TELECOMMUNICATIONS BILL: BT AND FAIR COMPETITION (Hansard, 22 March 1984)

§ The Minister of State, Scottish Office (Lord Gray of Contin)

The text of the Lord Advocate's letter of 19th March 1984 is set out below.

"1. When you moved your Amendment 42A on the first day of Report (12th March) time was short and I therefore suggested that it might be better to pursue the matter outside the Chamber. I have now had time to consider the concerns that you raised and I hope I will be able to reassure you.

"2. First of all, I would like to stress how much I share your concern about the need to ensure that BT does not behave in an anti-competitive manner. We believe that the Bill as drafted contains sufficient powers to achieve this objective and it might be helpful if I explained that there are two separate routes for doing so—one through the licence and the provisions for its enforcement and the other through the existing legislation ie the Fair Trading Act 1973 and the Competition Act 1980. These two routes are separate and I think that this may be where some confusion lies.

"3. First of all, the licence. When the Secretary of State issues BT's licence and includes conditions in it and when the Director enforces or modifies these conditions, both the Secretary of State and the Director will be bound by their duties in Clause 3. As you know Clause 3(2)(b) places them under a duty to exercise their functions in the way they think best calculated to maintain and promote effective competition between persons engaged in 1469WA commercial activities connected with telecommunications in the UK. The promotion of effective competition must involve the prevention of anti-competitive practices which prevent, restrict or distort competition. This duty extends to all commercial activities connected with telecommunications and therefore covers not only the provision of telecommunications services but also the supply and export of telecommunication apparatus and the production and acquisition for supply or export of such apparatus. This duty means that when the Secretary of State comes to grant BT's licence he must consider the inclusion of conditions to carry out the duty in Clause 3(2)(b). Since BT has over 90% of the market, it is inconceivable that the Secretary of State in reasonable exercise of his powers could fail to include conditions preventing anti-competitive behaviour having regard to his duties under Clause 3. I hope this answers one point which I think may have been troubling you, in that 7(5) says that a licence "may" include such conditions rather than "shall" include. The reasons for this is simply that there will be some licences—eg those for entry phones on a block of flats—where it will not be appropriate to include any of the conditions of the sort listed in Clause 7(5) but as I hope I have explained in the case of BT's licence there is no question of such conditions not being included. I hope that this reassures you on one of your concerns.

"4. In the case of licences to be granted to public telecommunication operators (PTOs), Clause 8 also applies and provides added safeguards against anticompetitive practices. Clause 8(1) says that licences of PTOs like BT must contain specific conditions which, amongst other things, are intended to prevent monopoly abuses and anti-competitive practices. These is no choice about this. BT's licence must include a requirement:—

— to provide specified services (thus preventing the practices of refusal to supply),
— to connect specified other systems and apparatus (thus preventing the practice of selective or discriminatory connection against competitors),
— to allow others to use the public system to provide services to third parties (thus preventing a monopolist using his market power to distort competition in other markets),
— not to show any undue preference or to exercise any discrimination (thus preventing the practice of selective or discriminatory pricing or applying terms and conditions which discriminate against competitors), and
— to publish price lists (thus preventing the practice of giving hidden discounts to obtain business).

"5. These are the main anti-competitive practices we have been able to identify in the provision of telecommunication services and the draft licence contains conditions to meet these requirements. In addition, the Secretary of State has already decided he should use his powers under Clause 7(5)(a) in fulfilment of his Clause 3 duty to include conditions in the BT licence to promote 1470WA competition throughout the telecommunications market, not just in the market for services. These conditions are set out in Condition 18—prohibition on cross-subsidies; Condition 20—separation of certain activities; Condition 21—apparatus production; Condition 22—prohibition of preferential treatment; Condition 23—alterations to the applicable systems; Condition 35—prohibition on linked sales; Condition 36—prohibition on certain exclusive dealing arrangements; Condition 37—requirement to provide itemised information; and Condition 38—codes of practice and confidentiality of information about customers. As you may recall from Committee stage we have also agreed to a further condition about numbering plans.

"6. I believe that these conditions provide a formidable array of controls to prevent anticompetitive behaviour by BT. It is for the Director to enforce these licence conditions using his powers in Clause 16. I will not go into detail about how these powers work (though I would be happy to if you would like further clarification) but I should simply say that we have amended the Bill through its passage through Parliament (and there are further amendments on the Order Paper to he considered shortly) so to strengthen the Director's powers to act in this respect. When doing so the Director will also be hound by the Clause 3 duties including, in particular, the duty in Clause 3(2)(b) to promote effective competition.

