A Review of the Telephone Equipment Direction
December 1999
Chapter 1 - Summary
Chapter 2 - Background
Chapter 3 - Relevant markets
Chapter 4 - Other Aspects of the Market
Chapter 5 - Preliminary Analysis
Chapter 6 - Conclusion
Summary
The Direction
1.1 In 1994 and 1995 a number of firms in the telephone equipment industry alleged that BT was running its telephone equipment business at a loss and that this was having a detrimental effect on competition. Oftel therefore conducted an investigation into BT’s telephone equipment business (‘network applications business’) to see whether this was so and if it was, whether those losses could amount to an unfair cross-subsidy. Cross-subsidising an area of business using profits from another area can damage competition. Where an unfair cross-subsidy or subsidy exists, and the subsidy could have a material effect on competition, the Director General of Telecommunication (‘the Director’) has a power to issue a direction to prevent the cross-subsidy. As a result of that investigation the Director General of Telecommunications found that BT was unfairly cross-subsidising its network applications business and accordingly issued a Direction to remedy such cross-subsidy (this power is now enshrined in BT’s Licence Condition 78).
1.2 The telephone equipment direction (‘the Direction’) requires BT to ensure that its network applications business, various distribution channels within that business and various product groups all achieve minimum prescribed financial returns. Product groups covered are corded phones, cordless phones, and telephone answering machines.
1.3 The Direction also imposes certain financial reporting requirements on BT. Since the Direction was issued, the profitability of the relevant BT businesses has improved.
The Relevant Markets
1.4 For the purpose of analysing competition, it is first necessary to define the sorts of products that form part of the market under scrutiny. From its initial analysis Oftel considers that the relevant markets are the market for voice telephone equipment and network voicemail services in the UK (excluding mobile phones and facsimile machines) and the market for facsimile machines in the UK.
1.5 Nearly all the telephone equipment sold in the UK appears to be manufactured in Southeast Asia, with a small proportion, particularly certain digital equipment, notably Digital European Cordless Telecommunications (‘DECT’) phones, being made in Western Europe. Access to suppliers and manufacturers in Asia and elsewhere does not seem particularly problematic.
1.6 There appears to have been a concentration of market share in the high street with respect to the sale of telephone equipment, with firms such as Dixons Store Group (‘Dixons’) and the Argos stores increasing market share since the time of the direction. Oftel recognises that such concentration may affect competition and may afford retailers some measure of countervailing buyer power against a supplier with market power. This would therefore have a bearing on the need for the current Direction. In addition BT’s share of telephone equipment sales has been in decline.
Conclusion
1.7 Overall, Oftel’s preliminary view is that the markets in question are generally competitive.
1.8 In addition to the situation in the markets in question, Oftel’s consideration is influenced by the fact that since making the direction the regulatory framework has changed. On 1 March 2000 the prohibitions in the Competition Act, which prohibit anti-competitive conduct,come into force and give Oftel the power to fine companies that breach those prohibitions. Oftel’s powers to deal with anticompetitive behaviour are therefore considerably strengthened and the need for detailed, prescriptive regulation is therefore expected to decrease in due course.
1.9 This consultation seeks the views of interested parties on the state of competition in the relevant market and whether the current Direction continues to be necessary. This paper is being widely circulated and comments are welcome. Details on how to do so are explained in the section entitled Consultation. Comments are invited on the proposals by 1 February 2000.
Background
History and current scope of the Direction
2.1 Following an investigation into BT’s Network Applications Business in 1994 and 1995, the Director General of Telecommunications (‘the Director’) was satisfied that BT was subsidising its Network Applications Business and that that subsidy was either having, or could have had, a material effect on competition. Condition 20B.15 of BT’s Licence at the time allowed the Director to issue a Direction where he was satisfied that BT was unfairly subsidising any part of its Businesses (except Residual Business) and that the subsidy could have a material effect on competition in the United Kingdom.
2.2 The Director issued a Direction on 22 September 1995, which was subsequently amended on 27 March 1997 (‘the Direction’). Currently, the Direction prohibits BT from subsidising areas of its Network Applications Business such as the sale of cordless phones; corded phones; telephone answering machines; and facsimile machines. The Direction also prohibits the subsidisation of various Channels (the definition of the various distribution channels is given below) within the Network Applications Business and the subsidisation of the sales of the said individual product groups within those Channels.
