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UPDATE5 Ofcom in Huge Shake-up of Openreach and UK Broadband, if BT Agree

Tuesday, July 26th, 2016 (7:31 am) - Score 2,751
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A framework for the next decade of UK telecoms and broadband regulation has today been set out by Ofcom, which will see Openreach improve service quality, become more independent and give rival ISPs more access to their cable ducts. But the regulator has yet to reach a solid agreement with BT and a split is still on the table.

Naturally some of BT’s most outspoken critics, such as TalkTalk, Sky Broadband and Vodafone, will be displeased if not surprised to learn that the telecoms regulator did not push forward with the option of completely splitting Openreach, BT’s network access division, from the operator’s control. On the other hand Ofcom has managed to set out some major changes, not least to Openreach’s governance structure, and this may deliver much of what BT’s competitors desire.

The proposed deal aims to make Openreach more accountable and independent, which is to be partly achieved through the adoption of a new board that would also include several independent directors (jointly appointed by BT and Ofcom).

The new board will have control over Openreach’s budget and strategy, although BT has yet to agree with Ofcom over the need for Openreach to also become a “legally separate company” and for Openreach to have confidential discussions with its customers without oversight by BT (further details below).

However the regulator warns today that if BT fails to reach an agreement on these sticking points then they will “reconsider whether BT and Openreach should be split into two entirely separate companies, under different ownership.”

Ofcom believes that its proposal will “provide Openreach with the greatest degree of independence from BT Group that is possible without incurring the costs and disruption – to industry and consumers – associated with separating the companies entirely.

Sharon White, Ofcom Chief Executive, said:

“We’re pressing ahead with the biggest shake-up of telecoms in a decade, to make sure the market is delivering the best possible services for people and business across the UK.”

Openreach are generally responsible for maintaining, managing access to and upgrading BT’s national telecoms and broadband networks across the United Kingdom, which they’ve been required to do on a “functionally separate” basis since Ofcom’s last Strategic Review in 2005.

By contrast the most recent Strategic Review, which posted its initial recommendations in February 2016 (full summary), found “evidence” to show that Openreach “still has an incentive to make decisions in the interests of BT, rather than BT’s competitors, which can lead to competition problems“.

Ofcom also said that “other telecoms companies have not been consulted sufficiently on investment plans that affect them.” Since then a recent cross-party inquiry has further accused BT of not investing enough into its infrastructure (here) and the regulator supports the view that BT has been under-investing by “hundreds of millions of pounds“.

BT has of course denied the accusations of under investment and point to their plan for deploying 300Mbps G.fast broadband technology to 10 million UK premises by 2020, with “most of the UK” likely to be done by 2025. On top of that they aim to roll-out 1Gbps FTTP to 2 million UK premises by 2020, but critics say this isn’t enough and that they should be doing much more FTTP instead of cheaper hybrid-fibre G.fast.

So far Ofcom has already proposed a series of changes to balance the market, such as requiring Openreach to give rivals better access to its cable ducts and poles (details), a more independent governance structure for Openreach, tougher minimum service requirements and better information sharing.

Easily the biggest challenge is over the issue of governance, with Ofcom hinting that Openreach could “become a ring-fenced, ‘wholly-owned subsidiary’ of BT Group, with its own purpose and board members,” which was strongly opposed by BT and an agreement has yet to be done. In that sense today’s proposal represents BT’s final warning.

Highlights of Today’s Proposed Deal

* Openreach to become a distinct company.
Openreach should be a legally separate company within BT Group, with its own ‘Articles of Association’. Openreach – and its directors – would be required to make decisions in the interests of all Openreach’s customers, and to promote the success of the company.

* Openreach to have its own Board.
The new Board should have a majority of non-executive directors, including the Chair. These non-executives should not be affiliated to BT Group in any way, but would be both appointed and removed by BT in consultation with Ofcom.

* Executives accountable to the new Board.
Openreach’s Chief Executive should be appointed by, and accountable to, the Openreach Board – not BT Group. The Chief Executive would then be responsible for other executive appointments. There should be no direct lines of reporting from Openreach executives to BT Group, unless agreed by exception with Ofcom.

* Greater consultation with customers.
Openreach would be obliged to consult formally with customers such as Sky and TalkTalk on large-scale investments. There should be a ‘confidential’ phase during which customers can discuss ideas without this being disclosed to BT Group.

* Staff to work for Openreach.
Ofcom’s principle for the new model is that people who work for Openreach should be employees of the new company, rather than BT Group. This would prevent any real or perceived conflict of interest, and allow Openreach to develop its own distinct organisational culture.

* Openreach to own assets that it already controls.
Openreach should own its physical network. This would allow the Openreach Board to make decisions that depend on investing in, and looking after, Openreach’s assets. There may be costs in transferring assets or people to Openreach, which would need to be mitigated.

* A separate strategy and control over budget allocation.
Openreach should develop its own strategy and annual operating plans, within an overall budget set by BT Group.

* Independent branding.
Openreach should have its own brand, not affiliated with BT Group, to help embed the organisational culture of a distinct company.

One of the key questions in all of this is whether or not the changes will truly make the UK’s market for broadband connectivity more competitive, innovative, accessible and fair. The regulator is clearly trying to encourage more competition for BT at the infrastructure level, albeit without breaking BT itself into pieces, but even this won’t be enough to silence some of their fiercest critics.

Similarly not all of Ofcom’s ideas have been given a warm welcome by BT’s rivals (e.g. the semi-separate Dark Fibre proposal) and it may take a fair few years before we can truly gauge whether or not the scale of competition has significantly improved beyond existing levels of growth via ISPs like Gigaclear, Cityfibre, Hyperoptic and others. Meanwhile Sky has already said that it has no plans to build their own fibre optic network (here) and TalkTalk’s aspiration to deliver FTTP to 10 million UK premises continues to lack a firm strategy and financial foundation.

