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Openreach’s Bargaining Chip in Pledge to Fund UK 10Mbps Broadband USO

Monday, July 17th, 2017 (10:21 am) - Score 1,712

The CEO of Openreach (BT), Clive Selley, appears to be closing in on a deal that could see the telecoms giant commit hundreds of millions of pounds to deploy the Government’s promised 10Mbps Universal Service Obligation (USO) for broadband, but only if Ofcom softens their planned FTTC charge controls.

At present it’s widely expected that fixed line “superfast broadband” (24Mbps+) capable networks will cover around 97% of homes and businesses in the United Kingdom by 2020. The Government is also working to implement a new legally-binding USO from 2020, which would offer a minimum broadband speed of 10Mbps (Megabits per second) and this is primarily set to focus on those in the final 3% of premises.

The government has yet to set out their exact criteria for the USO design, although estimates produced by Ofcom and the Broadband Stakeholders Group (here) suggest that it could cost anything from £180m and up to around £1bn to deliver (depending upon coverage level, cost threshold and whether or not inferior Satellite is used for a tiny proportion of the most remote properties).

Openreach could use a mix of technologies to deploy the USO (e.g. FTTP, FTTrN), although their Fibre-to-the-Cabinet (FTTC) based Long Reach VDSL (LR-VDSL) solution is the current favourite to deliver on most of the extra coverage in the final 3% (details here and here). Under LR-VDSL the national coverage of so-called faster “fibre broadband” (mostly hybrid) networks could reach upwards of 99%.

According to the Sunday Telegraph, Openreach are now in “late-stage negotiations with the Government” over a deal that could see the operator fund all of the USO deployment cost. However one key stumbling block appears to be Ofcom’s proposal to slash the wholesale cost of the 40Mbps (10Mbps upload) FTTC tier (here) from £88.80 +vat per year (now) to £52.77 by 2020/21.

The price reductions could drive a surge in consumer uptake of FTTC based “fibre broadband” packages and that might finally kick old style ADSL connections into history, although at the same time such a cut could also make it harder for Openreach to gain a return on their investment.

Clive Selley, CEO of Openreach, said:

“I want to deliver decent broadband to all of the UK. It is not like it is their agenda and not mine. I will have a happier customer base if everyone could get fast broadband.

It is short-term price cuts versus enabling the industry to get together to build an infrastructure that will take 20 years to put in place but will serve the country for decades after.”

We should point out that Clive’s final sentence appears to be more of a reference to Ofcom’s proposed charge controls versus Openreach’s hope of being able to deliver a much wider scale deployment of “full fibre” (FTTP/H) ultrafast broadband, which is a related but largely separate challenge to the USO.

Naturally there’s little incentive for a commercial business like Openreach to commit to funding such a huge investment (they first proposed funding the USO last year) if they’re unable to get their money back. However Ofcom seem unlikely to abandon their proposal, although it’s conceivable that the regulator could cut the size of reduction or instead apply it to a much slower tier.

Meanwhile those who optimistically say that alternative network providers (AltNets) could help to deliver the USO should note that none have shown any interest. This is largely because the financial and legal responsibility of handling a USO is quite a significant obstacle for such providers, the bulk of which operate at a much smaller scale than Openreach.

Openreach has also raised the problem of the VOA’s recent business rates hike on existing fibre lines (apparently this has hit them with an annual increase of £200m) and issues with local councils delaying necessary roadworks for 3 months.

We should point out that KCOM would also need to find its own separate USO solution for their network coverage of Hull in East Yorkshire, although we expect that a future expansion of their FTTC/P deployment should resolve most issues.

The Government had previously promised to set out their final USO design this summer (part of one last consultation), although that was before the General Election and its ensuing chaos. Still there’s plenty of time to reach an agreement before we slip into the autumn.

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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 Twitter, , Facebook and Linkedin.
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8 Responses
  1. NGA for all says:

    What extra funds? BT owe Gov £446m for more rural fibre. This is set to grow if audits on BT’s capital contribution are pursued.
    BT is £1bn short of the £2.5bn promised in its commercial rollout and it’s contribution to BDUK is not yet publicly reconciled.
    Ofcom’s ‘fair bet analysis’ (WLA consultation – Annex 8) is already crediting BT with a £100 per premise passed investment while refusing to confirm a uniform capital contribution for the subsidised works by BDUK. For example Audit Scotland only found £4m due from BT for works in the H&I contract that is only £16 per premise passed in the intervention area. The Welsh contract shows a less than £40 capital contribution if the money is paid.

    1. Mark Jackson says:

      The BDUK clawback and savings are what is being used to take ‘superfast broadband’ from the 95% target to c.97%. Meanwhile BT’s commercial investment is a separate kettle of fish and I imagine they can just push any left over from that into G.fast.

    2. CarlT says:

      There’s a certain predictability about anything involving the USO, BDUK, etc, and the ISPR and TBB comments sections.

      I would say it’s a relief to having something certain in such an uncertain world, however after 5 years with zero robust evidence, zero prosecutions, accusing BT of what could be considered fraud, and presumably by extension councils, DCMS, BT and the European Union of conspiring to defraud taxpayers is a little problematic.

      Who knows, maybe with time more will come out and the burned bridges will be rebuilt.

    3. NGA for all says:

      Mark, According to Openreach commitments the first £130m of clawback pays for the next 1% to 96%, then the underspends, the capital owed and the remaining and growing clawback. The question remains what new funding?

    4. CarlT says:

      Incidentally you are, again, ignoring that the BDUK contracts cover both capital and operational expenditure.

      The commercial programme is irrelevant to BDUK or any USO programme.

      If BT were trying to defraud the taxpayer they’ve done a really lousy job of it. You’d have thought they’d have contrived some way to ensure zero clawback instead of ending up returning half the subsidies and counting.

      As far as H&I goes I’m confused. The contract states £128.47 / premises passed from BT, paid over 11 years as it’s CapEx and OpEx. Are you pulling out the CapEx number and ignoring the costs of things like lighting up and maintaining the 400 km of subsea and 800 km of land backhaul fibre that forms part of the contract, the cost of upgrading exchange power, powering cabinets, etc, etc?

      Given your past experiences, especially the events in 2012, alongside your input since it’s fair to say that you are very much not a fair arbiter in this programme, not least because if you can’t show BT malfeasance with regards to BDUK, the events in 2012 were for nought.

    5. TheFacts says:

      It would be helpful to find someone who supports the claims of @NGA over the last 5 years.

    6. NGA for all says:

      Carl T the predictability comes from the numbers. £446m is in BT’s accounts for Q4. The £1.5bn is Ofcoms analysis. No need for drama, but there is a need for proper analysis of the options available. That is not in Ofcom/Analysis Mason December report to Government.
      A full mix of copper gain and full fibre, not one at the expense of the other could build upon what is a promising situation if the funds are used well.

  2. Chris P says:

    So OFCOM got their way in appointing an independent board and they’re still being told the same things the previous boards have said.

    I suspect OFCOM won’t be happy till openreach start plucking from Corbyns money tree and start delivering products and services today that OFCOM believe will still be relevant in 20 years time.

    Hands up those that don’t use wifi to connect to the net at home.

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