July 1997
In March of this year I issued a Consultative Document asking whether, in the light of BT's progressive transformation into a global telecommunications company, I required additional powers to enable me to act so as to secure BT's continued adherence to its licence obligations in the UK. I have a statutory duty to secure that all reasonable demands for telecommunication services are met and that companies providing these services can finance them. It is that duty which prompted me to carry out the consultation.
BT's continued adherence to its licence obligations is essential while the transition to fully effective competition across all UK telecommunication markets is still not yet complete. Once that transition is complete, and there are good prospects that this will be within a few years, the market alone, operating within a framework of fair trading principles, should be sufficient to ensure that all reasonable demands for telecommunication services are met.
The Consultative Document I issued in March contained a regulatory financial assessment of whether BT's progressive globalisation could result (although it is not possible to predict precise future developments) in an outcome which would impose material pressures on its ability to meet its licence obligations. The assessment concluded that the probability of such an outcome was small, but one that I could not ignore in the light of my strict statutory duties. A wide range of events which might contribute to such an outcome were represented in that regulatory financial assessment. While developments since the publication of the March Consultative Document confirm the need for additional regulatory reassurance, the overall conclusion of the regulatory financial assessment as set out in that Document has not changed materially. As such, I have not had to revisit the range of possible regulatory responses that I asked respondents to the consultation to consider. It should be emphasised that my regulatory financial assessment is distinct from a commercial financial assessment in that it is for the specific purpose of assessing my duty to secure that BT can meet the demand for its services and has sufficient financing available.
I have read and heard the views of respondents to the consultation. In the light of my statutory duty I have considered these views, along with recent events in telecommunications markets. I have concluded that some additional regulatory reassurance is required and that this reassurance should be broadly in the form of the third of the four options consulted on.
This amended version of option 3 will be in the form of a licence condition which contains an obligation that BT does nothing that may detract materially from its ability to meet its licence obligations, as such obligations are reasonably interpreted for the time being, for the remainder of the licence period. After the end of each financial year BT's board of directors (`the Board') will have to submit a certificate to me stating whether, in the Board's reasonable opinion, the Licensee has done anything during the financial year which caused or would cause it to breach this obligation. The condition will also allow me, no more than once a year, to request that BT employ its auditor to produce a report stating whether BT has in place and is following the appropriate systems and processes to enable the Board to form a reasonable opinion as to whether BT is complying with the obligation contained in this condition.
I intend to proceed with the implementation of the amended version of option 3, subject to a statutory public consultation. The consultation to make the necessary modification to BT's licence that will give effect to this decision will begin tomorrow. Your views continue to be very welcome and very necessary. The text of the licence modification is contained in Annex B of this Statement.
Chapter 1 Introduction
Chapter 2 Background
Chapter 3 Regulatory response
Chapter 4 The BT corporate structure
Annex A Summary of responses to the consultation on Domestic Obligations in a Global Market
Annex B Proposed modifications to BT's licence
1 In March the Director General of Telecommunications (DG) issued a Consultative Document Domestic Obligations in a Global Market seeking views on whether, in the light of BT's progressive move towards globalisation in telecommunications markets, his existing powers were sufficient to ensure BT's continued adherence to its licence obligations. The DG has a statutory duty under Section 3(1) of the Telecommunications Act 1984 to act so as to secure that all reasonable demands for telecommunications services are met and that companies providing these services in the UK are able to finance them adequately. It was with this strict duty in mind that the DG issued the Consultative Document.
2 While there has been an encouraging growth in the number and strength of alternative providers of telecommunications services in many sectors of the UK market, there remain some sectors - particularly where low spending residential users are concerned - where BT does not yet face fully effective competition. As such, the continued maintenance and development of BT's network is essential in order to provide services to customers in markets where competition has yet to develop. For the time being at least, it is also essential for the provision of certain network services to enable other operators to compete effectively while they are in the process of rolling out their own networks. It is during this interim period that the DG needs to ensure that his powers are adequate to enable him effectively to carry out his duties under Section 3(1).
3 The March Consultative Document set out four possible regulatory responses to BT's globalisation. These were;
4 This Statement summarises the comments respondents to the consultation have made on each of the four options and states the DG's conclusion on each option and his preferred regulatory response.
5 The DG concludes that options 1 and 2 do not provide sufficient regulatory reassurance so as to discharge his strict statutory duties under Section 3 (1) of the Telecommunications Act 1984 in the light of BT's progressive globalisation. The DG remains of the opinion that option 4 represents an excessively intrusive level of regulation and may, by default, involve the DG in `second guessing' the implications of BT's commercial decisions.
6 In the light of his statutory duty the DG has considered the responses to the consultation, recent events in UK and global telecommunications markets, and the analysis contained in chapters 4 (Regulatory financial assessment) and 5 (Possible regulatory responses) of the Consultative Document. The DG has concluded that his preferred regulatory response to BT's globalisation is option three, amended in the light of comments made during the informal consultation.