Elsewhere some of the measures, such as the new requirement for Openreach to consult formally with customers such as Sky Broadband and TalkTalk on large-scale investments, might potentially slow down the introduction of new products and services.

In the end Ofcom has attempted to balance a multitude of competing interests in what remains a highly complicated market. No one solution will deliver the magic bullet that people expect and that’s particularly true for rural areas, which with a few exceptions (e.g. B4RN, Gigaclear) will always be stuck at the back of the pack due to the high cost of commercial upgrades.

Suffice to say that we might well be back to this question again in another 10 years’ time, but in the meantime we can at least look forward to further service quality improvements, new systems for consumer compensation following major faults and an ever expanding choice of alternative broadband networks. Meanwhile BT faces an agonising week, with Ofcom attempting to force through some major changes that they clearly won’t enjoy.

A Government (DCMS) Spokesperson told ISPreview.co.uk:

“Nine out of ten homes and businesses now have access to superfast broadband, but our goal is to make sure the UK builds the right infrastructure to maintain our position as a world leading digital nation.

We are clear that a more independent Openreach is needed to benefit consumers and the UK’s digital infrastructure. We are concerned that BT’s proposals do not go far enough and think it is right that full structural separation remains an option.

Swift and clear action is needed to give certainty to consumers, industry and investors in the UK’s broadband infrastructure, and which delivers rapid improvements in the level of investment and service.”

Ofcom are seeking views on the plans outlined today by 4th October 2016. In the meantime they’re also working to develop stricter minimum requirements for Openreach to repair faults and install new lines more quickly (a statement on this will follow later this year). Ofcom also intend to publish new performance tables from next year that will enable consumers to compare ISPs by quality of service over a range of measures.

Finally, the regulator has published an update on their earlier proposed Cable Duct and Pole Access product (here), which Openreach have of course already started to trial (here). However this is perhaps less of an update and more of a summary of what the product aims to deliver.

UPDATE 8:09am

Both BT and Sky have given their response.

Jeremy Darroch, Sky’s Group Chief Executive, said:

“Today’s proposal to create a legally separate Openreach is a step in the right direction, although falls short of the full change that would have guaranteed the world-class broadband network customers expect and the UK will need.

In particular, leaving Openreach’s budget in the hands of BT Group raises significant questions as to whether this will really lead to the fibre investment Britain requires.

At the end of the day, Ofcom’s changes will only work if they deliver better outcomes for customers.

It’s now important that the changes Ofcom have mandated today are implemented rapidly, fully and without dilution. We are encouraged by Ofcom’s stated commitment and willingness to use its powers to hold BT’s feet to the fire.”

Gavin Patterson, CEO of BT Group, said:

“The UK is the most digitally advanced nation in the G20 and further investment is required if it is to keep and extend that lead. That’s why we are poised to invest a further six billion pounds in our UK networks over the next three years”.

We have listened to Ofcom and industry and are introducing significant changes to meet their concerns. These changes will make Openreach more independent and transparent than it is today, something both Ofcom and industry have requested.

Openreach is committed to delivering better service, broader coverage and faster speeds and these changes will enable it to do just that. Our proposals can form the basis for a fair and sustainable regulatory settlement and we believe they can also enable Ofcom to bring its Review to a speedier conclusion.

Proportionality has to underpin any regulatory solution and we believe our proposals are a bold and appropriate response to the concerns outlined by Ofcom and others. We have considered the more extreme solutions proposed by others but they would be overly complex, disproportionately costly and time consuming to implement. They would also undermine Openreach’s ability to invest and create years of uncertainty.”

Interestingly BT has set out a rough summary of its own voluntary proposal and it notes that “elements” of this have been welcomed by Ofcom above, although we know that BT has not yet been able to agree on the demand for Openreach to become a “legally separate company” and for it to have confidential discussions with its customers without oversight by BT.

BT believes its counter offer would help the UK to remain “the leading digital economy in the G20” by investing a further £6bn in its fixed and mobile/EE networks over the next three years, which partly reflects their roll-out of 4G, G.fast and more FTTP connectivity. Here’s roughly what Openreach has proposed.

Openreach’s Voluntary Proposal

* “More independent governance, with a responsibility to serve all customers equally”
BT will establish an Openreach Board as a board committee of BT plc, BT’s main operating company. It will have a majority of independent members, including the Chair, all to be appointed in consultation with Ofcom. The Board will be accountable for Openreach’s strategy and operational delivery. The Openreach CEO will be accountable to this Board and will report into the BT Group Chief Executive.

An obligation for Openreach to serve all its customers equally will be included in the Articles of Association of BT plc. This will supplement the legal obligations set out in the current regulatory Undertakings and strengthen Openreach’s purpose to serve all of its customers equally.

* “Increasing Openreach’s autonomy over budget and decision making”
Openreach and its Board will enjoy a high level of autonomy. Openreach will produce Annual Operating and Medium Term Plans setting out its budgetary, strategic and operational objectives. The Openreach Board and CEO will also control how they deploy capital, within the overall budget agreed with the BT Board. This is in keeping with its wider corporate responsibilities and its legal duties as a public company

* “Improving Openreach’s approach to consultation with customers”
A formal three stage process will be introduced whereby industry will be consulted in advance on substantial investment decisions and the development of new products. This process will include an early stage during which Openreach can engage with its communications provider customers on a confidential basis.

* “Enhancing Openreach’s operational capacity”
Openreach will have access to sufficient capabilities and resources to make its own decisions and run its own operations.

UPDATE 8:32am

Statements from market analyst Ovum and Cityfibre have also been received.

An Ovum Spokesperson said:

“In many ways, a voluntary agreement between Ofcom and Openreach, which is backed by the rest of the industry, would achieve more than years in court and a forced enhanced model of separation could. Many of the things proposed by Ofcom, and that are being offered by BT, could be enacted within months. Attention and money could then turn to getting on with delivering what this review is ultimately all about – making sure Britain has the broadband infrastructure fit for the next decade.

