Regulatory financial reporting obligations on BT

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  • 1. Regulatory financial reporting obligations on BT UKCTA Response to Ofcom Consultation - Part 2, questions 13 - 30 Submitted to Ofcom: 12th July 2006
  • 2. UKCTA is a trade association promoting the interests of competitive fixed-line telecommunications companies competing against BT, as well as each other, in the residential and business markets. Its role is to develop and promote the interests of its members to Ofcom and the Government. Details of membership of UKCTA can be found at Introduction UKCTA welcomes this opportunity to comment on Ofcom’s consultation on the proposed changes to BT’s regulatory financial reporting obligations. In this document UKCTA is responding to the second phase of the consultation (questions 13 – 30). In June 2006 UKCTA submitted a response covering questions 1 – 12. Proposed changes to BT’s regulatory financial reporting framework 2 Questions 13 - 30 UK Competitive Telecommunications Association
  • 3. Q&A In the following section, UKCTA responds to the specific questions (13 – 30) posed in the consultation document. Question 13: How should Ofcom apply concepts of commercial confidentiality and proportionality in determining how much information should be made publicly available? The suggestion that BT should not be required to make some regulatory financial reporting data publicly available on the grounds of commercial confidentiality implies that, in doing so, other operators are competitively advantaged. However, publication obligations stem from SMP designations and are intended to counter the unfair competitive advantages bestowed upon a dominant provider. Once a market is no longer subject to dominance by any one player, then normal market conditions prevail and publication obligations are no longer required. Where common costs transcend both SMP and non-SMP markets, accounting separation may cover both markets to ensure that the data is coherent. The publication of BTs regulatory financial reports is important because all stakeholders, not just Ofcom, require comfort that BT is meeting its obligations as a result of its SMP designations in certain markets. Other operators have a unique role to play in scrutinising these reports and sometimes are best placed to interrogate the information that BT publishes. It is BT’s competitors who understand the cost mechanics of a market best, as they are engaged in similar activities. Specifically, UKCTA considers that the benefits of accounting transparency with regard to markets that act as “enduring economic bottlenecks” outweigh commercial confidentiality concerns in either that market or an associated non-SMP market. Clearly, the inference is that publication of cost data to parties other than Ofcom is a proportionate remedy to economically significant market failure. Needless to say, in terms of administrative burden, if BT is already required to provide data to Ofcom then it is not be unduly onerous to make that data publicly available. In fact, if the cost data from an SMP product is not published it could be viewed as conferring an unfair competitive advantage upon a dominant provider. The cost data associated with an SMP product is a key feature of that product. The dominant provider has access to this data because of its SMP and, by not making it publicly available, becomes better informed in that market than its competitors. Proposed changes to BT’s regulatory financial reporting framework 3 Questions 13 - 30 UK Competitive Telecommunications Association
  • 4. Question 14: Do you agree that Ofcom should attempt to define separately the regulatory, assurance and commercial interests that stakeholders might have in BT’s regulatory financial statements in determining how much financial information should be made publicly available? UKCTA does not believe that stakeholder interests can be so easily separated as they are, by their nature, mutually inclusive. It is recognised that “publication of information may contribute to an open and competitive market and also add credibility to the regulatory accounting system.” 1 Commercially minded stakeholders, such as other network operators, are solely interested in the regulation of markets because of the impact that it has on their businesses. Question 15: What is the role for stakeholders in contributing to the level of scrutiny on the financial information provided by BT? Any regulatory accounting regime needs to be credible to industry. UKCTA does not believe that an assurance regime alone is sufficient to provide that level of comfort. Ofcom’s own use of the published accounts appears to be targeted and non- comprehensive and, as such, will be insufficient to reassure industry that obligations are being met. Stakeholders have a better understanding of some of the issues than auditors or the regulator. A benefit of publication to industry is that a certain rigour and discipline is instilled upon the dominant provider that would not necessarily occur if the data was scrutinised by an NRA and auditor. Stakeholder scrutiny is essential because it will be directed towards the elements of BT’s regulated activity where failure to meet its obligations will have the greatest detrimental impact. By interrogating the data themselves, industry is able to lighten the burden on both Ofcom and BT. Without access to detailed regulatory financial reporting, stakeholders may approach Ofcom more often to investigate elements of the regulated accounts. Such approaches are likely to be more speculative and unfocussed. Question 16: What are the key compliance issues that industry needs to have answered by the regulatory reporting regime and what is the regulatory basis for each of these requirements? UKCTA agrees with the “compliance issues that need answering” detailed in its consultation : 1 220/698/EC Annex – Guidelines on Reporting Requirements and Publication of Information, Commission Recommendation of 19 September 2005 on accounting separation and cost accounting systems under the regulatory framework for electronic communications Proposed changes to BT’s regulatory financial reporting framework 4 Questions 13 - 30 UK Competitive Telecommunications Association
