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UPDATE4 Ofcom UK Forces BT to Adopt Legal Separation of Openreach

Tuesday, Nov 29th, 2016 (7:51 am) - Score 3,535

Bad news for BT today. Ofcom confirms that it has been unable to reach a voluntary agreement over the future of Openreach and would now force the operator to adopt “legal separation“. A new UK framework for the next decade of telecoms and broadband regulation will now be established.

Openreach is responsible for managing access to and upgrading BT’s national telecoms and broadband network, which they’ve been required to do on a “functionally separate” basis since the last review in 2005. The outcome of that review loosened BT’s control and fuelled the rise of ISPs like Sky Broadband, TalkTalk and many others, which also made related services cheaper.

However the regulator’s most recent Strategic Review, which posted its initial proposals in February 2016 (full summary) and an update in July 2016 (here), found “evidence” to show that Openreach still had an “incentive to make decisions in the interests of BT, rather than BT’s competitors, which can lead to competition problems“. Ofcom added that BT had failed to “sufficiently” consult rival ISPs, specifically those that piggyback off its network, on “investment plans that affect them.”

Ofcom also appeared to support the view of a cross-party inquiry (here), which claimed that BT has been under-investing in its network by “hundreds of millions of pounds.” BT denied that accusation and pointed to their plan for deploying 300Mbps G.fast broadband to 10 million UK premises by 2020, with “most of the UK” likely to be done by 2025.

On top of that BT aims to roll-out 1Gbps FTTP to 2 million UK premises by 2020 and the operator hopes to invest £6bn over the next three years, although this includes their vast mobile business under EE and that covers a lot of existing commitments. However BT’s critics want to see significantly more FTTP and less hybrid-fibre G.fast.

The new agreement therefore hopes to find a way forward by giving rivals easier access to BT’s national network of cable ducts and poles (details), as well as a more independent governance structure for Openreach, tougher minimum service quality standards, new consumer protection measures and better information sharing.

Ofcom’s Statement

Our proposal requires Openreach to become a distinct company with its own Board. This would comprise a majority of non-executive directors, including the Chair, who are not affiliated with BT. Openreach would be guaranteed greater independence to make decisions on strategic investments, with a duty to treat all of its customers equally.

We are now preparing to notify the European Commission of our intention to implement these plans, requiring the legal separation of Openreach to make it more independent. Throughout this process, we remain open to BT bridging the gap between its proposal and what is required to address our strong competition concerns.

Around 94,000 people responded to our consultation via an online campaign. Some 90,000 of these were identical responses written by the [Fix Britain’s Internet] campaign, calling for action to improve the UK’s telecoms infrastructure; including the full, structural separation of BT. A few responses shared positive experiences of BT and urged no further action.

A significant number of the 4,000 non-standard responses raised concerns about slow broadband speeds, the availability of fibre broadband and the quality of service from major service providers. Most concerns related to BT, with a smaller number of complaints about other providers including Sky Broadband, TalkTalk and Virgin Media.

One of the biggest stumbling blocks to a voluntary agreement has stemmed from Ofcom’s call for Openreach to “become a ring-fenced, ‘wholly-owned subsidiary’ of BT Group, with its own purpose and board members.” As part of that they also wanted Openreach to be allowed to have confidential discussions with its customers (i.e. without oversight by BT).

However BT has been bitterly opposed to Openreach becoming a “legally separate company” (no CEO likes to lose full control over part of their business, even if the BT board would still have a say). Furthermore BT also complained about the related risks and costs of moving staff and pension liabilities to the “new” company.

In the end Ofcom has forced through “legal separation“, which is not the nuclear option of full structural separation that many of BT’s rivals had been demanding. Ofcom sees their approach as being able to deliver all of the benefits that stem from full separation, albeit without many of the complexities and costs.

Structural separation could generate materially greater costs and risks compared to models based on legal separation. This includes the costs of physically separating the two businesses, and effects on the BT pension scheme,” said Ofcom. However most stakeholders who responded to their consultation felt as if BT had “overstated” the impact on their pension scheme.

Ofcom’s Legal Separation Statement

We have continued to discuss with BT potential changes to its voluntary proposal. Although we have made some progress, BT has so far failed to offer proposals that would adequately address our concerns. BT’s proposals still fall short in important areas. These include the transfer of people and assets, and the level of influence that BT Group executives could exert over the management of Openreach.

