Ofcom to pursue legal separation of Openreach from BT
Written by: Sam Fenwick | Published:

Ofcom has announced that it is proceeding with a formal notification to require the legal separation of Openreach, the BT subsidiary that manages the UK’s copper and fibre networks from BT.

In a statement, the regulator said that: “We are disappointed that BT has not yet come forward with proposals that meet our competition concerns. Some progress has been made, but this has not been enough, and action is required now to deliver better outcomes for phone and broadband users.”

Ofcom has proposed that Openreach becomes a distinct company with its own board, with the majority of the non-executive directors and the chair not being 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,” added the statement. The regulator notes that if its monitoring suggests that “legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers”, then “we will return to the question of structural separation – fully breaking up the companies”.

Ofcom is preparing to notify the European Commission of its intention to separate the two companies and states that during this process it remains “open to BT bridging the gap between its proposal and what is required to address our strong competition concerns.” The regulator is expecting to consult publicly on a submission to the Commission in early 2017 and following this, quickly submit a detailed plan to it, so a decision can be made.

Responses to the Ofcom consultation on Openreach highlighted the greater costs and risk associated with a structural separation instead of a legal one, such as the costs of physically separating the two businesses and the effect that doing so would have on the BT pension scheme.

BT stated: "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 chief executive 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."

“There is no question in FCS's mind that full structural separation remains the only long-term guarantee that Openreach will deliver as it should,” said Chris Pateman, CEO of the Federation of Communication Services (FCS) “But this legal separation approach should, at least, put much of the infrastructure in place so structural [separation] wouldn't be so much of a trauma.”

“…it's good news to see Ofcom sticking to their guns. In spite of several months of intense push-back and partial concessions from BT, Ofcom have held to the line they first announced in the summer. The industry came up with a 10-point plan. It's pleasing to see the regulator adopting six and a half of them.

“We see this as part of a much more helpful attitude from government generally: there's a growing concern that the UK [does not have] the infrastructure [it] needs for a world-class tomorrow. And an inevitable understanding that that's because of BT's relationship with Openreach.

“So, what's in it for the reseller channel? The new Openreach Board won't be able to make any real investment and strategic decisions, because BT still holds the investment purse strings. So there is a good chance they will focus on what they CAN deliver. And that will be around customer service improvements, accountability, reliability and transparency. All of that should be helpful. Who knows: maybe we can even get to the point where an engineer can be trusted to use his or her skill and judgment, rather than to comply with a series of bureaucratic reporting controls.

“But let's be honest: at bottom, it'll still just be Undertakings-lite. Just look at the language [of Ofcom’s official statement].

"After 11 years of Undertakings, Ofcom’s head office is so used to life being an endless round of negotiations with BT that it has Stockholm syndrome. They come up with an idea; BT pushes back -- even to the point yesterday of announcing the appointment of a chairman for the new Openreach Board before Ofcom's pronouncements are even made -- and they anticipate a future relationship on the same basis.

"Ofcom is, of course, a co-signatory to the Undertakings. It is therefore an interested participant as distinct from a dispassionate third-party. Yet Ofcom is cast in the role of judge, jury and executioner. There is no upstream escalation route of appeal for this decision. Parliament may not be finished with us yet.”

“Today’s news shows that Ofcom remains hugely concerned over BT’s ability to satisfy its competition concerns,” said Kester Mann, principle analyst, operators at CCS Insight.It again highlights clear flaws in the existing Openreach model and a worry that UK broadband deployment could be restricted without serious change.

“Steering clear of a structural split is unsurprising. This would have been the most controversial and costly action Ofcom could have taken, but would still not have offered guaranteed improvements for customers.

“No doubt, BT’s rivals will criticise Ofcom for not being brave enough to push for structural separation. But after many months of campaigning, they should see the regulator’s efforts to engage with Brussels as a partial victory. The move toward legal separation and greater independence will bring important benefits to companies like Sky and TalkTalk in the long-term.

“Today’s announcement represents just the next stage in a long and protracted issue. Expect further lobbying from all parties and old arguments to be recycled. In the interest of stability and market certainty, the sooner a final outcome can be reached the better.”

Image credit:Vismedia

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