Chapter 8

Accounting issues

8.1 This chapter covers financial reporting obligations that may be imposed on dominant providers (ie, as proposed, in chapter 4 BT and Kingston) to ensure that a number of the proposed obligations set out in Chapter 6 are met. In particular, in relation to this Review, obligations of cost orientation, charge controls and non-discrimination can require the imposition of financial reporting regimes to monitor dominant providers’ compliance with these obligations. In particular, this chapter covers the imposition of obligations for cost accounting systems and accounting separation.

8.2 The Director is of the view that it is appropriate to impose cost accounting obligations on BT in certain of the markets covered in this review. The two sub-sections below outline what financial reporting obligations are required and why.

8.3 However, the processes of cost accounting and accounting separation are complex, covering issues such as cost attribution methodologies, accounting standards, audit, transparency, disaggregation, reconciliation and publication of information. These practical processes are distinct from the questions of principle, such as the level of regulation in the market, the remedies to be applied, etc. For example, the decision on whether to impose a cost accounting obligation and the level of information required is made on the basis of the findings of the market review. However, the practical processes must be consistent across all markets susceptible to regulation to ensure that there is certainty both for the Director, the dominant providers, BT and Kingston, and other persons in the market regarding regulatory financial information requirements.

8.4 Therefore, the Director will be carrying out a separate consultation – Financial reporting in SMP markets: A consultation on accounting separation and cost accounting systems – on the nature of the obligations necessary for implementing the processes of cost accounting systems and accounting separation. The scope of this consultation will be to address the issues of how the requirements for cost accounting and accounting separation will be implemented. It will also address the level of granularity required for such obligations to be imposed in a proportionate and appropriate manner. That consultation will contain the draft cost accounting and accounting separation obligations. The Director intends to carry out this consultation towards the end of the market review process so that the requirements of the accounting separation condition and the cost accounting condition can reflect the findings of the individual reviews.

Cost accounting systems

8.5 Under clause 87(6) of the Communications Bill, where a regulatory control on tariffs or other matters to which costs are relevant is imposed, the Director shall also impose cost accounting obligations to the extent that he considers it appropriate. As set out in Chapter 6, the Director is proposing a charge control for BT for certain residential retail markets. As explained in those sections, this charge control is necessary to ensure that BT does not use its market power to maintain prices at a higher level than they would be if competition were effective. In particular, 6.30 to 6.32 describe why the charge control is a justifiable response to the extent of competition in the markets, and why the level of the charge control is proportionate. It should be noted that the Director is not proposing a charge control for business retail markets for the reasons given in Chapter 6. It should also be noted that the Director is not proposing a retail charge control on the services offered by Kingston for the reasons given in Chapter 6.

8.6 Given the imposition of the retail charge control on BT, the Director is proposing that BT shall maintain a cost accounting system, that demonstrates that the obligation of the charge control is being met and that enables the Director to monitor compliance with that obligation.

8.7 The cost accounting obligations for BT will apply to certain of the markets identified in 6.18 as being subject to the retail charge control. These markets, in the UK excluding the Hull area, are:

• residential analogue exchange line services;
• residential local call services;
• residential national call services;
• residential international call services – market for category A routes and the route-by-route markets for category B routes;
• residential operator assistance call services; and
• residential calls to mobile services.

8.8 A cost accounting system is necessary to provide information to support the monitoring of the retail charge control. For this monitoring it is necessary to have information on the cost base of services or products covered by the charge control. Therefore, it is necessary for BT to establish cost accounting systems that capture, identify, value and attribute relevant costs to its services and products in accordance with agreed regulatory accounting principles such as cost causality.