2.3 In addition, the amendments made to the Direction on 27 March 1997 mean that BT is prohibited from offering contracts in the rental channel of certain products to new customers unless certain conditions are satisfied.
2.4 The Direction also places a reporting requirement upon BT to Oftel in relation to its Network Applications Business and in respect of the Product Groups and Channels. This information allows Oftel to monitor the financial activity within the Network Applications Business to ensure that the terms of the Direction have not been contravened.
2.5 Late in 1998, it appeared that conditions in the telephone equipment market had changed and at about the same time, BT approached Oftel with a request for the current Direction to be reviewed. To that end, BT has also conducted its own review of the telephone equipment market, which it has submitted to Oftel and which Oftel took into account in producing this document.
Structure of BT Business subject to the Direction
2.6 The Direction covers the Network Applications Business, which is a part of the Apparatus Supply Business. BT has various distribution channels within the Network Applications Business. The Retail sales consist of the supply at the retail level of the products in the Product Groups via BT’s shops. Trade sales consist of the supply of the products in the Product Groups to wholesalers and retailers (other than BT). Zone Sales consist of the supply at the retail level (other than Rental or Retail) of the products within the Products Groups.
2.7 BT has access to the retail sector of the market through its shops, including those in which BT has a shareholding such as ‘The Link’, through telephone sales and via wholesale provision to other retail outlets notably Dixons, Argos and others. BT therefore has broad access to the market at both the retail and at the wholesale level.
Relevant Markets
3.1 In considering competition issues, it is necessary to first define the area of analysis, the relevant market. In so doing it is necessary to consider which products should be included in the relevant market, which in turn, is done by assessing the extent to which products are substitutes for each other, on both the supply-side and the demand-side of the market. The presence of such substitutes should constrain the ability of a hypothetical monopolist supplier of that product to sustain a small but significant, non-transitory increase in price.
3.2 In respect of telephone equipment, both function and features can differentiate products. At first sight, an ordinary telephone answering machine is unlikely to be a substitute for a corded phone. However, corded phones that have integrated telephone answering machines can be a substitute for corded phones. The former are, in turn, substitutes for telephone answering machines. Thus a chain of substitution exists between these products. Likewise cordless phones with integral answering machines can be a substitute for corded phones with integral answering machines. Oftel therefore believes that a chain of substitution exists between telephone answering machines, corded phones and cordless phones. In addition, Oftel believes that network provided voice mail is also a substitute for telephone answering machines and should be included in the relevant market.
3.3 There are substantial differences of functionality and price between fax machines and other telephone equipment, so that a corded phone with additional features would not be a realistic substitute for a fax machine and telephone combination. These differences, in Oftel’s view, break the chain of substitution and mean that fax machines are not in the same relevant market as other telephone equipment.
3.4 Oftel does not consider that mobile phones exist in the same market as other fixed-line equipment given that they are used to access the services provided over mobile telephony networks (although clearly there is interconnect with fixed-line networks). Several factors notably cost, mean that they do not currently provide a realistic demand-side substitute for fixed-line equipment (see also ‘Future Developments’ below).
3.5 Oftel’s preliminary view therefore is that there are two relevant markets in the UK, one for fixed-line voice telephony equipment and network-provided voice mail (‘the Market’) and one for facsimile machines (‘the Fax Machine Market’).
3.6 Oftel would like to hear whether retailers and suppliers of telephone equipment agree with this view, or if not, whether they have information that demonstrates otherwise (especially information on price elasticity).
Market Shares
(Source: MZA 1999)
3.7 At a retail level, it appears that BT’s share of telephone equipment sold has been in gradual decline over the past few years. Its share of products sold however varies from product group to product group, with BT’s share of the Fax Machine Market being now quite low (about 8 or 9%). BT’s share of the corded terminal business (as defined by MZA and including ISDN terminal equipment) was around 43% in 1998, albeit that this share is declining, as in 1997 it was 50%. BT’s share of the supply of personal cordless products in 1998 in the UK was 38% (again its share is declining, in 1997 it was 52%).
3.8 To gain an accurate figure for market share, Oftel would like to hear from all suppliers as to their revenue and number of units sold within the Market only in the year up to the end of 1998.