7 The amended version of option 3 consists of a licence condition containing an obligation that the Licensee does nothing that would materially detract from its ability to meet its licence obligations, as such obligations are reasonably interpreted for the time being, for the remainder of the licence period. In addition, the Licensee's board of directors (`the Board') must annually submit a certificate to the DG which will state whether, in the Board's reasonable opinion, the Licensee has done anything in the preceding financial year which caused or would cause it to breach this obligation. Option three also allows the DG to request that the Licensee employ its auditor to produce a report confirming that the Licensee has in place and is following the appropriate systems and processes to enable the Board to form a reasonable opinion as to whether the Licensee is complying with the obligation contained in this condition. This condition will expire in 2004, unless the DG determines otherwise.
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1.1 On 27th March 1997 the Director General of Telecommunications (DG) issued a Consultative Document Domestic Obligations in a Global Market seeking views on whether, in the light of BT's progressive move towards globalisation in telecommunications markets, his existing powers were sufficient to ensure the continued integrity and enhancement of BT's UK network and services, notably its Systems Business. The DG has a statutory duty under Section 3(1) of the Telecommunications Act 1984 to act so as to secure that all reasonable demands for telecommunications services are met and that companies providing these services in the UK are able to finance them adequately. This is an onerous duty and it was with this particular duty in mind that the DG issued the Consultative Document.
1.2 In the Consultative Document, the DG set out four regulatory options, which ranged from maintaining the status quo by relying on his existing powers and if necessary activating the additional powers added to the Telecommunications Act by the Competition and Services (Utilities) Act, to placing a duty on BT and its directors to secure the UK Systems Business for the remainder of the licence period until 2009. Only the first of these options would not involve the making of licence modifications. Respondents to the consultation were asked to say whether the DG should continue to rely on existing arrangements to secure the interests of consumers, or whether he should seek additional powers, by modifying BT's licence.
1.3 The assessment of the appropriate regulatory response to BT's globalisation as set out in this Statement takes account of the degree of risk to BT's ability to meet its UK licence obligations identified in the regulatory financial assessment contained in chapter four of the March Consultative Document. A wide range of events which might contribute to that risk was set out in the March Consultative Document.
1.4 Developments since the publicaton of the March Consultative Document confirm the need for additional regulatory reassurance where the securing of BT's continued adherence to its licence obligations in the UK is concerned. However, the overall conclusion of the regulatory financial assessment as set out in the Consultative Document has not changed materially and the range of possible regulatory responses (contained in chapter 5 of that document) has not had to be revised. It should be emphasised that Oftel's regulatory financial assessment is distinct from a commercial financial assessment in that it is for the specific purpose of assessing the DG's duty to secure that BT can meet the demand for its services and has sufficient financing available.
1.5 In the light of his statutory duty the DG has considered the responses to the consultation, recent events in UK and global telecommunications markets, and the analysis contained in chapters 4 (Regulatory financial assessment) and 5 (Possible regulatory responses) of the Consultative Document. The DG has concluded that reliance upon his existing powers is not an acceptable option and that some modification to BT' s licence is necessary. The DG has decided that option three, amended in the light of comments made during the informal consultation, is the most appropriate. The amended version of option three consists of a licence condition containing an obligation that the Licensee does nothing that would materially detract from the company's ability to meet its licence obligations, as such obligations are reasonably interpreted for the time being, for the remainder of the licence period. In addition, the Board must submit annually a certificate to the DG which will state whether, in the Board's reasonable opinion, the Licensee has done anything in the preceding financial year which caused or would cause it to breach this obligation. Option three also allows the DG to request that the Licensee employ its auditor to produce a report confirming that the Licensee has in place and is following the appropriate systems and processes to enable the Board to form a reasonable opinion as to whether the Licensee is complying with the obligation contained in this condition. This condition will expire in 2004, unless the DG determines otherwise.
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2.1 Since its privatisation in 1984 BT, in line with other major international telecommunications operators, has sought to make alliances with telecommunications operators in other countries. As the number and size of these alliances has grown BT has had to consider investment priorities in relation to its various overseas ventures, setting these against the need for adequate funding to meet its licence obligations in the UK. The announcement in November 1996 of its proposed merger with MCI has brought the question of BT's investment priorities into sharper focus, although BT's record thus far has demonstrated, overall, an acceptable level of quality and reliability at both the wholesale and retail levels.
2.2 While there has been an encouraging growth in the number and strength of alternative providers of telecommunications services in many sectors of the UK market, there remain some sectors - particularly where low spending residential users are concerned - where BT does not yet face fully effective competition. The maintenance and enhancement of BT's Systems Business remains essential if the UK is to move to a fully competitive market in telecommunications, expected to be achieved in the early years of the next century. It is during this interim period that the DG needs to ensure that his powers are adequate to enable him effectively to carry out his duties under Section 3(1).