  • 5. • Fair wholesale prices that comply with price controls • Cost-orientation in order to provide appropriate build/buy decisions • No excessive profits on SMP products • No discrimination in favour of downstream markets • What makes up these costs? These questions need to be answered to ensure that there is no abuse of market power and UKCTA believes that this is best achieved if the relevant information is in the public domain. In addition to the increased level of scrutiny that industry can bring, the mere act of preparation and publication itself establishes rigour within BT with regards to its behaviour in SMP markets. Question 17: With reference to specific statements where possible, how effective is the information provided in the Current Cost Financial Statements for 2005 and those proposed for 2006, in addressing the needs of communications providers? UKCTA believe that the current form of the regulatory financial statements is very helpful. It is much more relevant to industry than the previous statements, which we agree were difficult to navigate. The statements are therefore a significant advance on what was previously provided. The perception that they are not used is out of date (if it ever were the case). However, there are areas where the Current Cost Financial Statements can be improved. These can be divided into basic items to fix, and things that UKCTA would like to see as improvements to the current format. Basic items to fix current format 1. Volume information should be included for all internal and external transactions (not just those relating to voice minutes); 2. Transactions relating to wholesale SMP inputs sometimes require both the sales side and the purchase side of the transaction to be shown even if BT does not have SMP in all retail markets using the product; 3. Usage factors need to be based upon real usage and clearly identify any differences between internal and external supply if they exist. This is particularly relevant to leased line markets; 4. The key components required by Ofcom need to be reported on. Notably 3rd party site multiplexers in the leased line markets were not separately identified last year. Improvements to current format 1. A more useful list of components e.g. components for access fibre and backhaul fibre 2. Greater detail of the use of components and products (that are relevant to SMP markets) by parts of the business that do not currently have SMP in order to judge the appropriateness of cost apportionment and/or potential issues of discrimination. For example, currently we can see where less than half of the Proposed changes to BT’s regulatory financial reporting framework 5 Questions 13 - 30 UK Competitive Telecommunications Association
  • 6. internal call origination is actually used in BT Retail and therefore it is not possible to understand if the correct product variants are being used in the correct places 3. An explanation of the attribution inputs and results for a few of the most significant areas of common cost (possibly new areas selected each year). E.g. show how all duct costs get allocated to copper, access fibre, backhaul fibre and core fibre, etc. This could contribute to the development of a simpler DAM (see the answer to question 24). 4. More regular and/or timely information – but recognising that this would probably only be a subset of information we’d have to be confident that the subset was sufficient to consider any issues (most likely non discrimination issues) 5. Figures published in the form of an Excel spreadsheet in order to make them easier to use 6. More streamlined supporting documentation which is easy to navigate around (but recognising that there is a clear trade-off in this area between work to produce and amount of use so we should be willing to consider the alternative of the information required for internal documentation 7. The use of pictures to help explain what costs and charges relate to which aspects of network and products would improve clarity 8. The inclusion of a high level summary showing the revenue, MCE, costs, return and percentage return on mean capital employed for each of the markets would be useful (as presented by BT in their transparency workshops) UKCTA are concerned that within the next few paragraphs in this section of Ofcom’s document, Ofcom notes that it will ‘wish to consider the extent to which stronger processes and controls might reduce the required level of ex-post reporting’ (paragraph 5.34). We strongly believe that relying on auditing and control processes would be inadequate. Compliance with regulatory accounting requirements is a matter of judgement rather than an objective fact that can be satisfied by the application of stronger processes. The industry will judge compliance from a different perspective to BT. As such, it will