"7. I can assure you that the "anti-competitive" conditions in the draft licence will be contained in the final licence but in an improved form to take account of public comments on them. I should say at this juncture that if you think that there are any glaring malpractices that will not be covered by these conditions the Department will be only too happy to receive suggestions for new conditions or improvements to existing ones. They certainly intend to make the licence as comprehensive as possible.

"8. The Department is also aware that in future there may well arise unforeseen practices which are anti-competitive in nature hut which are not covered by a specific licence condition. I think that this is another point about which you are concerned and perhaps I might explain how we intend these situations to he dealt with. First of all the Director as well as enforcing conditions of licences also has powers to seek to modify or add conditions to licences. In doing so he is continually bound by his duty in Clause 3(2)(b). For example, if he became aware (through a complaint by a competitor) that BT was engaging in any particular anti-competitive practice, he would be under a duty to consider how best to exercise his functions so as to "maintain and promote effective competition". Clearly, letting anti-competitive practices continue would not, prima facie, be in accordance with this duty. Therefore the Director, if he considers the complaint justified, must seek ways to ensure that matters are put right. If the practice in question is not the subject of a specific condition then he can initiate proceedings to change the licence by including a new condition.

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"9. I have spent some time on how the licence works; it is rather complicated but I hope that I have managed to assure you that there are sufficient powers and positive duties on both the Secretary of State and the Director to exercise their functions so as to maintain and promote effective competition which includes the prevention of anti-competitive practices. I think that this latter point was one about which you were particularly concerned.

"10. I should now like to turn to the second set of powers for dealing with anti-competitive behaviour—namely those in the Fair Trading and Competitions Acts. As a general point I should like to stress that we view these powers very much as a long stop. It is the licence and the powers to enforce and modify it which are our first line of defence. In fact the controls in the licence are unique to telecommunications; no other area of the economy has such special rules and regulations to prevent anti-competitive behaviour. Nevertheless even though there are these special measures we did not think it right to prevent the normal law which applies almost throughout the economy—the Fair Trading and Competition Acts—from also applying to telecommunications. For example there may be some monopoly or competition issues which cannot be resolved by licence conditions. This might happen if BT engaged in activities unconnected with telecommunications but indulged in anticompetitive practices in those activities which affect the telecommunications market. The provisions of Clause 49(2) and (3) provide for action to be taken in such cases. The important point is that these subsections transfer powers to the Director General of Telecommunications so that, so far as commercial activities connected with telecommunications are concerned he in effect becomes the Director General of Fair Trading. He is therefore able to engage in investigations under the Competition Act and to make references to the Monopolies and Mergers Commission under either the Competition Act or the Fair Trading Act.

"11. I think that there is some misunderstanding about the rules under which the Director operates under Clause 49 and this was the subject of Lord Spens' manuscript amendment to Clause 3 to which Simon Glenarthur replied (Col. 598–599). I hope that I have explained sufficiently how the Secretary of State and the Director will be bound by the Clause 3 duties in carrying out their other functions 1472WA under the Bill but when he is carrying out his Clause 49 functions the Director will operate entirely within the framework of the Fair Trading and Competition Acts. These already contain criteria for the way in which the Secretary of State and the Director General of Fair Trading carry out their functions in relation to anti-competitive practices and, since the Director General of Telecommunications will be carrying out the Director General of Fair Trading's functions, he must be guided by the same criteria. But if the DGT brought with him his Clause 3 duties, not only would he have two different sets of criteria to guide his actions but there could be considerable distortions and inconsistencies. As Simon put it very neatly, you cannot have two policemen operating different laws in the same town. That is why we have removed Clause 49 from the scope of Clause 3. But I hope you are in no doubt that disapplying the Clause 3 duties when the Director acts under Clause 49 in no way diminishes the fact that the Clause 3 duties apply in respect of all the Director's other functions in Parts II and III of the Bill.

"12. I should also like to draw your attention to some amendments which we have just tabled which seek to give the Secretary of State powers to modify licence conditions or indeed revoke licences where orders have been made following MMC investigations under either the Fair Trading Act or Competition Act. We will be able to debate these amendments more thoroughly next week.

"13. Finally, perhaps I might briefly comment on your mention of Article 90 of the Treaty of Rome. This Article relates to public sector undertakings but once BT plc is privatised we do not consider it will fall into this caregory. Not only will the Government hold less than 50 per cent. of the shares—i.e. a minority stake—but, as in the case of other privatisations, the Government will state in the prospectus for BT plc that it does not intend to use its rights as an ordinary shareholder to intervene in the commercial decisions of the company. Of course as a private undertaking BT, in common with other companies, will be subject to Articles 85 and 86 of the Treaty which cover, respectively, association in cartels to distort competition and voluntary abuse of monopoly powers.

"14. I hope you find these comments helpful. I am sending a copy to Michael Spens.".