2.3 The continued maintenance and development of BT's network is not only essential in order to provide services to customers in markets where competition has yet to develop; it is also necessary, for the time being at least, for the provision of network services to enable other operators to compete effectively.
2.4 With this in mind the Consultative Document included 5 specific questions on which respondents were asked to comment. The questions are set out in full together with a summary of the responses to them in Annex A. It is worth noting that one of the questions referred to the potential need for Oftel to specify quality standards for the BT network. The responses to this question are included in Annex A, and Oftel intends to take these responses into account when the issue of network quality of service (along with other issues including accounting separation arrangements) is considered within the context of the Network Charge Control Review.
The powers of the DG in relation to Globalisation
2.5 In this matter the DG is exercising his powers of licence modification in accordance with Section 3(1) of the Telecommunications Act, to act so as to secure that all reasonable demands for telecommunication services in the United Kingdom are met. He has no direct involvement in merger control, which in the UK is a matter for the Secretary of State for Trade and Industry and the Office of Fair Trading. In the case of the BT/MCI merger this has been considered by the European Commission (DGIV) and the Department of Justice in the United States of America. It is currently under consideration by the Federal Communications Commission in the United States of America. The European Commission approved the proposed merger on 16 May 1997 and the Department of Justice cleared the merger on 7 July 1997 subject to final approval by the Courts. The decision of the Federal Communications Commission is still awaited.
2.6 The changes which the DG proposes to make to BT's licence, subject to statutory public consultation, will not therefore in any way affect the completion of the proposed merger, nor any conditions which the EU or USA authorities attach to their approvals.
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3.1 The March 1997 Consultative Document, Domestic Obligations in a Global Market contained a regulatory financial assessment of the risk that events, or combinations of events, would occur sufficiently adverse to bring Concert's ability to meet BT's UK licence obligations under pressure. The assessment concluded that there was only a small probability that an outcome which may impose material pressures on Concert's ability to meet BT's UK licence obligations would occur. However, whilst the probability of such an outcome is small, it is one which the DG cannot dismiss if he is to discharge his statutory duties properly. In this context the DG considered that some degree of regulatory reassurance was necessary and proposed four possible regulatory options. They were:-
i The continued (and possibly more rigorous) monitoring of BT' s performance in carrying out existing obligations (no licence modification required);
ii A new obligation prohibiting the taking of any action which could have an adverse effect on the new merged Concert's ability to meet its service obligations in the UK;
iii Annual review and certification that the new obligation (as in ii) is being complied with; and
iv A duty to secure the adequate resourcing of the UK Systems Business.
3.2 The DG also considered two other possible regulatory approaches, but dismissed them on the grounds that they were excessively intrusive given that BT's change of focus was progressive and incremental, and that any concerns were likely to be for a limited period only, given the prospects within a relatively short period for effective competition across almost all UK telecommunications markets. This chapter sets out the four options that were included in the Consultative Document, summarises the comments respondents made on these options and states the DG's conclusion on the preferred regulatory option.
3.3 This option recognises that the various service obligations in BT's licence, taken together with the powers added to the Telecommunications Act by the Competition and Service (Utilities) Act 1992 to set and enforce specific standards, already provide safeguards for the interests of UK consumers. Under this option the DG would monitor very closely, through reference to comparable performance indicators, quality of service statistics, consumer feedback, etc, how Concert continued to meet its licence obligations, paying attention in particular to how it performed in the less competitive, as against the competitive, segments of the market. Any indication that performance of these obligations was deteriorating, would prompt the DG to take steps immediately to enforce Condition 1 of the licence and if necessary activate the additional powers added to the Telecommunications Act by the Competition and Services (Utilities) Act.
3.4 This option would involve no changes to BT's licence and would represent a continuation of Oftel's existing policy of vigilance and a readiness to use the statutory powers already available.
3.5 Of the eighteen respondents to the first round of consultation (see Annex A), five suggested that option 1 was the appropriate response. Four of these respondents are UK based telecommunications companies (including BT), while the other, EVUA, is a representative of large corporate telecommunications users. BT suggests that Oftel's concerns about the effects of globalisation on its ability or willingness to meet its domestic obligations were misplaced and, therefore, extra powers to enforce these obligations were unnecessary. CableTel (who responded on behalf of the Cable Communications Association) and Mercury both felt that option 1 was preferable as it minimised regulatory involvement and had the benefit of continuity with current policy. Ionica stated that there was no suggestion that existing arrangements, which had been accepted as adequate since 1984, were materially deficient in the context of BT's globalisation and, therefore, the status quo should be maintained.
3.6 Oftel acknowledges that, hitherto, the substantial powers associated with the status quo have been generally adequate in securing BT's adherence to its licence obligations. However, the progressive globalisation of BT's business means that BT's self interest in future may not necessarily coincide so fully with meeting the needs of UK consumers - this could have an effect on BT's compliance with its licence obligations. The regulatory financial assessment conducted by Oftel suggests that the incremental risk which BT may incur as a result of its overseas investments could impose material pressures on Concert's ability to meet its UK licence obligations. Given that the globalisation of BT could undermine both the ability of BT to meet its UK licence obligations and BT's focus on complying with its licence obligations, some degree of regulatory assurance, in addition to the status quo, is required.