8.9 In order to provide the appropriate level of regulatory financial information, it is envisaged that, for example, the profit and loss financial statement for residential local calls would detail the wholesale inputs (purchases from BT wholesale activities including regulated, non regulated services and transfer charges) such as call origination and call termination services. The retail costs attributed to this market will need to contain reasonable granularity of the main retailing activities such as marketing, billing, bad debts and customer service

8.10 Clause 4 of the Communications Bill sets out the Community requirements for regulation. The Director has considered all of the criteria in Clause 4 of the Communications Bill. In particular, the imposition of a cost accounting obligation would specifically be justifiable and proportionate to ensure efficient and sustainable competition in the markets for electronic communications networks and electronic communications services. This is because it supports the retail charge control by providing information that assists in monitoring its impact and in particular the sustainability of the control.

8.11 Clause 43 of the Communications Bill requires conditions to be objectively justifiable, non-discriminatory, proportionate and transparent. Additionally, clause 87(6) states that cost accounting systems shall be imposed to the extent considered appropriate. The Director believes that the obligation of cost accounting is objectively justifiable because it is essential for the provision of information used by the Director to monitor the impact of the retail charge control. Furthermore, the obligation does not discriminate between operators of the same class. That is, BT is the only dominant provider on which the Director is proposing to impose a retail charge control obligation.

8.12 The proportionality and transparency of the obligation will be dealt with in more detail in the separate consultation – Financial reporting in SMP markets: A consultation on accounting separation and cost accounting systems. In this document, the Director will propose the amount of information required and the processes needed to ensure that the information is fit for purpose, relevant and reliable. The Director will ensure that the cost accounting obligation imposed is both proportionate and transparent.

Accounting separation

8.13 Under clause 87(5) of the Communications Bill, the Director may impose such regulatory controls as he may from time to time direct in relation to the provision of services to end users. Such conditions may be imposed where conditions set in the wholesale market would fail to achieve the objective of ensuring effective competition and public interest. Therefore, the Director may, if the tests are met, impose an accounting separation obligation, for example, in those retail markets that have obligations to not unduly discriminate.

8.14 However, at this time and on the basis of the information currently available, the Director is not proposing to impose an accounting separation obligation in these retail markets. This decision does not fetter the Director’s discretion to impose such an obligation if further information becomes available or further analysis is carried out.

Q8.1 Do you agree that cost accounting requirements should be imposed in the markets proposed?

Chapter 9

Consultation

9.1 The Director seeks the views of interested parties on the analysis and proposals contained in this consultation document. The Director will then publish a statement setting out his conclusions.

9.2 With reference to regulation 6(6) of the Regulations, a consultation period of six weeks has been permitted for Representations. Representations must arrive at Oftel no later than close of business on 30 May 2003. Representations received after this time will not be taken into account, and no extensions of the deadline will be permitted.

9.3 Where possible, comments should be made in writing and sent by e-mail to alan.pridmore@oftel.gov.uk. However, copies may also be posted or faxed to the address below. If any stakeholders are unable to supply their comments in one of these ways, please use the contact details below to discuss alternatives.

Alan Pridmore
Oftel
50 Ludgate Hill
London EC4M 7JJ

Tel: 020 7634 8910
Fax: 020 7634 8847

9.4 Confidential responses should not be sent via the Internet. Responses will be published on Oftel's website in the Publications section under Responses to Oftel consultations except where respondents indicate that the response, or part of it, is confidential. Appointments to view written comments in Oftel's Research and Information Unit must be made in advance (see contact details below). Respondents are therefore asked to separate out any confidential material into a clearly marked annex. In the interests of transparency, respondents are requested to avoid confidential markings wherever possible

9.5 On this occasion, the Director is not inviting stakeholders to comment on the representations made by others.

Further copies of this document

9.6 This document can be viewed on Oftel’s website, www.oftel.gov.uk. Paper copies and more accessible formats such as large print, Braille, disc and audio cassette can be made available on request. Please contact Oftel’s Research and Information Unit by telephoning 020 7634 8761 or by sending an e-mail to infocent@oftel.gov.uk.

E-mail notifications

9.7 Oftel has a free e-mail based mailing list to help people stay informed about the work that Oftel is doing. Each time an Oftel document is published and placed on Oftel’s website at www.oftel.gov.uk, subscribers to the list receive an e-mail alert. To register, please go to the What’s New section of the website and access the electronic form.