Nevertheless, for some, only full structural separation will be enough and it is important to note that Ofcom have kept this option on the table should its proposed model not deliver. Given the enormous costs and uncertainties, coupled with the weight of evidence, for Ofcom to proceed with structural separation now would be a disproportionate response, even if it could be practically delivered.”

Mark Collins, Cityfibre’s Director Strategy & Policy, added:

“Fundamentally, today’s proposals do not address Ofcom’s key objectives of reducing the country’s dependence on Openreach and encouraging essential investment in fibre. Whilst correctly identifying Openreach as the principal source of the industry’s dysfunction, it is hypocritical of Ofcom to focus on a restructured Openreach as a panacea.

Further debate and navel-gazing as to the appropriate structure of BT will continue to create a period of uncertainty at a time when the industry needs clarity, direction and competitive investment. Openreach has a critical role to play, but it is not prudent to entrust them with sole responsibility for our digital future.

CityFibre has proven its commitment to delivering future-proof digital infrastructure across the UK through its significant investment in dark fibre assets. Unconstrained by the ongoing regulatory debate, CityFibre has the financial flexibility and independence to rapidly deliver the fibre infrastructure, innovation and challenger ethos essential to meet the UK’s future digital needs.”

UPDATE 8:55am

Now it’s TalkTalk’s turn.

Dido Harding, CEO of TalkTalk Group, said:

“The creation of a legally separate Openreach is a step in the right direction, but we must not forget the history of the organisation. The intention ten years ago was to create a functionally separate division that served all customers equally, but that is far from what happened. The lack of clear rules and responsibilities meant that BT was (according to Ofcom) able to make £4 billion in excess returns in a decade, and I fear that we’re repeating the mistakes of the past.

Legal separation still means that a highly complex web of regulation, and BT has proven itself expert at gaming this system. There is nothing to suggest they will not continue to do so in the new system. Structural separation is cleaner, with less red tape – and removes BT’s ability to exploit loopholes in the regulation. In taking one cautious step forward, I fear Ofcom may in practice have taken five steps back.

However we should remember this is just a consultation. Now is the time for the country to make their voices heard, and we are going to help them do that over the course of the next few months.”

UPDATE 9:50am

Here’s one from the founder of the cross-party British Infrastructure Group (BIG).

Grant Shapps MP said:

“Ofcom’s continuing reluctance to act condemns hundreds of thousands of people to the slow lane of internet connections, meaning it takes longer to access information, download a movie or run a business from home.

By now Ofcom should appreciate that high speed broadband is the fourth utility which no modern household should be without.

You have to wonder how many times BT Openreach has to fail the public before the regulator acts. The idea of one more chance is being stretched to its limit while ordinary families and British businesses continue to suffer through poor or no super-fast broadband.”

UPDATE 10:50am

Entanet has chimed in with some criticism.

Neil Watson, Entanet’s Head of Service, said:

“Ofcom’s chief executive, Sharon White, said that splitting Openreach off from BT completely – as we and many others in the industry have called for because we believe it’s the only way to ensure free and fair competition – would take too long. This sounds like a bit of a cop-out. It remains to be seen just how ‘independent’ Openreach becomes while it is still a division within the BT Group.

If there are improvements to responsiveness and service levels, it will be most welcome. But that’s a big ‘if’ in our view. For years, ISPs, CPs and customers have had to endure poor service levels from Openreach. But we don’t see how this organisational change will make Openreach perform better. It will still be part of BT, within the walls of the larger organisation. Until it is completely outside and independent of BT, we don’t believe it can ever deliver truly fair and balanced service levels to the industry and to the UK’s businesses and consumers.”

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Mark Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he is also the founder of ISPreview since 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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78 Responses
  1. FibreFred

    Sounds like a split from within then, everything a full split would give but still owned by BT Group

    Hopefully this will make Sky/TT/etc happy

  2. FibreFred

    And if this does happen which I’m sure it will I hope talktalk and sky will be held to their investment claims

    • 3G Infinity

      Fred,

      Sky and all the other ISPs would not be happy, the internal split remains under BT’s budget control. If Openreach said yes to Talk Talk to a new competitive access product, but that then needs GBP675m of investment, Openreach would have to go to BT Group and say ‘we need 675m’. BT Group as a publicly listed company would have to then justify to its shareholders that spending 675m on a Talk Talk initiative – that would be disruptive to BT’s own offering – and would cause BT’s revenues to drop was a good idea.

  3. TheManStan

    If it owns all it´s own assets it should be responsible for all of it´s own debts and liabilities… they go hand in hand.

    • Bob

      There seems to be confusion amongst many. OPNREACH becomes a totally separate company with its own board and its own P&L. BT have no direct control over what BT does. They would only be a shareholder of Openreach. They can have no direct control over the Openreach investment strategy. Openreach as well would no longer have to contribute to BT Groups corporate costs or R&D costs

  4. dragoneast

    Like an old friend, our eternally favourite subject: endless debate on who and how we cuts the cake.

  5. Sledgehammer

    A Government (DCMS) Spokesperson told ISPreview.co.uk:

    “Nine out of ten homes and businesses now have access to superfast broadband, NOT TRUE.

  6. Optimist

    Bearing in mind that BT is a PLC responsible to their shareholders, what happens when Openreach decides it needs to to invest an extra £10billion, so asks the BT board, which replies it can invest that £10billion more profitably elsewhere?

    • Bob

      Opnreach would be a seperate company it does not have to go to the BT board it would make its own investment decisions. It could go to the shareholder (BT) to increase captal in the company such s by a share split

    • Steve Jones

      @Bob

      You are talking or a rights issue and/or shareholders dilution. Any such think requires agreement from the shareholders which would be BT (as the sole shareholder). Any idea which way they might decide?

      Any idea a sole shareholder will agree to any such dilution (or to put in more capital investment) without some prospect of a return is ridiculous.

  7. Steve Jones

    Forgive me if I’ve missed something, but how does this change the commercial and financial issues about investment in expensive to reach areas?