3.7 In addition to Option 1, the DG could seek to impose an obligation prohibiting 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 to detract materially from the company's ability to meet its licence obligations for the remainder of the licence period. The purpose would be to focus attention on these service obligations on a continuous basis. A simple, clear condition could provide that:
Under this option, the DG 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.
3.8 The FEI and Reuters consider that option 2 is the appropriate regulatory response, as it would be sufficient to reinforce the message that BT's globalisation should not interfere with its domestic obligations. Three other respondents also considered that option 2 was the appropriate response, although subject to some important caveats. SACOT felt that the appropriate regulatory response was to impose option 2, while being prepared to impose option 3 or 4 should it prove insufficient. NIACT felt that option 2 with an added requirement for the directors' annual confirmation that it had not been breached was the appropriate response. This would, in effect, be similar to option 3 (discussed below), without the requirement for an auditors report. John Hughes (Oftel consumer group panel member) felt that option 2 with a requirement that the DG must consent to disposals of significant parts of the UK systems business was appropriate.
3.9 Having considered all the responses, the DG believes that option 2 on its own does not provide the degree of regulatory assurance which is necessary. Option 2 buttresses existing arrangements by requiring the directors of Concert to focus their attention on compliance with BT's UK licence obligations. However, such a focus would be, essentially, of a passive nature in that it would not require any positive confirmation that Concert's directors were satisfied that the company did, in fact, remain in a position to comply with its UK licence obligations for the remainder of the licence term. The responses to the consultation suggest - by implication - that while option 2 serves to reinforce the message that BT's globalisation should not interfere with its domestic obligations, it does so merely by rephrasing BT's existing licence obligations in terms of a prohibition on doing anything that would compromise compliance with such obligations. Given that the DG has a statutory duty to act so as to `secure' that all reasonable demands for telecommunications services are met and that companies providing these services in the UK are able to finance them adequately, it is not felt that option 2 provides the additional regulatory reassurance necessary for him to ensure, as far as is possible, that he can meet this onerous test in the context of BT's globalisation.
3.10 Option 3 is an incremental step-up from, rather than an alternative to, option 2. Option 2 would act as a check on the company's ability to meet its licence obligations in the UK. The company's directors would be free to act as 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 necessity of continuing to comply with the company's licence obligations. The constraints imposed by the licence condition required under option 2 need not, therefore, cause any undue delays for their commercial decision making process.
3.11 Option 3, as it appeared in the March Consultative Document, would add the further requirements that BT:
Option 3 would, therefore, place a rather greater onus on the company's directors than option 2: 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 on the basis of appropriate enquiries exercising due diligence.
3.12 Three respondents to the consultation, the Chairman of ENACT, France Telecom, and AT&T, support option 3 as the appropriate regulatory response. Option 3 is supported by these respondents on the basis that it regularly requires the directors of Concert to specifically focus on BT's compliance with its UK licence obligations. Option 3 also provides independent confirmation (via the auditor's report) as to whether the Licensee has complied with its UK licence obligations. Option 3, therefore, gives the DG the necessary regular assurance supported by an audit certificate on BT's ongoing compliance with its domestic licence obligations. While only three of the 18 respondents to the consultation recommended option 3, five other respondents favoured option 2, with three of these suggesting a modified version of option 2 that, to varying degrees, was similar to option 3.
3.13 Two respondents expressed doubts regarding the feasibility of the Licensee's auditor producing a report of the type required by option 3. BT suggested that it would be extremely difficult for its auditor to provide such a report and, in any case, the report would have to be subject to such caveats as would undermine its value. Commenting on the specific draft of option 3 (Annex D, Condition B of the March document), BT added that it would be inappropriate to ask its auditor to comment on a matter as subjective as the `extent' to which BT had complied with its licence obligations. SACOT also expressed reservations concerning the appropriateness of an auditor being asked to make judgement on matters other than those relating to financial management and financial resources.
3.14 The DG believes that option 3 broadly strikes the correct balance between providing the degree of assurance required, notwithstanding recent events in UK and global telecommunications markets, while not representing an over intrusive level of regulation. This option draws the attention of the Licensee's Board to the implications of their decisions for compliance with BT's UK licence obligations, while requiring that they positively and actively focus on their decisions to satisfy themselves that these decisions will not materially detract from the company's ability to meet its licence obligations, as such obligations are reasonably interpreted for the time being, for the remainder of the licence period. While this requires the Board to make potentially difficult decisions, the DG does not believe it would necessarily lead to undue delays in their decision making process, given that the judgement required of the Board concerns the implications for future compliance of business decisions that have already been taken - in that sense the judgement required is essentially retrospective.