Barriers to entry
3.9 Whilst a high market share can be an indication of market power, other factors also need to be considered. In particular, it is also necessary to analyse whether there are any significant barriers to entry that may hinder potential competition. Such barriers to entry may include strategic barriers, such as heavy advertising and brand proliferation, economies of scale or scope and structural barriers, such as legal regulations. Generally speaking, where there are no significant barriers to entry, a monopoly supplier would not be able to sustain prices above a competitive level, as this would attract entry. The threat of such entry should be sufficient to constrain prices, therefore, even where there are no other suppliers currently in the market.
Access to Suppliers
3.10 A large proportion of telephone equipment sold in the UK is made in the Far East and the access to Far Eastern producers’ products seems quite straightforward.
3.11 Oftel is not aware of any such access problems, although it would be grateful to know if suppliers to the UK market have experienced any such problems or expect any changes that would affect the ease of entering the market (particularly recent entrants).
Advertising and First-mover Advantage
3.12 Advertising and goodwill represent sunk costs (as the costs cannot be recovered following exit from the market) and can act in certain circumstances as barriers to entry. Much of BT’s advertising expenditure (which is quite considerable) relates to its services, such as its recent BT Together campaign, however this advertising would also be expected to have a beneficial effect on the perception of the BT brand generally. This in turn would be expected to have a positive effect on sales of BT terminal equipment, albeit that this effect is indirect. In addition, BT has also benefited in the past from a first-mover advantage giving it an advantage in terms of customer familiarity with its brand. However, whilst these effects may have an impact on the general level of sales of BT equipment, Oftel does not believe that advertising forms a significant barrier to entry in the Market. Furthermore the effect of BT’s first mover advantage seems much less significant than it did at the time of the issue of the Direction and in spite of BT’s apparent advantages, the market share of BT’s competitors seems to be increasing
Technical Standards and Approvals
3.13 Technical standards appear to be becoming more universal. For instance, the DECT standard is used in 40 countries, reducing the potential for national geographic barriers. In the UK, the approval system is also set to change. The current equipment approvals system is a third party approval system. This is set to change to a self-certification approvals system on 8 April 2000. This will lower the cost of approvals and reduce the cost of entry for some potential competitors.
New Entry
3.14 Finally, a very good indication of low entry barriers is the fact that new entry to the market has taken place. In the period since the Direction has been in place, both Cable and Wireless and Doro have entered the Market (by way of joint venture and acquisition respectively). Oftel’s preliminary view is that entry barriers in both the Market and the Fax Machine Market are low.
3.15 Oftel would be grateful for the views of BT’s competitors (particularly new entrants) on Oftel’s preliminary assessment of the barriers to entry in the relevant markets and whether the advantages that BT has had mean that entrants face a significant long run cost which BT does not need to bear.
Other Aspects of the Market
BT Shops and stocking policy
4.1 BT Shops afford BT another route to the retail sector of the market. BT has a policy of including other brands for sale in its shops. Indeed, latest figures from BT indicate that the number of other brands sold in BT shops is rising. Despite this, however, BT’s own products still form the majority of sales and shelf space does not necessarily translate into sales. BT’s share of high street sales of telephone equipment in 1997/8 was just over 20% with Argos having roughly 30% and Dixons having just over 10% (Source: GfK Marketing Services 1999).
4.2 Given BT’s policy of stocking other brands and the strength of other retailers, Oftel does not believe that BT’s network of shops acts to restrict entry to the retail sector of the market. Oftel would need to review this, however, should the current position (particularly the stocking policy) alter significantly.
4.3 Oftel would be grateful to hear from suppliers as to whether they believe BT’s shops operate to restrict access to market and their views on the current stocking policy in BT Shops.
Rental of BT equipment
4.4 As a result of the amendment to the Direction in 1997, BT ceased signing new rental agreements for the following products: cordless telephones, telephone answering machines and fax machines, as from 8 April 1997. The number of BT rented units is therefore now declining. Furthermore, given the continuing decline in prices for products such as corded phones, Oftel does not believe that, at least in the long term, rental will form a significant part of the market overall. However, telephone equipment rental still forms a significant source of income for BT’s Network Applications Business.
4.5 Even if the current ban in the Direction against BT signing new rental agreements were to be lifted, it is not clear whether the number of rentals would increase. The downward pressure on purchase prices means that, in the long run at least, it can be significantly cheaper to buy telephone equipment rather than rent. Indeed, Oftel is not aware of firms in the market starting to provide telephone equipment rental services since the Direction, and this may indicate that the proportion of consumers renting telephone equipment is unlikely to grow. Oftel has received comment in the past indicating that BT may have an advantage in its billing processes which others are unable to replicate. Whilst the economy of scope that can be obtained from billing for more than one product or service certainly affords BT cost savings, BT is by no means unique in this respect and Oftel doubts whether BT’s billing processes offer it a significant advantage. Instead Oftel believes that new entry into the rental segment is constrained by a lack of demand for new rental contracts.
