secure’ is a rigorous test, meaning to ‘make certain’. It is important to recognise that the judgments that the Director General is called upon to make are against this test. They are not commercial judgments.
2.4 Oftel considers that the best way to secure the provision and funding of telecommunication services in the UK is through a competitive market. In such a market, if one operator were to withdraw or to cease serving its customers well, other operators would be eager to meet the demand. In considering whether further steps are necessary to meet the Director General’s duty to secure the provision and funding of telecommunication services, therefore, it is necessary to examine the degree of competition in the UK market. This exercise has been done in some depth in the context of the March 1996 consultation on price control, the Pricing of Telecommunications Services from 1997. The conclusion Oftel has reached is that many sectors of the UK retail telecommunications market are indeed already competitive, and that there is a very good prospect of effective competition in the remaining retail sectors within the next 4–5 years. Competition in the local access market from cable companies and radio fixed access operators, though growing fast, is not yet fully effective. Until it is, some – notably the low spending residential and business customers – will not be able to take full advantage of the increasing competition in the provision of national and international calls. There is therefore a need, in the medium term, for regulatory safeguards to ensure that the reasonable demands of customers, together with the needs of other operators to obtain interconnection to them through BT’s network, continue to be met.
2.5 In the wholesale market, Oftel’s ability to rely on a competitive market is constrained by the fact that, in a network industry, competing operators need to interconnect with each other in order to provide a full end to end service to their customers. Although competing operators are rolling out local, long distance, and international networks, they rely, and will continue to rely for some time, on the capacity and performance of the BT network to deliver their services in some geographical areas. BT’s network is, therefore, very important to UK telecommunications competition policy. Specific regulation is therefore likely to be needed even when all the retail markets have become fully competitive. The nature of the regulation can and will reduce over time as the wholesale market itself becomes more competitive, but there is a need to ensure for the time being nothing is done to compromise the BT network.
2.6 BT’s licence requires it to furnish the Director General, when requested, with the information he needs to carry out his functions. In addition, Oftel has set up a system for the acquisition, and where appropriate publication, of financial data essential to ensure that it has the information available to maintain fair competition in the wholesale market place. The key feature of this system is that, whilst BT is left free to adopt what managerial and organisational structures it judges best, Oftel can nevertheless define, for regulatory purposes, a set of ‘regulatory businesses’ designed in terms of a segmentation of the market place relevant to the pattern of competition. The accounts of these regulatory businesses are published annually. The regulatory accounts help Oftel and the industry to identify any unfair cross subsidy for these businesses as defined. Underpinning this ability are provisions for Oftel to access BT’s system of attributing costs. For regulatory purposes, Oftel has power to control these attributions through investigations and directions. In addition, the data provided under these regulatory controls underpins the determinations made by Oftel for the interconnect charges paid to BT by other competing operators; and also Oftel’s capacity to review BT retail prices, when these are challenged as anti-competitive. Whatever the future structures adopted by BT as it responds to its global challenges, Oftel will continue to need this information to discharge its statutory duties and functions. The use of financial information for regulatory purposes is more fully discussed in Annex A.
2.7 Apart from the issues relating to accounting separation, and with particular reference to BT’s proposed merger with MCI, one effect of this merger will be to reduce the amount of stock market information available to Oftel. In setting what Oftel anticipates will be the last retail price control (effective from August 1997), the cost of capital for the regulated business was calculated from that for the BT group by removing the effects of BT’s shareholdings in MCI and Cellnet. BT’s proposed merger with MCI will result in the loss of separate stock market information for MCI and this will make such an adjustment significantly more difficult in future. As such, Oftel recognises that it may have to rely on companies analogous to MCI for proxy information when calculating the cost of capital for the UK regulated business. This would be an exercise similar to the one carried out in the last retail price control review, where the effects of BT’s shareholding in Cellnet were removed from BT’s cost of capital using Vodafone’s beta as a proxy for that of Cellnet.
2.8 A related matter is the possible effect of the merger on the cost of capital for BT’s regulated business. Concert’s beta, which measures the riskiness of the business relative to the market average and is an important determinant of the cost of capital, may differ from that of BT prior to the merger. There are a number of reasons why this might be so, and these will be discussed more fully in the forthcoming consultative document on the control of BT’s network charges. In addition, Concert will have a higher gearing (the ratio of debt to equity) than that of BT prior to the merger and this is also likely to affect the cost of capital. The range of gearing levels considered in the forthcoming consultative document on the control of BT’s network charges will have to reflect this. However, it is an important point of principle that customers of the UK regulated business should not face higher charges as a result of the effects the merger may have on the cost of capital.
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3.1 BT’s licence still reflects to a large extent the market position it enjoyed for a good number of years following privatisation. Condition 1 of its licence places on BT an obligation to meet all reasonable demands for telecommunication services in the UK. As described in Chapter 2 above, detailed regulation is being progressively withdrawn as competition spreads through more of the markets in which BT operates. This process is continuing apace, and accelerating, but there remain a number of retail markets where competition will only become effective during the next 4–5 years. In particular, BT’s residential customer base, together with the inherited infrastructure with which it is served, means that for the moment BT remains the largest provider to that and some other markets.