    Secondly, I assume this sort of structural and legal separation by other means will involve a huge amount of assignment and shuffling around of liabilities, especially for the pension fund and corporate borrowings. There is also the little issue of dividend policy. Legally boards have responsibilities to shareholders, but with Ofcom appointing directors then this drives a coach and horses through normal corporate governance principles for PLCs.

    I suspect a bluff may be called on this if this is forced as it could be the worst of all possible worlds for the existing shareholders. If BT were to decide that it wasn’t worth the game, then they could decide to float off OR loaded with debt and liabilities.

    • NGA for all

      It does not change the cost of rural but it may,
      a) allow investments to be made rather than gamed. The £2.5bn promised and the £1bn for rural are just financial PR. Investment was flat since 2009 except for the last year. The c£1bn on 51k commercial cabinets was done at the expense of repairing other legacy systems, while continuing the cost recovery on those assets.
      b) Openreach is likely to make a different decision on G.Fast, or the balance between G.Fast and FTTP.
      c) Cost recovery is tied to investment without reducing the risk of funds being diverted to other projects. The gaming of cost recovery and investment needs to be got under control.
      The existing arrangement is being abused so some change has to occur.

    • Bob

      The Pension would probably not be affected. Existing Openreach members of the BT scheme would just cease to be members but their accrued rights wouuld remain. For new service they would jouing a new Openrech Pension scheme. THey would have the right to transfer from the BT schme to the new Openreach scheme or any other approved scheme

    • Steve Jones

      @Bob

      Whether or not there’s a new pension scheme for transferred OR employees is a complete irrelevance (the BT pension scheme for existing employees is much less generous since it was reformed). The problem is the accrued benefits for pensions under the old scheme, and I think there are something over 300 hundred thousand existing pensioners.

      There is precisely no way in which OR would be floated off without either having to cover its share of any deficit (which is likely to be the majority given past employment patterns) or buying themselves out of their part of the liability (in other words, a cheque for several billion pounds). There is no way that a BT stripped of its fixed network is going to let itself be lumbered with the responsibility for that deficit without the cashflow to fund it.

    • GNewton

      @SteveJones: Honestly, you should have known the risks of being a shareholder with BT. Your question about how this would change the commercial and financial issues about investment situation has been answered multiple times over. You may want to take another look at the http://stakeholders.ofcom.org.uk/telecoms/policy/digital-comms-review/dcr-feb-16/

    • Steve Jones

      @GNewton

      Simply stating “I should have known the risks” does not in any way absolve state bodies of responsibilities to respect the rights of private ownership. In any event, I as a private shareholder am small beer in this debate. BT shares are primarily bought be institutional shareholders as a fairly low-return, low-risk income source. As such, they are the sort of shares bought by pension funds and other investment funds. They are not going to just settle back and see their dividend income threatened should this turn into what amounts to be an asset grab (and running OR as a not-for-profit, non-dividend paying company would effectively be that).

      Then there are the other interest groups, especially the BT pension fund and its trustees.

    • TheManStan

      @GNewton

      That report states clearly that it would be complex and not without problems… additionally that lack of competition is the cause and that any form of separation may not remedy the issue.
      That said the investment situation would be likely to change as all costs relating to pension pot would affect ORs cashflow. TalkTalks mickey mouse usage of proportional current EBITDA as a method to divide up the pension liabilities can never be used, as the liability is always with the historic employer.

    • GNewton

      @Steve Jones: I noticed in your posts you are quite concerned about the shareholders here, even though your share is quite small. If a pension fund can’t do any better than investing in BT shares, then I’d seriously doubt their management skills.

      Splitting or selling off companies is nothing new, it has even happened with BT in the past. Most people and groups involved can see that some fundamental changes are needed for BT. Lamenting over the welfare of shareholders in this context doesn’t help.

    • Steve Jones

      @GNewton

      I have around 5,000 shares, so it’s enough to cause me some interest (in more than one sense of the word), even if its insignificant to BT.

      As for the dividend yield, it’s about 3.6% a year. It’s considered to be a low-risk investment. Other blue-chips, like Unilever, yield less at 2.8%. You can get 5% in some companies (like Royal Dutch-Shell), but they are considered riskier due to market volatility and other issues (witness BP).

      It’s about 17:1 at the moment. It’s very much the sort of share that pension funds hold. Pension funds are disallowed (by law) in investing too much money in high-risk/high-return shares. Given the very low returns on government bonds at the moment, companies with a steady, albeit not enormous yield at fairly popular investment vehicles for those requiring income.

      High risk, high growth business are another matter. Not every company can be like ARM which trades on a PE ratio of about 60:1 and yields about 0.5%.

    • FibreFred

      Heheh some cracking comments of delusion from gnewton today. Especially on the asset front
      Steves replies more than cover what I would have said

  8. 3G Infinity

    To me there are a couple of issues:

    a) if Ofcom exercises its control of Openreach ‘over an issue/decision’ then effectively the company ‘Openreach’ has been nationlised and even worse Ofcom is not fully accountable to either DCMS or Treasury, so would need more statutory action from Parliament to make it more accountable to commercial customers

    b) Openreach would not be free to raise investment, all its decisions would be within the directly set budget from BT Group – that would imply Openreach would not be able to develop a 3rd party initiated program to give say Sky an advantage without BT Group saying yes “we will fund that” – and that isn’t going to happen.

    Without access to the financial market, Openreach will always be constrained in any ambitions it may have. While Ofcom may suggest a new Board would manage everything, this board would not be a legal entity with the Companies Act 2006 and therefore the directors would be notional and not legally accountable.

    • Steve Jones

      I cannot see that BT would agree to something not in their shareholder’s interests. In fact they are legally bound not to do so. The idea that OR could somehow make autonomous decisions without having independent access to financial markets is a simple nonsense. If that was to happen OR would only be able to fund investment from internal cashflow. There would presumably also be a charge against OR for funding the pension deficit, dividend contributions, cost of finance.