4.6 Oftel would like to hear from those in the industry for their views on the rental segment generally and in particular, whether they intend to offer rental services or their reasons for preferring not to do so.
‘Hard-wired’ phones
4.7 ‘Hard-wired’ phones are connected directly to the network and are a legacy technology (in the sense that no such new connections now occur). Prior to being able to use other telephone equipment, therefore, ‘hard-wired’ phone users need to have their network termination point altered to a universal socket. This alteration creates an additional cost to the user before he or she can connect other equipment. Previously BT had run a promotion (from 16.9.1996 to 30.6.1997) offering conversion to universal sockets free of charge. Given that BT no longer installs ‘hard-wired’ phones, it would be reasonable to assume that most people who had wanted to switch to a universal socket would have taken advantage of the promotion and that those who did not wished to retain their ‘hard-wired’ phone. At the time of writing, the cost of conversion was £29.38 including VAT.
4.8 It is worth noting that under Condition 67.1 of its Licence, BT’s charges for the rental of such telephone equipment are subject to a price cap, limiting any price rise to the Retail Prices Index. In addition, the number of people still using ‘hard-wired’ phones is quite small (current figures indicate that this number represents less than one percent of all exchange lines). At first sight it does not appear that the current charge for alteration is prohibitive (indeed BT makes provision for offering free conversion to certain vulnerable groups that may not be in a position to afford the cost of conversion). Furthermore, since such a small number of phones are still ‘hard-wired’, Oftel’s preliminary view is that it does not believe that this factor has a significant impact on competition.
4.9 Oftel would like to hear from suppliers and users with hard-wired telephones as to whether they believe the charge described above is a significant obstacle to consumers buying other telephone equipment or exiting their rental agreement with BT.
Future developments
4.10 Whilst Oftel does not believe that mobile phones form part of the Market, it is possible that this situation will change in the future. The demand for mobile phones is complementary with the demand for mobile phone services. Likewise the demand for fixed-line telephone services is complementary with the demand for fixed-line telephone equipment. In certain circumstances mobile phone services are substitutable for fixed-line services. The price of mobile phone services and equipment may therefore have an effect on the Market. However, Oftel believes that since this effect is indirect and marginal, it is not currently significant but that this situation may alter. In particular recent reductions in mobile telephony prices, technology changes such as the introduction of 3rd generation mobile telephony, pre-pay phones and better quality mobile phone service generally will all have an impact on the demand for fixed-line services and fixed-line telephone equipment.
4.11 Finally, fixed-mobile integration means that dual capability (for example a combination of DECT and GSM technology) telephone equipment may become a future substitute for mobile telephone equipment and fixed-line equipment. However, the difference in price between fixed-mobile integrated equipment and services, and fixed-line telephone services and equipment, makes it very unlikely that they are currently effective substitutes.
4.12 In summary, Oftel does not believe that either mobile telephone equipment or fixed-mobile integrated equipment currently exert a significant effect on competition in the relevant markets, although they may well do so in the future.
4.13 Oftel would be interested to hear suppliers’ views on the impact of other developments on the relevant markets. In particular, whether suppliers believe that newer developments such as network services and the decline in price of mobile phones (and mobile phone services) have had a significant impact on the sale of telephone equipment.
Oftel’s Preliminary Analysis
Initial Assessment of BT’s Market Power
5.1 Although the entry barriers appear quite low, there are other factors that indicate BT may have market power in the relevant markets. In particular BT still appears to have a sizeable market share of about 40% of the Market with a share of about 9% of the Fax Machine Market. However, given the lack of significant entry barriers, as evidenced by entry of new firms into the Market and the decline in BT’s market shares, Oftel very much doubts whether BT’s large market share could readily translate into an ability to raise prices above competitive levels. Similarly, any losses BT makes in this market would not be expected to place it in a position whereby it could command monopoly prices at a later date. This would indicate that BT lacks market power despite its high market share and well-known brand. BT’s share of the Fax Machine Market and the low barriers to entry indicates that it does not have market power in respect of the supply of such equipment.
