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Ofcom badly wrong on Openreach separation, MPs told

The decision not to separate BT and Openreach has not solved any regulatory issues and will not address the problems at the heart of broadband roll-out, a Select Committee hears

Ofcom’s decision not to force full structural separation between BT and its arms-length infrastructure arm Openreach was wrong-headed, unsatisfactory and incoherent, a senior economist told the Culture, Media and Sport Select Committee.

The regulator delivered its long-awaited verdict on the future of Openreach as a wholly owned unit of BT at the end of February 2016.

It stopped short of forcibly splitting the two apart, and imposed new conditions on Openreach to open up its duct and pole infrastructure to let BT’s competitors build their own fibre networks. Openreach must also act in a more transparent manner, opening up aspects of its operations such as budget and network planning to rivals.

The decision, which came after a year-long review and much debate, was welcomed by many in the industry as a pragmatic decision that recognised the complex realities of the UK’s national broadband roll-out. It also gives BT’s competitors – such as Sky and TalkTalk – the opportunity to put their money where their mouth is and begin building fibre networks themselves.

However, speaking to members of Parliament (MPs) at a hearing, Dieter Helm, an economist and professor of energy policy at the University of Oxford, said that Ofcom had fudged the issue and left BT with too many loopholes to wriggle through.

“It is the most regulatory burdensome and unsatisfactory way of addressing the issues,” said Helm, adding that it would almost have been preferable to stick “with the status quo”.

“Ofcom seems to have an extraordinary belief that Openreach can act as an independent company and, at the same time, ought to be beholden to the shareholders of BT.”

Helm said he believed the complexity that would have come from full separation was “magnified significantly” by functional internal separation. This is because many of the problems that needed to be addressed at Openreach would still need to be addressed, only now they will still have to take BT’s views into account.

Issues such as directorial independence and pension funds would have to be dealt with whether Openreach was fully independent or not, he suggested.

Separation inevitable

Helm branded Ofcom’s proposals incoherent and predicted that full structural separation – an option that the regulator is keeping on the table as an incentive to make BT follow through – was basically inevitable, and will eventually happen.

“The extraordinary thing about the Ofcom document is that, apart from saying it is complicated, they don’t have any objections to structural separation. Ofcom makes a fantastic argument for full separation then baulks at its conclusion.”

“I am convinced we will end up with separation. It’s just a question of whether you want to mess around for several years going through all the regulatory rigmarole we did with British Gas,” said Helm.

He proposed that Openreach should become an equity-based public company that could, over time, morph into more of a trust. However, he added that care would need to be taken to avoid becoming another Network Rail.

Read more about broadband roll-out

  • After Ofcom’s decision to leave Openreach in BT, what happens next – and how will the UK reap the benefits of superfast broadband?
  • At Broadband World Forum in London there was much talk of G.fast technology – but is it really the broadband panacea operators such as BT make it out to be?
  • A series of pilot schemes has proved that small broadband suppliers can effectively compete against BT Openreach in rural areas.

The Select Committee is currently in the final stages of gathering evidence in its broadband inquiry, having received more than 100 testimonies since it started.

Besides business leaders, broadband stakeholders and academics, the inquiry – chaired by MP Jesse Norman – will also be questioning BT CEO Gavin Patterson, digital economy minister Ed Vaizey and Ofcom CEO Sharon White.

“Proper digital connectivity is key to the well-being of many communities and to Britain’s economic future. Yet many people and businesses are unable to receive the digital access and services they need. This inquiry is designed to find out exactly why that is, and how to fix it,” said Norman.

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