Annex A

NOTIFICATION OF PROPOSALS UNDER REGULATION 6 OF THE ELECTRONIC COMMUNICATIONS (MARKET ANALYSIS) REGULATIONS 2003

Proposal for identifying markets, making market power determinations and the setting of market power conditions in relation to BT and Kingston

1. The Director General of Telecommunications ("the Director"), in accordance with Regulation 6 of the Electronic Communications (Market Analysis) Regulations 2003 (S.I. 2003/330) (the ‘Regulations’), hereby makes the following proposals for identifying markets, making market power determinations and the setting of market power conditions.

2. The Director is proposing to identify the following markets for the purpose of making market power determinations-

(a) for the United Kingdom, except the Hull area-

i. Analogue Exchange Line Services provided to Residential Customers;
ii. Analogue Exchange Line Services provided to Business Customers;
iii. ISDN2 Exchange Line Services provided to Business Customers;
iv. ISDN30 Exchange Line Services provided to Business Customers;
v. Local Calls provided to Residential Customers;
vi. National Calls provided to Residential Customers;
vii. International Direct Dial Calls on Category A routes provided to Residential Customers;
viii. International Direct Dial Calls on Category B routes provided to Residential Customers on a route by route basis;
iv. Operator assistance provided to Residential Customers;
x. Calls to Mobiles provided to Residential Customers;
xi. Local Calls provided to Business Customers;
xii. National Calls provided to Business Customers;
xiii. Operator assistance provided to Business Customers;
xiv. Calls to Mobiles provided to Business Customers; and

1. Analogue Exchange Line Services provided to Residential Customers;
2. 128kbit/s-capable Digital Exchange Line Services provided to Residential Customers;
3. Analogue Exchange Line Services provided to Business Customers;
4. ISDN2 Exchange Line Services provided to Business Customers;
5. ISDN30 Exchange Line Services provided to Business Customers;
6. Local Calls provided to Residential Customers;
7. National Calls provided to Residential Customers;
8. International Direct Dial Calls on Category A routes provided to Residential Customers;
9. International Direct Dial Calls on Category B routes provided to Residential Customers on a route by route basis;
10. Operator assistance provided to Residential Customers;
11. Calls to Mobiles provided to Residential Customers;
12. Local Calls provided to Business Customers;
13. National Calls provided to Business Customers;
14. International Direct Dial Calls on Category A routes provided to Business Customers;
15. International Direct Dial Calls on Category B routes provided to Business Customers on a route by route basis;
16. Operator assistance provided to Business Customers; an
17. Calls to Mobiles provided to Business Customers.

3. The Director is proposing to make market power determinations that the following persons have significant market power-

(a). in relation to each of the markets set out in paragraph 2(a) above, BT; and

(b) in relation to each of the markets set out in paragraph 2(b) above, Kingston.

4. The Director is proposing to set SMP conditions on the persons referred in paragraphs 3(a) and (b) above as set out in Schedules 1 and 2 to this Notification.

5. The effect of, and the Director’s reasons for making, the proposals to identify the markets set out in paragraph 2 above are contained in Chapter 3 of the consultation document with this Notification.

6. The effect of, and the Director’s reasons for making, the proposals to make the market power determinations set out in paragraph 3 above are contained in Chapter 4 of the consultation document with this Notification.

7. The effect of, and the Director’s reasons for making, the proposals to set the market power conditions set out in Schedules 1 and 2 to this Notification are contained in Chapter 6 of the consultation document with this Notification.

8. In identifying and analysing the markets referred to in paragraph 2 above, and in considering whether to make the proposals set out in this Notification, the Director has, in accordance with regulation 5(2) of the Regulations, taken due account of all applicable guidelines and recommendations which have been issued or made by the European Commission in pursuance of a Community instrument, and relate to market identification and analysis or the determination of what constitutes significant market power.

