Changes to BT and KCOM's regulatory financial reporting

  • Start: 20 March 2009
  • Status: Closed
  • End: 01 May 2009

Executive Summary

Background

1.1 Relevant, reliable and timely financial information is fundamental to the effective economic regulation of the electronic communications sector. It provides the data and evidence that informs many of our decisions. We require this 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).

1.2 As a result of changes in the regulatory, technological and competitive environment, our ongoing review and use of the regulatory financial statements (RFS) and discussions with BT we identified a number of areas where we proposed to enhance the presentation and improve the quality of BTs RFS.

1.3 Our proposals were set out in a consultation document published on 20 March 2009 (the March Consultation) and fell broadly into three categories:

  • Changes to aspects of the preparation of the RFS;
  • Improvements to reporting in the markets reviewed during 2008 in the Business Connectivity Market Review (the BCMR), the replicability review and the Leased Lines Charge Control (the LLCC); and
  • Implementation of the changes set out in the recent wholesale broadband access statement (the WBA statement) and the business connectivity market review statement (the BCMR statement).

1.4 The current regulatory financial reporting regime is also applicable to KCOM (previously Kingston Communications plc) but prior to our March Consultation no changes had been proposed to KCOMs reporting requirements since they were set in July 2004. This time we set out two minor proposals that affect KCOM to implement changes to market names and definitions in the business connectivity and wholesale broadband access markets.

Scope of this document and final decisions

1.5 This statement sets out our final decisions in respect of the March Consultation.

1.6 The table below summarises the objectives addressed in this statement and our final decisions taking full account of the responses to the March consultation.

Objective/Issue

Decision: BT to….

1) Change to ensure consistent recognition of costs and revenues

We have found examples where BT sells equipment, either externally or internally, and recognises the revenue upfront and capitalises the costs and depreciates them over the life of the equipment. This hinders the users’ ability to properly understand service costs and revenue

Separately prepare and publish information for the relevant markets providing the extra disclosure that allows the reader to see adjusted market and service costs, and profitability. BT to publish this information no later than six months after publication of the 2008/09 RFS.

In addition and for Ofcom only, BT to prepare additional financial information comparing unit sales with the costs of provision on a matched basis (conditional on the basis of preparation used for the published statement)

2) Improvements to reporting in business connectivity markets

We have identified areas for improvement through the replicability review, the LLCC and the BCMR. These are necessary to aid the monitoring of BT’s cost orientation and no undue discrimination obligations.

Separately identify and report the costs of resilience in the RFS. Then no later than six months after the publication of the RFS, BT to separately identify and publish the costs of excess construction charges (ECCs) and equipment and infrastructure charges. From 2009/10 BT to report these costs in the published RFS.

Prepare gross margin statements for the downstream product groups covered by the business connectivity markets (for Ofcom only).

Report local end internal and external unit costs to better reflect, where relevant, the point of handover element in the external costs.

Publish the cost stack analysis underlying partial private circuit (PPC) services and technical areas.

Prepare a reconciliation, for Ofcom only, showing the difference between the total revenues in BT’s general ledger and the calculated service by service revenue for the markets covered by the replicability review (grouped where necessary).

Change the reported units, where necessary, in the AISBO market, so that they are consistent with the basis on which these services are sold in BT’s price list.

3) Implementation of changes set out in recent market review statements
Two market reviews were concluded in 2008; for wholesale broadband access (WBA) and business connectivity markets. These reviews made changes to existing market definitions and introduced geographic markets. These changes need to be reflected in the regulatory reporting for BT and KCOM.

Geographic reporting in the relevant business connectivity markets will not be implemented until 2009/10 therefore the national market will continue to be reported.

Make changes to the form and content to implement geographic reporting in WBA markets and any changes to market definitions. This will include publication of information on the national markets (and therefore limited disclosure of non-SMP market 3).

Provide complete information for all three WBA markets to Ofcom only, on a cost accounting and Equivalence of Input (EOI) basis.

Make changes to the form and content of the statements to take account of any new market definitions in the business connectivity area*.

4) Removal of reporting for markets that account for less than £10m revenue

No longer report the wholesale residential ISDN2, retail operated assisted calls in the UK and retail residential IDD calls category B.

*Applies to both BT and KCOM

1.7 In the March Consultation we also highlighted two issues identified in “A New Pricing Framework for Openreach” consultation (the “Openreach Consultation”).  One was an issue of cost allocation, where Ofcom identified that some of the non-regulated Openreach services do not appear to pick up an appropriate share of costs. Subsequently, the Openreach Statement concluded that - in determining regulated prices- some costs should be reallocated from the Core Rental Services in each year of the price control. We will discuss with BT changes to its cost attribution methodology in the next year to reflect the implications of this adjustment from 2009/10 onwards.  However, due to the timing of the Openreach statement, it is not practicable to require any changes to be made in the 2008/09 RFS.

1.8 The second issue concerns the allocation of Low User Scheme (LUS) costs to Openreach. This is being considered by the Equality of Access Office (EAO) in relation to paragraph 5.31 of the Undertakings.  We will review any further steps we need to take after the findings of the EAO are known.

1.9 Separate to the decisions in this statement which deal with ongoing improvements and modifications to the existing reporting regime we will be undertaking a “clean sheet” reassessment of the regulatory reporting framework. This reassessment will ask fundamental questions about the information required to demonstrate compliance with obligations or provide reliable evidence for other regulatory purposes such as investigations or the establishment of price controls. Our intention is that we will formulate options and proposals that underpin new arrangements for the ongoing provision of regulatory financial information for consultation in the summer.


Main documents

Supporting documents

Supporting documents

Supporting documents

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Responses

Responder name Type
BT.pdf (PDF File, 55.9 KB) Organisation
Cable_Wireless.pdf (PDF File, 48.1 KB) Organisation
UKCTA.pdf (PDF File, 115.4 KB) Organisation