Consultation issued by the Director General of Telecommunications

Contents

Chapter 1 Summary
Chapter 2 Introduction
Chapter 3 Analysis
Chapter 4 Conclusion
Chapter 5 Consultation
Annex A Condition 20B.15 (now Condition 78) of BT’s Licence
Annex B Condition 78 of BT's Licence
Annex C Draft Notice Revoking the MNS Direction

Chapter 1

Summary

1.1 On 7 February 1996 the Director General of Telecommunications (the "Director General") issued a Direction under Condition 20B.15 (now Condition 78.12) of BT’s Licence (the "Direction"). The Direction required BT to provide accounting information on its Managed Network Services to the Director General on a 6-monthly basis. The Director General has been asked by BT to revoke the Direction.12. This document sets out the background to the issue and the reasons for the Director General's provisional view that it is appropriate to revoke the Direction.

1.2 The Direction was made following a complaint-initiated investigation into the allegations that BT was cross-subsidising its Managed Network Services ("BTMNS") division. The main provisions of the Direction require that as regards to five BTMNS product offerings - Transborder, High Speed National, Cardway, Frame Relay International and Low Speed Custom Networks - BT ensures that:

• each product/long term contract is not unfairly subsidised or cross-subsidised; and
• it supplies to the Director General independently audited accounting data on a six-monthly basis to support this.

1.3 BT has provided accounting information including financial reports in accordance with the Direction which was put in place to ensure BT has not acted, and is not likely to act, in breach Condition 20B.15 (now 78.12) of its licence as regards to the unfair cross-subsidy or unfair subsidy of its MNS services. Further, the Director General is advised that some of the MNS products cited in the Direction now face lower demand and have ceased or will cease to exist in their original form as discrete networking services, instead forming part of a wider customer offering.

1.4 BT believes that it has been fully compliant with the reporting requirements of the Direction and in ensuring that no cross-subsidy has occurred. Consequently, BT has requested that the Director General revoke the Direction.

1.5 Having considered the issues, the Director General's preliminary view is that no clear evidence of a breach of the terms of the Direction as regards the requirement that there is no unfair subsidies or unfair cross-subsidies has been shown. The Director General's preliminary view is also that there is no clear evidence to show future breaches of the relevant licence condition in a manner similar to the breaches that resulted in the issuing of the Direction.

1.6 Further, the Competition Act 1998 provides the Director General with increased powers of investigation and enables him to impose financial penalties of up to 10% of a company’s UK turnover for each year that an infringement has lasted, up to a maximum of three years. This should provide a disincentive to any companies who might intend to engage in anti-competitive behaviour. But, if such abusive behaviour occurs, the Competition Act 1998 provides the powers to investigate and take appropriate action.

1.7 Accordingly, and pursuant to Paragraph 7 of BT’s Licence, the Director General proposes to revoke the Direction. A copy of the draft revocation notice can be found at Annex C.

1.8 This consultation seeks the views of interested parties as to whether the Direction continues to be necessary. The closing date for comments on this proposal is 30 September 2002. Full details of the consultation process are set out in Chapter 5.

Chapter 2

Introduction

2.1 This chapter sets out the background to the BTMNS Direction, providing brief descriptions of the products concerned and the legal basis for the Director General’s intervention.

BTMNS

2.2 The Direction was focused on five specific product lines offered by BTMNS that constituted separate "parts" of its business for the purposes of Condition 20B.15 (now Condition 78.12):

• Transborder (an international X25 service, since known as Concert Packet Services);
• High Speed National;
• Cardway (a separate low speed credit card verification network, inter-linked with X25);
• Frame Relay International (Now known as Concert Frame Relay); and
• Low speed networks, including High Street Networks and Mid Size Networks (these are discount packages offering customers volume and duration discounts, using the X25 network).

The Direction extended to cover any product line which replaces any, or any combination of the above product lines.

The complaint

2.3 In 1992 four complainants alleged anti-competitive practice by MNS, centering on unfair subsidy of MNS's activities from its systems business and predatory pricing in the provision of value-added data services. In December 1994 the Director General expressed his concern that a lengthy investigation had proved inconclusive because of limitations in the information available to him. He stated his intention to verify the adequacy of accounting improvements BT was making in 1994/5 and 1995/6, and to return to the original allegations.