3.2 BT’s licence obligations, especially those relating to the provision of services to its own retail customers, therefore remain correspondingly onerous. These are set out in Annex B, with an indication of how they compare with those in the ‘slimline’ licences of many public telecommuni-cations operators. The licence obligations cover many socially sensitive services such as those for the visually or aurally impaired. The licence obligations also cover many services which are of general application. This is particularly important for lower spending residential users for whom the prospect of effective competition cannot be held out for a few years more. Condition 1 requires BT to meet all reasonable demands for voice and other telephony services throughout the UK except where impracticable. Under the licence it is left to the Director General to determine what constitutes reasonable demands. This requirement could not have been contemplated without BT’s network ubiquity. However, two important factors affect its application.
3.3 First, where BT is operating in effectively competitive markets it may not be reasonable or necessary to impose certain service obligations on BT. Equally, however, and importantly from the perspective of this consultation, what constitutes ‘reasonable demand’ has to be seen in the context of economic, technical and social development. Expectations as to the reliability and quality of telecommunication services have risen enormously since 1984 – in line both with general consumer expectations and with the successive improvements which have actually been made to the services on offer. The Director General is able to determine what constitutes ‘reasonable demand’ at any given time, and thus to ensure that the services delivered to consumers are in line with the possibilities, needs and expectations of the day. BT’s performance to date has been such that there has been little need for the Director General to use his powers to protect and to raise service levels.
3.4 Competition will ensure that this process of improvement continues, at least where it is sufficiently developed to provide a strong enough spur both to BT and to its competitors to give customers better, and better value, services. If this were the case in all markets, the extent to which BT’s activities centred on the UK, underpinned by its licence obligations, would be less crucial to customers’ getting adequate service levels. However, the fact is that some sectors of the market are still dependent on BT delivering its service. In particular, the Director General must consider whether BT’s global strategy makes it any less likely that it will want, or be able, to meet the ever higher standards implied, or potentially required, by its licence obligations.
3.5 Separately, BT’s ability to meet the interconnection requirements of competing operators, under Condition 13 of its licence, also depends crucially on the quality of its infrastructure. While competing operators are rolling out their own networks, interconnection to BT’s ubiquitous network remains important for the time being in some geographical areas, particularly where call termination is concerned. Condition 13 of its licence obliges BT to provide interconnection to its network for other operators and contains a power for the Director General to make determinations on the cost and other aspects of interconnection in the event that other operators are unable to agree terms with BT. Both Condition 1 and Condition 13 of BT’s licence are therefore crucial to securing reasonable demands for telecommunication services.
3.6 Up to now, BT has relied almost exclusively on the UK market for the generation of cash and profits, and this has enabled the Director General to rely on BT’s self-interest as providing sufficient incentive to serve customers, and in particular to provide the investment to maintain, and ensure the progressive development of, the existing systems business which constitutes its core. The introduction of competition has been an added spur to this process, particularly from 1991.
3.7 Oftel understands it is the BT Board’s intention to continue to meet its licence obligations. But BT will be subject to a range of commercial pressures arising from its increasing diversification into overseas markets, in particular if and where its judgment might indicate that higher levels of return and capital growth could be achieved than in the UK. In those circumstances the Director General must, in addition to carrying out the regulatory financial assessment described in Chapter 4 below, consider whether there is adequate assurance on the matter and, if not, what safeguards might be available to give such assurance.
3.8 A number of factors are relevant to this consideration:
3.9 BT’s record demonstrates, overall, an acceptable level of quality and reliability at both wholesale and retail levels. Competition, too, has clearly contributed to BT’s commitment to continuously improving service levels – and, it is to be particularly noted, without the need of the Director General or other authority prescribing in advance what those levels should be, still less the inputs required to meet them.
3.10 Oftel is firmly of the view that regulation should focus on outputs such as quality of service, rather than inputs such as investment, because it is quality with which customers are concerned. However, a level of investment consistent with maintaining an adequate quality of service is implicit in the financial projections used to determine the appropriate value of X when setting the RPI–X controls applying to certain of BT’s charges. Whilst it is not necessary to require that the forecast amounts of investment are undertaken, it is appropriate for the regulator to ensure that the quality of service implicit in the price control is realised. This is because of the incentive, under RPI–X regulation, for the price-capped firm to reduce costs and so increase profits by reducing quality for a given price level. If actual quality of service were to diverge significantly from the level implicit in the price cap, then the price cap could be re-opened.
3.11 Oftel’s approach has been to encourage BT to improve its quality of service by:
Oftel has taken the view that this, combined with the increasing pressure of competition, is the best way of delivering improvements in service quality to customers.
3.12 It is unwise to be deterministic about output levels. It is one thing to develop and observe measures of performance, quite another to prescribe them. That may stifle progress rather than promote it, slow it rather than expedite it; it may fail to take account of market dynamics; and it seeks by definition to second guess customer expectations. But regular and comparable quality of service information, enabling effective monitoring and benchmarking, has proved of value in the past.