Unfair Subsidy and BT’s performance so far
5.2 Overall BT’s performance against the terms of the Direction has generally been good. Although there have been several minor breaches, these have occurred intermittently within Channels and in respect of single Product Groups, and are not significant either as a departure from the relevant requirement within the Direction or in terms of competition. Furthermore, in the last year, Oftel has received only one complaint in respect of the supply of BT telephone equipment. That complaint involved the attempted sale of a small amount of stock (roughly 700 units). BT informed Oftel that this was a sale of stock from redundant product ranges and was not successful. In any event, given the size of the sale, Oftel would not have expected it to have a significant effect on competition. Furthermore, this sale did not appear to affect the achievement of financial targets under the Direction.
5.3 Oftel still has concerns regarding the accounting framework of the Network Applications Business in particular the treatment of certain costs and revenues but as already announced, this is being dealt with as a separate issue. However BT has agreed that it will subject certain financial information to the MICRA methodology, which calculates the Long Run Incremental Costs, and this will give an indication that the supply of equipment is above incremental cost.
The Competition Act 1998
5.4 The Competition Act is expected to have a major impact on the way that anti-competitive behaviour is dealt with in the United Kingdom. It will come into force on 1 March 2000 and has two main prohibitions:
b. It prohibits conduct which amounts to an abuse of a dominant position, in a market in the United Kingdom (or a part thereof), which may affect trade in the United Kingdom (Chapter II prohibition).
5.5 The Director has concurrent powers with the Director General of Fair Trading to enforce the terms of the Competition Act in respect of commercial activities connected with telecommunications, which includes the supply or export of telecommunication apparatus. Unlike the powers under the Telecommunications Act, the Competition Act gives the Director the power to impose fines of up to 10% UK turnover on those who infringe its prohibitions. This will have a greater deterrent effect on those contemplating anti-competitive conduct than previously was the case. The advent of the Competition Act means that the need for detailed prescriptive regulation, such as the Direction in question, is reduced.
Conclusion
6.1 Oftel’s preliminary view is that the Market and the Fax Machines Market are broadly competitive, and that any losses in these markets would not be expected to have a significant effect on competition. Although BT has a high market share, factors such as low barriers to entry and recent successful entry indicate that, with respect to the Market, any market power it might currently possess appears limited. Accordingly, Oftel doubts whether a below cost strategy would be feasible for BT in this market, in the long run.
6.2 In respect of the Fax Machines Market, Oftel believes that BT does not have any market power and that there is no need for the Direction with respect to the supply of fax machines by BT.
6.3 Finally, the Competition Act will give powers to Oftel to deal with unfair subsidy that it did not have at the time of the Direction. These powers will be in addition to those under the Telecommunications Act and will provide a greater disincentive to operators intending to engage in unfair subsidy or predatory strategies than is the case at present. In view of the changes in legislation and the nature of the relevant markets, Oftel’s preliminary view is that the Direction should be revoked on 1 March 2000 or as soon as practicable thereafter. As a safeguard, Oftel believes that this revocation should coincide with the Competition Act coming in to force and be reviewed one year after revocation. In addition, Oftel proposes to monitor the relevant financial information for one further year.
6.4 Oftel would be interested in views of both suppliers and consumers in respect of Oftel’s preliminary views and conclusion.
Oftel seeks the views of consumers and industry on the proposals contained in this consultation document by 1 February 2000. Oftel will then publish a statement setting out its conclusions and any modifications to the Direction that it proposes to make.
Comments should be made in writing and sent to:
Philip Taylor
Compliance Directorate
Oftel
50 Ludgate Hill
London EC4M 7JJ
Tel: 0171 634 8782
Fax: 0171 634 8949
or e-mail ptaylor@oftel.gov.uk
Written comments will be made publicly available in Oftel’s Research and Intelligence Unit except where respondents indicate that their responses, or parts of it, are confidential.
Respondents are therefore asked to separate out any confidential material into a confidential annex that is clearly identified as containing confidential material. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible. Appointments to view written comments in Oftel’s Research and Intelligence Unit, which must be made in advance, can be arranged by ringing: 0171 634 8761 (fax: 0171 634 8946).
Oftel would like to set up a link between this Consultative Document and any responses places on respondents own Internet pages. Please contact Lauren Ryner at Oftel on 0171 634 8753 to arrange this. Confidential responses should not be sent via the Internet.