2.4 Following his review of the BT's accounting improvements, the Director General announced in February 1996 that he was satisfied that no further action was required in six of the eight areas examined. However, in two important areas he did not find it possible to reach favourable conclusions: adequacy of internal accounting controls within BT's core business over charges to other parts of BT (such as MNS), and whether customers were charged all relevant costs for services offered by MNS.

Regulatory position

2.5 After detailed investigations, including the use of powers under Condition 20B.15 (Separate Accounts) of BT's Licence and independent accountancy advisors Messrs Pannell Kerr Forster, the Director General concluded that certain product lines offered by MNS constituted 'parts' of its business for the purposes of Condition 20B.15 (now Condition 78.12) of BT's licence: Transborder, High-Speed National, Cardway, Frame Relay International, and Low-Speed Networks (including High Street Networks and Mid-Sized Networks).

2.6 Additionally, certain parts of the BTMNS business were characterised by the award of relatively long-term contracts with high start-up costs, recovered after the life of each contract. Therefore, the most appropriate measure of profitability was considered to be the internal rate of return ("IRR").

2.7 The Director General concluded that:

• at least some of the BTMNS product offerings were being either subsidised or cross-subsidised;
• such subsidy or cross-subsidy was unfair in that it deprived third parties of opportunities to gain contracts; and
• any such subsidy or cross-subsidy could have a material effect on competition in the United Kingdom.

2.8 On 7 February 1996 the Director General accordingly directed BT, under Condition 20B.15, to:

• make an appropriate return on each of the activities listed in the Direction (ie the product lines listed above, plus product lines which replace any, or any combination of, those product lines);
• provide him with a business plan showing how this is to be achieved;
• keep records and provide on-going information on the financial performance of the activities; and
• show that charges between MNS and other parts of BT's businesses are properly based and charged, in particular by providing an external audit report.

BT request for revocation of the Direction

2.9 BT has now applied to the Director General to have the Direction revoked. BT states that it has been fully compliant in meeting the requirements of the Direction in the supply of reports and other documentation to the Director General and that it has been fully compliant with the Direction in ensuring that there has been no cross-subsidy. 

2.10 BT further observes that in the five years of providing returns for the contracts and products that fall within the scope of the Direction, there have been no issues raised by the Director General, nor have there been any qualifications to the independent audit reports.

Legal framework

2.11 At the time of making the Direction, Condition 20B.15 of BT's licence stated that where the Director General is satisfied that the Licensee,

2.12 Condition 78 (Separate Accounts) of BT's licence has since superseded Condition 20B.15. Note that the requirements of all licence conditions and licence enforcement actions in their current form will be lifted from 25^th July 2003, as all current telecommunications licences will cease to exist in line with the requirements of European Commission Directives (published on 24^th April 2002).

2.13 Condition 78.12 provides that where the Director is satisfied that the licensee,

b) is unfairly subsidising or unfairly cross-subsidising;

either:

2.14 In assessing whether or not the Direction should be revoked, the Director General has considered the following issues:

This assessment is discussed in Chapter 3.

Chapter 3

Analysis

3.1 This chapter discusses whether or not BT has met the requirements of the Direction and the Director General's views on the likelihood of a future breach of Condition 78.12 by BT as regards those parts of the MNS business (or the replacement of any, or any combination of those parts) specified in the Direction.

Compliance with the terms of the Direction

3.2 At the time of the Direction, Condition 20B.15 of BT's licence referred to "any part or parts" of BT's business. The Direction specified five product offerings as being such "parts" of the BTMNS business:

3.3 The Direction requires that for each of these parts and for each long-term contract, BT shows that an overall positive internal rate of return of at least 15% is made over the anticipated life of that part or contracted period of each long term contract. In order for BT to demonstrate compliance, the Direction also requires that BT submits accounting information to the Director General on a six-monthly basis along with audit reports on an annual basis.

3.4 BT has provided financial returns in line with the reporting requirements of the Direction and the Director General has not demonstrated that BT has acted in breach of the Direction as regards the requirement that there are no unfair subsidies or unfair cross-subsidies.

