BT’s regulatory financial reporting

Executive Summary

Background

1.1 Relevant, reliable and timely regulatory financial information is fundamental to the effective economic regulation of the electronic communications sector. Fit for purpose financial reporting forms an essential element of the regulatory framework.

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 21 st 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, regular discussions with BT and use of the regulatory financial statements we identified a number of areas where we proposed to enhance the presentation and improve the quality of BT’s regulatory financial statements, with the aim of ensuring they are fit for purpose.

1.5 The proposals for these changes were set out in a consultation document published on 17 April 2008 (the “April Consultation”).

Scope of this document and Final Decisions

1.6 This Statement sets out Ofcom's final decisions in respect of the April Consultation proposals which fell 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 (“business as usual” changes) to ensure the regulatory financial statements remain fit for purpose.

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

Objective	Decision: BT to…
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.	Add new network components specific to BT’s 21CN. Disclose of the costs of these new components in the relevant 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 specified network components to the agreed list. Prepare analysis of cost inputs to regulated wholesale leased line services (this will not be made publicly available).
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.	Voluntarily prepare financial statements for the downstream product groups that use inputs from regulated business connectivity markets (this will not be made publicly available).
Matching revenues and costs We have found that in some markets the immediate recognition of revenues for sales of equipment does not match the costs of that equipment (depreciated over their estimated economic life). This impacts the interpretation of profitability in those markets.	Explain in the financial statements the effect this accounting treatment has on the underlying margins in relevant wholesale markets (wholesale local access and 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 Business Connectivity Market Review (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.	Improve and describe the basis on which revenues are calculated to more closely match internal and external billing practices. Prepare a statement showing the difference between the revenue recognised in BT’s general ledger and the calculated service by service revenue for the business connectivity markets covered by the replicability review (not for publication). Revise the internal debtor calculation to reflect equivalent settlement terms experienced by BT with its external customers. Provide additional financial information on services in relevant BCMR markets including improved disclosure of resilience and third party infrastructure. Report separately for Central London Zone (CLZ) and non-CLZ prices in relevant BCMR markets. Amend and enhance supporting documentation to reflect all of the changes set out above.
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.	Prepare and report additional cost data on 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.	Ensure that no direct or indirect costs relating to the provision of the LUS, under BT’s universal service obligations, are attributed to SMP wholesale markets.

1.8 The proposals in the April Consultation and the decisions in this Statement only relate to BT. In respect of KCOM (previously Kingston Communications plc), we have considered the implications of all the issues raised. However, given the scale and scope of the reporting obligations currently imposed on KCOM relative to BT, we have decided that no changes are necessary to KCOM’s regulatory financial statements for 2007/08.