be always better to have a variety of eyes and perspectives on the accounts. Question 18: What, if any, are the needs of other stakeholders that should be addressed in the regulatory financial reports? UKCTA strongly disagrees with any attempt to adjust the accounts to meet the needs of other potential users (Ofcom suggests that these groups could include: consumers and consumer groups; UK and EU govt departments, actual or potential investors and employees of BT). The Regulatory Accounts were developed and designed to meet regulatory needs. To expand or adjust them to meet the needs of an alternative audience would dilute their ability to meet the original regulatory purpose. As such, this would therefore be completely incorrect. BT’s competitors use the accounts for regulatory purposes and have an impact on the markets through our interest in ensuring BT complies with its regulatory requirements in this area. Proposed changes to BT’s regulatory financial reporting framework 6 Questions 13 - 30 UK Competitive Telecommunications Association
  • 7. Question 19: What benchmarks, if any, should Ofcom take into account when considering the design of BT’s accounting regime? In paragraph 5.51 of its consultation document, Ofcom suggests that to ‘inform our assessment of key characteristics of effective compliance statements, Ofcom may refer to benchmarks from the UK and abroad’. Ofcom goes on to state that it will look at the obligations on other regulated telecoms providers across Europe and benchmarks across other industries. UKCTA believe that the major benchmarks Ofcom should use when considering the design of BT’s accounting regime, are the European Commission Recommendation on accounting separation and cost accounting systems for electronic communications 2 and the related ERG guidelines 3 . In fact we were somewhat surprised that these were not included within Ofcom’s review. The Recommendation itself consists of supporting text and guidelines in the appendix. These together include an outline of the type of documents to be produced (e.g. profit and loss statements, capital employed statements) as well as mentioning principles such as non-discrimination and transparency (first sentence of the guidelines themselves) and proportionality, transparency, regulatory objectives, relevance, reliability, comparability and materiality (in clause 2 of the supporting text which outlines the Commission’s recommendations). The ERG Guidelines are a comprehensive document which discusses the implications of the Commission Recommendation. It outlines not only principles for the development of the accounts (for instance, section 6 states that the key accounting principles are ‘cost causality, objectivity, transparency and consistency’) but also principles that should be followed for development of attribution methodologies, LRIC models etc. Section 7 particularly stresses the importance of transparency and publication of accounting statements. In 7.3 the ERG notes that ‘publication by the notified operator of sufficiently detailed cost statements showing the average cost of network components will increase transparency and raise the confidence of competitors that there are no anti-competitive cross subsidies’. UKCTA has a number of comments about the benchmarks suggested by Ofcom. Ofcom has stated that it will ‘consider how the interpretation of the reporting obligations imposed on BT compare with those of other regulated telecommunications providers across Europe’ (paragraph 5.52). UKCTA are concerned that, given Ofcom’s position as a leading regulator in Europe, by definition the other regimes will have much weaker and less successful regulatory accounting 2 Commission Recommendation of 19 September 2005 on accounting separation and cost accounting systems under the regulatory framework for electronic communications – 2005/698/EC 3 ERG Common Position: Guidelines for implementing the Commission Recommendation C (2005) 3480 on Accounting Separation and Cost Accounting Systems under the regulatory framework for electronic communications – ERG (05) 29 Proposed changes to BT’s regulatory financial reporting framework 7 Questions 13 - 30 UK Competitive Telecommunications Association
  • 8. regimes. Ofcom should be aware that other countries regulators may not have got it right and instead Ofcom’s work to date is probably leading the field. Ofcom has also suggested considering the benchmarks used in other industries and has already done an initial assessment of several of these i.e. the Guidance on regulatory reporting developed by The Institute of Chartered Accountants in England and Wales (ICAEW), The Combined Code, the Financial Services Authority (FSA), the US Sarbanes-Oxley Act and Sustainability Reporting. UKCTA’s comments on these benchmarks and Ofcom’s work to date on them, are below. ICAEW – in Appendix 8 paragraph 8.5 of Ofcom’s consultation, Ofcom states that the ‘guidance states that the key components of the regulatory statements should include: Profit and loss accounts Balance sheet Segmental analysis of operations, cost and income (as defined in the regulatory licence) and Reconciliations between the results and net assets reported within the Regulatory Accounts and those reported within the statutory financial statements prepared in accordance with the Companies Act 1985’. UKCTA believe that this is a broadly correct reading of what the ICAEW say, though we note that Appendix A of the ICAEW report actually states that there ‘is no precise definition of Regulatory Accounts, either