Re-organisation of BTMNS

3.5 Since the issuing of the Direction in February 1996, the organisational structure of BTMNS has moved towards what BT describes as a 'solutions-based' approach combining network and IT services, normally tailored to the needs of individual customers, rather than offering distinct services such as the parts listed in the Direction.

3.6 In 1997, BTMNS was merged with another part of BT, Syncordia Solutions, to form BT Syncordia Solutions. This in turn has more recently been re-branded as BT Ignite Solutions, describing its business as providing "managed and outsourced total business solutions".

3.7 BT has advised the Director General of the history of each of the five parts specified in the Direction since 1996:

3.8 BT believes that a change in the demands of customers has in turn led to a business area characterised by fragmentation of supply, high-growth and a wide variety of competitors, including well-established telecommunications and IT services companies such as Accenture, IBM, CMG, Logica, Worldcom, Cable and Wireless, Energis and France Telecom.

The Director General welcomes any views on the above description of services, in particular the availability of the parts listed, or their replacements, as individual products or in combination. Comments are also welcomed on BT's assertion that the demand has changed over time from the need for individual services to complex solutions provided by a range of telecoms and IT services companies.

Compliance with the licence condition outside of the terms of the Direction.

3.9 The Director General is not currently aware of any breaches of Condition 78.12 in any areas related to those parts specified in the Direction.

Likelihood of future breaches

3.10 The Direction addresses concerns with the adequacy of internal accounting controls within BT's core business over charges to other parts of BT, and whether customers were charged all relevant costs for services offered by MNS.

3.11 As already discussed, the Direction refers to specific parts, some of which are now no longer in existence (or will be withdrawn) in their original form as discrete network services or a combination of such services.

3.12 Upon receipt of its financial returns, the Director General has shown no clear breach of the Direction by BT. Additionally, the preparation by BT of a customer contract also involves the identification of individual components that are priced according to the BT Price List.

3.13 Taking into consideration the above arguments, the Director General currently considers that there is no clear evidence to show that BT will breach its licence condition 78.12 in a manner similar to the breaches that resulted in the BTMNS Direction being issued.

3.14 It should be noted that if the Direction is revoked, Condition 78.12 of BT's licence still places an overriding obligation on BT to not unfairly subsidise or cross-subsidise.

3.15 Additionally, action could be taken by the Director General or affected third parties under Chapter II of the Competition Act 1998 if BT was considered to be abusing its dominant position. The Competition Act 1998 provides the Director General with increased powers of investigation and enables him to impose financial penalties of up to 10% of a company’s UK turnover for each year that an infringement has lasted, up to a maximum of three years. This should provide a disincentive to any companies who might intend to engage in anti-competitive behaviour. But, if such abusive behaviour occurs, the Competition Act provides the power to investigate and take appropriate action.

Chapter 4

Conclusions

4.1 On the basis of the information available to him at this time, the Director General is of the preliminary view on the basis of the information available to him at this time that the breach of BT’s licence which gave rise to the Direction in this case is not continuing and is not likely to recur. the Direction is no longer necessary to secure compliance with the licence obligation.

4.2 The Director General is therefore minded to revoke the Direction. This does not however preclude the possibility of a further Direction being issued in future, if further breaches of licence conditions become likely, nor does it preclude action under the Competition Act 1998 in appropriate circumstances.

 Chapter 5

Consultation

5.1 The Director General seeks the views of interested parties on the proposals contained in this consultation document. Please supply your comments by 30^th September 2002. All non-confidential responses will be published. The Director General will then publish a statement setting out his conclusions and, if still minded to do so, the Director General will revoke the Direction.

5.2 Comments should be made in writing and where possible sent by e-mail to lawrence.knight@oftel.gov.uk. However, copies may also be posted or faxed to the address below. If any stakeholders are unable to supply their comments in one of these ways, please use the contact details below to discuss alternatives.

Lawrence Knight
Oftel
50 Ludgate Hill
London EC4M 7JJ

Telephone: 020 7634 8747
Fax: 020 7634 8738

5.3 Confidential responses should not be sent via the Internet. Responses will be published on Oftel's website in the Publications section under 'Responses to Oftel consultations' except where respondents indicate that the response, or part of it, is confidential. Appointments to view written comments in Oftel's Research and Information Unit must be made in advance (see contact details below). Respondents are therefore asked to separate out any confidential material into a clearly marked annex. In the interests of transparency, respondents are requested to avoid confidential markings wherever possible.