Our current view is still that an effective and robust form of legal separation, with Openreach as a wholly-owned subsidiary of BT, is likely to achieve the greatest improvements for everyone in the shortest amount of time. Therefore, this is the approach with which we are minded to proceed.

Our model will include proposals to publicly scrutinise and monitor its effectiveness against several measures of success. The most direct will be whether Openreach Board decisions are taken independently, without undue influence from BT Group. If Ofcom’s monitoring suggests that legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers, we will return to the question of structural separation – fully breaking up the companies.

As an operator BT has always faced somewhat of a conflict between public expectation and investment reality. On the one hand they are of course a commercial company, not a charity, and one that quite understandably must take account of what shareholders and the business case deem to be the best course of action for their bottom line.

On the other hand BT’s private interests often seem to have become increasingly different from what the public and cross-party MPs expect. A large part of this divide could perhaps be expressed as both a product of historic regulation and key political decisions, not least former PM Margaret Thatcher‘s move in 1991 to stall BT’s early fibre optic roll-out due to competition concerns.

Another problem is that new services (e.g. ultrafast broadband) cost more to deliver and it can sometimes be difficult to get people to pay the extra for those when we all exist in an aggressively competitive market, one where consumers expect to get a fast and good quality Internet connection for very little money; today’s deal probably won’t change that reality.

Ofcom will thus be hoping that their changes are just enough to redress the balance by boosting competition, accountability and service quality, albeit without completely turning the market on its head. Suffice to say that we might well be back to this same question again in another 10 years’ time, but a lot can happen in a decade.

In the meantime Ofcom said that they “remain open to further voluntary proposals from BT” to address their outstanding concerns, but were pressing forwards regardless and expect to consult publicly on a submission to the European Commission during early 2017.

A BT Spokesperson said:

“We note Ofcom’s announcement this morning, updating on the next steps of the Digital Communications Review.

We put forward proposals in July that we believe are fair and sustainable, and that meet Ofcom’s objectives without disproportionate costs. We are implementing these proposals, and have just appointed Mike McTighe to be the first chairman of Openreach. We are in discussions with Ofcom on two outstanding issues, the reporting line of the Openreach CEO and the form of legal incorporation.

We will continue to work with Ofcom to reach a voluntary settlement that is good for customers, shareholders, employees, pensioners and investment in the UK’s digital future.”

It’s no coincidence that Openreach has today appointed Mike McTighe to be its first ever Chairman. BT said that McTighe, who will take up his role from January 2017, is an “experienced telecoms executive and regulator who spent eight years on the Board of Ofcom“. He will oversee the new Openreach Board, which will operate from early 2017, and be “instrumental in selecting further independent members to join that Board“. But Openreach knows that it will soon have to go a lot further.

Sir Michael Rake, BT Chairman, said:

“I am delighted that Mike has agreed to be the first Chairman of Openreach. He has extensive experience and I am sure Openreach will benefit from his detailed industry and regulatory knowledge.

We promised in July to create an Openreach Board and we are delivering on that promise. I remain hopeful this significant move by BT can help to underpin a sustainable, proportionate and fair regulatory settlement that is in the interests of the whole country.”

We should add that the Strategic Review also covered a number of other service improvement proposals, such as the push for a new “automatic compensation” requirement when consumers suffer a fault that causes a “loss or reduction of service” and we must not forget the forthcoming 10Mbps Universal Service Obligation (USO).

Many of these service improvement measures are being defined and consulted upon as part of the wider Digital Economy Bill 2016-17. We’d argue that these will probably have a much more obvious impact upon consumers than the above decision.

Ofcom is effectively trying to help the market to become more competitive and fair, but this will take many years to foster and won’t be something that is immediately apparent to most end-users. Now here’s a quick recap of Ofcom’s original proposals and you can also read the latest UPDATE NOTE on their website. Comments from ISPs are at the bottom of this article.

Summary of the Key Openreach Changes

* Openreach will be required to give rival ISPs easier access to their national network of telegraph poles and cable ducts, which can be used to install faster broadband services. The Duct and Pole Access (DPA) solution is effectively an enhanced and more flexible version of their old Physical Infrastructure Access (PIA) product. As part of this Openreach must provide comprehensive data on the nature and location of its ducts and poles.

* Tougher minimum service requirements, which aim to push Openreach into repairing faults and installing new lines / services more quickly. Ofcom will monitor and report on related progress.

* Openreach’s governance structure will be overhauled so that the operator can take its own decisions on budget, investment and strategy. The new management will be required to “serve all wholesale customers equally, and consult them on its investment plans“. This includes greater transparency over how costs and assets are allocated between Openreach and the rest of BT.