9. The Director considers that the proposed SMP conditions referred to in paragraph 4 above comply with, and are necessary for satisfying requirements in, the provisions of the Directives, as appropriate and relevant to each of such SMP conditions, referred to in regulation 6(8) of the Regulations.

10. Representations may be made to the Director about any of the proposals set out in this Notification and the accompanying consultation by 30th April 2003.

11. Copies of this Notification have been sent to the Secretary of State, the European Commission, and such of the regulatory authorities of other member states as the Director thinks fit.

12. In this Notification-

(a) "BT" means British Telecommunications plc (registered company number 1800000) including any of its subsidiaries or holding companies, or any subsidiary of such holding companies, all as defined by section 736 of the Companies Act 1985, as amended by the Companies Act 1989;

(b) "Hull area" means the area defined as ‘Licensed Area’ in the licence granted on 30 November 1987 by the Secretary of State under section 7 of the Telecommunications Act 1984 to Kingston upon Hull City Council and Kingston Communications (Hull) plc;

(c) "Kingston" means Kingston Communications (Hull) plc (registered company number 2150618) including any of its subsidiaries or holding companies, or any subsidiary of such holding companies, all as defined by section 736 of the Companies Act 1985, as amended by the Companies Act 1989;

(d) "significant market power" has the meaning given to it in regulations 5(3) to (7) in the Regulations; and

(e) "United Kingdom" has the meaning given to it in the Interpretation Act 1978 (1978 c.30).

DAVID ALBERT EDMONDS

DIRECTOR GENERAL OF TELECOMMUNICATIONS

14 MARCH 2003

Schedule 1

The conditions imposed on BT under Section 87 of the Communications Act 2003/Regulation [X] of the Networks and Services Regulations 2003 as a result of the analysis of the markets set out in paragraph 2 of this Notification in which BT has been found to have significant market power

Part 1: Definitions and Interpretation

1. Condition D1 shall apply to the markets set out in paragraph 2(a) sub-paragraphs (i), (v), (vi), (vii), (viii), (ix) and (x) of this notification. Conditions D2 and 3 shall apply to the markets set out in paragraph 2(a) of this Notification.

2. For the purpose of interpreting the conditions imposed on the Dominant Provider following a review of the markets referred to in paragraph 2(a) of this Notification the following definitions shall apply-

3. Except insofar as the context otherwise requires, words or expressions shall have the meaning assigned to them and otherwise any word or expression shall have the same meaning as it has in the Act.

4. The Interpretation Act 1978 shall apply as if each of the conditions were an Act of Parliament.

5. Headings and titles shall be disregarded.

Part 2: The conditions

Condition D1 – Control of Charges

In this Condition-

(a) Approved Apparatus to be readily connected to, and disconnected from, the Network;

(b) the conveyance of Signals between such Approved Apparatus and the Network;

(c) the due functioning of the Network to be tested,

i. to supply energy between such Approved Apparatus and the Network;

ii to protect the safety or security of the operation of the Network; or

iii. to enable other operations exclusively related to the running of the Network to be performed or the due functioning of any system to which the Network is or is to be connected to be tested (separately or together with the Network;"

"Network Termination Point" means the physical point at which a Subscriber is provided with access to a Public Electronic Communications Network and, where it concerns Electronic Communications Networks involving switching or routing, that physical point is identified by means of a specific network address, which may be linked to the Telephone Number or name of Subscriber. Where a Network Termination Point is provided at a fixed position on Served Premises it shall be within an item of Network Termination and Testing Apparatus;

and any subsidiary or holding company of the companies listed in (a) – (e) above, or any subsidiary of that holding company, all as defined by Section 736 of the Companies Act 1985 as amended by the Companies Act 1989, or any successor company operating the same or substantially the same mobile public electronic communications network as the companies listed in (a) to (e) above;

"Subscriber" means any person who is party to a contract with a provider of Public Electronic Communications Services for the supply of such Services; and

D1.1 The Dominant Provider shall take all reasonable steps to secure that, during any Relevant Year, the amount of General Charges (determined by employing the formula set out in paragraph D1.2 and, as the case may be, calculated as set out in paragraphs D1.4 and D1.10) is not more than the Controlling Percentage.