in law, or in practice, although they are commonly referred to by Regulatory Bodies, Regulated Entities and accountants and within RAGs and the Regulated Entities licence arrangements’. They also note (before the list) that the Regulated Accounts typically include (appendix A ICAEW document) – which is slightly different to ‘should include’. At the end of the list there is also the following statement: ‘Regulatory returns usually incorporate regulatory accounts but may also include other financial information required by the Regulator’. Hence, overall UKCTA believe that the ICAEW are slightly less prescriptive than Ofcom would suggest. We also believe that there are other sources (such as the Commission, ERG and GRI) that offer more detailed and helpful work in this area. The Combined Code: Ofcom are correct that this Code was developed to ensure that corporate governance is carried out correctly within companies (it was developed after stakeholder concerns about financial reporting and the ability of auditors to provide necessary safeguards). The main implication is that the Board of the Directors must abide by the various aspects of the code and report that they have done so and where they have not done so. UKCTA believe that this benchmark would probably have very limited application in relation to the regulatory accounts. The Board of Directors has a duty to its shareholders and this Code is in relation to fulfilling this duty. Therefore the Code Proposed changes to BT’s regulatory financial reporting framework 8 Questions 13 - 30 UK Competitive Telecommunications Association
  • 9. and the duties of the Board are completely aligned. Where reporting regulatory obligations are concerned, this is not as directly the case. BT’s regulatory accounts are designed to ensure that it is compliant with regulatory obligations – these obligations could be viewed as ones which are primarily for the benefit of its regulator and its competitors and only indirectly its owners – to whom the board will always owe their primary duty of care. FSA The FSA is a very different regulator from the UK’s competition regulators (Ofwat, OFT, Ofcom, Ofgem). It is not primarily a competition regulator but instead concerned with the health of the financial system (i.e. that banks do not go bust) and protecting the consumer. Whilst we believe that the objectives laid out in appendix 8 seem sensible (regulatory accounts should be clear, timely, consistent, appropriate standards, in line with internal and external developments, adequate cover for potential losses), the fact that they may be for a different purpose to those required of BT should be borne in mind. Sarbanes Oxley Section 404 This is, like The Combined Code, to do with Boards of Directors producing "internal control reports" which: (1) state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and (2) contain an assessment, as of the end of the issuer's fiscal year, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. UKCTA believe that this benchmark will have the same limitations as we have outlined in relation to the Combined Code. Sustainability reporting – namely the Global Reporting Initiative (GRI) Guidelines UKCTA found the GRI reporting principles and guidelines a very interesting and comprehensive read, which we believe could be used alongside the Commission recommendation and ERG guidelines to help Ofcom develop its thinking on BT’s regulatory accounts. The GRI believe that the following principles ‘essential to producing a balanced and reasonable report on an organisation’s economic, environmental, and social performance.’ • Transparency - Full disclosure of the processes, procedures, and assumptions in report preparation are essential to its credibility. Proposed changes to BT’s regulatory financial reporting framework 9 Questions 13 - 30 UK Competitive Telecommunications Association
  • 10. • Inclusiveness - The reporting organisation should systematically engage its stakeholders to help focus and continually enhance the quality of its reports. • Auditability - Reported data and information should be recorded, compiled, analysed, and disclosed in a way that would enable internal auditors or external assurance providers to attest to its reliability. • Completeness - All information that is material to users for assessing the reporting organisation’s economic, environmental, and social performance should appear in the report in a manner consistent with the declared boundaries, scope, and time period. • Relevance - Relevance is the degree of importance assigned to a particular aspect, indicator, or piece of information, and represents the threshold at which information becomes significant enough to be reported. • Sustainability Context - The reporting organisation should seek to place its performance in the larger context of ecological, social, or other limits or constraints, where such context adds significant meaning to the reported information. • Accuracy - refers to achieving the degree of exactness and low margin of error in reported information necessary for users to make decisions with a high degree of confidence. • Neutrality - Reports should avoid bias in selection and presentation of information and should strive to provide a balanced account of the reporting organisation’s performance. • Comparability - The reporting organisation should maintain consistency in the boundary and scope of its reports, disclose any changes, and re-state previously reported information. • Clarity - The reporting organisation should remain cognizant of the diverse needs and backgrounds of its stakeholder groups and should make information available in a manner that is responsive to the maximum number of users while still maintaining a suitable level of detail. • Timeliness - Reports should provide information on a regular schedule that meets user needs and comports with the nature of the information itself. The GRI also stress that the ‘principles of transparency and inclusiveness represent the starting point for the reporting process and are woven into the fabric of all the other principles. All decisions about reporting (e.g., how, when, what) take these two principles and associated practices into consideration’. Proposed changes to BT’s regulatory financial reporting framework 10 Questions 13 - 30 UK Competitive Telecommunications Association
