The Comparative Efficiency of BT in 2003: A Report for Ofcom

Fri Mar 11 15:24:38 EST 2005
By Nigel Attenborough et al.

This report was commissioned by Ofcom (the independent regulator and competition authority for the UK communications industries) to estimate the comparative efficiency of BT's (the UK's incumbent and largest fixed-line operator) fixed-line network in 2003. The report compares BT's costs to those of 67 US local exchange carriers, using econometric and mathematical methods to take account of differences in size and operating environments.

The efficiency of a company can be defined as the extent to which it is able to minimize its costs for producing a given set and volume of outputs, taking into account the environments in which it operates, including demographic and geographical circumstances. A perfectly efficient company is one that has the lowest costs possible given the outputs that it produces and the environments in which it operates. To calculate the inefficiency of a particular company, a perfectly efficient version of the company needs to be considered. Since no such company can be observed, the authors had to proxy for this by calculating efficiency compared to a sample of other companies.

The authors explain the different techniques that can be used to measure comparative efficiency and highlight the strengths and weaknesses of each. They go on to describe the data used in their study, outline required adjustments made when collecting or processing the data (including a detailed methodology to estimate current cost accounting asset valuations from historic cost data), and explain the benefits of the dataset used.

The report's results show that BT is a relatively efficient company, and has become more efficient since previous studies of BT's efficiency were carried out. Furthermore, the results demonstrate that there is a steady relationship over time between operating costs, capital costs, and outputs, which can be used to predict the costs of an efficient company in a robust manner, provided that the operating environment is properly controlled for.