      The dividend issue is important. Who would actually decide and how? A board half appointed by Ofcom would not follow the normal corporate governance system which applies in the UK.

      I can’t see BT agreeing to this.

    • 3G Infinity

      Steve,

      A charge can only be made against OR if it is a separate legal entity and has assets that would form the security indicated in the charge.

      Sharon White knows very well that legal separation – while causing a period of chaos – is the only true way of having a board, accountability and the ability to independently raise funding.

    • Steve Jones

      @3G Infinity

      Whilst a formal legal charge could only be made that way, there would be payments required to fund OR’s costs and it would appear on their balance sheet. They would have to pay money over for any funding costs (for interest charges) on what was deemed to be OR’s borrowings and the same for contributions to the pension deficit. It would simply be part of the cost of running the OR business.

      In any event, if anybody thinks that the BT board would accept such a one-sided deal as to get BT group to incur all the historic costs of funding and pensions without any of the cashflow to fund it, then they are living in cloud cuckoo land. It would likely end up in the courts.

    • Steve Jones

      @3G Infinity

      Having now read through the Ofcom proposal document, then OR would, indeed, be a legally separate body albeit solely owned by BT.

      In any event, the issues I refer to, such as contributions to the pension fund (including historical deficits), financing costs, borrowings and, presumably, dividends (not specifically mentioned by Ofcom) are to be covered by some form of annual setting of a financial operating envelope. That sounds like an enormous can of works just waiting to be opened. Just who will decide how of the current BT debt is the responsibility of OR and therefore how much is to be paid every year to fund interest payments? Who decides corporate dividend policy and what part of OR’s cashflow has to be diverted to pay that?

      Who would have the final say on that is not obvious. BT still have the right to appoint the OR directors (within certain constraints), but Ofcom seem to be relying on the public embarrassment factor over any such intervention.

      So that issue remains. Those details of where OR’s cashflow goes when covering common corporate demands is a big, big issue.

    • GNewton

      @Steve Jones: “Just who will decide how of the current BT debt is the responsibility of OR and therefore how much is to be paid every year to fund interest payments? Who decides corporate dividend policy and what part of OR’s cashflow has to be diverted to pay that?”

      I think most people will agree that the government and/or Ofcom will have a big say in this, given BT’s poor track record, and given the fact that so much taxpayer’s money has been given to that company. As I said, splitting a near-monopolistic telecom company into smaller companies is nothing new. Doing nothing for the sake of shareholders is simply not an option anymore. The quiet days for the BT shareholders are over. In fact, it shouldn’t even be allowed to pay out such high dividends given all the issues with the current BT.

    • Steve Jones

      @GNewton

      “think most people will agree that the government and/or Ofcom will have a big say in this, given BT’s poor track record, and given the fact that so much taxpayer’s money has been given to that company.”

      That’s essentially saying the government should control a privately owned company without paying shareholders for the assets. If the government want such control, then they should pay for it. Not some shabby backdoor approach which involves selling something on one hand and then taking it back with another.

      If the government want to set some form of national broadband strategy where they control the priorities, and not use commercially driven ones, then they had better come up with an appropriate framework, not this sort of nonsense which will change nothing save cost a lot of money.

      As for money being “given” to the company, it wasn’t “given”. It was a series of contracts awarded by competitive tender using specifications, requirements and objectives drawn up by local authorities and according to political priorities. It was open to multiple companies to bid, and it appears to have escaped you attention that (almost universally) that it has cost less and achieved higher coverage than what was bid for and pretty well within contracted timescales.

    • GNewton

      @Steve Jones: “As for money being “given” to the company, it wasn’t “given”. It was a series of contracts awarded by competitive tender using specifications,”

      You are joking here, aren’t you? Everyone knows that it was anything but a genuine tender, it was biased toward BT from almost the beginning. And no taxpayer’s money should have been given to BT via dubious BDUK schemes. If BT wants to be a commercial company it should start acting like one, and not like an incompetent near-monopolist. In fact, thinking about it, the taxpayers had been screwed several times over:

      – paying the copper network in GPO times
      – shareholders paying again for their shares
      – excessive line rentals even though
      landline investments have been paid for multiple times over the decades
      – BDUK-style gap funding schemes which BT never needed in the first place

      How many more years do hard working people have to pay into this incompetent company before they can get actually a genuine fibre broadband service? Or for how many more years do customer’s have to put up with such a poor customer service by this “company”?

    • Steve Jones

      @GNewton

      The majority of the copper network was, of course, installed before privatisation, but what relevance has that? It was bought off the government by the shareholders, and at a price which (in inflation adjusted terms) is roughly what BT is capitalised at now.

      As for your ridiculous notion that an asset is worthless once it’s been paid for, is it your contention that a landowner, once covered for the full cost of their property by rent, now has a worthless asset and it can be taken from them? It’s simply a ludicrous notion. Ofcom set the wholesale rate for line rentals and it’s based on a valuation of the asset (and an appropriate rate of return) and the costs of running that service. If an owner is not allowed to make a profit from an asset they’ve bought (as you are explicitly stating) then who would ever buy it in the first place, and shouldn’t the government have told potential buyers that? Risks from competition is one thing, taking control without compensation something else entirely.

      As for you case about BDUK, go take it to the politicians. They made the rules and ran the whole thing. Politicians crying foul after something they set up because it didn’t achieve something that was never defined in the project in the first place is ridiculous.

    • GNewton

      @Steve Jones: Some of your assumptions are wrong here. I never said that BTs assets are worthless. Only, that customers have been overcharged on ridiculous line rentals, while at the same time there has been a serious lack of upgrades and investments in BTs access infrastructure, which after decades still is pre-dominantly copper based. Many people now recognise that nextgen superfast/ultrafast broadband has become like a utility, and it should therefore be treated as such, and be kept with a private company for whom shareholders are more important. Ofcom has started a new phase in an attempt to resolve the serious issues with BT, and shareholders should not play an important role here, the future burdens of risks lies with the shareholders, not the public nor taxpayers. I am sorry if you can’t understand the fact that BT is not a normal company at the moment.

