Ofcom proposes to legally separate BT and Openreach

Ofcom proposes to legally separate BT and Openreach

In February 2016, Ofcom published its initial conclusions on the Digital Communications review. Much of the review focused on the need for Openreach to improve the quality of service it delivers to its customers and strengthen Openreach’s independence from BT Group. Ofcom have today set out their detailed approach for how to do this, namely, constituting Openreach as a legal entity within BT Group, stressing however that the option of structural separation remains open in case changes aren’t deemed satisfactory.

Ofcom believes that this is needed to ensure that BT cannot discriminate against its downstream customers due to its vertically integrated structure and its position in the market. The current relationship between BT Group and Openreach is a competition concern for Ofcom as strategic decisions on Openreach’s investments to improve the network are currently governed by BT. The proposed legal separation would provide Openreach’s customers with an opportunity to take a tangible part in the decision-making process regarding Openreach investments plans.

Legal separation differs from structural separation as in the latter case, BT Group and Openreach remain under common ownership whilst being split into separate legal entities. Going further than BT’s voluntary plan proposed on 18 July 2016 , the main features of legal separation presented by Ofcom today include:

  • Openreach operating as a distinct company from BT Group, with its own governance arrangements and Articles of Association
  • An Openreach Board (BT would appoint and remove non-executive directors, and Ofcom consulted in the process)
  • An Openreach Executive (appointed and accountable to the Board) with no direct lines of reporting to BT Group
  • All downstream Openreach customers would be consulted on large scale investments plans in a “confidential phase”
  • Openreach would be given a set budget by BT Group and have authority to develop and manage its own strategic and operating plans
  • Those working for Openreach and assets (such as underground ducts and telegraph pole) would be transferred to Openreach
  • Openreach would receive increased resources to be able to develop and deliver its strategy without relying on BT Group
  • Openreach would have its own brand, independent from BT
  • The Openreach Board would ensure regulatory compliance (replacing the Equivalence of Access Board)

Ofcom is consulting on the proposed reforms until 4 October 2016. Ofcom acknowledges that this does not go as far as some in industry wanted it to go – stating that issues such as open competition to BT retail goes beyond the competition issue that it has identified.

In stating how it will measure whether its proposal has been successful, Ofcom outlined three broad categories that it would expect to see improvements in. These are; a more responsive Openreach, increased levels of competition, investment and innovation, and better consumer and business outcomes.

Whether these outcomes are achieved will doubtless depend on how BT and industry now respond. However, it is important to note that whilst Openreach is a key player in the UK’s telecoms sector, it is not the only player. The ‘once in a decade’ strategic review cannot just focus on Openreach and all players will need to focus on ensuring that sustainable and continued investment is brought into the sector.

 

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