Internet

5.4 This document is available on Oftel's website at www.oftel.gov.uk. Hard copies are also available from Oftel's Research and Information Unit. 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 website at www.oftel.gov.uk, subscribers to the list receive an e-mail informing them about the document. To register, please go to the What's New section of the website and link to the electronic form.

Alternative formats

5.5 Copies of this consultation document are available on disk. Accessible formats such as large print, Braille and audio cassette can be made available on request. Please contact the Oftel Research and Information Unit on 020 7634 8761 or by e-mail at infocent@oftel.gov.uk for more information.

The consultation criteria

5.6 Oftel considers that this document meets the Cabinet Office code of practice on written consultation documents. The code is reproduced below for convenience. If you have any comments or complaints about this consultation process please contact:

Oftel Co-ordinator for the Code of Practice:
Rob Jex,
Oftel,
50 Ludgate Hill,
London EC4M 7JJ,

e-mail: rob.jex@oftel.gov.uk

tel: 020 7634 5350
fax: 020 7634 8943

Code of practice

5.7 The code of practice states that:

• timing of consultation should be built into the planning process for a policy (including legislation) or service from the start, so that it has the best prospect of improving the proposals concerned, and so that sufficient time is left for it at each stage;
• it should be clear who is being consulted, about what questions, in what timescale and for what purpose;
• a consultation document should be as simple and concise as possible. It should include a summary, in two main pages at most, of the main questions it seeks views on. It should make it as easy as possible for readers to respond, make contact or complain;
• documents should be made widely available, with the fullest use of electronic means (though not to the exclusion of others), and effectively drawn to the attention of all interested groups and individuals;
• sufficient time should be allowed for considered responses from all groups with an interest;
• responses should be carefully and open-mindedly analysed, and the results made widely available, with an account of the views expressed, and reasons for decisions finally taken;
• departments should monitor and evaluate consultations, designating a consultation co-ordinator that will endure that all lessons are used.

Annex A

Please click here to access the statement that accompanied the Direction dated 7 February 1996.

Condition 20B.15 - 20B.20 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:

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.

Annex B

Condition 78 of BT’s Licence. This replaces Condition 20.B.

SEPARATE ACCOUNTS

78.1 The whole purpose of this Condition is:
(a) to ensure that the Licensee does not unfairly subsidise or unfairly crosssubsidise or show undue preference or exercise undue discrimination; and
(b) without prejudice to sub-paragraph (a), to assist the Director, in pursuance of his functions, to examine or investigate whether:
(i) interconnection charges offered or proposed to be offered by the Licensee to an Operator or payable by an Operator to the Licensee; or
(ii) to the extent that the Licensee’s costs are relevant, interconnection charges offered or proposed to be offered by an Operator to the Licensee or payable by the Licensee to an Operator, are reasonably and transparently derived from costs.

78.2
(a) Subject to paragraph 78.14 and subject to a requirement that there shall be a Network Business:
(i) the composition of each Business in terms of any or all of the revenues, costs or assets it comprises may be amended; and
(ii) each Business may be divided to create one or more additional Businesses or aggregated to create one or more fewer Businesses;
as the Director and the Licensee agree from time to time in writing.
(b) Each Business shall be disaggregated in terms of the activities of the Business on the basis agreed between the Licensee and the Director on or before the date on which this Condition comes into force. Subject to paragraph 78.14 that disaggregation may be amended by agreement in writing between the Licensee and the Director.
(c) "Network Business" means the Business which includes the revenues, costs and assets derived from or used in activities related to Interconnection taken together.

78.3 The Licensee shall establish sufficient accounting and reporting arrangements to comply with its obligations under this Condition.