3.15 Oftel is of the opinion that the requirement for an auditor's report, and the way that requirement was expressed in the draft licence condition contained in the March Consultative Document, is perfectly workable. However, in the light of comments received during the consultation, the DG is of the opinion that the requirement for an annual audit report would impose an excessive burden, in terms of both financial costs and administration, on the Licensee. In addition, the requirement that the auditor's report should confirm the extent to which BT had complied with its obligation under that condition would, to some extent, involve the auditor second guessing the judgement of the Board on its compliance with that obligation. This could, by implication, exonerate the Board from some of its responsibility. It is the DG's opinion that such a judgement and the associated onus is solely a matter for the Board.
3.16 However, the DG does feel it necessary to have the power to request some form of independent confirmation in respect of the robustness of the Board's opinion on the Licensee's compliance with the obligation contained in option 3. As such, option 3 has been amended to allow the DG to make ad-hoc requests for an auditor's report that will confirm that the Licensee has in place and is following, at the time the audit is undertaken, the appropriate systems and processes that will enable the Board to form a reasonable opinion as to whether the Licensee is complying with the obligation contained in option 3. Should the DG request that the report confirm that the Licensee had in place and has followed the appropriate systems and processes throughout the financial year, the Licensee will be required to ensure that its auditor produces such a report, subject to the DG making his request at least four months before the end of the financial year to which the report will relate.
3.17 Option 4 moves much more towards the DG second guessing the commercial judgement of the Licensee's directors. It would put a more onerous duty on BT's directors, and could involve the DG much more closely in the monitoring of BT's business decisions. A new consolidated condition to give effect to this option would require the Licensee to:
3.18 Some modulation of these requirements is obviously possible, but such arrangements would be consistent with the DG 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 auditor that any decision - say, to transfer or create 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 directors in making business decisions and might lead to delays (and some cost) while the directors and auditor satisfied themselves that any transfers or charging could be carried out without breaching the licence.
Option 4 is quite distinct from option 3. While option 3 requires the Board to confirm that in making past decisions they have not done anything to detract from the Licensee's ongoing ability to comply with its licence obligations (as such obligations are reasonably interpreted for the time being), option 4 requires that the Board and auditor confirm in advance of implementing decisions that the decision in question is consistent with the Licensee's ability to meet its licence obligations for a specified future period.
3.19 Three respondents to the consultation, TUA, TMA and Energis, felt that option 4 was the appropriate regulatory response. The TUA and TMA felt that option 4 was appropriate given the perceived dependence on BT of the majority of UK telecommunications users. The TUA felt option 4 should be combined with the `ring fencing' (an option considered and dismissed in the Consultative Document) of the UK systems business, whilst the TMA felt that option 3 could be considered as a minimalist alternative. Energis felt that option 4 was desirable as it allowed the early identification of potential non-compliance with licence obligations. They saw this as preferable to the other options, which would only alert Oftel to non-compliance after the fact, thus giving rise to the possibility of prolonged periods of non-compliance. The ENACT Chairman and AT&T felt that option 4 was too interventionist, particularly given the continuing development of competition in the UK.
3.20 Notwithstanding recent events in UK and global telecommunications markets, the DG remains of the view that option 4 represents an excessively intrusive level of regulation. The requirement for the directors, supported by their auditor, to satisfy themselves that the company had the resources and capacity to carry on the UK business would introduce delays to the decision making process of the company (and lead to the incurrence of costs) while these checks were conducted. Given the forward looking nature of the condition, the DG may, by default, become involved in assessing the implications of BT's commercial decisions for future compliance with UK licence obligations. It is not felt that this `second guessing' of BT's commercial decisions is an appropriate role for the Regulator. Such second guessing would also shift implicitly some of the onus for ensuring the Licensee's compliance with its obligations from the Licensee to the DG. As such, the DG does not believe that this option would be appropriate, particularly given that any concerns are likely to be for a limited period only since the prospects for effective competition across almost all UK telecommunications markets within single figures of years are considered to be good.
3.21 The DG believes that option 3, subject to the amendments described in paragraphs 3.15 and 3.16, is the most appropriate of the 4 options he has consulted on and that its incorporation into the licence of Concert should enable him, without imposing a disproportionate burden on the Licensee and as far as is possible, to secure BT's adherence to its licence obligations in the light of its progressive globalisation. The amended version of option 3 also avoids any possibility of the DG's involvement in the commercial management of the company which is a function which can only be discharged properly by its directors.
3.22 The draft modification to the licence of BT (which Concert will inherit) and which will give effect to the amended version of option 3 is set out at Annex B. Its effect will be to place an obligation on the Licensee not to do anything that would materially detract from the company's ability to meet its licence obligations, as such obligations are reasonably interpreted for the time being, for the remainder of the licence period. The Licensee's Board must annually submit a certificate to the DG which will state whether, in the Board's reasonable opinion, the Licensee has done anything in the preceding financial year which caused or would cause it to breach this obligation. The condition also gives the DG the power to request that the Licensee employ its auditor to produce a report confirming whether the Licensee has in place and is following the appropriate systems and processes to enable the Board to form a reasonable opinion as to whether the Licensee is complying with the obligation contained in this condition. The condition will expire in 2004, unless the DG determines otherwise.
