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Regulatory Financial Obligations
"Regulatory Financial Obligations on BT" published 26 January 2007
Issued March 23, 2007
Executive Summary
Ofcom have undertaken several reviews, which has led to significant change to the regulatory reporting environment over the past few years. This ongoing review continued with Ofcom's consultation documents of 3 May 2006 ("May Consultation") and 26 January 2007 ("January Consultation").
The May Consultation explored the principles behind the regulatory reporting framework and what level of detail BT should be required to provide and publish. The January Consultation summarises the scope, key findings and recommendations arising from the May Consultation. The aspects of significant change from these consultations will be incorporated into BT's "Current Cost Financial Statements for 2007".
In the BT response to the May Consultation, we pointed out that "Ofcom has missed a significant opportunity to reduce the regulatory burden, whilst at the same time providing key stakeholders with much needed clarity and usefulness of information about BT's activities".1 Over the past two years BT has been proactively working with Ofcom to develop a more fit-for-purpose and proportionate form of regulatory reporting that still meets key stakeholders requirements. For 2005/06 BT voluntarily produced a form of regulatory reporting that we believe provided an appropriate level of detail for annual reporting.2
In addition to providing this alternative form of regulatory reporting BT agreed with Ofcom's proposal for it to be provided with a comprehensive data file of transactions that underpin the published regulatory accounts for use in a data extract tool. The provision of this tool forms a material increase in the amount of regulatory information BT provides to Ofcom and was agreed on the understanding that this would be the catalyst for a radical review of regulatory reporting. BT considers its voluntary report to be a more proportionate, focussed and fit for purpose report covering key regulatory areas, which together with the flat file would allow for the removal of less significant detail and explicit deregulation on reporting in markets where regulation is diminishing.
Given Ofcom's rejection of BT's voluntary report BT is disappointed that Ofcom has again missed a significant opportunity to streamline regulatory reporting and reduce the regulatory reporting burden. Furthermore, the provision of much needed clarity and usefulness of information about BT's regulated activities to key stakeholders has been missed. BT believes the increase of information provided via the data extract tool has not resulted in a commensurate reduction in other areas of reporting and has resulted in the overall reporting burden on BT becoming disproportionately heavy.
However, as the Ofcom annual plan for 2007 discloses, the regulatory reporting review will continue into the future3. There will continue to be areas of reporting change (for example the reporting of Retail SMP markets or the incremental product costs in a next generation network world) and BT hopes to continue the recent constructive dialogue with Ofcom and the other UK communication providers into the future.
Our main concerns from this consultation are summarised below, with detailed responses to questions 1 to 9 being set out in the following section of this document.
Little change proposed compared to previous 2005/06 reporting
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Format driven - no radical review: Ofcom's proposed changes are relatively format driven when compared to information previously provided in BT's Current Cost Financial Statements for 2006. The exception is in the Long Run Incremental Cost ('LRIC'), which will still be provided but proposed to be in an 'indicative' way. Overall, little information has been removed whilst more information has been added. Additional information includes Openreach related financial statements; nature of costs / fixed assets and their associated drivers and changes in the year (Annex 5 and 6); and additional detail in the Financial Review at Market Group level (Annex 10). BT does not see these changes as reducing the regulatory burden.
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Missed opportunity: The proposed changes do not appear to take into account the fundamental principles put forward by BT as part of the 2005 and 2006 regulatory accounting review. BT's voluntary "Regulatory Financial Report 2006" (or the "Blue-sky" report) attempted to make regulatory accounting more concise, readable and targeted at the relevant "bottleneck" markets. These were principles stated as being important by Ofcom throughout the joint review, but have not been adhered to in the illustrative regulatory accounts Ofcom has proposed for 2006/07.
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Proportionality: All SMP markets are given an equal weighting in Ofcom's illustrative regulatory accounts for 2006/07. The detail required for the publication of SMP markets could potentially be defined by materiality and importance. The addition of the comprehensive data extract tool has significantly increased the ability of Ofcom to review financial data and therefore should lead to a more material reduction in the level of detail published compared to that Ofcom which has proposed.
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Readability: The continued inclusion of granular information; for example the component and route factor information ensures the illustrative regulatory statements will remain a specialist document that few will understand and use. Ofcom indicated that they would share proof of evidence regarding how altnets use the regulatory accounts and, more importantly, for what purpose. BT has seen no evidence of this, and it remains our belief that companies use BT's regulatory accounts for commercial purposes, that has little elevance to BT's regulatory obligations.
LRIC reporting
Sections 4.50 to 4.77 outline the changes Ofcom proposes for the reporting of LRIC. In summary, BT supports Ofcom's review of the requirements of LRIC information in a next generation networks ('NGN') environment. However, LRIC remains an important regulatory and competition law test for cost orientation purposes both in the UK and across Europe and the reduction in emphasis on the reported numbers raises some important issues that need addressing.
Although LRIC may be more difficult to calculate in a NGN environment; given the above transition period and as the calculation of LRIC prices is a key part of BT's day to day business, BT will continue to maintain its LRIC systems to aid potential future regulatory and legal tests that require LRIC information. However BT supports Ofcom's proposals for reduced emphasis in the reporting of, and reduction in the audit assurance on these LRIC figures. Our interpretation of the LRIC reporting requirements for 2006/07 is laid out in our response to Question 6 below.
Audit opinion
BT's view remains that one overall opinion can provide adequate assurance for users provided it is driven by an audit approach that is structured in an appropriate way. However the need to move away from each SMP market having its own separate audit opinion is welcomed.
BT is concerned about the significant increase in the overall level of external assurance being sought by Ofcom, which clearly increases the regulatory burden for BT. The proposed financial statements still contain multiple audit opinions, with increased scope this year with the publication of Openreach related financial information (which we believe should simply be covered in the overall audit opinion on the regulatory financial statements as a whole); the provision of the data extract tool which requires external auditor assurance; and Ofcom's proposed Agreed Upon Procedures which also require separate Independent Accountants' Report(s) to be provided by BT's external auditors. All of these additional assurances raise the levels of external auditor assurance in the years ahead and is a significant additional regulatory burden on BT.
Openreach
BT believes that the proposed format and content for the publication of Openreach financial information and the reconciliation to Openreach information published in the statutory accounts do not provide the right balance between transparency and clarity for that trading entity.
In particular where there is an SMP market shared between Openreach and Wholesale, the publication of these 'part markets' will cause more confusion than clarity. BT believes that an appropriate level of aggregation in the reconciliation will give the users of the accounts sufficient detail on the trading of Openreach for the 'broad product grouping' as outlined in BT's Undertakings agreed with Ofcom. Furthermore, BT does not believe the level of detail for the Mean Capital Employed ('MCE') at SMP level and especially the MCE reconciliation is required. This MCE reconciliation is not stated in the Undertakings as being necessary. The production of product level MCE statements is not how Openreach manages its business or balance sheet. The information on the balance sheet should be aggregated to a more appropriate level.
Download full response as a PDF document 
BT would welcome any comments on the contents of this document. Comments should be addressed to Sharon Lim by e-mail: sharon.lim@bt.com
