Office of Telecommunications

PROPOSED MODIFICATIONS OF THE CONDITIONS OF THE LICENCE OF BRITISH TELECOMMUNICATIONS PLC (“BT”)

The Director of Telecommunications (“the Director”) in accordance with section 15(3) of the Telecommunications Act 1984 (“the Act”) hereby gives notice that, following his consideration of the reports of the Monopolies and Mergers Commission (“the Commission”) of 4th December 1998 on the reference made by him on 5th March 1998 with respect to the price of calling mobile phones (“the reference”), and having regard to the modifications proposed by the Commission by which the adverse effects specified in the report could be remedied, he proposes to make modifications to the licence granted to British Telecommunications on 22nd June 1984 (the BT licence). The effect of the modifications which the Director proposes to make is set out in the Schedule below. The Director proposes to make the modifications for the following reasons: (1) In making the Reference, the Director required the Commission to investigate and report on certain questions relating to the matter specified in the Reference. The matter was whether the charges made by BT to users of its fixed public telecommunications system for calls to the subscribers to the mobile public telecommunications system operated by Telecom Securicor Cellular Radio Ltd (“Cellnet network”) and by Vodafone Ltd (“Vodafone network”) operate or may be expected to operate against the public interest. (2) In reporting to the Director, the Commission concluded that this matter operates and may be expected to operate against the public interest and specified the following adverse effects: that the level of BT’s retention (the balance of BT’s retail price after deducting the charge paid to Cellnet or Vodafone for terminating the call, VAT and discounts) and thus BT’s retail prices for calls to the Cellnet and Vodafone networks are higher, and are likely to be higher, that the level required to enable BT to recover its efficiently incurred costs and a reasonable rate of return and to finance its licensed activity, contrary to the interests of callers as regards prices. The public interest benchmark level specified by the Commission for 1999-2000 is 3.4 pence per minute. (3) Having regard to the modifications specified by the Commission, the Director’s proposed modifications are, in the Director’s opinion, requisite for the purpose of remedying or preventing the adverse effects specified in the Report in that the conditions of the licence as modified under the proposal and having the effects set out in the Schedule below would reduce BT’s retention to the benchmark level specified by the Commission which covers BT’s appropriately allocated costs together with an allowance for a reasonable rate of return for 1999-2000 and provides for continuing control of the level of BT’s retention for the following two years. The Director is required by section 15(3) of the Act to consider any representations or objections which are duly made and not withdrawn. The consultation procedure comprises two stages. In the first stage, representations or objections to the proposed modifications may be made to Vince Affleck, OFTEL, 50 Ludgate Hill, London EC4M 7JJ, telephone 0171-634 8819, e-mail vaffleck@oftel.gov.uk) by not later than 19th March 1999. Any confidential information should be clearly marked as such and separated out into a confidential annex. All representations or objections received by OFTEL, with the exception of material marked confidential, will be made available for inspection in OFTEL’s Research and Intelligence Unit. In the second stage, interested parties are invited to send comments to Vince Affleck, details as above, by no later than 26th March 1999, on representations or objections received in the first stage. Copies of the proposed modifications can be obtained from Lisa Etwell at the above address, telephone 0171-634 8835, e-mail letwell @oftel.gov.uk). Schedule A new condition would be added to BT’s licence to control BT’s retention on calls to the Cellnet and Vodafone networks, separate from the basket of call services already subject to price controls, until March 2002. The condition would provide that BT’s weighted average retention should not exceed 3.4 pence per minute for the year 1999-2000 and that this ceiling should be adjusted in each of the following two years by RPI-7 per cent. The weighted average retention is to be calculated as the average of retentions for calls to Cellnet and calls to Vodafone combined during the financial year in question, weighted according to the profile of call minutes by charging period in the 12 month period to 31 December of the preceding year (“the base year”). Where any retention is in force during only part of the year, the weighting is to be derived from the profile of call minutes in the corresponding part of the base year. BT may not in any charging period apply a retention for calls to Cellnet different from the retention for calls to Vodafone, except to the extent necessary to enable BT to rounded to the nearest 0.1 of a penny per minute its retail charge for calls to Cellnet and Vodafone or otherwise following a request by BT, as the Director may direct. If BT fails to secure that its average retention has not exceeded the levels specified for the financial years 1999-2000 or 2000-2001, it must compensate by adjusting downwards the price control in the following year by the amount overcharged. If it appears to the Director that BT is likely to exceed the maximum allowable average retention for the year 2001-2002, the Director may direct BT to make appropriate adjustments to its retention in that year for the purpose of avoiding that failure. The condition will also contain a provision to ensure that the RPI-X price control is not eroded by variations in BT’s discounts. BT must estimate the total discounts below its standard tariff which are received for calls to mobile phones in the relevant control year. On the basis of that estimate BT must calculate on a percentage basis the revenue it has foregone through the discounts received by customers in that year. This amount is compared to the percentage discount received by customers in the year to 31st March 1998, which BT is required to maintain in any year covered by these arrangements. If in any year BT does not maintain the level of discounts as in place during the year to 31st March 1998, it must compensate customers by the amount involved in the following year, for that year only. BT can choose to recompense customers for such a shortfall in discounts either through lower standard prices or higher discounts, or a combination of the two. This control applies separately to business and residential customers. Provision is made for the Director General to consult before making any direction under the proposed condition. The Director General proposes to use his information powers already in BT’s licence to obtain the information required to monitor compliance with the condition. D. Edmonds, Director General of Telecommunications 16th February 1999.