Oftel has a free e-mail based mailing list to help people stay informed about the work that Oftel is doing. Each time an Oftel document is published and placed on Oftel’s web site subscribers to the list receive an e-mail informing them about the document. If you would like to join please click here.
Alternative formats
Copies of the full Consultative Document are available on disk. The Summary is available in large print, braille, and tape formats.
Please contact the Oftel Research and Intelligence Unit on 0171 634 8761, or by e-mail, or call textphone 0171 634 8769 for more information.
Barriers to entry
An additional cost which must be borne by entrants but not by firms already in the industry; or other non-cost factors, which enable an incumbent to maintain prices above the competitive level without inducing entry.
Cross-price elasticity
Shows how the quantity demanded of one good changes when the price of another good changes. A cross-price elasticity that is positive indicates that products may be substitutable and may be part of the same relevant markets. It is defined as the responsiveness of demand for one product with a change in the price of another.
Complementary
Products or services are complementary if an increase in demand for one causes an increase in the demand for another, e.g. cameras and films.
DECT
Digital European Cordless Telephone
GSM
Global Standard for Mobile Telephony
Market power
The ability to raise prices above the competitive level for a non–transitory period
PBX
Private Branch Exchange
Substitutable
Products or services are substitutable if an increase in the demand for one causes a decrease in the demand for another e.g. coffee and tea.
Sunk Costs
Sunk costs are irreversible and irrecoverable. They can be defined as the costs of acquiring assets that cannot be recovered through the sale of those assets outside the relevant markets. Endogenous sunk costs are those costs determined by the behaviour of the incumbent undertakings whilst exogenous sunk costs are determined solely by the technology of a particular industry.
Key terms defined in the Direction:
Product Group
Means any one of the following: (a) corded telephones, (b) cordless telephones, (c) telephone answering machines and telephone/telephone answering machines, (d) fax machines, (e) products which are ancillary to the products in the Product Groups (a) to (d) and (f) other products the supply of which is within the Network Applications Business
Network Applications Business
Means the part of the Apparatus Supply Business which is described as ‘network applications’ in the regulatory accounts which BT provides to the Director pursuant to the ASB Direction;
Relevant Activity
Means:-
Channel
Means any one of Trade Sales, Retail Sales, Zone Sales or Rental;
Trade Sales
Means the part of the Network Applications Business which consists of the supply of the products in the Product Groups to wholesalers and retailers (other than BT) and the provision of related Services;
Retail Sales
Means the part of the Network Applications Business which consists of the supply at retail (other than by Rental) of the products in the Product Groups from retail shops, including the procurement and distribution of such products for that purpose, and the provision of related Services;
Zone Sales
Means the part of the Network Applications Business which consists of the supply at retail (other than by Rental) of the products within the Product Groups other than from retail shops, including the procurement and distribution of such products for that purpose, and the provision of related Services
Trade Sales
Means the part of the Network Applications Business which consists of the supply of the products in the Product Groups to wholesalers and retailers (other than BT) and the provision of related Services.
The Direction was issued by the Director on the 22 September 1995 and was subsequently amended on 27 March 1997 (‘the Direction’). Currently, the Direction prohibits BT from subsidising
(Readers should refer to Oftel’s R & I Unit for a full copy of the Direction. According to the terms of the Direction, Subsidised can either mean not attaining a Return on Capital Employed of 15% or not attaining a Return on Sales of 5%, depending on the particular terms applying).
The amendments made to the Direction in 27 March 1997 meant that BT was prohibited from offering contracts in the rental channel to new customers unless certain conditions were satisfied.
The Direction also places a reporting burden upon BT to Oftel in relation to its Network Applications Business and in respect of the Product Groups and Channels. This information allows Oftel to monitor the financial activity within the Network Applications Business to ensure that the terms of the Direction have not been contravened.
Condition 20B.15 BT’s Licence
20B.15 Without prejudice to Condition 18, where the Director is satisfied, on the basis of the most up to date information which has been made available to him at the relevant time, that the Licensee:
(a) has within the previous six years (excluding any period before the date on which this Condition comes into force) unfairly subsidised or unfairly cross subsidised and has ceased to unfairly subsidise or unfairly cross subsidise but is likely to repeat that unfair subsidy or unfair cross subsidy at any time in the future; or
(b) is unfairly subsidising or unfairly cross subsidising;
either:
(i) any or all of the Businesses other than the Residual Business; or
(ii) any part or parts of any of the Businesses other than the Residual Business where the Director is satisfied that unfair subsidy or unfair cross subsidy, as the case may be, has or could have a material effect on competition in the United Kingdom in relation to the activity to which the unfair subsidy or unfair cross subsidy relates;
or both, it shall take such steps as the Director may direct for the purpose of remedying the situation.