3.13 In 1986/87 it became apparent from a number of surveys – and representations, particularly from the City of London – that BT’s service quality had deteriorated. There were delays to BT’s capital expenditure and, along with reduced maintenance staffing levels, it suffered from a maintenance workers’ strike. These factors all contributed to the emergence of a problem. Although a serious matter, the available evidence enabled Oftel to ensure that corrective action was taken such that improvements were made. Although Oftel was ready to re-open the price control, it first forced upon BT both the necessary management action and the publication by BT of quality of service statistics from 1987 onwards. Subsequent reports showed improvements in service levels, and such reports became a permanent focus of Oftel’s monitoring. Most importantly, customer guarantee schemes and measures better to address quality of service from an operational point of view were put in place.
3.14 In addition, and especially since 1991, greater competition has added a sharper focus to BT’s attention to quality of outputs to retail customers. The question therefore needs to be answered, in what circumstances might this trend be slowed or reversed over the medium term? In such circumstances, provided any deficiencies are spotted early, could management and/or regulatory action be taken before material degradation occurs?
3.15 If regulatory intervention were the appropriate medium, it would be open to the Director General to seek changes to BT’s behaviour, including its investment plans, designed to correct for any longer term problems. This is not a novel departure, since, within price cap regulation, it has been recognised that delivery of service quality is as important as lower prices to the customer. A serious degradation of quality could, if appropriate, lead to a reassessment of the price cap. In addition, if shorter term performance appeared to be degrading, it is likely that action could be taken to avert the worst effects. For example, the Director General could impose quality standards.
3.16 The Competition and Service (Utilities) Act 1992 added a number of provisions to the Telecommunications Act which gave the Director General powers to require BT (or other designated operators) to comply with a set of pre-determined standards in the services which it provides. For the reasons given above, the Director General has not as yet found it necessary or desirable to impose such standards, relying instead on general increases in performance standards which BT has achieved since its privatisation in 1984. However the power remains available and, in the event that there were a manifestation of falling standards, or a failure to meet necessary increases in standards, it would be open to the Director General to impose require-ments under Sections 27A and 27B of the Act.
3.17 Indeed, Oftel has recently stepped up its efforts on publication of comparable performance indicators and benchmarking studies to show both customers and industry what standards are being achieved in the UK and elsewhere. The Director General believes these indicators will be of particular importance for monitoring whether customers’ expectations are met, especially up to the end of the century. If the Director General’s expectations are not met, he is committed to quick and decisive action to secure that they are.
3.18 While BT’s network is essential for the provision of high quality services to end users, it is equally important for the delivery of competitive services. This inevitably raises questions about quality of service at the network level because it is through interconnection to BT’s network that other operators are able to offer an end to end service to customers in competition with BT. As part of the changes to the interconnection and accounting separation arrangements made in April 1995, a system was put in place to monitor quality standards for BT’s network. This framework for monitoring the quality of BT’s network services was designed both to ensure that absolute quality levels are transparent and that any differences between the levels of network service quality that BT provides to itself and those it provides to other operators are also transparent. This is analogous to the accounting separation arrangements, in that any discrimination by BT in terms of the quality of the network services it provides to itself and to other operators will be readily apparent. The results of this exercise are made available to other telecommunications operators.
3.19 Oftel is at present considering the appropriate arrangements for the network charge control which will be used to regulate certain of BT’s network charges from October 1997. As part of this exercise, consideration will be given to quality of service issues, in particular whether specific network quality of service targets are appropriate and, if so, how they might be defined and how they should be implemented. Any such decision would clearly be relevant to an assessment of the possible effects of the globalisation of BT on its network business. Responses to this consultation paper will therefore help inform Oftel’s assessment of the appropriateness of network quality of service targets. Oftel will be publishing a consultation paper specifically concerned with the network charge cap in early May 1997 which will include this assessment of network quality of service issues.
3.20 This chapter has considered the regulatory framework under which quality of service is assessed by the Director General, and how information pertaining to quality standards is collated and made available to retail and network customers. The next chapter considers the circumstances in which BT’s quality of service might be put at risk.
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4.1 Chapter 2 explained why, whatever the commercial incentives for BT seeking to gain new business opportunities as a result of significantly expanded international activities, from the Director General’s regulatory perspective he must satisfy himself that BT will continue to secure, that is make certain, that the relevant UK licence obligations are satisfied. BT’s plans for future investment in the US and elsewhere, especially the EU, clearly could have major implications for the finances of its UK businesses. It is possible to envisage circumstances in which BT’s overseas operations might become a drain on the group’s resources and hence limit its ability to meet its obligations under its UK licence. For example, BT might seek to delay investment in the UK network and this could lead to a lower rate of improvement, or even degradation, in the quality of service. Were this to happen, Oftel believes that it would have to take action to ensure that UK customers did not suffer in circumstances where fully effective competition was not available. In any event, the nature of the Director General’s statutory duties makes it necessary for him to make some assessment, from a regulatory perspective, of the risk of such an eventuality.