D1.2 The formula referred to in paragraph D1.1 is-

where:

D1.3 I n applying the formula set out in paragraph D1.2, references in that formula to revenues from, and volumes of, package i and service j shall mean those revenues and volumes accrued from all Customers whose bills issued by the Dominant Provider to them are equal to or less than the highest bill of Customers in the eighth decile (ranked on the basis of the amount billed by the Dominant Provider to all Customers for the services for which General Charges are charged, the highest bill being at the top of the tenth decile) in the Relevant Financial Year.

D1.4 Where the Value of Inclusive Calls-

(a) is increased during any Relevant Year beyond £5.49 per quarter (excluding VAT), such increase shall not be taken into account in the calculation of the Percentage Change in the aggregate of General Charges (calculated in accordance with paragraph D1.2) for the Relevant Year in question or any following Relevant Year; and

(b) is decreased during any Relevant Year, such decrease shall be deemed as a corresponding increase in the charges for the services in the market for Analogue Exchange Line Services provided to Residential Customers in the United Kingdom excluding the Hull Area and shall be taken into account as such in the calculation of the Percentage Change in the aggregate of General Charges (calculated in accordance with paragraph D1.2) for the Relevant Year in question.

D1.5 Where, notwithstanding the obligation imposed on the Dominant Provider by paragraph D1.1 (or paragraph 1 of Condition 70), and without prejudice to the generality of that obligation, there has taken place a change in General Charges (or General Charges as defined under Condition 70) of a kind not permitted under paragraph D1.1 (or paragraph 1 of Condition 70), the Dominant Provider shall make such adjustments in General Charges (or leave them unchanged), for such period, whether in the year in question or the following year (and whether or not that year is a Relevant Year), as may be reasonably required to satisfy the Director that the matter has been remedied. Such adjustments shall not be relevant for the purposes of establishing compliance with paragraph D1.1 in a following Relevant Year.

D1.6 Subject to paragraph D1.7, the Controlling Percentage in relation to any Relevant Year is the amount of the change in the Retail Prices Index (‘RPI’) in the period of 12 months ending on 30 June immediately before the beginning of that Year, expressed as a percentage (rounded by two decimal places) of that Index as at the beginning of that period, reduced by RPI subject to the following provisions-

(a) where the Director notifies the Dominant Provider in writing that he is satisfied in relation to the introduction and provision of services specified in paragraph AA10.1 during any Relevant Year, he may direct that the Controlling Percentage in the Relevant Year in question shall be calculated according to the following formula-

where a is the number of days in the Relevant Year prior to the satisfactory introduction and provision of such services and b is the number of days in the Relevant Year after the satisfactory introduction and provision inclusive and that the Controlling Percentage in any following Relevant Year shall be RPI; and

(b) where on 30 June, in any Relevant Year, RPI is 4 per cent or more, the Director may direct that the Controlling Percentage for the following Relevant Year shall be RPI reduced by 4.

D1.7 If the Percentage Change in any Relevant Year is less than the Controlling Percentage, then the Controlling Percentage for the following Relevant Year shall be determined in accordance with paragraph D1.6 but increased by the amount of such deficiency.

D1.8 Where the Dominant Provider makes a material change (other than to the amount of a General Charge) to any service for which a General Charge is charged or to the date on which its financial year ends, this Condition shall have effect subject to such reasonable adjustment to take account of the change as the Director, after consultation with the Dominant Provider, shall direct to be appropriate in the circumstances; and for the purposes of this paragraph a material change to any service includes the introduction of a new service wholly or substantially in substitution for that existing service.

