Legal provisions of C(1998)960 - 98/322/EC: Commission Recommendation of 8 April 1998 on interconnection in a liberalised telecommunications market (Part 2 - Accounting separation and cost accounting)

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dossier C(1998)960 - 98/322/EC: Commission Recommendation of 8 April 1998 on interconnection in a liberalised telecommunications market (Part 2 - ...
document C(1998)960
date January  1, 1945
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31998H0322

98/322/EC: Commission Recommendation of 8 April 1998 on interconnection in a liberalised telecommunications market (Part 2 - Accounting separation and cost accounting) (Text with EEA relevance)

Official Journal L 141 , 13/05/1998 P. 0006 - 0035


COMMISSION RECOMMENDATION of 8 April 1998 on interconnection in a liberalised telecommunications market (Part 2 - Accounting separation and cost accounting) (Text with EEA relevance) (98/322/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to Directive 97/33/EC of the European Parliament and of the Council of 30 June 1997 on interconnection in telecommunications with regard to ensuring universal service and interoperability through the application of the principles of open network provision (ONP) (1), and in particular Article 7(5) thereof,

Whereas Directive 97/33/EC gives national regulatory authorities for telecommunications (NRAs) an important role in securing adequate interconnection of networks, in accordance with Community law, taking into account recommendations laid down by the Commission so as to facilitate the development of a genuine European home market; whereas, in particular, Article 7(5) of Directive 97/33/EC requires the Commission to draw up recommendations on cost accounting systems and accounting separation;

Whereas Article 7(2) of Directive 97/33/EC requires that certain organisations notified by their NRA as having significant market power (hereinafter referred to as 'notified operators`) should follow the principles of transparency and cost orientation for interconnection charges;

Whereas Article 8(2) of Directive 97/33/EC requires notified operators to keep separate accounts for, on the one hand, their activities related to interconnection - covering both interconnection services provided internally and interconnection services provided to others - and, on the other hand, other activities, so as to identify all elements of cost and revenue, with the basis of their calculation and the detailed attribution methods used, related to their interconnection activity, including an itemised breakdown of fixed asset and structural costs;

Whereas the Commission in its recommendation 98/195/EC of 8 January 1998 (2) on interconnection in a liberalised telecommunications market (Part 1 - Interconnection pricing) considers that the most appropriate approach to interconnection pricing is one based on forward-looking long-run average incremental costs, since this is the most compatible with a competitive market; whereas this approach does not preclude the use of justified 'mark-ups` as a means of recovering such forward-looking joint and common costs of an efficient operator as would arise under competitive conditions;

Whereas an approach to interconnection pricing based on forward-looking long-run average incremental costs entails an accounting system based on current costs rather than historic costs; whereas the Commission has recommended Member States (in the recommendation of 8 January 1998) to set deadlines for the implementation by their notified operators of new accounting systems based on activity based costing; whereas although the bottom-up economic/engineering models are becoming highly sophisticated, they are as yet imperfect, and thus reconciliation of top-down and bottom-up approaches is advised for the foreseeable future;

Whereas Article 7(5) of Directive 97/33/EC requires NRAs to ensure that a description of the cost-accounting system, showing the main categories under which costs are grouped and the rules used for the allocation of costs to interconnection, is made available on request to interested parties; whereas allocation methods need to be displayed at a level of detail that makes clear the relationship between costs and charges of networks components and services (that is to say, usage factors); whereas the basis on which unattributable costs have been allocated between different accounts also needs to be provided; whereas compliance with the cost accounting system has to be verified by the national regulatory authority or some other competent body, independent of the telecommunications organisation and approved by the NRA; whereas a financial statement concerning compliance has to be published annually;

Whereas Articles 12(1) and 13(1) of Directive 95/62/EC of the European Parliament and of the Council of 13 December 1995 on the application of open network provision (ONP) to voice telephony (3) requires tariffs for use of the fixed public telephone network and the voice telephony service to follow the basic principles of cost orientation and transparency, including the implementation by notified operators of a suitable cost accounting system for this purpose; whereas contributions by interconnected-parties to 'access deficit` type schemes are only permissible when tariff constraints are imposed by NRAs on the grounds of affordability and accessibility of telephone service in accordance with Article 12(2) of Directive 95/62/EC; whereas the Commission, in its communication of 27 November 1996 on assessment criteria for national schemes for the costing and financing of universal service in telecommunications and guidelines for the Member States on operation of such schemes (4), believes that such schemes should disappear by 1 January 2000;

Whereas Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services (5), as amended by Directive 96/2/EC (6), requires Member States to ensure effective competition between operators competing in the relevant markets; whereas, in particular, transparency is required in respect of cost-accounting of operators providing both fixed networks and mobile telecommunication networks;

Whereas Article 2 of Commission Directive 95/51/EC of 18 October 1995 amending Directive 90/388/EEC with regard to the abolition of the restrictions on the use of cable television networks for the provision of already liberalised telecommunications services (7) requires Member States to ensure accounting transparency and to prevent discriminatory behaviour where an operator having an exclusive right to provide public telecommunications network infrastructure also provides cable TV network infrastructure, and in particular to ensure the separation of financial accounts as concerns the provision of each network and its activity as provider of telecommunication services; whereas under Article 8(1) of Directive 97/33/EC notified operators which have special or exclusive rights for the provision of services in other sectors (cable or satellite TV broadcasting) are required to keep separate accounts of telecommunication activities and the others, to the extent that would be required if the telecommunications activities in question were carried out by legally independent companies or to have structural separation of telecommunication activities and other activities.