  • 11. To conclude, UKCTA believe that the most useful sources for Ofcom will be the Commission Recommendation on Regulatory Accounts, the backup guidelines by the ERG and the work of the GRI. The Combined Code and Sarbanes Oxley are probably irrelevant and we fear that using examples from other European countries would suffer from the problem that these countries regulators are followers rather than leaders in regulatory thinking. Question 20: What do you consider to be the essential attributes of the BT annual regulatory financial statements if they are to represent an effective compliance statement? In paragraph 5.54 Ofcom identify the following as common characteristics from the five industry benchmarks (the GRI, Combined Code etc): Clarity of objectives Transparent reporting Timeliness Clarity of respective responsibilities Good internal control Proportionality Comparability Appropriate assurance. These are outlined in more detail in Annex 8. In general these look fairly sensible – though we would prefer that Ofcom use the ones developed by the ERG in response to the Commission Recommendation. Leaving that aside, we note that comparability should be taken to include consistency over time (this is certainly the view of the ERG) and that it may be useful to add in an additional principle of ‘completeness’ (as outlined by the GRI) i.e. ‘all information that is material to users for assessing the reporting organisation’s economic, environmental, and social performance should appear in the report in a manner consistent with the declared boundaries, scope, and time period’. The ability to assess BT’s behaviour is entirely material to its competitors. Finally, whilst we accept Ofcom’s view of ‘proportionality’ outlined in Appendix 8 i.e. that a cost benefit analysis may be used to assess proposed regulatory requirements’, part of the potential costs of not producing detailed enough regulatory accounts are that BT could eventually be found guilty of an anti-competitive practice (i.e. fined up to 10% of group turnover). Question 21: What factors should be taken into account when determining whether this information should be published rather than being available on request? UKCTA believes that Ofcom’s role is to decide what BT needs to provide in the form of regulatory accounts to ensure compliance with its regulatory obligations. Once this form is set and being provided to Ofcom, and assuming that commercial Proposed changes to BT’s regulatory financial reporting framework 11 Questions 13 - 30 UK Competitive Telecommunications Association
  • 12. confidentiality is not an issue, then it would seem illogical for this information not to be published. If BT has to provide the information on request, within a reasonable timescale to competitors, then it must be available to hand for release. Therefore if the work has already been done, it would seem more logical to publish in one piece rather than release data in dribs and drabs. Certainly it is important for industry to have access to this information. We have previously explained to Ofcom how we use the accounts i.e. • To investigate issues that come to light e.g. in consultation, through carrier buying relationship with BT, other regulatory projects – this is reactive use of the information • Limited proactive use – i.e. reading the accounts just to see what they say apart from to gain an understanding in order to address reactive uses • It is the detail that is used – particularly volumes and breakdown of costs by individual components • The market statements help guide the reader into the document • The accounts are used mainly by the regulatory teams but occasionally by the carrier relations teams As such publication of the regulatory accounts in their current format meets many of our needs. The current format (revised as a result of the new market based regulatory regime) is much clearer and transparent than the previous version of the accounts which were quite difficult to navigate. We also believe that for consistency it is important that the regulatory accounts be published in their current format for several years. This will also help develop trust and confidence for BT’s competitors – particularly given all the changes that are taking place within the industry. UKCTA also believe that it is much better to have people with different perspectives looking at this data. The industry will view the information from a different perspective than BT, Ofcom or the auditors (even if the auditors have some technical knowledge, this will be much greater within industry and backed up by a commercial interest to identify potential errors within cost attributions etc). As such industry may well pick up issues which none of the above