Ofcom Find BT Make Reasonable Progress on Legal Openreach Split

Openreach has today been deemed by the national UK telecoms regulator, Ofcom, to be making “satisfactory” progress in most but not all areas with their on-going efforts to become a distinct company away from BT, which follows last year’s agreement to legally separate the operator’s network access division.

Ofcom’s 2016 Strategic Review (full summary) found 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” and that the BT had failed to “sufficiently” consult rival ISPs, such as those that piggyback off their network, on future “investment plans that affect them.” They were also deemed to have under-invested in their network to the tune of “hundreds of millions of pounds.”

In response BT and Ofcom last year reached a voluntary agreement (here), which aimed to boost competition by giving rivals easier access to the operator’s infrastructure and fostering an independent governance structure for Openreach, as well as tougher minimum service quality standards, separate branding, new consumer protection measures and better information sharing etc.

Ofcom has been monitoring BT’s implementation progress on all of this via their Openreach Monitoring Unit (OMU) and, as we’ve now passed the agreement’s first anniversary, they have today published an update. Overall the regulator found that satisfactory progress has been made but some issues with implementing legal separation have suffered a delay.

Ofcom’s View of Openreach’s Progress

Full legal separation has not been finalised, due to complexities with BT’s pension scheme and transferring staff to Openreach.

Moving employees from one company to another is covered by the Transfer of Undertakings (Protection of Employment) Regulations 2006 – or TUPE. The majority of staff have not yet been transferred from BT to Openreach, due to complexities with the pension scheme. However, BT has now resolved the pensions issue, and the need for Government to amend the Crown Guarantee has fallen away. BT has confirmed it will commence the TUPE process in the coming months and complete the consultation with staff by the end of 2018. BT and Openreach consider that the remaining actions and governance arrangements for the separation are in force as of 9 April 2018.

We are broadly satisfied with the steps taken on the remaining Commitments so far, but there is more to do.

Openreach is now a separate legal entity from BT, with its own independent board and progress has been made in many areas. This includes removing “BT” from branding; putting in place compliance procedures; and carrying out staff training on the changes. Both BT and Openreach have worked openly and constructively with Ofcom throughout the implementation phase. Senior executives have demonstrated a strong commitment to making the new regime a success, but also recognised there is more to do.

Openreach has committed to invest in faster, better broadband networks.

While it is still early in the reform of Openreach, we are seeing some positive signs. These include Openreach’s recent announcement to extend its planned roll-out of a full-fibre broadband network by an additional 1 million premises, to reach 3 million by the end of 2020; and the adoption of a “Fibre First” strategy. Openreach has been involved in investment discussions with its customers, including around co-investment opportunities and risk sharing. It is vital this momentum builds, and we would expect to see bolder commitments to full fibre over time.

Further work needed to ensure more independent decision-making from Openreach.

Although progress has been made, we are concerned that BT and Openreach have not yet struck the appropriate balance between BT as a parent company, and Openreach as a legally separate and more independent part of the BT Group. We will be monitoring this area closely in the next financial year, to make sure BT does not have more influence than necessary and Openreach is making key decisions independently.

Industry is cautiously optimistic about the new arrangements.

Many customers of Openreach stressed the importance of making sure the new arrangements result in tangible positive change, such as greater transparency in Openreach’s decision making. Some are uncertain as to whether the new arrangements allow Openreach to act with greater independence and treat all its customers equally in practice.

Positive signs in Northern Ireland, but better progress needed in some areas.

We have closely monitored how BT has met its commitments in Northern Ireland, where Openreach does not operate. The main implementation steps have been taken promptly, including strengthening information sharing arrangements and training employees, though progress has not yet been made on some aspects.

At present the operator’s original 2005 Undertakings, which established Openreach as the regulated network division of BT, remain in force until all of the required changes are completed. Ofcom will post its next interim compliance update in November 2018 and a full review in 2019, hopefully by then they’ll have made more progress.

We should point out that Openreach have also frequently spoken of their aspiration to extend “full fibre” FTTP broadband ISP networks to 10 million UK premises by around 2025, although this depends on various favourable changes in regulation and other areas.

So far no firm agreement on the 10 million has been reached but BT Group’s outgoing CEO, Gavin Patterson, did recently say he was “feeling increasingly confident that actually we’re going to get the right set of conditions to be able to make a return on it, and that’s got to be good for shareholders” (here).

Openreach Progress Report (PDF)
https://www.ofcom.org.uk/../openreach-implementation-report-2018.pdf