    • GNewton

      @Steve Jones: Correction: “… and not be kept with a private company for whom shareholders are more important …”

    • TheFacts

      @GN – do you know that the core network was copper and fully replaced by fibre?

    • GNewton

      @TheFacts: So what? BT needs another Peter Cochrane!

      Do you have any thoughts on the subject about how Ofcom should deal with the BT issues? Or are you just another BT shareholder?

      And don’t come up again with your government-funded nationwide FTTP-rollout!

    • Chris P

      why do some people fixate on fibre being the only solution.
      there is northing wrong with copper, over 100m or so it more than matches fibre, its cheaper to deploy and more hard-worthy too. i hate to write this but the typical home user does not need anywhere need 1Gb access speed. 100Mb will be more than enough, people likely won’t notice any difference over 50Mb anyway. Pushing up the access speed will just move the bottle neck into peoples home networks. most cheap tablets / phones / laptops / devices are unable to connect at speeds over 54Mbs (802.11.G) anyway, couple in wifi interference and that rate plummets, those that are wired or use 802.11ac will occasionally push 1Gb but that really depends on what the remote end can deliver.
      If the government wants everyone to have fibre then they should mandate that ISP’s together with openreach should deploy it en masse , recouping the costs through line rental and sod those who have absolutely no need for fibre, just like tehy are doing for smart meters.

  9. TheManStan

    CityFibre´s response is the most laudable, points out that properly resolving the UKs situation is not Openreach´s separation but other companies providing the competition and therefore stimulus to invest. Which is sadly lacking from major ISPs barring VM. We can already see the fruit of VMs competition in BTs “counter investments”.

    • Steve Jones

      Quite, although Cityfibre’s own interests are in not having Ofcom force OR to invest in uneconomic infrastructure and thereby undermine the wholesale market. Unfortunately Ofcom seem to be wholly clueless in this regard. They seem to think that their proposal would remove Ofcom’s incentive to make life very difficult for other network operators (which it won’t of course) whilst promoting infrastructure competition, including the use of PIA++ (or whatever we call it).

      Cityfibre quite like the PIA++ proposals of course, but there’s no incentive to OR to make it easy. Meanwhile Ofcom state in their proposals that OR will be open to new investment models because they’ll be able to aggregate demand using their new relationship with customers. There is some talk about co-investment (whatever that means in practice – new shared ducts?), but it’s not exactly convincing.

      This is (to put it politely) pure b******t on Ofcom’s part as it’s directly contradictory. This is trying to have your cake and eat it. The same is, of course, true about regulated dark-fibre access. If OR are required to offer dark-fibre at something close to marginal cost prices it drives a coach and horse through the incentive to finance alternative networks.

      What I suspect will happen (whatever happens) is that OR will see the VM network in the consumer area as the priority investment area. That is clearly also what Sky, TalkTalk and so on will want too as that gives them the maximum reach and ability to compete with VM. All those Conservative MPs who think that OR will suddenly pour vast sums into the countryside networks by this sort of proposal (or any other purely structural change one) are barking mad.

  10. Henry

    I would be interested in knowing how this is supposed to help the position in Rotherhithe

    At the moment, when I speak to BT Retail to say that my 4/0.4 Mbit/s ADSL service on a good day and 0.3/0.04 on a bad day has switched from good to bad again, they offer to send an engineer round again to check my home wiring and the connection to the DP, but they refuse to pass on my concern to Openreach that the 2km EO line back to Bermondsey is inadequate and needs upgrading. BT Retail tell me they are not allowed to talk to Openreach about long-term network issues.

    Will this reform make it more or less likely that BT will tell its supplier Openreach to get its act together for thousands of homes in a small area of inner London?

    • fastman

      Rotherhithe is primarily exchange – former wharves and factories — many developer build massive new flats and appartments and are still doing the same on copper only — suggest f you live in one of those see if you developer managing agent will fund the gap for a network rearrangement for your development

    • NGA for all

      Henry, it seems to fail to do this.. There is no direct link between cost recovery allowed and establishing an obligation to invest a proportion of those monies in updating the network. This might be much simpler than what is being proposed.

      Our retail prices rise, but investment is flat.

      Ring fencing investment as a proportion of cost recovery is not referenced. BT is still assumed to be an efficient operator and thus has rights and discretions how costs are allocated and recovered.

      There is no nudge to do difficult work like Rotherhithe. This is how a lot of BDUK money is being used, diverted from rural to urban knotty spots.

      I will update if I find something on linking cost recovery and investment.

    • NGA for all

      with reference to Fastman, he has you over a barrel and wants a partnership squeeze of £20k-£40k. However if there is a new development nearby, you could use BT’s new development offer to get the work done.

      There are some early cases of turning a BT partnership request of £20-£40k into BT making payments to a developer. The associated spine with the former would then permit BT to do more locally.

    • Henry

      Except that is not really true; most of Rotherhithe is not brand-new, and much of the unserved area is made up of houses rather than flats.

      After the docks were filled in 35 years ago, flats were built on the riverside but houses inland. Most of the current problems stem from cost-cutting network decisions in the 1980s. BT installed a couple of cabinets, since upgraded to FTTC, but for the overwhelming bulk of the houses the issue is long low-quality EO lines even when like me they are several kilometres from the exchange but 200m from a cabinet: in most other parts of London there would be a nearby exchange and a reasonable ADSL service. The original cable TV sub-contractors failed to dig duct when the peninsula was a building site (they were only paid per actual home passed), so the Virgin Media coverage is now very small and Rotherhithe was not mentioned in the recent Project Lightning announcement for London despite the responses to “Cable My Street”.

      The recent alt-nets are selective: Hyperoptic does serve many of the riverside flats and the boats at South Dock marina using the pattern you suggest, but will not serve freehold houses in its business model; IFNL serves some of the recently built flats, including some where Openreach then built a new cabinet; Relish offers a service on the Bermondsey riverside and the Isle of Dogs, but not Rotherhithe between them.

