One of the practical problems with so-called ‘service based competition’ is that it requires setting regulated prices for access to the dominant operator’s physical infrastructure – the prices that Talk Talk, Sky and the rest pay for using the BT network. Because such charges are supposed to be ‘forward looking’, they have to be based on the current (replacement) value of these assets, not their actual (historic) cost. This is by no means an easy calculation but BT’s competitors are understandably concerned that it might involve some creative accounting techniques. A report recently commissioned by their trade association (UKCTA) from Towerhouse Consulting drew attention to a number of weaknesses in the regime.
“In particular:
· current cost accounting inevitably involves a high degree of judgement, and in some circumstances requires entirely arbitrary assumptions;
· as a result, BT has the opportunity and incentive to choose these assumptions in a self-interested manner; and
· the extent to which charge controls allow BT to recover more than their actual costs is not clear…”
Well, it is now. In Ofcom’s ‘Charge control review for LLU and WLR services’, published today, the regulator goes to considerable lengths to demonstrate how some of BT’s assets appear to have been overvalued, specifically its holes in the ground. Over the past two years, for example, BT spent a total of £360m on these ‘duct assets’. Making some necessary adjustments for prices and BT’s buying power, Ofcom calculates a net replacement cost today of around £290million. By comparison, BT’s own estimate of the replacement cost for these same assets is £480million, around 30% more than was actually spent when the assets were acquired. Oops.
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