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Executive Summary

Background

1.1 Financial reporting is an essential part of regulation. Relevant, reliable and timely regulatory financial information is fundamental to the effective economic regulation of the electronic communications sector.

1.2 Ofcom requires regulatory financial information in order to monitor and enforce various obligations that are placed on dominant providers in markets where they are found to have significant market power (“SMP”). The regulatory financial reporting regime also demonstrates to the industry that certain ex-ante obligations are being effectively monitored and enforced.

1.3 The current regulatory financial reporting regime for British Telecommunications plc (BT) has evolved over time in response to ongoing changes in the regulatory, technological and competitive environment, including:

• changes in the regulatory framework (following Ofcom’s strategic review of the telecommunications sector);
• structural changes in the way BT transacts with itself and its competitors (by way of the ongoing implementation of undertakings by BT accepted by Ofcom in lieu of a reference under the Enterprise Act and the creation of Openreach);
• technological changes to the nature of BT’s business, including the move to the next generation network, which BT refer to as their 21st Century Network (21CN);
• changes in the way financial information will be made available to Ofcom (via the implementation of a new data extraction tool); and
• the results of various regulatory decisions including market reviews and investigations.

1.4 As a result of some of the factors above, our ongoing review, regular discussions with BT and use of the regulatory financial statements, we have identified a number of areas where we propose to enhance the presentation and improve the quality of BT’s regulatory financial statements.

1.5 Our proposals fall broadly into two categories;

• Improvements to BT’s regulatory accounting methods relating to the replicability of services in a number of the business connectivity markets.
• A number of ongoing improvements (the “business as usual” changes) to ensure the regulatory financial statements remain fit for purpose, for example changes to the network component list.

1.6 The table below is a summary of the objectives we address in this consultation and our proposals on each.

Objective	Proposal
Next generation networks – BT’s 21CN costs Ensure the impact of BT’s significant investment in its 21CN on regulated services is explained and disclosed appropriately.	• Create a set of new network components specific to BT’s 21CN. • Require disclosure of these components in the regulatory financial statements.
Other network components – ongoing updates Regular updating and amending of the list of components to ensure they remain “fit for purpose”.	• Add or delete components to maintain integrity of reporting. • Provision to Ofcom of the cost stack information for regulated leased line products (inc. partial private circuits).
Transfer charging – the recording of wholesale SMP input costs to downstream (retail) activities Clarification of BT’s transfer charging scheme in support of its undue discrimination obligations.	• Preparation of information for Ofcom for the downstream product groups covered by the relevant business connectivity markets.
Reporting on leased lines – addressing some of the findings set out in annex 13 (Replicability and the PPC charging model) of the BCMR We concluded last year that there should be a number of improvements in BT’s regulatory reporting for Partial Private Circuits (PPCs) such as improved transparency, calculation of internal transfer charges and the updating of payment terms for internal and external services.	• Enhance the basis on which revenues are calculated to more closely match internal and external billing practices. • Formal requirement to produce a statement for Ofcom only showing the difference between the total revenue in BT’s general ledger and the calculated service by service revenue for the business connectivity markets covered in the replicability review. • Amend the internal debtor days to reflect broadly equivalent settlement terms experienced by BT with its external customers. • Increase granularity of services reported in certain markets e.g. AISBO. • Ensure these improvements are reflected across all reported markets and transparently explained in supporting documentation.
Matching revenues and costs We have found that in some markets the immediate recognition of revenues for sales of equipment not matching the costs of that equipment which are amortised over their estimated economic life impacts the interpretation of profitability in those markets.	• Require additional disclosure in the regulatory financial review (RFR) to ensure readers understand the underlying margins in relevant wholesale markets (wholesale local access and the relevant business connectivity markets.
Reporting of services in the Asymmetric Broadband Origination market statement We have identified some improvements to be made to the reporting of services sold in this market.	• Improve the disclosure of IPstream and Datastream services.
Attribution of low user scheme (LUS) costs We believe BT’s interpretation that these costs should be attributed to wholesale access markets to be inappropriate.	• Require BT to amend its attribution methodology so all costs relating to the provision of the LUS, under BT’s universal service obligations, are not attributed to SMP wholesale markets.

1.7 Alternative means of addressing these objectives have been considered. These are set out in the document. We are also keen to hear any other views that we may not have considered in formulating our proposals.

1.8 The closing date for responses to this consultation is 29 May 2008.

1.9 The proposals in this consultation only relate to BT. In respect of KCOM (previously Kingston Communications plc), we will consider the implications, if any, of the issues raised. However, given the scale and scope of the reporting obligations currently imposed on KCOM relative to BT, we do not consider that there any changes necessary to KCOM’s regulatory financial statements for 2007/08.

• BT’s regulatory financial reporting [pdf]
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