78.4
(a) Except to the extent the Director may otherwise consent, the Licensee shall maintain accounting records in a form:
(i) which enables each Business and, insofar as it has been disaggregated in terms of activities of the Business, each of the activities of that Business, to be separately identified or the costs, revenues and assets of each Business and, insofar as it has been disaggregated in terms of activities of the Business, the costs, revenues and assets of each of those activities, to be separately attributable, on an historic cost basis;
(ii) which enables each Business, and, insofar as it has been disaggregated in terms of activities of the Business, each of the activities of that Business, to be separately identified or the costs, revenues and assets of each Business, and, insofar as it has been disaggregated in terms of activities of the Business, each of the activities of that Business, to be separately attributable, on a current cost basis; and
(iii) which shows and explains the transactions of each Business and, insofar as it has been disaggregated in terms of activities of the Business, the transactions of each of the activities of that Business.
(b) The accounting records referred to in sub-paragraph (a) shall be kept in a form which enables the Licensee to prepare the Financial Statements:
(i) in the case of each Business, on an historic cost basis; and
(ii) in the case of each Business, on a current cost basis, which comply, in each case, with the requirements of this Condition.
(c) Records sufficient to provide an adequate explanation of each Financial Statement, each Restated Financial Statement and each Interim Financial Statement shall be preserved by the Licensee for a period of six years from the date on which they were made.

78.5
(a) Except to the extent the Director may otherwise consent, the Licensee shall prepare in accordance with paragraph 78.6, in respect of each of its financial years:
(i) beginning with the financial year ending 31 March 1995 and ending with the financial year ending 31 March 1999, a financial statement on an historic cost basis, in respect of each Business and, insofar as it has been disaggregated in terms of activities of the Business, each activity of that Business; and
(ii) without prejudice to any requirements for the preparation and audit of the current cost Financial Statements for the financial year ending 31 March 1997 in effect on 30 September 1997, beginning with the financial year ending on 31 March 1998, a financial statement on a current cost basis, in respect of each Business and, insofar as it has been disaggregated in terms of activities of the Business, each activity of that Business, (each a "Financial Statement" and together the "Financial Statements").
(b) Each Financial Statement prepared for the purposes of sub-paragraph (a)(i) on an historic cost basis shall comprise:
(i) a statement of fully allocated costs calculated on a basis which is not inconsistent with the Licensee’s statutory accounts for the relevant financial year;
(ii) a profit and loss account, a statement of mean capital employed, statements of costs (if applicable) and additional information to be provided by way of notes for the relevant financial year; and
(iii) an explanation and reconciliation of any differences between the statement mentioned in sub-paragraph (i) and the matters mentioned in sub-paragraph (ii).
(c) Without prejudice to any requirements for the preparation and audit of the current cost Financial Statements for the financial year ending 31 March 1997 in effect on 30 September 1997, except to the extent that the Director may otherwise consent, beginning with the financial year ending 31 March 1998, each Financial Statement prepared for the purposes of sub-paragraph (a)(ii) on a current cost basis shall comprise:
(i) a statement of fully allocated costs calculated on a basis which is not inconsistent with the Licensee’s statutory accounts for the relevant financial year;
(ii) a profit and loss account, a statement of mean capital employed, statements of costs and additional information to be provided by way of notes for the relevant financial year;
(iii) in the case of the Network Business, statements of long run incremental costs with and without hybrid adjustments and additional information to be provided by way of notes for the relevant financial year;
(iv) in the case of the Network Business, a statement for Retail Systems Business purchases from the Network Business and a statement of detailed long run incremental costs by bands and additional information to be provided by way of notes for the relevant financial year; and
(v) an explanation and reconciliation of any differences between the statement mentioned in sub-paragraph (i) and the matters mentioned in sub-paragraph (ii), of any differences between the statements mentioned in sub-paragraph (iii) and the statements mentioned in subparagraph (iv) and of any differences between the statements without hybrid adjustments mentioned in sub-paragraph (iii) and the statement for the Network Business mentioned in sub-paragraph (i).
(d) The Licensee shall also prepare, in accordance with paragraph 78.6, in respect of each of its financial years beginning with the financial year ending 31 March 2000 a statement ("Standard Service Statement") of costs of and charges for each Standard Service.