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4.1 How BT arranges its overall corporate structure is a matter for BT, provided that the DG can be satisfied that this creates no new difficulties for the processes of licence modification or licence enforcement. Currently, it is proposed that following the merger with MCI, BT will change its name to Concert plc. Concert will be the quoted company and the holder of the Telecommunications Act Licence originally granted to BT in 1984. All consumer and business customer contracts for the supply of telecommunication services in the UK will be with Concert. It will direct and manage the UK business and be responsible for compliance with the licence. Concert will own the Applicable Systems (ie; the network) and maintain the high degree of directorial and management control required to run the Applicable Systems and to satisfy all the Public Telecommunication Operator and other obligations incumbent on it. Oftel considers that these arrangements are sufficient to ensure that the licence can be effectively modified and enforced where appropriate.
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This annex summarises the responses to the first and second periods of consultation on the March document. The table at the end of this annex lists the respondents and summarises their opinions on the appropriate regulatory response.
In general, respondents found the Consultative Document both timely and comprehensive. A number of respondents made comments which related to the BT/MCI merger control process itself. As pointed out in the March Consultative Document, this consultation is quite separate from the merger control process and comments relating to that process should not be directed to Oftel but to the competition authorities whose jurisdiction encompasses that process. Comments relating to the merger control process are, therefore, not summarised here.
BT are of the opinion that current monitoring and benchmarking arrangements are sufficient. BT also points to the fact that Oftel has the additional powers introduced by the Competition and Services (Utilities) Act to require BT to comply with a set of pre-determined standards.
(John Hughes); Suggests that Oftel should seek an explicit commitment from BT to cooperate fully with monitoring and benchmarking studies.
(SACOT, EVUA); Feel that current arrangements for monitoring and benchmarking are sufficient.
(ENACT Chairman); Feels that current arrangements for monitoring and benchmarking are flawed as they will only alert Oftel to problems after the fact. Suggests that the onus should be on BT to ensure problems do not arise in the first instance.
(NIACT); Suggest that performance indicators broken down by geographical region and by customer type (business/residential) are required.
(MCL); Considers that current arrangements for monitoring and benchmarking are sufficient.
(Energis); Is of the opinion that current arrangements for monitoring and benchmarking are inadequate as they are retrospective and problems will only become apparent after the fact and will then take time to remedy. Energis suggests that inputs should also be monitored.
(France Telecom); Suggests that the arrangements for monitoring and benchmarking should ensure that the quality of service domestic consumers enjoy can be compared to the quality of service that international clients (ie; MNCs) enjoy.
BT feels that performance targets for BT's network should be discussed within the context of the NCCR as globalisation does not add any special weight or urgency for such measures.
No response.
(MCL); Comments that globalisation does not add to these concerns.
(Energis, France Telecom); Are of the opinion that globalisation adds weight to the need for network performance targets and suggests that they should be put in place as soon as possible.
(AT&T); Comments that BT's interconnection customers require assurance that commitments to the UK (in terms of network investment) will be met. AT&T feels Oftel should go beyond specifying standards and also specify improvements that are necessary to enable other operators to interconnect more effectively.
BT makes the following comments; 1) Oftel over estimates the degree and longevity of the risk globalisation poses as it under estimates the current level of competition in the UK market and over estimates the timeframe within which most market segments will be effectively competitive: 2) BT also notes that it is in its own strategic interest to invest in profitable services in what is and will continue to be its main market (the UK): 3) BT suggests that, assuming that `reasonable demands' are for services that will earn companies a reasonable return, then a competitive market funded by efficient capital markets will ensure that these demands are met: 4) BT suggests that even if it was faced with a shortage of investment capital and high gearing, it would not be forced to choose between profitable projects. It would be rational for BT to fund all profitable projects, if necessary, via an equity issue. If BT did not fund such projects, other operators would step in: 5) The merger will to some extent reduce risk by diversifying BT's investment portfolio and ensuring a stronger financial base: 6) If BT were to fail financially, its physical assets would be in place for another operator to supply the UK market: 7) BT does not feel the USA Telecommunications Act (1996) has any implications for BT's commitment to the UK, and objects to Oftel's assertion that it has not been provided with sufficient financial information.
(SACOT); SACOT point to the potential positive spinoffs from the coordination of R&D efforts between BT and its international partners.
(ENACT Chairman); The ENACT Chairman feels that Oftel does not appear to take into account the possibility that Concert's obligations in the UK may conflict with its obligations elsewhere, particularly the USA.