4.2 A distinction can be made between the business risk already facing BT and the incremental risk which it incurs as a result of its overseas investment plans. This incremental risk may arise from the change in financial structure accom-panying the merger with MCI, with its higher gearing, and may mean that Concert is more vulnerable to risk than BT, either in its UK operations, or in its activities in the USA, EU and other overseas markets.
4.3 Oftel has therefore had to take a view on the implications of different assumptions about market developments in the UK, the US and other overseas markets in which BT plans to invest. Oftel has therefore conducted a risk analysis in order to assess what events, or combinations of events, might occur which would place a strain on BT’s finances. It has then sought to make a judgment as to whether the probability of UK investment being placed at risk is sufficient to justify some form of precautionary action, either to put in place suitable monitoring arrangements or to propose amend-ments to BT’s licence. It is worth repeating that this is not a commercial judgment, far less an assessment of the merits of BT’s strategy. It is also based on a different type of financial analysis to that which would be used to make a purely commercial judgment; one for the specific purpose of assessing the Director General’s duty to secure that BT can meet the demand for its services and has sufficient financing available.
4.4 Oftel prepared a number of forecasts embodying different assumptions about market developments in future. Oftel conducted checks on the plausibility and consistency of the forecasts and developed further scenarios to investigate the effect of different assumptions.
4.5 The central projection of this exercise is consistent with BT’s investment plans and dividend policy. The UK market assumptions are those used in the 1996 review of BT’s price control, updated for 1995/96 outturns. The different assumptions tested represent different combinations of events in order to examine what range of outcomes could be sustained by BT without giving rise to difficulties in financing its UK systems business. These represent not the probability of any specific event, but a range of possible events having equivalent effect. They include, inter alia:
4.6 The focus is on the amount of free cash flow generated. Whilst a net cash outflow in any one year need not cause concern, a persistent negative cashflow could not be sustained and could ultimately lead to pressure to reduce expenditure. Forecasts for a number of financial ratios indicate the financial strength of the business and hence its ability to invest and maintain adequate services. These are the ratio of debt to equity (or gearing), interest cover (the number of times interest payments could be financed out of operating profit) and dividend cover (the number of times dividends could be paid out of profits after interest and tax). These ratios are widely used in financial markets to assess companies’ financial standing. In addition, Oftel has considered the interest and repayment coverage ratio as a test of the number of times cash flow will cover both interest and debt repayments.
4.7 The gearing ratio is based on the book value of equity. It is also possible to calculate the ratio of debt to the market value of equity. This gives a better indication of financial risks facing a company when the market value is below the book value. However, when the market value exceeds the book value then the market-based ratio may overstate borrowing capacity if it reflects intangible assets which cannot be borrowed against – and may be ephemeral. Both ratios would be used as appropriate in Oftel’s ongoing financial monitoring.
4.8 A number of analysts have published research notes on the subject of the BT/MCI merger. A clear distinction exists between their work and this analysis, which does not seek to assess a ‘fair’ value for Concert or to comment on the price paid by BT for the remainder of MCI. The Director General’s concern here is purely with the ability of the business to meet its licence obligations.
4.9 If the forecasts of cash flow and financial indicators under any set of assumptions indicate a serious deterioration in the business, then some corrective action would be required. The Director General’s concern is about the probability of this action being in the form, inter alia, of reduced investment in the UK network. The analysis seeks to establish whether there is any – not just significant or material – but any risk of such an outcome.
4.10 The risk that events will occur sufficiently adverse to bring Concert’s ability to meet BT’s UK obligations under pressure is very hard to assess. It is especially difficult to evaluate what is the appropriate regulatory response to the possibility of outcomes to which only small probabilities attach but which could have a material impact were they to occur.
4.11 It is important to remember that the Director General’s task is not to second guess business judgments of Concert’s directors. Even if he agreed entirely with them regarding the probability of different outcomes, their interests and his would not fully coincide. The Director General must give primacy to his duties under the Telecommuni-cations Act, whilst Concert’s directors are primarily concerned with shareholders’ interests. Thus, diversification overseas may provide large rewards for BT’s shareholders and, at the same time, expose UK customers to lower investment and a lower quality of service.
4.12 The Director General considers that, on the basis of information presently available, and the analysis described above, an outcome which may be acceptable to shareholders of Concert could nevertheless impose material pressures on Concert’s ability to meet BT’s UK licence obligations. The Director General considers that, whilst the probability of such an outcome is small, it is one which, from his regulatory perspective, he cannot dismiss. This conclusion is heavily influenced by two factors: the fact that BT cannot as yet specify fully and precisely the immediate and short term financial arrangements of the merger (in effect the opening balance sheet); and the uncertainties surrounding the implementation and effect of the 1996 Telecommunications Act in the USA (including increased competition in the long distance market and the costs of establishing alternative local access networks). In all the circumstances, the Director General considers that a degree of regulatory reassurance is necessary, within the range of options set out in the following chapter.