      To repeat my question: how will the Ofcom proposal make Openreach more responsive in areas where its network is clearly inadequate?

    • NGA for all

      Henry .. nothing to help Rotherhithe in either Ofcom doc or the duct and pole update. I see the LEP appears to be funding FTTC in Rotherhithe and more is promised from them by 2017.

      There is no current link between the cost recovery regime and network investment and the new proposals fail to secure that basic linkage.

    • fastman

      Henny lets be clear on this — Rotherhithe is one of the Biggest EO exchanges in the country where massive amout of apartment Blocks have been built on former Dock primariry 5 – 7k away from exchange — so not sure what the 1980’s have to do with it expect lots of blocks built on existing copper lines

    • Henry

      fastman – that is precisely my point. The history is that in the 1980s when the Surrey Commercial Docks in Rotherhithe were filled in and built on, BT decided not to site an exchange there. BT also decided to supply most of the housing with long EO lines from the Bermondsey exchange (up to 4km by main road) and it is not clear how much of this was copper rather than aluminium. All these decisions would have been driven by cost-concerns at the time.

      Since then, Openreach has done relatively little to improve the situation: a few small new cabinets, some announcements they failed to deliver, and now some “in scope” areas with no timetable. So this is a case of market failure to deliver in a reasonably dense area with slow ADSL (though space for streetworks), and where the current commercial incentives in Ofcom’s regulated market do not appear to have worked so far.

      Ofcom’s new plans are supposed to improve the situation in some way, and I am asking how they might be expected to do that.

  11. fastman

    primarily exchange only

  12. GNewton

    Ofcom are not solving the BT issues here by merely re-arranging the deck chairs.

  13. Ken

    If openreach was its own acting body of a company that would be good just for infrastructure that would be even better but ofcom doesn’t understand how difficult share splitting is! You can’t just hand openreach 10bn from BT Plc assets it’s classed as fraud ya bunch of plumes. Looks like a invested is needed now from the UK piggy bank and of communication to sustainable keep this split of openreach.

    • Bob

      Not really. It remains a BT company so BT would still own all the assets of OPNREACH but indirectly

  14. Wise Old Owl

    I’d also like to see Openreach stripped of its legacy, Neanderthal, working practices and in many instances, workforce. They need new blood, dynamic, responsive and focused on service delivery and quality.

    Until then it will continue to be regurgitated wrong doing no matter how much money or restructuring occurs.

    • TheFacts

      What are the ‘legacy, Neanderthal, working practices’?

    • GNewton

      @TheFacts: You asking the wrong question.

      It should have been: Where is the widespread fibre broadband investment? Whee and how will BTs extremely poor customer service be sorted out? When will BT stop relying on taxpayer’s money to roll out outdated VDSL solutions?

    • fastman

      G Newton — so in excess of 4bn not enough for you — I assume you either not covered then !!!!

    • TheFacts

      @GN – so this is simply about 100% FTTP, ignoring that VDSL actually gives millions a service that meets their requirements in a very short timescale. With that in place for the vast majority we will see what the next stage is.

    • GNewton

      @TheFacts: I am glad you are happy with your VDSL line.

      All I was doing was pointing out to you is how you keep posting strange questions, like the one of ‘legacy, Neanderthal, working practices’ which shows you are completely out of touch with the issues caused by BT, which Ofcom is trying to solve. And do you remember your fancy dream about a nationwide FTTP rollout paid for by the government (in other words, taxpayers)? Come back to the real world here.

    • TheFacts

      @GN – if people use words like that they should explain the detail.

    • GNewton

      @TheFacts: Sorry, I have to disagree here. You are obviously blatantly ignorant of the BT issues.

      The OP expressed a valid observation, wrapped up in a figure of speech in which a word or phrase is applied to the BT situation, namely BTs issues with its working practices, service delivery and quality. If you want details, read up on Ofcom’s proposals, or look up any major review site for BT, including its own business forums. These will be just the tip of an iceberg, but gives you some ideas that all is not well at the moment with that company.

      You are not another shareholder with that company, are you?

    • FibreFred

      Good to see when GNewton is called out he as usually cannot provide a response and starts to tattle on about Trustpilot and issues etc.

      If you are going to make arguments, argue them

    • GNewton

      According to Ofcom’s Digital Communications Review from Feb 2016, Ofcom’s decisions were designed to achieve:

      1) A choice of networks for consumers and businesses. Openreach must open up its network of telegraph poles and underground tunnels to allow rivals to build their own, advanced fibre networks, connected directly to homes and offices.

      2) Reform of Openreach. Openreach needs to change, taking its own decisions on budget, investment and strategy, in consultation with the wider industry.

      3) Better quality of service across the telecoms industry. Ofcom intends to introduce tougher rules on faults, repairs and installations; transparent information on service quality; and automatic compensation for consumers when things go wrong.

      4) Better broadband and mobile coverage. Ofcom will work with the Government to deliver a new universal right to fast, affordable broadband for every household and business in the UK. We also intend to place new obligations in future spectrum licences to improve rural mobile coverage.

      Some posters here are wishfully ignorant about point 3) because of their irrational emotional attachments to, or sometimes financial interests in, BT. The issues won’t go away on their own. Let’s hope the latest Ofcom update will be a wake-up call for the telecoms, especially BT.

  15. Bob

    There would be no pension deficit in the new company. Pensions as well are outside of TUPE. There are a number of options. Existing FS scheme Openreach staff would retain any accrued rights in the BT Group FS scheme but for new service would be able to join the new OPENREACH money purchase scheme . A remote possibility is that OPENREACH would buy the OPENREACH staff into the BT FS scheme but that would be very expensive it would probably require doubling the existing contributions

    • Steve Jones

      Have you actually read the Ofcom discussion document? There is a very large section which discusses the pension deficit and the access that BT Group will need to the OR cashflow to pay for their part of it. There is also a lot of discussion over the attitude that the pension trustees will have to the paydown of the deficit (which some are estimating will now come out at £12bn). If, the pension trustees feel that any new organisation imperils the existing pension fund, they could demand the deficit is covered much faster which will have a direct impact on BT group including any separate OR. The pension regulator also comes into this.

