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Ofcom, the UK’s telecommunications regulator, is to proceed with a formal notification to require the legal separation of BT from its infrastructure arm Openreach, saying that BT had failed to voluntarily offer proposals that satisfactorily addressed its competition concerns.
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This comes in the wake of a major review of the UK’s communications sector that said because BT runs the national Openreach network, it had the incentive and ability to favour its own retail business when making decisions about new network investments, which could be to the detriment of other communications services providers (CSPs).
Subsequently, Ofcom, which had been under pressure from campaigners to impose full structural separation of the two businesses, consulted on a proposal to force legal separation in July 2016.
It said creating a more independent Openreach that could operate in the interests of all CSPs would be an important part of improving the UK’s broadband and telephone services.
Ofcom’s plan was to require Openreach to become a distinct company with its own board, comprising a majority of non-executive directors who are unaffiliated with BT, and to guarantee its independence to make strategic investment decisions, with a duty to treat all its CSP customers equally.
However, with the responses to the consultation now received, and after lengthy negotiations with BT, Ofcom has said it will move to enforce legal, but not structural, separation.
“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,” said the regulator in a statement.
It said BT’s proposals came up short in a number of areas, including transfer of people and assets, and the level of influence that BT Group executives could exert over the management of Openreach.
Legal versus structural separation
Ofcom said it had considered very carefully numerous calls for the full structural separation of Openreach but, although it has always reserved this option as a last resort, it concluded that going down this route would generate massive costs, and risked years of legal wrangling.
“Our current view is still that an effective and robust form of legal separation, with Openreach as a wholly owned subsidiary of BT, is likely to achieve the greatest improvements for everyone in the shortest amount of time. Therefore, this is the approach with which we are minded to proceed,” said Ofcom.
“Our model will include proposals to publicly scrutinise and monitor its effectiveness against several measures of success. The most direct will be whether Openreach board decisions are taken independently, without undue influence from BT Group.
“If Ofcom’s monitoring suggests that legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers, we will return to the question of structural separation – fully breaking up the companies.”
Ofcom CEO Sharon White has now written to European Commission (EC) vice-president for the digital single market, former Estonian prime minister Andrus Ansip, to set out Ofcom’s next steps. It will likely submit a notification under the power to impose an exceptional remedy on BT early in 2017.
However, Ofcom added: “Throughout this process, we remain open to BT bridging the gap between its proposal and what is required to address our strong competition concerns.”
A BT spokesperson commented: “We note Ofcom’s announcement this morning, updating on the next steps of the Digital Communications Review.
“We put forward proposals in July 2016 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 CEO 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,” said BT.
Fix Britain’s Internet
The regulator received 94,122 responses to its consultation on its plans for BT and Openreach, 94,032 of those through the Fix Britain’s Internet campaign arranged by TalkTalk, Sky, Vodafone, Three and the Federation of Communications Services.
Out of those respondents to the campaign who did not use a standard template to contact Ofcom, 42% raised concerns over broadband speed and 22% over the roll-out of superfast services. However, only 11% were in favour of full structural separation of BT and Openreach, and 2% were supportive of BT.
A number of respondents also criticised the Fix Britain’s Internet campaign itself, saying they were concerned that it might cause the commercial interests of BT’s rivals to be prioritised over the development of the UK’s broadband infrastructure.
Dan Howdle, director of communications at Cable.co.uk, said: “It’s tough to read whether BT’s heel-dragging is as a result of a tactic with the intention to deliberately delay and undermine the process, or whether, rather like Brexit, the process of separating Openreach is simply too vast and complex to be fully planned out in such a short period of time.
“That Ofcom has had to speak out of its ‘frustration’ suggests to me there is more to this delay than bureaucracy and red tape – that unwillingness to comply is also playing some part.”
Kester Mann, principal analyst, operators at CCS Insight, said steering clear of a full structural split was unsurprising, and backed Ofcom’s view that it would have been a costly and risky option to take.
“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,” he said.
“The move toward legal separation and greater independence will bring important benefits to companies such as 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.”
Read more about Openreach
- Frances Murphy, partner, and Joanna Christoforou, of counsel, from the London office of global law firm Morgan Lewis examine Ofcom’s review of BT’s Openreach.
- BT Group’s plans to give Openreach greater independence share some common ground with Ofcom’s recommendations, but will this be enough to ease its rivals’ anti-competitive concerns?
- After Ofcom's decision to leave Openreach in BT, what happens next – and how will the UK reap the benefits of superfast broadband?