could have identified. It is worth noting that several complaints and disputes have been brought by members of industry as a result of considering the accounts. If all the data was only available on request this will make the process of investigating BT’s costs much more arduous for its competitors – which maybe BT’s goal. BT has argued that it is extremely expensive to produce and publish the accounts but we believe that in their current format such publication is entirely proportionate. BT has suggested that the current cost of publishing the accounts is around £7million per annum – which obviously BT collects back via its charges. This seems a low price to pay given the benefits identified above. Certainly a cost benefit analysis would need to take into account the fact that by publishing the accounts and having them available to scrutiny by BT’s competitors, this may ensure that anti- competitive practices do not develop. Later in this response UKCTA also suggest Proposed changes to BT’s regulatory financial reporting framework 12 Questions 13 - 30 UK Competitive Telecommunications Association
  • 13. some ways of improving the supporting documentation which may increase the benefits competitors obtain from the accounts. Finally, whilst we welcome BT’s attempts to involve industry in workshops to discuss the accounts, to date these have involved discussions which were more general in nature. We believe that they could be more in depth in future but are not clear at this point that they could in any way replace publication of the accounts and supporting documentation in their current format. Question 22: Do you have any initial views on BT’s draft proforma publication and, what, if any, additional information would you like to see and why? UKCTA believe that BT’s strawman is set out in a user friendly and accessible format. However, whilst it provides a useful summary of the regulatory financial statements, it does not provide the level of detail required. In its current format it would only prove a useful addition – and could not replace the Current Cost Financial Statements. UKCTA has already put some very detailed views on the strawman to BT and this paper is attached as an appendix to this response for Ofcom’s information. UKCTA certainly do not believe that the strawman would enable us to be confident that BT had complied with its regulatory obligations of cost orientation, non- discrimination and price cap compliance. Far more detail is needed on costs and volumes. We believe that publication of the financial accounts in their current format is the minimum – one compromise would be to have the ‘strawman’ as an overall headline document, with publication of the detailed market and product data in spreadsheets and streamlined supporting documentation. This could be supported by regular transparency workshops. Whilst we welcome BT’s initiative in relation to the transparency workshops they could not replace the publication of the accounts in their current format. UKCTA would also like to comment on Ofcom’s view that its improved access to financial reporting (via the comprehensive data file and the data extraction tool – see paras 6.9 to 6.12 inclusive) could replace the publication of the basic financial accounts. UKCTA have already outlined how the industry uses the regulatory accounts (see previous answer). We do not believe that having the regulator looking at the detailed data can replace these activities. We reiterate the importance of people with different perspectives looking at the financial accounts. A commercial company may well investigate the accounts in a completely different manner to Ofcom, i.e. we will be forced by financial imperatives to investigate particular topics whereas Ofcom may be much more wide ranging in its investigation (i.e. look at a cost attribution methodology rather than particular cost stacks or pricing of a product). The two approaches are complementary and one cannot replace the other. Proposed changes to BT’s regulatory financial reporting framework 13 Questions 13 - 30 UK Competitive Telecommunications Association
  • 14. Finally we note that to get complaints raised with Ofcom for investigation, companies need to produce at least some research and investigation into the topic. Evidence is required to get a case opened, given Ofcom’s limited resources and the regulatory accounts have acted as sources of such information in the past. We would be extremely concerned if this source was therefore withdrawn. Question 23: What are the key attributes you would expect to see of a process designed to enable stakeholders request and obtain additional information that was not provided in the published statements? Leaving aside our strong concerns about Ofcom taking this route, UKCTA believe that the key attributes of such a process would be: • Timeliness i.e. the process to provide information should be reasonable but as short as possible. • Upfront clarity i.e. the process itself (logging requests for data, timescales for provision etc) should be outlined upfront so that BT’s competitors understand how they should make such requests, whether they will get acknowledgements of receipt of request, how long it should take to process them etc. • Transparency i.e. that BT is as open as possible when answering queries. We would be very concerned if the process degenerated into some sort of iterative process because questions have been wilfully misunderstood. However, in reality we believe that it would be very difficult to design a process which