Related Governance Changes

* 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.

UPDATE 8:56am

Added a comment from BT above.

UPDATE 9:33am

Now it’s TalkTalk’s turn to comment.

Dido Harding, CEO of TalkTalk, said:

“Openreach has been letting consumers down for far too long, unable to meet promises of even minor improvements and becoming a household name for all the wrong reasons.

However, we welcome the fact that the regulator has finally made a decision, and while we do not think legal separation goes far enough to deliver the broadband consumers deserve, they are at least a step in the right direction.

Consumers will be keen to understand how these changes will improve their service and by when. We will continue to push Ofcom to ensure the plans deliver real, meaningful improvements quickly, and if major changes cannot be delivered, then they should move to structurally separate Openreach once and for all.”

UPDATE 10:13am

Some more comments.

Charles Trotman, CLA Senior Business Adviser, said:

“Any formal break between BT and Openreach must not lose sight of the goal to deliver broadband to rural areas. Ofcom must make it clear that the conditions of the separation include guarantees for future investment to further support rural digital connectivity.”

A Sky Spokesperson said:

“Let’s not forget why we are here – BT Openreach has continued to fail consumers. This is why we have always said that we want a solution that is clear and executable and in the best interests of consumers and industry. We will now watch closely as to how Ofcom executes its proposals.”

Matthew Howett, Ovum Analyst, said:

“This announcement will undoubtedly come as a blow to BT, which thought it was making progress with Ofcom; however, the door remains open for both sides to reach a voluntary agreement. In many ways, a voluntary agreement remains a better outcome than a forced legal separation, not least because the EU route is uncertain, untested, and likely to take much longer to achieve. It is also made more complex by the decision from the UK to leave the EU.

In the summer of 2016, BT and Ofcom appeared to be close to reaching an agreement. Today, it is clear that the issues around the transfer of people and assets, and the level of influence that BT Group executives could exert over the management of Openreach remain sticking points, including complex issues surrounding BT’s pension scheme. These will be the areas that BT needs to focus on to avoid the imposed legal separation Ofcom stands ready to implement.

In the time between the July consultation and today’s announcement, there have been repeated calls for a full structural separation of Openreach from the BT group. Ofcom has once again reiterated that structural separation is off the agenda. Only if Ofcom’s monitoring suggests that a legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers, will it return to the question of structural separation.”

UPDATE 11:06am

Telecoms operator Vodafone has chimed in to claim in a new report that BT’s “excess profits from regulated services” increased to more than £1 billion in the last financial year.

Apparently the Frontier report also shows that BT made returns of 70% from the regulated wholesale broadband services used by around 1.8 million customers living in rural parts of the country, where it faces little or no network-based competition. Vodafone claims this means that rural customers, who make up 9.5% of UK premises, provided BT with average excess profits of £93.84 per customer per year.

Helen Lamprell, Vodafone UK’s Director of External Affairs, said:

“We, along with broadband customers across the country, share Ofcom’s disappointment at BT’s performance and at its reluctance to undertake the transformation necessary to ensure the UK has the competitive fibre networks it needs for the future. We will analyse the detail of what Ofcom proposes – and BT’s response to those details – very carefully.

We believe Openreach should be separated from BT as soon as possible so BT’s customers and other providers can be better protected from the excessive charges highlighted in this Frontier report.”

UPDATE 30th Nov 2016

Just a comment from Fluidata (FluidOne).

Simon Stokes, Fluidata Head of Channel, said:

FluidOne support the Ofcom’s announcement. This proposal combined with the recently pledged government funding appear to be a step in the right direction to support Britain maintaining its position as a leading digital economy and working to deliver universal access to good internet speed.

BT appear to be evolving into a content based organisation with an increased focus on TV and Media operations, it seems to make sense at this stage to separate the long term infrastructure investment Openreach, from the retail and media investment model. Allowing Openreach to take a long term strategic approach to infrastructure investment in the UK should allow for the further development of an independent, competitive Openreach which is good for Britain, good for consumers and good in the fight to reach the final 10%.

FluidOne see the announcement today as a step in the right direction. However, Openreach is only one weapon in the armoury of a digital Britain and we encourage continued investment in the Alt-net community and the open access of our public assets to support innovation across all of the country.”

Mark-Jackson
By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on X (Twitter), Mastodon, Facebook and .
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