20B.16 The Licensee shall, with the consent of the Director, make such amendments as are from time to time required to:
(a) the definition of each Business in terms of the revenues, costs and assets comprised in it;
(b) the number of Businesses for the purposes of this Condition;
(c) the manner in which each Business may be disaggregated;
(d) the form and content of:
(i) the profit and loss account;
(ii) the statement of mean capital employed;
(iii) the statements of costs (if any); and
(iv) the additional information to be provided by way of notes;
comprised in each Financial Statement; or
(e) the Accounting Documents;
to ensure that they are consistent with, and give effect fully to:
(aa) modifications of any of the Conditions in Schedule 1 of this Licence;
(bb) final Orders made under section 16 of the Act;
(cc) formal undertakings given by the Licensee to the Director following investigations by him into possible contraventions by the Licensee of any of the Conditions in Schedule 1 to this Licence; and
(dd) directions, consents and determinations given or made by the Director from time to time under any of the Conditions in Schedule 1 of this Licence;
made or given on or after the date on which this Condition comes into force together with, in each case, any published explanations and reasons given by the Director in connection with any of the matters specified in sub-paragraphs (aa) to (dd) provided that the requirements of this paragraph shall be suspended pending the final disposal of any proceedings seeking to have any such final Orders, directions, consents, or determinations, quashed, set aside, modified or varied.
20B.17 If the Director is considering whether a determination, direction or consent under this Condition is appropriate, he shall notify the Licensee and Interested Parties of his proposed decision or the options which he is considering, and his reasons, and give them a reasonable opportunity to make representations. On making or refusing a determination or direction or giving or refusing consent, he shall notify the Licensee and Interested Parties of the determination, direction or consent or refusal, as the case may be, and his reasons.
20B.18 (a) Where the Director has reasonable grounds to believe that:
(i) the Licensee has done or is doing any of the things specified in paragraph 20B.15 or Condition 18 or both; or
(ii) the Licensee:
(aa) has within the previous six years (excluding any period before the date on which this Condition comes into force) shown undue preference to, or exercised undue discrimination against, any Operator in respect of the provision or Quality of a Standard Service or Private Circuit or International Private Circuit (defined in Condition 24B) telecommunication service contrary to the provisions of Condition 17 or Condition 17B or both and has ceased to do so but is likely to repeat that undue preference or undue discrimination at any time in the future; or
(bb) is showing undue preference or undue discrimination as described in sub-paragraph (a) (ii) (aa); or
(iii) the Licensee is in breach of this Condition; or
(iv) any or all of the Accounting Documents, the Financial Statements, the Restated Financial Statements and the Interim Financial Statements are deficient;
the Licensee shall, without prejudice to Condition 52, extend its prompt co-operation to the Director, his representatives and members of his staff and, in particular, on the Director’s reasonable request shall:
(A) furnish the Director in accordance with his reasonable requirements with any information, documents, accounts, estimates, returns, reports or other information (including, without limitation, any facility enabling him to read data not held in readable form);
(B) on reasonable notice by him allow at all reasonable times the Director, his representatives and any member of his staff on production of his special authority access to any relevant premises of the Licensee to investigate, assess, examine, review or verify any of its accounting records or accounting and reporting arrangements, systems or processes; and
(C) for the purpose of sub-paragraph (B), allow the Director, his representatives and any member of his staff to be accompanied by any person whom the Director may specify, being a person to whom the Licensee has raised no reasonable objection, whose assistance the Director might reasonably require: Provided that the Director has given the Licensee notice (which save in exceptional circumstances shall be of at least 5 working days) of the identity of that person.
