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Section 1
Summary

Scope of this document

1.1 This document sets out Ofcom’s final decision on the detail of the regulatory financial reporting requirements necessary to implement the remedies identified by the market reviews in a proportionate and appropriate manner.

A new regulatory regime

1.2 A new regulatory framework for electronic communications networks and services entered into force in the UK on 25 July 2003. The basis for the new framework is five new EU Communications Directives ("the Directives") that are designed to create harmonised regulation across Europe.

1.3 The new Directives require National Regulatory Authorities ("NRAs"), amongst other things, to carry out reviews of competition in communications markets to ensure that regulation remains appropriate in the light of changing market conditions.

1.4 As part of this series of reviews, on 8 April 2004 Ofcom published a consultation document entitled The regulatory financial reporting obligations on BT and Kingston Communications where SMP has been demonstrated (the "April consultation" - see Related Items). That document followed an earlier consultation document published on 22 May 2003 (the "May consultation"; - see Related Items) and invited comments on Oftel/Ofcom’s proposal for imposing regulatory financial reporting obligations on BT and Kingston Communications ("Kingston") in markets where they had been found to be dominant. The period of consultation for the April consultation closed on 10 May 2004.

1.5 As required by the Directives, the draft decision was also sent to the European Commission and to other NRAs as, in Ofcom’s opinion, the proposal may have affected trade between Member States. The final decision included in this document is also being communicated to the European Commission and to the NRAs in other Member States in accordance with the scheme of the Directives.

Summary of decision

1.6 Having considered all responses to the April consultation document, Ofcom is setting out in the present document its final decision. This is summarised below.

Regulatory remedies

1.7 Given the position of significant market power ("SMP") held by BT and Kingston – i.e. their ability to behave, to an appreciable extent, independently of competitors, customers and ultimately consumers, Ofcom concludes that the regulatory financial reporting conditions and directions, described in Section 4 and set out in Annexes 2 and 4 for BT and Annexes 3 and 5 for Kingston, should be imposed on BT and Kingston in the markets identified in the notifications in Annex 2 for BT and Annex 3 for Kingston and summarised below.

1.8 This decision on imposing regulatory financial reporting obligations is substantially unchanged from that proposed in the April consultation document. A number of small changes have been made in response to the representations made to the April consultation. These changes are summarised below 1.14 and detailed in Sections 3 and 4. Ofcom does not consider that these changes are material. The detail of the regulatory financial reporting obligations are set out in Section 4 of this document and the notifications, conditions and directions implementing the decisions are set out in Annexes 2 and 4 for BT and Annexes 3 and 5 for Kingston.

1.9 The new Directives allow Member States to carry forward some existing regulation until the market reviews have been completed and any new conditions put in place.

1.10 Currently, BT and Kingston are required to comply with the following specific obligations in relation to regulatory financial reporting. These are:

• Condition 50: Requirement to have cost accounting systems and accounting separation for interconnection purposes;
• Condition 55: Leased Lines (including cost accounting obligations); and
• for BT only, Condition 78: Separate Accounts.

1.11 These conditions, including any directions made by the Director General of Telecommunications (the "Director") under these conditions, are currently still in place by way of continuation notices issued to BT and Kingston in July 2003, and hence Ofcom expects that the regulatory accounts for the financial year 2003/2004 will be prepared and presented on this 'old' basis. These conditions will remain in place until Ofcom issues a discontinuation notice in respect of them. Ofcom currently expects to issue relevant discontinuation notices in respect of the old conditions as soon as all documentation required to be provided under them for the 2003/2004 financial year has been received and assessed for compliance with the condition requirements.

1.12 Ofcom expects that the 'new' basis for the preparation of regulatory financial accounts will be in place in sufficient time for BT and Kingston to align their reporting systems so as to produce the regulatory financial statements required by the new conditions for the 2004/2005 financial year.

Responses to the April consultation and Ofcom’s view

1.13 Ofcom received responses to the April consultation from BT, Kingston, the UK Competitive Telecoms Association (UKCTA) and the European Commission. These responses are discussed in detail in Section 3 of this document, along with Ofcom’s views on the responses and Ofcom’s final decisions.

1.14 Taking into account the representations received in response to the April consultation and taking utmost account of the Commission’s views, Ofcom has decided to make the following non-material changes to the conditions and directions.

• Ofcom has amended Conditions OA5 and OB5 to clarify that regulatory Financial Statements are to be prepared and published on an annual basis.
• Ofcom has amended Conditions OA5(f) for BT and OB5(f) for Kingston to include the words "in so far as it is reasonably practicable to monitor the effect of such changes", in order to clarify Ofcom’s intention that these conditions are designed to capture material changes caused by changes to processes.
• Ofcom has amended Condition OA25 which applies to BT to include the words "in relation to any specified calendar month or months". This is to clarify that Ofcom considers that one calendar month should be the shortest period for which on-demand information should be requested.
• In direction 3 in Annex 4, Ofcom has removed the obligation on BT to secure audit opinions for the schedules of additional financial information.
• In direction 3 in Annex 4 and direction 3 in Annex 5, Ofcom has clarified that BT and Kingston will not be expected to secure an audit opinion of the regulatory financial review.
• In direction 3 in Annex 5, Ofcom has reduced the reporting requirement on Kingston in respect of preparing financial statements for products and services within relevant markets.

Markets covered by this statement

1.15 A number of the market reviews identified the need for and proposed the imposition of financial reporting obligations (i.e. cost accounting and/or accounting separation) on BT and/or Kingston. The full details of the markets in which Ofcom has proposed these obligations is provided in Schedule 3 of the Notifications at Annexes 2 and 3 (for BT and Kingston respectively). The table below provides a summary of these decisions.

Market review	BT		Kingston
	A/S	C/A	A/S	C/A
Fixed geographic call termination	Yes	Yes	Yes	Yes
Wholesale international services	Yes	No	No	No
Fixed narrowband wholesale exchange line, call origination, conveyance and transit	Yes	Yes	Yes	Yes
Fixed narrowband retail	No	Yes	No	No
Retail leased lines, symmetric broadband and wholesale trunk segments	Yes	Yes	Yes	Yes
Wholesale broadband access	Yes	No	Yes	No

 

Accounting Separation (A/S); Cost Accounting (C/A).
This table only reflects those market reviews where some form of regulatory financial reporting was proposed for BT and/or Kingston.

1.16 Full details of the conclusions of the narrowband market reviews, the conclusions of the retail leased lines, symmetric broadband and wholesale trunk segments review and the conclusions of the wholesale broadband access review can be found in Related Items.

FINAL STATEMENT: The regulatory financial reporting obligations on BT and Kingston Communications

• The regulatory financial reporting obligations on BT and Kingston Communications [pdf]

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