78.6
(a) The Licensee shall ensure that each Financial Statement shall:
(i) be prepared as to the form and content of:
(A) the profit and loss account;
(B) the statement of mean capital employed; and
(C) the statements of costs (if applicable);
as the Licensee and the Director shall have agreed, on or before the date on which this Condition comes into force (or, in the case of the statements of costs required under paragraph 78.5(c)(iii) and 78.5(c)(iv), as the Licensee and Director shall have agreed on or before the date on which paragraph 78.5(c) as substituted comes into force) together with such additional information to be provided by way of notes as the Licensee and the Director shall from time to time agree;
(ii) be prepared in accordance with the current Detailed Attribution Methods, Detailed Valuation Methodology and Long Run Incremental Cost Model: Relationship and Parameters (which taken together are appropriate to implement the principles and procedures contained in the Accounting Documents) and the Accounting Documents (the Accounting Documents, the Detailed Attribution Methods, the Detailed Valuation Methodology and the Long Run Incremental Costs Model: Relationships and Parameters shall be identified in the Financial Statements by reference to their date) and insofar as there is any inconsistency between any or all of the Accounting Documents listed below, the Licensee shall ensure that each Financial Statement shall be prepared in accordance with the Accounting Documents in the following order of priority:
(A) the Regulatory Accounting Principles;
(B) the Attribution Methods;
(C) the Transfer Charging System;
(D) the Accounting Policies; and
(E) Long Run Incremental Cost Methodology; and
(iii) subject to sub-paragraph (ii), in the case of the Financial Statements prepared on:
(A) an historic cost basis, be reconciled with the annual statutory financial statements and that reconciliation shall be demonstrated and explained;
(B) a current fully allocated cost basis, be:
(AA) reconciled with the accounts which the Licensee is required to publish under Condition 77 and that reconciliation shall be demonstrated and explained;
(BB) reconciled with the Financial Statements prepared on an historic cost basis for the corresponding financial year (ending with the financial year ending 31 March 1999) and that reconciliation shall be demonstrated and explained; and
(CC) (beginning with the financial year ending 31 March 2000) reconciled with the annual statutory financial statements and that reconciliation shall be demonstrated and explained.
(b) Subject to paragraph 78.14, the form and content referred to in sub-paragraph (a)(i) may be amended as the Director and the Licensee agree from time to time in writing.
(c) The Licensee shall ensure that each Standard Service Statement shall be prepared:
(i) as to the form and content as the Licensee and the Director shall have agreed, on or before the date on which this Condition comes into force; and
(ii) in accordance with paragraph 78.6(a)(ii), provided that, subject to paragraph 78.14, the form and content may be amended as the Director and the Licensee agree from time to time in writing.
(d) Any requirement to which the Licensee would otherwise be subject under paragraph 78.6 and paragraph 78.5(d) shall not apply if, or to the extent that, the Licensee can demonstrate to the reasonable satisfaction of the Director, in respect of which the Licensee shall be afforded a reasonable opportunity to present its case, that the requirement is not proportionate.

78.7 The Licensee shall procure in respect of each Financial Statement for each Business an audit report by the Auditor which shall conform to Auditing Standards in which he shall state whether in his opinion:
(a) the Financial Statement complies with the requirements of paragraph 78.6;
(b) the Financial Statement fairly presents in accordance with the Accounting Documents:
(i) in the case of the profit and loss account, the results of the relevant Business or, insofar as it has been disaggregated in terms of activities of the Business, of the relevant activity of that Business, for the relevant financial year;
(ii) in the case of the statement of mean capital employed, the mean capital employed of the relevant Business or, insofar as the Business has been disaggregated in terms of activities of the Business, of the relevant activity of that Business, for the relevant financial year; and
(iii) in the case of the statements of costs (if any), the costs incurred by the relevant Business or, insofar as the Business has been disaggregated in terms of the activities of the Business, by the relevant activities of that Business, for the relevant financial year; and
(c) the Detailed Attribution Methods, the Detailed Valuation Methodology and the Long Run Incremental Cost Model: Relationship and Parameters, respectively, are appropriate to implement the principles contained in the Accounting Documents.