`(b) If, as a result of any investigation, assessment, examination or review referred to in sub-paragraph (a), the Director is satisfied that:
(i) the Licensee has done or is doing any of the things referred to in sub-paragraph (a) (i) to (iii);
(ii) any or all of the Accounting Documents, the Financial Statements, the Restated Financial Statements and the Interim Financial Statements are deficient; or
(iii) he has insufficient information to conclude whether or not the Licensee has done or is doing any of the things referred to in sub-paragraph (a) (i) to (iii);
he may direct with effect from the date specified in the direction, without prejudice to his other powers under this Licence, that:
(i) the Licensee shall amend any or all of:
(aa) the composition of any or all of the Businesses in terms of any or all of the revenues, costs and assets they respectively comprise;
(bb) the manner in which any or all of the Businesses are disaggregated in terms of activities of the relevant Business;
(cc) the form and content of any or all of the profit and loss account, the statement of mean capital employed, statements of costs and the additional information to be provided by way of notes comprised in the Financial Statements, the Restated Financial Statements or the Interim Financial Statements of any or all of the Businesses; and
(dd) any or all of the Accounting Documents; or
(ii) the Licensee shall divide any or all of the Businesses to create additional Businesses, or aggregate them to create fewer Businesses;
or both: Provided that any direction given pursuant to this sub-paragraph shall relate to the results of the relevant investigation, assessment, examination or review referred to in sub-paragraph (a) in respect of which the direction is given.
20B.19 This Condition operates without prejudice to Conditions 20 and 20A.
20B.20 In this Condition:
‘Accounting Documents’ means together the Accounting Policies, the Attribution Methods, the Regulatory Accounting Principles, the Transfer Charging System and the Long Run Incremental Cost Methodology;
‘Accounting Policies’ means the manner in which the requirements of the Companies Act 1985, the Accounting Standards and the accounting policies applied by the Licensee in the preparation of its annual statutory financial statements, where relevant and appropriate, are applied in each of the Financial Statements, the Restated Financial Statements and the Interim Financial Statements as agreed in writing between the Director and the Licensee on or before the date on which this Condition comes into force, as amended from time to time in accordance with this Condition;
‘Accounting Standards’ has the meaning given to it in the Companies Act 1985;
‘attributable’ includes allocatable and apportionable, ‘attribute’ includes allocate and apportion and ‘attribution’ includes allocation and apportionment;
‘Attribution Methods’ means the practices used to attribute revenue (including appropriate transfer charges), costs (including appropriate transfer charges), assets and liabilities to a Business or, insofar as that Business has been disaggregated in terms of activities of that Business, to each activity of that Business as agreed in writing between the Director and the Licensee on or before the date on which this Condition comes into force, as amended from time to time in accordance with this Condition;
‘Auditing Standards’ means United Kingdom auditing standards and guidelines issued from time to time by the Auditing Practices Board and its predecessor body, the Auditing Standards Board;
‘Auditor’ has the meaning given to it in Condition 20;
‘Businesses’ means the businesses (including the Network Business and the Retail Systems Business) comprising the revenues, costs and assets as agreed in writing between the Director and the Licensee on or before the date on which this Condition comes into force, as amended in accordance with this Condition and ‘Business’ means any one of them;
‘Detailed Attribution Methods’, ‘Detailed Valuation Methodology’ and ‘Long Run Incremental Cost Model: Relationship and Parameters’ mean the documents with those titles containing the further details of the systems and processes for deriving or calculating the costs, revenues, assets and liabilities which are used by the Licensee, in addition to the descriptions in the Accounting Documents, to prepare the Financial Statements, the Restated Financial Statements and the Interim Financial Statements;
‘Interested Parties’ has the meaning given to it in Condition 13;
‘Long Run Incremental Cost Methodology’ means the long run incremental cost principles and modelling processes which form the framework under which LRIC statements are prepared as agreed in writing between the Director and the Licensee on or before the date on which this definition comes into force, as amended from time to time in accordance with this Condition;
‘Major Office’ has the meaning given to it in Condition 13;
‘Operator’ has the meaning given to it in Condition 13;
‘Quality’ has the meaning given to it in Condition 13;
‘Regulatory Accounting Principles’ means the principles agreed in writing between the Director and the Licensee on or before the date on which this Condition comes into force, as amended from time to time in accordance with this Condition;
‘Residual Business’ means the business or businesses of which the revenues, costs and assets are not comprised in any Business as agreed between the Director and the Licensee in accordance with this Condition, as amended from time to time in accordance with this Condition;
‘Standard Service’ has the meaning given to it in Condition 16B; and
‘Transfer Charging System’ means the system which enables a Business to use a service or good from another Business and to account for it as though it had purchased that service or good, as agreed in writing between the Director and the Licensee on or before the date on which this Condition comes into force, as amended from time to time in accordance with this Condition.