could overcome the inherent problem that BT is incentivised to provide as little information as possible to its competitors. Further, it is difficult to see how BT could answer any query in full if answering this query was self incriminating. We doubt that any process could be developed which would adequately meet our needs in comparison to providing the full financial data we already have. BT has proposed that regular transparency workshops would be the way of providing extra more detailed cost information. Again whilst welcoming this, UKCTA believe that the workshops to date, whilst helpful, have not yet performed this function. They have provided an opportunity to discuss general regulatory issues – and to push BT’s BlueSky proposals – but have not really gone beyond this. Certainly UKCTA would be very concerned if the transparency workshops were the only way of getting any extra information from BT. Even assuming that we were given paper documents to take away from these meetings, by their very nature we would be limited in our access to data to that which was being discussed at the next meeting. If a number of companies are interested in different products, then they may each have to wait several months before receiving the information that they were interested in. Hence, UKCTA are very concerned that if BT were allowed to stop publishing the current regulatory documents, obtaining information by request and transparency workshop would be take significant time and hassle – and may not even answer our Proposed changes to BT’s regulatory financial reporting framework 14 Questions 13 - 30 UK Competitive Telecommunications Association
  • 15. questions. For instance, we may have to go through several iterations to get the precise information that could have been obtained simply by looking at several tables in the current format of the regulatory accounts. Further, how would we deal with internal reactive requests about the costs of BT’s SMP products? How would we even know the initial data to request if we had very limited visibility of what could be produced? If Ofcom insists on going down this route – which we would strongly advise against – at the very least, there should be legal obligations on BT in regards to the timescale for getting back to operators with precise answers to their questions. There should also be a route of being able to request data via letter between workshops. Question 24: Which, if any, of the supporting documents should be published and are there other documents that should be made publicly available? At a high level a detailed breakdown of the products, volumes and revenues for all relevant SMP products should be available for internal and external supply (with particular emphasis on where there are differences between internal and external supply). This information should be broken down into sufficient detail to be meaningful. From a user perspective the DAM and the DVM in their current form are difficult to use and hence are not used to their full potential. Nonetheless they remain important documents (and an essential plank in the published regulatory accounting documentation). UKCTA would suggest that these publications could be re-worked at a summary level to improve usability and user understanding (with the bulk of the main reference data unpublished, but accessible to both Ofcom and other stakeholders on request). In addition the wholesale and retail catalogues are required by both BT (for internal purposes) and Ofcom and used as a reference resource by industry. A reworked LRIC statement should also been considered (see the answer to Q. 25 below). Clarification is sought on BT’s proposal that supporting information would be published only in so far as to support the annual audit. Question 25: Do you consider that the publication of LRIC floors and ceilings prepared on their current basis will continue to provide useful and relevant information as BT implements its NGN and how might the requirements be updated? The use of Long Run Incremental Costs (LRIC) has the potential to provide extra or different cost information than that provided by Fully Allocated Costs (FAC). This includes: • Considering the cost of an increment only, including the relationship between cost and volume; Proposed changes to BT’s regulatory financial reporting framework 15 Questions 13 - 30 UK Competitive Telecommunications Association
  • 16. • Providing the allocation of common costs to provide a range between direct costs and stand alone costs; • Taking a view of future costs based upon an efficient design using modern assets. However, BT’s particular implementation of LRIC means that the information published does not provide as much value in practice. In particular it is not clear that the increments used are the most appropriate and the top down approach used is not the best approach for predicting future or efficient costs. As a result the main advantage that is seen today is the allocation of common costs, or rather the range of output costs that it provides. We also note that although various aspects of the SMP regulation on BT references long run incremental costs, in recent charge setting consultations Ofcom itself has chosen to use FAC rather than incremental costs in setting charge controls or ceilings. Therefore we see the area of BT’s LRIC costing as an area that Ofcom should review. One option would be for the publication of LRIC floors and ceilings to be replaced by greater detail of the actual costs and cost allocation that is already done as part of