FRONTIER ECONOMICS HIGHLIGHT MORE BT OVERCHARGING

Vodafone UK commissioned Frontier Economics to update its analysis of  BT’s overcharging.

As part of its submission to Ofcom’s Digital Communications Review, Vodafone UK recently commissioned Frontier Economics to update its analysis of data from BT’s regulatory financial statements (RFS) since the implementation of the 2005 Ofcom strategic review (of telecommunications) to assess the effectiveness of the regulatory framework in balancing the consumer benefits of lower prices with the need to provide incentives to invest in networks and operate these networks efficiently.

This analysis is based on comparing the level of profitability for BT’s regulated services, expressed as a return on capital, against Ofcom’s estimate of BT’s cost of capital. The Frontier analysis shows that over the period April 2006 to 31 March 2015:

• reported returns on BT’s regulated services overall were consistently above the rate required to compensate investors, as determined by Ofcom. More specifically, in the past 10 years BT made around £18.9 billion profit from regulated services, of this £6.5 billion was over and above the determined cost of capital, of which £770 million was for the financial year to 31 March 2015;
• there is no clear trend of a reduction in overall returns, despite a number of actions by Ofcom to constrain prices over the period; and
• there have been some changes over time in the composition of the excess returns, with the excess returns concentrated on those services used by competitors to BT.

The conclusion to the report is that BT’s returns for regulated services overall have been consistently above a benchmark rate based on Ofcom’s determinations of the return required by investors. This implies that prices overall have been set at a higher level than that required to provide investors in BT with an appropriate rate of return: in other words, prices could have been lower and BT’s investors would have still been adequately compensated. We estimate that BT’s regulated prices would have been 11% lower on average, had BT’s regulated returns been in line it the cost of capital.