Whereas Article 8(3) of Directive 97/33/EC requires organisations providing public telecommunications networks and/or publicly available telecommunication services to supply financial information to their NRA promptly on request and to the level of detail required; whereas NRAs may publish such information as would contribute to an open and competitive market, while taking account of considerations of commercial confidentiality;

Whereas the application of the principles of this recommendation is without prejudice to the duty of the Member States and of undertakings to comply fully with the Community competition rules, taking account of the specific positions set out in the communication from the Commission on the application of the competition rules to access agreements in the telecommunications sector (8);

Whereas the advisory committee set up by Article 9(1) of Council Directive 90/387/EEC (9) ('the ONP Committee`) has given broad support to the principles contained in this recommendation, and the Commission has taken utmost account of the views expressed,

MAKES THE FOLLOWING RECOMMENDATION:


1. This recommendation concerns the implementation of accounting separation and cost accounting systems by operators designated by their NRA as having significant market power (hereinafter referred as 'notified operators`) in accordance with Article 8(2) of Directive 97/33/EC for implementation of interconnection obligations, with particular regard to the principles of transparency and cost orientation.

The purpose of accounting separation is to provide an analysis of information derived from the accounting records to reflect as closely as possible the performance of parts of the business as if they had operated as separate businesses.

2. It is recommended that NRAs require from their notified operators the disaggregation of their operating costs, capital employed and revenues, into at least the following broad business lines:


Core network (switched infrastructure)

The core network covers the provision of interconnection services, transit services and carrier's carrier services.


Local access network (local loop infrastructure)

The local access network covers the provision of connections to the telephony network (10).


Retail

The retail business covers the activities mainly related to the commercial provision of fixed telephony services and leased lines to end users. Separate accounts may be prepared for each activity within retail that is subject to regulation (such as leased lines or telephony).


Other activities

'Other activities` covers other activities provided by the notified operator which may include unregulated activities as well as other type of regulated activities. Accounts for regulated and unregulated activities need to be kept separate.

Section 1 of the Annex defines the scope of each business. Transfer charges between businesses are identified in Section 2.

Further disaggregated accounts within these broad business lines may be considered appropriate by NRAs, regard being had to transparency and competitive requirements demanded by national or Community law (such as mobile, cable TV or international activities).

3. It is recommended that the allocation of costs, capital employed and revenue be done in accordance with the principle of cost causation (such as activity-based costing (ABC)).

The costing system of the notified operators need to be sufficiently detailed to permit - as far as possible - the allocation of costs to unbundled network components, in particular to determine the cost of unbundled interconnection services.

A well defined cost-allocation system will enable at least 90 % of the costs to be allocated on the basis of direct or indirect cost-causation (11).

It is recommended that unattributable costs (the cost which can only be attributed on an arbitrary basis) be clearly identified in a specific account and be the subject of a specific treatment by the NRA (that is, they should be distributed according to the rules determined by each Member State, in accordance with the Community's competition rules and in compliance with the principles of transparency and proportionality).

It is recommended that the NRA undertakes a public consultation with market players on the adoption of sound allocation methods and on the specific treatment to be given to unattributable costs.

Section 3 of the Annex outlines the recommended principles for allocating costs, capital employed and revenues when preparing separate accounts.

Section 4 of the Annex provides guidance on the application of those principles to the calculation of operating costs, including depreciation; Section 5 does the same for the cost of capital and capital employed, and Section 6 on revenues.

4. In the recommendation of 8 January 1998, NRAs were recommended to set deadlines for their notified operators' implementation of new cost accounting systems based on current costs.

It is recommended that the methodology and criteria for the evaluation of network assets at current value is fixed by the NRA after a public consultation with market players.

Evaluation of network assets at forward-looking or current value of an efficient operator, that is, at the value that would prevail if the market were vigorously competitive, is a key element of the 'current cost accounting` (CCA) methodology. This requires that the depreciation charges included in the operating costs be calculated on the basis of current valuations of equivalent assets, and consequently the reporting on the capital employed also needs to be on a current cost basis.

The Appendix of the Annex provides guidance on modern asset valuation and current cost adjustment methodologies.

5. With regard to the derivation of interconnection pricing, NRAs may require efficiency factors to be applied in recognition of the fact that the use of CCA values for the network may not fully reflect the costs of an efficient operator (12). To this end the 'best practice interconnection charges` as provided in the recommendation of 8 January 1998 constitute a suitable point of reference.

6. It is recommended that operators required to report accounting separation provide a profit and loss statement and balance sheet for each of the separate businesses. Transfer charges or purchases between businesses need to be clearly identified.

The recommended content and formats of the financial regulatory reports to be provided by the notified operators are indicated in Section 7 of the Annex.

For consistency, it is recommended that the financial reports of these separate regulatory accounts be consolidated into a profit and loss statement and a balance sheet for the company as a whole. A reconciliation of the separate regulatory accounts to the statutory accounts of the operator is also suggested.

7. It is recommended that NRAs make relevant accounting information from notified operators available on request to interested parties at a sufficient level of detail to ensure that there has been no undue discrimination between the provision of services internally and those provided externally, and to enable the average costs of unbundled interconnection services to be identified.

In this respect, the publication by the notified operator of sufficiently detailed cost statements showing the average cost of network components will increase transparency and raise confidence on the part of competitors, that there are no anti-competitive cross-subsidies. This is considered to be particularly important for cross-border interconnection services and international activities.

In addition, for those Member States that operate schemes to finance universal service obligations and/or access deficit contributions, it is also recommended that NRAs make available sufficient accounting information from notified operators to ensure that there is no discrimination between charges levied on other operators and those levied (implicitly) internally.

8. These accounting guidelines are concerned with regulatory reporting and they are not intended as a replacement for any statutory financial reporting that may be required in the Member State.

9. This recommendation will be reviewed by the Commission by 31 July 1999 at the latest.

10. This recommendation is addressed to the Member States.