the input into individual component costs. Ofcom should provide more detailed analysis of the way in which the current LRIC information is used, the impacts of removing it and the suitability of better FAC allocation information as a replacement within its next consultation on future regulatory reporting requirements. However, we do believe that LRIC costing still has a role to play in the setting of charge controls but possibly it would be preferable that Ofcom itself undertakes the LRIC modelling if and when it is required for this purpose. Furthermore, if Ofcom intends to continue to use BT’s LRIC information as part of its own judgement of BT’s compliance with cost orientation obligations then we believe that it is essential that the information remains available to stakeholders. Question 26: Do you have any views on if and how cost information can be provided in a more meaningful way and/or in a forward-looking context? While UKCTA understands the benefits of having forward looking information, any information provided on a forward looking context is unlikely to be robust enough to rely on (as it will be heavily dependent on forecast volumes & previous costs). From a practical perspective, BT is unlikely to be able to accommodate any forward looking costs information without a significant amount of additional work, and as stated above, any output is not likely to be without flaws. Question 27: Would a directors’ compliance statement provide useful assurance and what issues might it address? Proposed changes to BT’s regulatory financial reporting framework 16 Questions 13 - 30 UK Competitive Telecommunications Association
  • 17. In UKCTA’s view, a director’s compliance statement as proposed may be able to provide some useful assurance, but this would be limited in scope. As Ofcom suggests, certain aspects of regulatory obligations would not be feasible for sign-off by directors. As true assurance on many or most obligations is only ever achieved after investigation, it would not be appropriate for directors to make assurances that breaches had not occurred in advance of such an examination. UKCTA believes it would be worth pursuing ideas to make proposals on the type of assurance that directors could provide and is always willing to help in developing such ideas. Directors could comment on aspects such as the fitness and adequacy of systems and processes (such as accounting separation, cost attribution and allocation) and some of what is produced from them (cost floors and ceilings, as Ofcom suggests) and achieve some useful level of assurance and recognisable commitment to compliance. Any new directors’ compliance statement should not, of course, be used to make a case for removing any existing assurances or reporting that are relied on by stakeholders currently. Question 28: What, if any, information on the attribution of costs would be helpful and how might this best be presented? It is true to say that all information on the attribution of costs is potentially helpful, as one cannot second guess what may be of interest or use to relevant parties. However, it should be observed that the current (2005) Detailed Attribution Methods (DAM) document published by BT is over 10Mb in file size and 1563 pages long. All cost attribution and allocation data currently available should continue to be available, but it may not be necessary to publish the DAM itself, as long as BT continues to have an obligation to provide the data on request. UKCTA believes that development of a descriptive 'cost cascade' could be very useful, focusing attention on the key drivers and allocations and thereby assisting interpretation for all users without burying useful data. A publication of this type could become required for presentation to the public audience, with full DAM obligations reduced to ‘on request’. Question 29: Do you believe that Ofcom should develop its analysis of the possible reliance on internal controls relating to compliance with the cost orientation and non- discrimination obligations and whether this could allow a relaxation of scope of publication of regulatory financial information? UKCTA believes that full knowledge of any controls in place to ensure compliance with cost and non-discrimination obligations is desirable. However, we do not believe that this should change current changing publication requirements; knowledge of internal controls can never replace seeing the actual cost allocations and impact of policies on the accounts themselves. Certainly, these ideas are not completely clear to UKCTA and probably need more discussion and explanation between interested parties. It is assumed that any such ideas would be heavily reliant on BT cooperation. Proposed changes to BT’s regulatory financial reporting framework 17 Questions 13 - 30 UK Competitive Telecommunications Association
  • 18. Question 30: Would reporting on an exception basis be helpful? If compliance with obligations was reported by exception, would detailed information still be necessary and if so why? There maybe merit in devising a system that reports on compliance by exception. The parameters of what would be classed as an exception need to be refined to ensure that all items of interest are adequately captured and reported. We believe that this information should be provided in addition to the detail currently published to preserve the overall context of the data. - End - Proposed changes to BT’s regulatory financial reporting framework 18 Questions 13 - 30 UK Competitive Telecommunications Association