(TMA); The TMA suggest that Oftel ignores the possibility that Concert will increasingly become driven from the USA end and underestimate the extent to which Concert's overseas activities will prove a distraction. The TMA also suggests that Oftel's belief that there will be fully effective competition across most UK telecommunications markets in the short term is very over optimistic. As such, Oftel underestimate both the degree of additional risk and the period over which that additional risk will be an issue.
(TUA); The TUA suggests that Oftel's belief that there will be fully effective competition across most UK telecommunications markets in the short term is very over optimistic; as such, Oftel underestimate the period over which the additional risk will be an issue.
(Ionica); Feels that Oftel's analysis reaches the correct conclusion, although the possibility that the BT/MCI merger will lead to improved network performance and innovation is ignored.
(MCL); Feel that Oftel's analysis is comprehensive.
(Energis); Suggests that Oftel ignores the fact that EC Article 90 requires BT to implement equal access and this will necessitate investment and reduce market share. This would represent an additional drain on BT's resources and, therefore, a risk that Oftel should take into account.
(France Telecom); Competition will not develop as fast as Oftel believes, especially in the long distance market, without the introduction of equal access. BT will use UK revenues to cross-subsidise customers in new markets to the detriment of the UK customer this will result in delayed/reduced investment. Thus, Oftel underestimates the extent and longevity of the risk.
(AT&T); Is of the opinion that Oftel ignores the possibility that BT will increasingly use profits made in the UK (thus delaying/reducing investment in the UK) to subsidise its activities in the USA.
BT feels that the range the options cover is more than adequate.
(SACOT); SACOT feel that the range the options cover is adequate, although the feasibility of the auditor signing off on the ability of BT to meet its licence obligations for a future period (option 3) is debatable.
(MCL, Energis, AT&T); Feel that the options are comprehensive.
(France Telecom); Suggests that not enough attention is paid to competition considerations. FT goes on to propose `pro-competitive regulatory safeguards and measures'. These include; equal access, structural separation of national (UK/USA) and international activities, and a yearly audit.
Oftel already has the powers to require BT to comply with UK obligations and can rely on existing monitoring arrangements to signal any potential service problems. BT prefer option 1. BT also states that any other option should have a sunset clause to reflect the fact that most parts of the UK market will soon have effective competition.
(JH); Prefers option 2 with an additional requirement that BT do not dispose of, or relinquish control over, assets forming a significant part of the UK systems business unless notice has been given to the DG and he does not object .
(SACOT); Prefers option 2, with a commitment to imposing options 3 or 4, should concerns over BT's ability to meet licence obligations increase.
(ENACT Chairman); Prefers option 3, although option 4 should be used if Concert were taken over by a non-UK company.
(TMA); Prefers option 4, while option 3 should be viewed as an absolute minimum. In any case, additional measures to facilitate the emergence of competition in the UK should also be taken (introducing equal access for example).
(EVUA); Option 1 is preferred.
(CA); Is unsure, but question whether Option 4 is too intrusive as Oftel suggests it is.
(FEI); Option 2.
(TUA); Prefers option 4, unless actions are taken to speed the introduction of effective competition into all segments of the UK market (equal access for example).
(NIACT); Prefers option 2 with (from Option 3) the requirement for annual confirmation from the directors that nothing had been done to breach the general condition.
(Reuters); Option 2 would serve to reinforce the message that globalisation should not interfere with the discharge of BT's UK service obligations.
(Ionica); Given that existing arrangements have proved adequate since 1984, Option 1.
(MCL); Option 1, because it represents a light regulatory approach.
(CableTel); Option 1, to minimise intrusive regulation.
(Energis); Option 4 as it allows the early identification of problems. The other options are subject to a `lag factor'.
(France Telecom); Option 3 provides the level of regular confirmation that the DG requires. However, it will only be effective if supplemented by pro-competitive measures.
(AT&T); Option 3, with a clause requiring a review after two years as to whether the condition can be dropped (because of increased competition) or requires strengthening to protect the UK consumer. AT&T also suggest more specific benchmarking of BT's quality of service, particularly with respect to interconnection services.
Competition in the UK and the extent to which this limits the period over which any additional risk associated with globalisation will be an issue.
(BT); Oftel underestimates the extent of current competition in the UK and the speed at which competition will develop in the remaining, non-competitive, segments of the market.
(TUA, TMA); Members of both bodies feel that Oftel's time frame for effective competition in most segments of the UK market is over optimistic. They suggests equal access and separation of the local loop business to speed the onset of effective competition.
(AT&T); The UK market will become more competitive despite the lack of equal access.
(France Telecom); Suggests that equal access is essential to speed the development of competition in the UK.
(Energis); The introduction of equal access would speed the development of competition in the UK.
