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Statement

Executive Summary

Background

1.1 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 provides confidence 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) and Kingston Communications plc (KCL) has evolved over time in response to ongoing changes in the regulatory environment. The last significant consultation on the regime was in 2004 (the “2004 Consultation”) in response to the regulatory framework for electronic communications network services that came into effect on 25 July 2003. The regulatory financial statements for the year to 31 March 2005 were the first to take account of the full impact of these changes.

1.4 Since the 2004 Consultation, there have been significant changes in the regulatory environment and further changes are in progress, including:

• changes in the regulatory agenda (following Ofcom’s strategic review of the telecommunications sector);
• functional 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 developments, including the prospective build of the next generation network; and
• developments in the way financial information will be made available to Ofcom (via the implementation of a new data extraction tool).

1.5 Ofcom therefore considered that it was appropriate to take a fresh look at the regulatory financial reporting regime. This process started with the consultation document dated 3 May 2006 , entitled Regulatory financial reporting obligations on BT (the “May Consultation”).

1.6 The May Consultation as well as making proposals for changes to be reflected in BT’s 2005/06 regulatory financial statements, (including specific elements of the reporting obligations and changes to the audit requirements), set out the framework for further consultation on the objectives of good regulatory financial reporting in the new regulatory environment.

Scope of this document

1.7 On 26 January 2007, Ofcom published a further consultation document (the “January Consultation”). This discussed proposals for changes to the format and content of BT’s published financial statements and their requirements for additional financial reporting to Ofcom (consisting of Additional Financial Statements and Additional Financial Information).

1.8 This consultation document considered the following areas:

• objectives for the financial reporting regime as a whole;
• the role of the published documents as part of that regime; and
• proposals for a new regime.

1.9 It did this through consideration of the different aspects of BT’s financial framework as set out below:

• the information that should be maintained and prepared by BT and KCL
• the information that should be made available to Ofcom;
• the information that is made publicly available; and
• the framework for providing assurance on that information.

1.10 In the context of this consultation, Ofcom also considered if any changes should be made to the reporting obligations applicable to KCL. In particular, Ofcom was required to ensure that the reporting conditions placed on BT were not unduly discriminatory in respect of similar obligations on KCL.

1.11 It was determined however that the form and content of KCL’s regulatory financial statements already reflected KCL’s relative size and complexity compared to BT. Ofcom believed therefore that the reasons for form and content changes proposed for BT did not justify similar changes to KCL’s reporting formats. Hence Ofcom did not propose any changes to KCL’s current reporting obligations.

1.12 Ofcom will continue to discuss with KCL improvements to its regulatory financial statements and expect these discussions to be informed by BT’s published 2006/07 regulatory financial statements.

Final Decisions

1.13 This Statement sets out Ofcom’s final decisions in respect of the January Consultation proposals which consist primarily of a new format for the published regulatory financial report.

1.14 The structure of the report has been changed to make it more accessible to a wider audience without losing the information necessarily used by the regulatory community. The intention of these changes is to move the key information to the front of the document and push the (simplified) supporting analysis to the back of the report. The main changes can be summarised as follows:

• to provide a wider audience with an understanding of the key issues, the overall performance of BT’s regulated activities will be reported and explained at the front of the document (with a focus on the wholesale access markets);
• to provide the regulatory community with evidence of tests of compliance with obligations and sufficient information to understand and challenge this evidence, most of the detailed financial information currently provided will still be required;
• to give all users a better understanding of how costs are shared by products and services, new annexes will illustrate and explain how group costs and assets are allocated across all markets;
• to provide a market by market overview of financial performance and evidence of first order tests of compliance with BT’s obligations to offer cost-oriented charges and not to discriminate unduly, key financial data will now be set out on a single page summary for each market;
• to aid understanding, markets will be organised into groups; and
• to simplify reporting and facilitate comparison of the underlying data across different markets, detailed support for the data used in the first order tests for each market will be collated and included in a section towards the back of the report.

1.15 The effect of these changes will be to reduce the length of the regulatory financial report whilst making sure that, with the exception of some of the LRIC analysis, very little information that is currently provided will be lost. This reflects Ofcom’s view that an informed industry contributes to effective and efficient regulation and takes account of examples provided by industry of the ways in which published information has contributed to effective competition and informed, focussed requests for intervention.

1.16 In respect of the Secondary Accounting Documents currently published by BT and concerns expressed about the size and complexity of these documents, Ofcom considers that BT’s existing obligations allow BT adequate scope to prepare fit for purpose documents which do not place a significant additional burden on BT. No changes to the relevant obligations are being effected.

1.17 In respect of the further financial information provided only to Ofcom, Ofcom’s ability to interrogate BT’s financial data will be enhanced under existing obligations on BT to introduce a data extraction tool, which will allow Ofcom to extract, sort, analyse and report on BT’s cost attribution system including the replication of BT’s regulatory Financial Statements and a drill-down facility. Subject to the timely provision of a satisfactory data file, Ofcom does not consider it necessary for BT to continue to provide the Additional Financial Statements and the requirement to produce Additional Financial Information statements will be reduced.

1.18 Nothing in Ofcom’s changes affects BT’s obligation to provide information in response to specific requests from Ofcom.

1.19 Ofcom considers that these changes to the reporting requirements are consistent with the latest regulatory thinking, including for example, the conclusions in Philip Hampton’s 2005 report HM Treasury, “Reducing administrative burdens: effective inspection and enforcement” and specifically the recommendation for regulators to allocate resources to areas where the regulatory risk is greatest, reducing the administrative burden of regulation while maintaining or improving regulatory outcomes.

• Changes to BT’s regulatory financial reporting and audit requirements - Statement [pdf]
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