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5.1 This chapter considers whether, in the light of the conclusions above, there is any need to make any adjustments to the way in which BT is regulated, and if necessary to amend BT’s licence in order to ensure that existing UK licence obligations will continue to be met. It seeks views on how any such changes (whether through licence modification or otherwise) might be formulated.
5.2 It is not yet clear what the corporate structure of Concert will be after the merger. For Oftel the essential features of the licensing structure are that the main UK licence must be held by the UK holding company, and that the licensing arrangements must create no new difficulties for the processes of licence modification or licence enforcement.
5.3 The Director General does not at present consider it necessary to amend the existing service obligations themselves, but merely to take whatever measures may be necessary to satisfy himself that those obligations will be met. Although designed principally for a telecommunications company with a UK focus, the various service obligations in BT’s licence, taken together with the powers under the Competition and Service (Utilities) Act 1992, provide considerable safeguards for the interests of UK consumers.
5.4 One approach would be continued monitoring of BT’s performance in carrying out existing obligations:
5.5 This option would be a continuation of Oftel’s existing policy of vigilance and a willingness to use the powers provided by the Competition and Service (Utilities) Act 1992, in addition to the powers provided under the Telecommunications Act 1984, if necessary.
5.6 If the above action were not considered sufficient the Director General could nonetheless, and in addition, seek to impose a general prohibition on the taking of any action which could prejudice Concert’s ability to meet its service obligations in the UK. It would be a condition of the licence that the licensee did nothing materially to detract from the company’s ability to meet the obligations in its licence for the foreseeable future. The purpose would be to focus attention on these obligations on a continuous basis. A simple, clear condition could provide that:
A possible draft condition is at Annex C.
5.7 Under this option, the Director General would not normally be required to make any judgment on the company’s decisions. Consistent with Oftel’s general approach to licence compliance, the onus would be primarily on the company, not the regulator, to ensure that its business continued to meet its licence obligations in the UK. BT has indicated that, should the Director General require any further reassurance on this point, its preferred way of providing this would be by a condition similar in nature to the option considered here.
5.8 If the general condition considered above was included in the company’s licence it would act as an incremental check on its ability to meet its licence obligations in the UK. The company’s Directors are best placed to decide what needs to be done to maintain and improve the UK business. They would be free to act as they considered appropriate, having to take into account only the maintenance of the company’s continuing ability to meet its service obligations in the UK. It is assumed that any investment or related decisions which they would take would in any event take into account the legitimate interests of UK telecommunications customers. The constraints imposed by the licence condition need not, therefore, cause any undue delays for their commercial decision making process.
5.9 If, however, it were thought that the Director General should have regular positive confirmation that these decisions, taken singly or as a whole, had not and would not have any detrimental effect on the company’s ability to meet its service obligations in the UK, confirmation could additionally be sought to the effect that:
A possible draft condition is at Annex D.
5.10 This option would place a rather greater onus on the company’s directors: in addition to drawing their attention in their decision making to the company’s ability to meet its UK licence obligations, it would require them to review past actions and provide evidence of having positively satisfied themselves that those actions would not prejudice future compliance. It is recognised that this would be a difficult judgment for the directors to make.
5.11 A further option exists beyond those described above. It moves, however, much more towards the Director General second guessing the commercial judgment of the licensee’s directors. In its less interventionist form, a consolidated condition would require the Licensee to:
A possible draft condition is at Annex E.
5.12 Some modulation of these requirements is obviously possible, but such arrangements would be consistent with the Director General needing clear and regular assurance that the directors of the licensee were focused strongly on the UK business in all their decision making. They would need the support of their auditors that any decision - say, to transfer or grant charges over major assets, or to pay special dividends – did not put at risk the company’s ability to meet its licence obligations in the UK. Such a condition would still enable the licensee, through its directors, to decide what was in the best commercial interests of the group as a whole, subject only to the considerations set out above in relation to the company’s continued ability to meet its licence obligations in the UK. However, such a condition could serve to inhibit the ability of the Directors in making decisions and might lead to delays (and some cost) while the Directors and auditors satisfied themselves that any transfers or charging could be carried out without breaching the licence. This option is therefore likely to be less attractive in principle both to BT and the Director General.
5.13 In addition to the four options discussed above, and as part of the due diligence associated with his duties under section 3 of the Telecommunications Act, the Director General has considered whether he needs to seek a level of assurance beyond that implied by the four options listed above.
5.14 Such a level of assurance would entail preventing the licensee from:
5.15 This would complete the so called ‘ring-fencing’ of the UK systems business. The Director General could only object to significant transfers, or significant charging of assets, if he were satisfied that there would be a detrimental effect on the maintenance and improvement of the systems business. Concert would have great difficulty in obtaining funding secured on the assets of the UK systems business without such a consent.
