BT’s infrastructure arm Openreach to be ‘legally separate’, orders Ofcom

26 July 2016 | Jason McGee-Abe


Ofcom orders Openreach to become a "distinct company, with its own Board” and says telecoms providers will have greater access rights to physical infrastructure from July 31.

Openreach logoDespite the telecoms regulator falling short of calling for a full structural separation, which some of BT's competitors have lobbied for, Ofcom has proposed a significantly different Openreach model.

“We welcome Ofcom’s recognition that structural separation would be a disproportionate move. Our proposals provide Ofcom with every benefit they’re seeking but without any off the substantial and unavoidable costs associated with legal incorporation. We will continue to engage with them over the coming months,” BT told Capacity by email.

Sharon White OfcomBT has been under much industry and political pressure to divest its broadband infrastructure division but Ofcom states that it has chosen not to do so to incur “less costs and disruption to industry and consumers”. Ofcom has warned that if it is not successful then it “will reconsider whether BT and Openreach should be split into two entirely separate companies, under different ownership”.

“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,” said Sharon White, Ofcom’s chief executive.

The watchdog seeks to open up competition in the market and addresses BT’s incentive to influence significant Openreach decisions “in the interests of its own retail businesses, rather than BT’s competitors”. Its main proposals outlined today are:

  • - Openreach to become a legally distinct company within BT group;
  • - Openreach to have its own board;
  • - Executives accountable to the new board;
  • - Greater consultation with customers;
  • - Staff to work for Openreach not BT group;
  • - Openreach to own assets that it already controls;
  • - A separate strategy and control over budget allocation; and
  • - Independent branding.

A new-look board

Ofcom’s proposed model will see an Openreach board established with a majority of independent members, including the chair. The non-executives will not be affiliated to BT Group in any way, and will be both appointed and removed by BT in consultation with Ofcom. It will have greater autonomy, transparency, budgetary control and decision-making powers.

Openreach 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.

Openreach will now be able to develop its own strategy and annual operating plans, within an overall budget set by BT Group.

BT chairman Sir Mike Rake told BBC Radio 4’s Today programme yesterday: "We are absolutely willing to form an Openreach board that will have an independent chairman and a majority of independent directors."

In May 2016, BT pledged £6 billion of broadband investment over the next three years in faster broadband and mobile services, including plans to offer ultra-fast broadband to 12 million premises by 2020 and improving coverage of 4G mobile services.

UK fibre networks

Ofcom competitionIn February, Ofcom’s initial proposal included a revamped governance structure for Openreach as well as a commitment on investment. CEO Sharon White said at the time: “Openreach must open up its network of telegraph poles and underground tunnels to allow others to build their own, advanced fibre networks, connected directly to homes and offices.”

Today, Ofcom announces that on Sunday 31 July, new rules come into force that “will give telecoms providers further rights to access physical infrastructure. These measures are designed to reduce the cost of deploying broadband networks, by sharing access to infrastructure across different sectors”.

Ofcom said: “A number of companies are continuing to roll out ultrafast fibre networks. Virgin Media is investing £3 billion to extend its network across the UK. CityFibre, Sky and TalkTalk are connecting fibre to premises in York, and KCom is doing so in the Hull area. Other providers, such as Hyperoptic and Gigaclear, are bringing ultrafast broadband to local areas.”


Competitors


Today’s news will no doubt be a win for BT’s rivals, who have long-argued that only a forced separation will guarantee that BT does not unfairly profit from its monopoly over the phone and broadband network. In May, the Federation of Communications Services (FCS), which represents business providers, along with three of BT’s biggest rivals, Sky, TalkTalk and Vodafone, gave Ofcom's White a 10-point plan which they said will "ensure Openreach is fit to equip the nation for the challenges of tomorrow".

Dido Harding TalkTalk

Under today’s plans, 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”.

Commenting on the proposals, 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 we’re repeating the mistakes of the past.”

However, Mark Collins, director of strategy and policy at CityFibre, warns: “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.

ViaSat UK’s head of space and communications, Neil Fraser, who is an advocate of a mix of technologies to enhance superfast broadband access, believes the UK may soon see the effects of a “two-tier internet”. He said: “In order to ensure the UK can provide superfast broadband to everyone, a mix of technology is needed; as fibre, even fibre-to-the-premises, simply cannot reach the entire population at anything like an affordable cost. For instance, despite opinions to the contrary, satellite broadband is increasingly capable of offering the speed and capacity that modern broadband services need. By 2020, a single satellite will offer higher speeds, and a larger capacity, than every satellite currently in orbit.”

Political support

The news comes one week after the UK’s Culture, Media and Sports Committee’s BT must put house in order or face split report concluded that Openreach offered poor service and that BT is “significantly underinvesting” in broadband infrastructure and on the last -mile wholesale network. It also suggested that if BT failed to offer satisfactory reforms and investment assurances Ofcom should move to enforce full separation of the monopolistic Openreach division, which owns and maintains the cables in the UK network.

It also comes after 121 cross-party MPs supported a British Infrastructure Group (BIG) report earlier this year calling for BT to be broken up, which warned that a “staggering” 5.7million people do not receive the minimum expected download speeds as stipulated by the regulator. Former digital economy minister, Ed Vaizey MP, had also slammed BT Openreach’s customer service as “woeful”.

Next steps

In the coming months, Ofcom states that it will carry out further work on:

  • - “Tough performance rules on Openreach. Later this year we will set out stricter minimum requirements for Openreach to repair faults and install new lines more quickly.
  • - Performance tables. From next year, we will publish tables on communications providers’ quality of service, showing the best and worst performers on a range of measures so that customers can shop around with confidence.
  • - Coverage checkers by address. We plan to update our interactive maps to offer even more comprehensive information on mobile and broadband coverage by individual address, not just postcode.”

TalkTalk’s Harding added that “structural separation is cleaner, with less red tape – and removes BT's ability to exploit loopholes in the regulation” but warned: “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.”

The “Strengthening Openreach’s Independence” consultation closes on October 4, 2016, and you can send responses to Ofcom’s web form.