Financial reporting obligations in SMP markets

BT's response dated 31 July 2003, to Oftel's consultation document "Financial reporting obligations in SMP markets, a consultation on accounting separation and cost accounting" dated 22 May 2003

Download full response in PDF format.

Overview

This paper sets out BT's response to Oftel's Consultation Document on financial reporting obligations in markets in which an operator is found to have Significant Market Power (SMP) and, as such, should be read in conjunction with BT's responses on the consultations of each of these separate markets.

BT agrees that regulatory reporting has a key role to play: in allowing Oftel to monitor the impact of a charge control; in providing a demonstration of cost orientation; and in providing a demonstration of the absence of any undue discrimination, in markets where an operator is found to have SMP.

All such reporting should be:

• relevant and timely,

• practical and proportionate, such that it passes a cost/benefit test,

• reliable, and

• address a legitimate regulatory need.

We believe that the ex ante reporting obligations to be applied should be reduced from those proposed by Oftel to a more proportionate set, consistent with the above tests. Obligations should be set within an appropriate framework at a level that can be applied practically.

This framework should:

• require a level of detail that provides only information relevant to the regulatory need that it is intended to address, and no more;

• not require reporting of areas for which there only might be a regulatory need;

• avoid the need for Oftel to reconfirm the requirement each year as a result of requests for variations; and

• provide a reasonable timescale for reporting.

Oftel's proposals impose as a default a very extensive set of reporting obligations, many of which are considered by BT to be disproportionate. For example, Oftel proposes that BT prepare and have audited a profit and loss account and statement of mean capital employed (effectively a balance sheet) for that part of BT's business engaged in delivering both wholesale and retail IDD calls to each of 121 destinations. We note that 40 of these routes had retail revenues of less than £50,000 for the year ended 31 March 2003.

Although there is scope to vary the obligations by BT obtaining the consent of the Director in writing, we note that until a consent is given, Oftel's proposals would require BT to do all the things necessary to comply with all the obligations as proposed. In effect, this means that BT is obliged to incur the time, effort, opportunity cost and expense of complying with all the proposed obligations, even if Oftel then consents to their variation. It would also have the unfortunate effect of institutionalising regulatory uncertainty in the reporting area.

We believe that the reporting obligations should be set at an appropriate level at the outset, in order to limit the number of consents to be sought. Under Oftel's current proposals, we would expect to make a significant number of requests to Oftel for consent to variation of the obligations annually.

Oftel has the ability to request additional information through its extensive information gathering powers. It is therefore unclear to BT why Oftel is seeking to impose such significant ex ante reporting obligations. Oftel appears to be anticipating potential, but as yet unknown - and therefore remote - problems. We do not believe Oftel's proposals are necessary for it to carry out its regulatory duties and that it could reasonably rely on its information gathering powers to obtain specific information when required, without imposing on BT the burden of making it constantly ready to be available on a "just-in-case" basis.

The new regulatory framework is a watershed in the development of regulation. It marks a move to regulation based on competition law principles and a consistent EU-wide approach. We note that it is by no means clear how these proposals will result in harmonisation across the EU.

The aim of the new regime is to focus regulation on specific issues of market failure and ensure regulation remains proportionate in the light of changing market conditions.  Any remedies proposed should be appropriate and regularly reviewed to ensure they only address problems arising from market failure. Thus regulation should not be applied where competition law remedies would suffice and there should be no regulation at the retail level where regulation at the wholesale level is adequate to achieve the purpose of promoting competition.

The implementation of the new framework provides the opportunity to take a current perspective to the examination of all markets, rather than relying on the pre-existing framework. We believe that a number of proposals in this Oftel consultation do indeed reflect a backward-looking approach involving the carry-forward of existing remedies.

We believe that it is essential Oftel should start from a 'clean sheet' when considering which remedies to apply in markets where an operator has been identified as having SMP. To have SMP is not by itself a problem: it does not constitute an abuse and so no remedy should automatically follow. The imposition of any remedy needs to be rigorously appraised on two counts: whether it is proportionate to the specific market failure issues identified; and whether it will be necessary and effective in addressing specific market problems that have been identified as likely to occur in the absence of any ex ante regulation being in place.  We feel the case has yet to be made as to what market problems there are to be remedied that would justify the imposition of some of the ex ante reporting obligations proposed by Oftel.

BT believes that Oftel has made proposals that do not meet all of the criteria set out above, and that are in some parts disproportionate and unjustifiable.

In particular, the proposals with respect to 

• On-demand reporting,

• Granularity of reporting, and

• Audit

go beyond what BT believes is reasonable and proportionate.

We also note that BT concluded a significant debate with Oftel as to perceived deficiencies in BT's regulatory reporting under the former (Licence Condition 78) regime as recently as 8 months ago, on 27 November 2002, when Oftel issued a Direction following the completion of its lengthy and extensive investigation under condition 78.14 of the BT Licence. We are not aware of any significant concerns that have arisen since then that would invalidate the reasoning behind that outcome.

Whilst we recognise that Oftel is concerned with the implementation of a new regulatory regime, many of the issues on which it is now consulting are similar to those concluded upon on 27 November 2002. However, a number of Oftel's current proposals are more extensive than it was thought necessary to apply last November. We would remind Oftel of the report prepared by KPMG (dated 17 September 2002) in support of BT's views at that time, that Oftel's then proposals were unreasonably burdensome and disproportionate to those required to carry out its duties, and of the letter from Sir Bryan Carsberg that agreed with KPMG's conclusions. We believe that this conclusion applies also to Oftel's current proposals.

BT welcomes comments on this submission which should be sent to: Tim Jones Email: tim.jones@bt.com