5.16 Licence conditions of this type have been imposed by other regulators in response to mergers in the water and electricity industries. The conditions were imposed in response to particular merger proposals in those industries and are not considered appropriate in the present circumstances where the Director General is considering a progressive and incremental change of focus for BT. In the case of water and electricity, the companies concerned were being taken over by another company for principally corporate and financial reasons and the mergers were not necessarily with an industry specific global focus in mind. Mergers and takeovers in other former nationalised industries such as gas or water can easily be distinguished from BT’s aspirations to become a global player, currently highlighted in its proposed merger with MCI. In the United Kingdom there are already many areas of telecommunications where competition is effective and the Director General believes that the remaining segments of the UK telecommunications market will have effective competition within the next 4–5 years. Therefore any concerns which the Director General may have about possible changes of investment focus in terms of the UK systems business of BT would be for a limited period only, since a telecommunications market where effective competition was entrenched in all market segments would enable UK telecommunications customers to obtain services from competitors of BT, in the event that BT were unable to provide them, at a price and quality commensurate with those customers’ expectations.
5.17 While other nationalised industries such as gas and water were privatised some years ago, there is no evidence as yet that the services which those industries provide will be the subject of effective competition within the next few years, certainly not in a way which is comparable to that expected in the UK’s telecommunications industry.
5.18 The Director General has concluded that he does not wish to seek a level of assurance of the kind described in paragraph 5.14; such a course of action would create a level of regulatory involvement far in excess of anything so far in telecommunications regulation and would be likely to act as a significant constraint on the company’s ability to manage its corporate affairs, not only in its UK business, but its overseas interests as well. Moreover, in so far as it centres on the maintenance of the existing asset base it is a static, backward looking control which does little to foster future service enhancements. It would be a counterintuitive step and it goes much further than the Director General is minded to go.
5.19 In addition to considering the level of assurance discussed above, the Director General has also reviewed an alternative method of limiting the risks to the regulated business from failures elsewhere. This method is similar to that taken by regulatory bodies in some financial markets and would involve pre-specifying a level of gearing (the ratio of debt to equity) that Concert could not exceed. Were Concert to exceed this pre-determined gearing level, the Director General might then require Concert to raise additional equity or reduce dividends. This would be a highly intrusive form of regulation and would raise considerable practical difficulties. In addition, the issues faced by regulators in financial markets are not comparable to those under consideration here. For these reasons, the Director General is not minded to pursue this approach.
5.20 At one end of the spectrum is the view that the existing regulatory regime is satisfactory, requiring no substantive modification to the licence, although monitoring would continue, and possibly be stepped up, and the relevant measures introduced by the Competition and Service (Utilities) Act might be activated if necessary. The other end of the spectrum is clearly interventionist and could only be justified if the Director General had grave concerns about the licensee’s ability or willingness to meet its licence obligations in the UK including, in the short to medium term, the risk of depletion of the assets of the systems business.
5.21 In seeking the views of consultees to the questions set out below it needs to be made clear that the purpose of this consultation is to seek views on the possible effect on UK consumers of BT’s globalisation strategy. Issues of competition are for the USA and EU authorities in respect of the proposed merger. Competition is only of relevance here in the context of securing BT’s ability to meet its licence obligations.
5.22 In responding to this consultation respondents are asked to provide answers to the following questions.
1 Can the Director General rely on continuing performance monitoring and benchmarking studies to alert him to potential quality of service problems? Should the monitoring and benchmarking studies be of a similar type and scope as hitherto, or different? If different, how should they differ?
2 Given that possible performance targets for BT’s network will be considered in the context of the network charge control consultation which is due to take place shortly, do the implications of globalisation add special weight to the case for, or urgency of, such measures? Do they imply targets of a particular type or application?
3 Are there factors which Oftel may not have taken sufficiently into account in assessing the possible regulatory, financial or other consequences of globalisation? If so, what are these, and how might they impact on BT’s future ability to meet its UK licence obligations?
4 Do the options for regulatory action set out in this chapter cover a suitable range of responses to the questions which Oftel considers globalisation to pose? If not, why not? What alternatives would be preferable, and why?
5 Which option(s) do you consider most appropriate, and why?
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A.1 The importance of BT’s accounting systems in helping to ensure that Oftel has the financial information to identify unfair cross-subsidies between BT’s businesses, and any instances of undue preference or undue discrimination, is referred to in paragraph 2.6 of this consultative document. These arrangements are particularly important for the other operators who are competing with BT but who are nevertheless customers dependent on BT for many key elements of their services to their own customers, and in particular for delivering calls from their customers to BT’s own customers.
A.2 There are two key aspects to maintaining confidence in the effectiveness of the market in which those operators are competing: requiring non-discriminatory charges for interconnection where interconnect markets are not yet fully competitive (and they are dependent on BT) and assurance that, in all markets – retail or interconnect, competitive or uncompetitive – Oftel has the capacity to deal with any complaints they may have that BT is behaving anti-competitively.
A.3 The measures put in place by Oftel to secure these two essential features include the requirement to provide accounts for the separate ‘regulatory businesses’, defined by Oftel, to a high standard of audit verification; the provision of detailed information on BT’s cost attribution systems which underpins the results shown in these accounts; and the power in specific circumstances, by agreement or after investigation, to make changes in the cost attributions. In addition, BT’s licence has a long standing provision (Condition 52) for Oftel to call for information required for the Director General to exercise his functions.