78.7A The Licensee shall procure in respect of each Standard Service Statement, unless the Licensee can demonstrate, to the reasonable satisfaction of the Director, in respect of which the Licensee shall be afforded a reasonable opportunity to present its case, that the requirement to procure an audit opinion on a specific Standard Service Statement is not proportionate, an audit report by the Licensee’s Auditor which shall conform to Auditing Standards in which the Auditor shall state whether in his opinion:
(a) the Standard Service Statement complies with the requirements of paragraph 78.6(c)(i);
(b) the Standard Service Statement has been properly prepared in accordance with the relevant procedures contained in the Accounting Documents, the Detailed Attribution Methods, the Detailed Valuation Methodology and the Long Run Incremental Cost Model: Relationships and Parameters; and
(c) having reviewed the Accounting Documents, the Detailed Attribution Methods, the Detailed Valuation Methodology and the Long Run Incremental Cost Model: Relationships and Parameters in forming his opinion under (b) above, anything has come to his attention that would lead him to conclude that the principles and procedures contained in the Accounting Documents, the Detailed Attribution Methods, the Detailed Valuation Methodology and the Long Run Incremental Cost Model: Relationships and Parameters have not been properly applied in the preparation of the costs and charges disclosed in any Standard Service Statement, disclosing where practicable any adjustments he considers to be required in respect of any such matter.

78.8
(a) The Licensee shall, except in so far as the Director may otherwise consent:
(i) publish the Financial Statements prepared on an historic cost basis within two months after the date on which the Licensee’s annual statutory financial statements are published and, in any event, within four months after the end of the period to which they relate;
(ii) without prejudice to any requirements for publication of the Financial Statements for the financial year ending 31 March 1997 in effect on 30 September 1997, publish the Financial Statements prepared on a current cost basis:
(A) for the financial year ending 31 March 1998, by 30 November 1998;
(B) for the financial year ending 31 March 1999, by 31 August 1999; and
(C) for each subsequent financial year, within four months after the end of the period to which they relate, together, in each case, with the relevant Auditor’s report as required under paragraphs 78.7 and 78.7A.
(b) For the purposes of sub-paragraph (a), publication shall be effected by making the relevant Financial Statements together with the relevant Auditor’s reports (if applicable) publicly available and by sending copies to the Director.
(c) The Licensee shall send a copy of the Financial Statements together with the relevant Auditor’s report (if applicable) to any person who may (after they have been published pursuant to sub-paragraph (a)) request them, on the basis of that person paying a reasonable charge for them. The Licensee shall send the copies within seven working days after receiving payment of that charge.
(d) Except to the extent that the Director may consent to an alternative location or to an alternative method of publication, the Licensee shall make available and continue to make available in a publicly accessible part of every Major Office of the Licensee in such manner and in such place that it is readily available for inspection free of charge by members of the general public during such hours as the Secretary of State may prescribe under section 19(4) of the Act that the register of Licences and final and provisional orders is to be open for public inspection, or in the absence of any such order having been made by the Secretary of State, during normal office hours, a notice of the address and telephone number of the person to whom any request for a copy of any or all of the Financial Statements together with the relevant Auditor’s reports or any part of them may be made.
(e) The Licensee shall also publish with the Financial Statements any written statement made by the Director commenting on the data in, the notes to or the presentation of the Statements (or any of them) which has been provided to the Licensee at least 4 working days before publication of the relevant Statements. Sub-paragraphs (b), (c) and (d) shall apply to the publication of the Director’s statement. In order to give the Director sufficient time before publication to prepare a statement, except to the extent that the Director otherwise agrees in writing, the Licensee shall provide to the Director the current drafts of the relevant Statements one month before they are required to be published under this Condition and the Licensee shall provide to the Director copies of the relevant Statements audited in accordance with paragraphs 78.7 and 78.7A together with the Auditor’s report at least two weeks before they are required to be published.

78.9
(a) Subject to paragraphs 78.13 and 78.14, the Accounting Documents may be amended as the Director and the Licensee agree from time to time in writing.
(b) Except to the extent that the Director may otherwise consent, the Licensee shall not make any change to the way in which it attributes, or applies the principles of current cost valuation or incremental costing to the derivation or calculation of, costs, revenues, assets or liabilities if that change would cause a change in the distributed long run incremental cost floor or distributed stand alone cost ceiling relevant to any Standard Service of 5 percent or more.

78.10 The Licensee shall use its best endeavours to obtain from the Auditor any further explanation and clarification of the reports required under paragraphs 78.7 and 78.7A and any other information in respect of the matters which are the subject of the reports as the Director shall reasonably require.