      With the current Ofcom proposal there would be annual financial envelopes agreed with OR which will cover issues such as OR’s contribution to the pension deficit, interest payments and dividends. Should OR ever be fully split off, then it most certainly will have to carry across some of the corporate debt, very probably including an extra payment to pay for the pension deficit attributable to OR based on past employment practices. The pension regulator and the trustees would have a lot to say about this and it could easily end up in court.

      Note that none, absolutely none of this has anything to do with existing employees who are already on different terms to the old scheme which was closed several years ago. The new scheme is considerably less generous than the old, but none of this changes rights which have been earned up until the closure of the old scheme. Those are set in law.

  16. Bob

    AS far as I can tell their is nothing to stop Openreach forming a joint venture with other companies. This could provide a lot of additional investment capitol and avoids the issue of other companies rolling out a network only to get BT move in. I can see the likes of Sky & Talk Talk approaching Openreach on this. It could get fibre rolled out deeper into the network a lot quicker as well as allowing Sky to deliver multiplay over fibre

    • FibreFred

      Let’s see bob let’s see, both sky and talktalk have said they would invest, I have reservations

    • fastman

      Fibre I don’t expect to see any additional investment for other providers — its all noise — though I would love to be proved wrong on it

    • Steve Jones

      If there was to be new investment then the investors will expect a return (of course). That’s the nonsense of this. If a way could be seen to get a return then finance and investment was never a problem (although resourcing is).

      Sky, TalkTalk, Vodafone and so on are not going to just hand OR a lot of capital and not expect a dividend from it. Given that OR’s only income (in the mass market area) is from the SPs and, especially, BT Retail, Vodafone and Sky, the only way there will be extra income to pay for this substantial investment is if those SPs actually pay OR more for the services. Perhaps if the SPs moved completely to VULA products (GEA-FTTP, GEA-FTTC and GEA-G.FAST) then this might provide some extra revenue, but the amounts aren’t massive. At the moment, VULA product revenues are of the order of £500-600m a year as against £2.5bn or so for income from wholesale charges for the copper loop.

      It’s probably enough on the existing strategy of enhancing BB through fibre/copper hybrid technologies with a modest amount of FTTP, but it certainly won’t finance a complete uplift of the local network to fibre, let alone full coverage in rural areas.

    • NGA for all

      @steve – Fibre grew by 265% to £677m. Ethernet grew by 30% to £900m WLR is -13% to £1.9bn
      Fibre provides growth and cost transformation to go at.
      Resource is a big problem.

    • Steve Jones

      @NGA

      Those are fantasy figures. There were another 1.5m FTTC/FTTP lines in 2015-15 making 4.2m. That’s a 55% increase. In a full year that would be worth around £150m turnover (and there will be some associated costs). As for private circuits, yes they are increasing in volume, but Ofcom impose regulatory cost reductions which pretty well wipes out any increase in revenue (and the dark fibre proposal would reduce that further. OR are also required to make efficiency savings on a number of other products.

      The overall evidence that revenue is essentially flat is that OR turnover in 2013-14, £5bn in 2014-15, £5bn and in 2015-16 it’s £5.1bn. That in the context of the total number of fixed lines increasing slightly. So that’s a 2% increase in turnover in 2 years. Hardly a huge rate, although as more full year revenues come in and there is some increasing take-up of GEA-FTTC it will grow a bit more, but only £100-150m a year and if Ofcom do impose price controls on GEA-FTTC even that could disappear.

      A quote from the OR update for the latest set of results.

      “Revenue declined 1%, with regulatory price reductions offsetting the impact of fibre revenue growth. Our operating costs were 2% lower which meant EBITDA was flat. Cost efficiencies offset increased volumes, pay increases and the additional engineering resource we recruited to support our provision and repair performance.”

    • FibreFred

      NGA, no disrespect but your figures always seem to be at odds with everyone elses?

      With regards to this:

      “Ethernet grew by 30% to £900m”

      Even if that were true (not sure if it is) what has that got to do with commercial FTTP?

      Ethernet is a business product are you saying a business should take profits from one service line (Ethernet) and plough it into another (FTTP) that has very low returns , a very long term ROI and very very little demand (as a whole)

      Is that how to run a business, plough money into something that doesn’t make money?

    • NGA for all

      @Fibre Fred and Steve, the 30% Ethernet and 264% growth numbers are from Clive Selley slide deck presented on ‘Markets Day’. You can download the PDF from btplc.com.

    • FibreFred

      Ok but my point was you are suggesting a sane business would take profits from a profitable area and spend on a non profitable area (in comparison) Why?

    • NGA for all

      Fibre Fred, it is not unprofitable. Your making Ofcom’s case for it. At Group you can game the regime by allowing investment to slip in the network while taking the cash generated on regulated returns and using a proportion on something else, indirectly.
      Ofcom are not faultless by any means, but their £4bn calculation of excess returns on regulated products which BT disputes is £4bn not going into infrastructure over whatever period that was calculated.

    • FibreFred

      Of course it’s unprofitable.

      You are telling me here and now there is a great short term roi to be made on rolling out fttp on a large scale including rural?

      Seriously? 🙂

  17. FibreFred

    I expect it will be some time before we see this progress, it will keep bt lawyers busy.

  18. FibreFred

    I also wonder what this will do to current investment plans and the talks around uso.

    After all to put even some of these changes through will be very expensive.

    • NGA for all

      Most of Openreach investment is a decision on how labour is allocated and capitalised. You have huge accruals on the BDUK programme. What is the threat here?

  19. fastman

    NGA — I do not have anyone over a barrel – — comments lke that are not professional in any shape or form- !!! it would be like me publically summising why you don’t do what you used to do and for whom

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