Ofcom Slap BT for Bad Billing of GBP1.7m from EE Merger to Openreach

Rivals are today hoping that BT may have dented its position in Ofcom’s on-going Strategic Review after the UK telecoms regulator revealed that the operator had billed £1.7m from part of their EE mobile merger to its “functionally separate” Openreach division, which was called “inappropriate“.

Openreach, which maintains and manages access to BT’s national broadband and phone network, is supposed to be an arms-length organisation. However one of the criticisms that rivals, such as TalkTalk, Sky Broadband and Vodafone, often level against them is that BT can sometimes seem to shift unnecessary costs on to Openreach’s financial book.

Admittedly such costs could also be attributed to the normal complex accounting practices of a big group business, although as part of Ofcom’s Business Connectivity Review the regulator now appears to have spotted at least one incident where BT’s accounting has blurred the lines between what is and is not acceptable.

Extract from Ofcom’s Consultation Document

EEs Acquisition cost – corporate costs and liquid funds and interest

3.17 BT’s statutory financial statements show that amongst the various ‘specific items’ that affected BT’s operating costs and net finance expenses in 2014/15 was a £26m charge for EE Acquisition costs.

3.18 BT provided a breakdown of the allocation of these costs to business connectivity services together with an explanation for the allocation. In 2014/15 £1.3m was allocated to Ethernet and £0.4m to TI services. BT said the EE Acquisition costs were included within activity group AG112 (Corporate overheads) and AG113 (Total Liquid Funds and Assets).

3.19 We consider that BT’s EE Acquisition costs are incurred as a result of the activities associated with the acquisition of EE. However, BT attributes these costs across all UK lines of business, including, for example, Openreach and BT Wholesale to which we do not consider these costs relate. We do not consider that this is consistent with the Regulatory Accounting Principle of causality and therefore we consider this attribution inappropriate. We consider it would be appropriate to attribute these costs to residual markets and as a result we propose to exclude EE Acquisition costs from the 2014/15 base year costs.

Later in that same document Ofcom goes on to re-state that “BT must not attribute costs in connection with BT Group’s acquisition of EE to business connectivity services.” The regulator also recommends that BT tweak its accounts to “provide additional information” on how they “attributed costs across services and mitigates against the risk of double recovery of costs or that costs might be inappropriately attributed to particular services.”

The situation won’t have any tangible impact upon BT’s £12.5bn merger deal with EE, which recently gained provisional approval from the Competition and Markets Authority (here). However it does give the operator’s rivals a little bit of extra ammunition to use as part of their calls for BT to be split (structurally separated) from control of their Openreach division (here).

However a BT Spokesperson says it was all just a big mistake: “An error was made in relation to the allocation of £1.7 million in a cost stack of several hundred million pounds and we apologise for this. Ofcom are expected to exclude this sum from their calculations and we will obviously not object.”