D1.9 If the Dominant Provider imposes a specific charge or an increased charge in relation to any service which up to the time when the charge or increased charge is first imposed had been provided without charge or at a lower charge and the Director directs that some or all the costs properly attributable to that service had previously been attributed to services to which General Charges apply and that it would be proper in the circumstances for the newly introduced or increased charge to be controlled, that charge shall, unless the Director directs otherwise, be a General Charge and this Condition shall have effect subject to the following provisions:

D1.10 The Dominant Provider shall ensure that in any Relevant Year its Retention for Calls to Mobiles to a Specified Mobile Operator averaged across all the charging periods in each twenty-four hour period is within five per cent of its Retention for Calls to Mobiles to any other Specified Mobile Operator averaged across all the charging periods.

D1.11 The Dominant Provider shall comply with any direction the Director may make from time to time under this Condition.

D1.13 BT shall not be permitted to change any General Charge between 25 July 2003 and 31 July 2003.

Condition D2 – Requirement not to unduly discriminate

D2.1 The Dominant Provider shall not unduly discriminate against particular persons or a particular description of persons in relation to services offered.

Condition D3 – Requirement to notify charges

D3.1 Except in so far as the Director may otherwise consent in writing, the Dominant Provider shall publish charges, terms and conditions, including bundled charges, terms and conditions (whether or not those bundles include charges, terms and conditions for services supplied in markets to which this Condition does not apply) and act in the manner set out below.

D3.2 The Dominant Provider shall publish on any relevant website its charges, terms and conditions, and shall publish any amendment to them (including charges, terms and conditions for new services) on the day that the amendment comes into effect.

D3.3 The Dominant Provider shall also send to the Director a written notice of any amendment to its charges, terms and conditions (including charges, terms and conditions for new services) on the day that the amendment comes into effect, and shall send a copy of the notice to any person who may reasonably request such a copy.

Schedule 2

The conditions imposed on Kingston under Section 87 of the Communications Act 2003/Regulation [X] of the Networks and Services Regulations 2003 as a result of the analysis of the markets set out in paragraph 2 of this Notification in which Kingston has been found to have significant market power

Part 1: Definitions and Interpretation

1. Conditions DA1 and DA2 shall apply to the markets set out in paragraph 2(b) of this Notification.

2. For the purpose of interpreting the conditions imposed on the Dominant Provider following a review of the markets referred to in paragraph 2(b) of this Notification the following definitions shall apply-

‘Act’ means the Communications Act 2003]

‘Director’ means the Director General of Telecommunications

"Dominant Provider" means Kingston Communications (Hull) plc (registered company number 2150618 including any of its subsidiaries or holding companies, or any subsidiary of such holding companies, all as defined by section 736 of the Companies Act 1985, as amended by the Companies Act 1989;

3. Except insofar as the context otherwise requires, words or expressions shall have the meaning assigned to them and otherwise any word or expression shall have the same meaning as it has in the Act.

4. The Interpretation Act 1978 shall apply as if each of the conditions were an Act of Parliament.

5. Headings and titles shall be disregarded.

Condition DA1 – Requirement not to unduly discriminate

DA1.1 The Dominant Provider shall not unduly discriminate against particular persons or a particular description of persons in relation to services offered.

Condition DA2 – Requirement to notify charges

DA2.1 Except in so far as the Director may otherwise consent in writing, the Dominant Provider shall publish charges, terms and conditions, including bundled charges, terms and conditions (whether or not those bundles include charges, terms and conditions for services supplied in markets to which this Condition does not apply) and act in the manner set out below.

DA2.2 The Dominant Provider shall publish on any relevant website its charges, terms and conditions, and shall publish any amendment to them (including charges, terms and conditions for new services) on the day that the amendment comes into effect.

DA2.3 The Dominant Provider shall also send to the Director a written notice of any amendment to its charges, terms and conditions (including charges, terms and conditions for new services) on the day that the amendment comes into effect, and shall send a copy of the notice to any person who may reasonably request such a copy.

Annex B

IDD: List of Category A and Category B

Annex C