A.4 Where Oftel has reason to believe that there is unfair cross subsidy or undue discrimination or preference, or that the regulatory accounts (including the definitions of businesses) are deficient, Oftel has the power to conduct investigations. The power includes a requirement for the licensee to extend its prompt cooperation in investigations. In the light of the results of an investigation, Oftel has the power to direct changes in the definition of regulatory businesses and in the methods of cost attribution.
A.5 The separated accounts are designed to ensure – without dictating to BT how it should organise its business structures and management – that Oftel can check the requirements on BT not to cross-subsidise unfairly between businesses nor to engage in undue preference or undue discrimination. These accounts are published by BT along with details of the accounting policies, principles and practices that have been followed in drawing them up. BT is required to have the full year regulatory accounts audited to check that the figures ‘fairly present’ the results in accordance with the accounting documents agreed between BT and Oftel governing cost allocation in the regulatory accounts.
A.6 This access to, and the publication of, more detailed documentation on BT’s cost attribution systems allows Oftel to assure other licensed operators that the charges they pay for interconnect services under the present determination regime are fairly derived from relevant costs. It also allows Oftel to check BT’s retail prices when there are allegations that these are anti-competitive. The same information will again provide the basis for Oftel’s check, under the proposed interconnect controls to start in October 1997, that the interconnect charges when set by BT are not anti-competitive.
A.7 Oftel believes that the requirements set out in the key part of BT’s present licence (Condition 20B) should still be effective in the context of BT’s globalisation although further adaptation of these provisions may be necessary.
A.8 This conclusion rests on the assumption that there will be no difficulties – either in policy or practice – in Concert’s ensuring that it continues to provide Oftel with the separated accounts and the supporting information it needs to discharge its regulatory duties. Oftel aims to maintain the principle that it will leave the licensee free to organise its business into whatever managerial structures it judges best – provided that Oftel, and the industry at large, where appropriate, still have access to the information, or equivalent information, required to maintain the objectives of establishing confidence in the continuing transparency of the retail and interconnect markets.
A.9 Oftel recognises that the development of BT into a global operator, and the particular structures that may emerge from the BT/MCI merger, may pose detailed questions on how the objective of confidence is to be secured. This is an on-going consideration, not specifically related to whatever (as yet not fully determined) structure may accompany the launch of Concert. It can be expected that all entities in this rapidly evolving and increasingly global market may require continuing changes in their structures.
A.10 Oftel is considering whether it needs to take particular action to safeguard its capacity to ensure the accounting separation arrangements continue to be effective. Oftel will take whatever action may be necessary to ensure the provision of separated accounts for businesses, as defined by Oftel for regulatory purposes, and the supporting information on cost attributions that underlies them, whatever the corporate structures that may in future be adopted. This would include ensuring that accounts and information are presented to whatever degree of disagregation is required for Oftel to check that the licensee’s charges or prices are not anti-competitive.
A.11 The key element in securing the appropriate level of disaggregation is the ability to introduce new definitions of the businesses for regulatory purposes. Condition 20B provides for this to be done by BT in specified circumstances either with the Director General’s consent or after investigation by Oftel, consultation on the results of this investigation, and a direction by the Director General for BT to introduce regulatory accounts for the newly defined business.
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| BT’s licence | ‘Slimline’ domestic public telecommunication operator licence |
| Condition 1: Universal Provision of Telecommunication Services | Requirement to Provide Telecommunication Services only when Licensee has become a Well Established Operator |
| Condition 2: Provision of Telecommunications Services in Rural Areas | No corresponding condition |
| Condition 3: Directory Information | Directory Information (no requirement to provide for overseas systems). |
| Condition 4: Maintenance Service | No corresponding condition |
| Condition 8: Maritime Emergency Services | No corresponding condition |
| Condition 10: Priority Fault Repair Service | No corresponding condition |
| Condition 11: Public Call Box Services | Public Call Box Services (no obligation to provide) |
| Condition 12: Maritime Services | No corresponding condition |
| Condition 13: Connection of Systems Providing Connection Services | Requirement to Provide Connection Services (less onerous than BT’s Condition 13) |
| Condition 13A: Equal Access | No corresponding condition |
| Condition 16: Publication of Charges, Terms and Conditions | Publication of Charges, Terms and Conditions (only applies to Directory Information Services except where the Licensee is a Well Established Operator) |
| Condition 16A: Publication Requirements Relating to Condition 13.1 ( Interconnect Agreements) | No corresponding condition |
| Condition 16B: Standard Services | No corresponding condition |
| Condition 17: Prohibition on Undue Preference and Undue Discrimination | Prohibition on undue preference and undue discrimination only applies to Directory Information Services, except where the Licensee is a Well Established Operator |
| Condition 17C: Quality of Service – Quality Schedule | No corresponding condition |
| Condition 18: Prohibition on Cross-Subsidies | No corresponding condition |
| Condition 19: Access Charges | No corresponding condition |