78.11
(a) The Licensee shall publish details of the definitions of the Businesses as soon as practicable after the coming into force of this Condition and shall publish details of any amendment to the composition, or any division or aggregation, of a Business as soon as practicable, and in any event within 28 days, after the making of the amendment.
(b) On the direction of the Director, the Licensee shall publish the current Accounting Documents or the current Detailed Attribution Methods, Detailed Valuation Methodology or Long Run Incremental Cost Model: Relationship and Parameters as soon as practicable, and in any event within 28 days, after the making of the direction. The Licensee may exclude from publication any matter the exclusion of which the Director has directed.
(c) The Licensee shall publish any amendment to the Accounting Documents published in accordance with paragraph 78.11(b), as soon as practicable, and in any event within 28 days, after the making of the amendment.
(d) For the purposes of sub-paragraphs (a) to (c) publication shall be effected by making the required matters publicly available and by sending copies to the Director.
(e)
(i) The Licensee shall send a copy of each of the required matters or any of them to any person who may (after the expiry of the period specified in each of sub-paragraphs (a) to (c)) request them, on the basis of that person paying a reasonable charge for them. The Licensee shall send the copies within seven working days after receiving payment of that charge.
(ii) The Licensee shall send a copy of a description of its cost accounting system showing the main categories under which costs are grouped and the rules used for the allocation of costs to Interconnection, to any person who may request them, on the basis of that person paying a reasonable charge for them. The Licensee shall send the copies within seven working days after receiving payment of that charge.
(f) Except to the extent that the Director may consent to an alternative location or to an alternative method of publication, the Licensee shall make available and continue to make available in a publicly accessible part of every Major Office of the Licensee in such manner and in such place that it is readily available for inspection free of charge by members of the general public during such hours as the Secretary of State may prescribe under section 19(4) of the Act that the register of Licences and final and provisional orders is to be open for public inspection, or in the absence of any such order having been made by the Secretary of State, during normal office hours, a notice of the address and telephone number of the person to whom any request for a copy of any or all of the required matters may be made.

78.12 Without prejudice to Condition 75, 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.

78.13 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:
(A) modifications of any of the Conditions in Schedule 1 of this Licence;
(B) final Orders made under section 16 of the Act;
(C) 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
(D) 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 (A) to (D) 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.

78.14
(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 78.12 or Condition 75 or both;
(ii) the Licensee:
(A) 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 any or all of a Standard Service, a Private Leased Circuit or an International Private Circuit telecommunication service contrary to the provisions of Part G of this Licence and has ceased to do so but is likely to repeat that undue preference or undue discrimination at any time in the future; or
(B) is showing undue preference or undue discrimination as described in sub-paragraph 78.14(a)(ii)(A);
(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 33, extend its prompt cooperation 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 purposes of sub-paragraph (B) above, 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 subparagraph (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:
(iv) the Licensee shall amend any or all of:
(A) the composition of any or all of the Businesses in terms of any or all of the revenues, costs and assets they respectively comprise;
(B) the manner in which any or all of the Businesses are disaggregated in terms of activities of the relevant Business;
(C) 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
(D) any or all of the Accounting Documents; or
(v) 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.

78.15 This Condition operates without prejudice to Conditions 76 and 77.

78.16 This Condition is subject to the obligations which apply to the Licensee under Condition 50.

78.17 In this Condition "attributable" includes allocatable and apportionable, "attribute" includes allocate and apportion and "attribution" includes allocation and apportionment.

  ANNEX C

DRAFT REVOCATION OF THE MNS DIRECTION

Pursuant to Paragraph 7 of the Public Telecommunications Licence granted to British Telecommunications plc

WHEREAS

• not to cross-subsidise individual contracts above a certain size and not to cross-subsidise each of the Activities listed in the Direction;
• to make an appropriate return on each of the Activities listed;
• to provide him with a business plan showing how this is to be achieved;
• to keep records and provide ongoing information on the financial performance of the Activities; and
• to show that charges between MNS and other parts of BT's businesses are properly based and charged, in particular by providing an external audit report.

THEREFORE

Peter Waller

DIRECTO