(Reuters); Feels that Oftel's assessment of the extent of competition is over optimistic.
| Respondent type | Organisation | Preferred Option |
| BT | BT (British Telecommunications) | 1 |
| BT (2nd round response)# | Not applicable | |
| Consumer (and related groups) | Oftel consumer panel member (John Hughes) | 2* |
| Advisory Committee on Telecommunications for Disabled and Elderly People | None specified | |
| Scottish Advisory Committee on Telecommunications (SACOT) | 2 | |
| Consumer's Association (CA) | None specified | |
| Northern Ireland Advisory Committee on Telecommunications (NIACT) | 2* | |
| Chairman of the English Advisory Committee on Telecommunications (ENACT) | 3 | |
| Telecommunications Managers Association (TMA) | 4 | |
| European VPN Users Association (EVUA) | 1 | |
| Reuters | 2 | |
| Federation of the Electronic Industry (FEI) | 2 | |
| Telecommunications Users Association (TUA) | 4* | |
| Other operators | Mercury (MCL) | 1 |
| Ionica | 1 | |
| CableTel (on behalf of the Cable Communications Association) | 1 | |
| AT&T | 3 | |
| Energis | 4 | |
| France Telecom | 3 |
** = There were no confidential responses
# = Only BT responded during the second period of consultation.
* = Subject to some amendments (see main text of annex).
Comments on the operation of the conditions
(SACOT); Does not think that BT's auditor could make the judgement required under Option 3.
(BT); Feels that Options 2, 3 or 4 would be inconsistent with Oftel's desire to retreat from intrusive regulation. They would add complexity to the corporate decision making process and, in the cases of options 3 and 4, would require the directors to assess every decision against its likely impact on BT's ability to meet its licence obligations which is impractical. The requirement for auditor to have input where option 3 is concerned is also seen as impractical. The auditor's opinion would have to be subject to so many caveats, on such subjective and open ended issues, as to be worthless. BT also suggest that such an opinion is not a matter for auditor.
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After Condition 12 of the Licence shall be inserted the following Condition:
12A.1
The Licensee shall not do anything, whether by act or omission, which would materially detract from its ability, during 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, to provide telecommunication services, or any category of telecommunication service, to a specified standard.
The Licensee's obligations shall extend only to those obligations specified in sub-paragraph (a) and (b) above which are for the time being included in or arising under the Licence, any Act or subordinate legislation, as appropriate. For the avoidance of doubt, the Licensee's obligations shall extend only to those obligations specified in sub-paragraphs (a) and (b) above, as such obligations are reasonably interpreted for the time being.
12A.2
(a) The Licensee shall in respect of each financial year commencing after the date on which this Condition comes into effect, submit to the Director a certificate approved by a resolution of the board of directors of the Licensee (the Board) and signed by either a director or the secretary of the Licensee, which shall state whether, in the Board's reasonable opinion, after making appropriate enquires exercising due diligence, the Licensee has not done anything of a kind referred to in paragraph 12A.1 above in the course of the financial year to which that certificate relates.
(b) A certificate for the purpose of sub-paragraph (a) above shall be submitted as soon practicable, and in any event no later than 4 months, or such longer period as the Director may agree on the basis of represen_tations made to him by the Board, after the expiry of the financial year to which the certificate relates.
(c) If requested to do so by the Director, at any time after the commencement of the first financial year following the date this Condition comes into effect, the Licensee shall procure a report from the Auditor.The Auditor's report shall -
(i) state whether, in the Auditor's opinion, the Licensee has systems and processes which are appropriate to enable the Board to form a reasonable opinion as to whether the Licensee is complying with its obligation under paragraph 12A.1;
(ii) state, depending on the request made by the Director as referred to in sub- paragraph (c)(v) below, whether in the Auditor's opinion the systems and processes referred to in sub-paragraph (c)(i) above have been followed:
(aa) during the period the Audit was carried out, or
(bb) throughout a financial year.
(iii) be based on an examination of:-
(aa) all appropriate financial and other information made available to the Auditor as part of his audit of the accounts required to be produced under statute or under this Licence, and
(bb) such other financial records and other information as the Auditor may have required the Licensee to produce to him for the purpose of enabling him to prepare his report;
(iv) conform to the Auditing Standards to the extent applicable;
(v) be produced:-
(aa) within six months where the Director has made a request for a report covering the period specified in sub-paragraph (c)(ii)(aa) above, or
(bb) subject to sub-paragraph (c)(v)(cc) below, within four months of a financial year end where the Director has made a request for a report covering the period specified in sub- paragraph (c)(ii)(bb) above, provided that such request has been made at least four months before the end of the financial year to which the report relates;
or
(cc) where the Director has specified a longer period than four months under paragraph 12A.2.(b) above, the Auditor's report shall be produced within such longer period.
(d) Requests made by the Director under paragraph 12A.2(c) above shall be shall made no more frequently than once every twelve months. In any event, for the avoidance of doubt, this condition is without prejudice to Condition 52.
(e) In this Condition-
"Auditor" has the meaning given in Condition 20.5; and
"Auditing Standards" has the meaning given in Condition 20B.20.
12A.3
Unless the Director otherwise determines, this condition shall expire on 21 June 2004.".
2 In Condition 53.12 "12A.1" shall be inserted before "13"."