| Condition 20: Separate Accounts for Certain Activities | No corresponding condition |
| Condition 21: Apparatus Production | No corresponding condition |
| Condition 23: Alterations to the Applicable Systems | Customer Interface Standards |
| Condition 24A–E: Control of General Prices | No corresponding condition |
| Condition 26: Charges for Installation of Certain Exchange Lines | No corresponding condition |
| Condition 27: Code of Practice for Consumer Affairs | No corresponding condition |
| Condition 29: Bodies Recognised to be Representing the Interests of Consumers | No corresponding condition |
| Condition 31A: Provision of Relay Service for Textphone Users | No corresponding condition |
| Condition 32: Special Telephones for the Hearing Impaired | No corresponding condition |
| Condition 38: Code of Practice on the Confidentiality of Customer Information. | No corresponding condition |
| Condition 39: Intellectual Property | No corresponding condition |
| Condition 41A: Confidential Information | No corresponding condition |
| Condition 43: Wiring etc. not Forming Part of the Applicable System | No corresponding condition |
| Condition 45: Connection Arrangements | No corresponding condition |
| Condition 46: Private Circuits | No corresponding condition |
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Option 2: Additional general prohibition
A.1 The Licensee shall not do any thing, whether by act or omission, which would materially detract from its ability, for the remainder of the initial period of 25 years for which this Licence was granted, to comply with –
(a) its obligations under this Licence to provide telecommunication services; and
(b) its obligations, whether under this Licence or under any Act or subordinate legislation for the time being in force, to provide telecommunication services, or any category of telecommunication service, to a specified standard.
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Option 3: Annual review and certification
B.1 The Licensee shall not do any thing, whether by act or omission, which would materially detract from its ability, for the remainder of the initial period of 25 years for which this Licence was granted, to comply with –
(a) its obligations under this Licence to provide telecommunication services; and
(b) its obligations, whether under this Licence or under any Act or subordinate legislation for the time being in force, to provide telecommunication services, or any category of telecommunication service, to a specified standard.
B.2 (a) The Licensee shall in respect of each financial year submit to the Director a certificate to him approved by a resolution of the board of directors of the Licensee and signed by a director of the Licensee, which shall state whether, after making full and careful enquires, and having considered a report of the Auditor which complies with the requirements of sub-paragraph (c) below (“the Auditor’s report”), the board is satisfied that the licensee has not done any thing of a kind referred to in paragraph B.1 above in the course of the financial year in question.
(b) A certificate for the purposes of sub-paragraph (a) above shall –
- (i) be submitted as soon as practicable, and in any event no later than 8 months after the expiry of the financial year to which it relates; and (ii) be accompanied by a copy of the Auditor’s report.
(c) The Auditor’s report shall –
- (i) conform to the Auditing Standards; (ii) be based on a scrutiny of all appropriate financial records and other information made available to the Auditor by the Licensee in accordance with sub-paragraph (d) below; and (iii) state the extent to which, in the opinion of the Auditor, the Licensee has complied with its obligations under paragraph B.1 above in relation to the financial year in question.
(d) The Licensee shall make available to the Auditor for the purpose of enabling him to prepare the Auditor’s report all financial records and other information which it is necessary for the Auditor to consider in order to form a full and fair view on the matter described in sub-paragraph (c) (iii) above.
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Option 4: Duty to secure the UK systems business
C.1 The Licensee shall secure that it has, for the remainder of the initial period of 25 years for which this Licence was granted, all the financial, management and other resources which it requires to comply with –
(a) its obligations under this Licence to provide telecommunication services ; and
(b) its obligations, whether under this Licence or under any Act or subordinate legislation for the time being in force, to provide telecommunication services, or any category of telecommunication service, to a specified standard.
C.2 (a) The Licensee shall in respect of each financial year submit to the Director a certificate to him approved by a resolution of the board of directors of the Licensee and signed by a director of the Licensee, which shall state whether, after making full and careful enquiries, and having considered a report of the Auditor which complies with the requirements of sub-paragraph (c) below (“the Auditor’s report”), the board is satisfied that, for at least such period as is specified in the certificate and for reasons so specified, the Licensee will be able to comply with the requirements of paragraph C.1.
(b) A certificate for the purposes of sub-paragraph (a) above shall –
- (i) be submitted as soon as practicable, and in any event no later than 8 months after the expiry of the financial year to which it relates; and (ii) be accompanied by a copy of the Auditor’s report.
(c) The Auditor’s report shall –
- (i) conform to the Auditing Standards; (ii) be based on a scrutiny of all appropriate financial records and other information made available to the Auditor by the Licensee in accordance with sub-paragraph (d) below; and (iii) state whether the Auditor is aware of any matter which raises significant doubts as to the ability of the Licensee to comply with the requirements of paragraph C.1 for the period specified in the certificate to which the Auditor’s report relates.
(d) The Licensee shall make available to the Auditor for the purpose of enabling him to prepare the Auditor’s report all financial records and other information which it is necessary for the Auditor to consider in order to form a full and fair view on the matter described in sub-paragraph (c) (iii) above.