Strengthening Openreach’s strategic and operational independence

Update on plans to reform Openreach (29/11/16)

Ofcom has today announced that it is proceeding with a formal notification to require the legal separation of Openreach from BT, after BT failed to offer voluntary proposals that address our competition concerns.

Openreach is the division of BT Group that develops and maintains the UK’s main telecoms network used by providers such as Sky, TalkTalk, Vodafone and BT’s retail business.

Ofcom is pressing ahead with its plans to improve broadband and telephone services for people across the country, pursuing better service quality and encouraging greater investment in networks. Creating a more independent Openreach – which works in the interest of all providers, not just BT – is an important part of achieving this.

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.

Plans to reform Openreach 

In July, we set out our competition concern that BT has the incentive and ability to favour its own retail business when making strategic decisions about new network investments by Openreach. This concern arises because BT runs the national network, Openreach, as well as its own retail business.

We proposed reforms to address this structural issue, to provide regulatory clarity and confidence to the industry, and ultimately better outcomes for people and businesses. A more independent Openreach would be well placed to invest in ‘full fibre’ broadband for everyone.

Our proposal requires Openreach to become a distinct company with its own Board. This would comprise a majority of non-executive directors, including the Chair, who are not 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.

We are now preparing to notify the European Commission of our intention to implement these plans, requiring the legal separation of Openreach to make it more independent. Throughout this process, we remain open to BT bridging the gap between its proposal and what is required to address our strong competition concerns.

Responses to our July consultation 

Ofcom has today published the non-confidential responses to our July consultation on Openreach. These responses reflect a wide range of views.

Around 94,000 people responded to our consultation via an online campaign. Some 90,000 of these were identicalresponses written by the campaign, calling for action to improve the UK’s telecoms infrastructure; including the full, structural separation of BT. A few responses shared positive experiences of BT and urged no further action.

A significant number of the 4,000 non-standard responses raised concerns about slow broadband speeds, the availability of fibre broadband and the quality of service from major service providers. Most concerns related to BT, with a smaller number of complaints about other providers including Sky, TalkTalk and Virgin Media.

These views underline the critical role that digital communications play in people’s lives, and the importance of the steps Ofcom is taking to deliver better telecoms services for people and businesses. We will be taking into account all of the views as we finalise our proposals.

Across the range of consultation responses, two issues featured particularly heavily: calls for the structural separation of Openreach; and the potential costs of any action, notably how BT’s pension deficit could be affected.

We have today provided an update on our initial views on both of these issues, in light of the consultation responses.

Separation models

We have considered carefully the calls for the structural separation of Openreach, which would split BT and Openreach into two entirely separate companies, under different ownership. Stakeholders have also provided a range of views on how our July proposal for legal separation could be enhanced to address the competition concerns identified.

Responses to our consultation also make clear that structural separation could generate materially greater costs and risks compared to models based on legal separation. This includes the costs of physically separating the two businesses, and effects on the BT pension scheme. Structural separation is the most intrusive form of regulatory intervention available.

BT’s pension scheme

In response to our consultation, BT told us that our proposed model would trigger substantial costs, and highlighted the impact of our proposals on the BT Pension Scheme Trustees. The Trustees of the scheme echoed this concern, as did the unions who represent most BT employees. However, most stakeholders who responded to our consultation took the view that the concerns raised by BT, the unions and Trustees relating to the BT Pension Scheme have been overstated.

We have today published a note setting out some background on the BT Pension Scheme, and our initial views as to how we might take forward the questions raised in these consultation responses.

Ofcom’s current view

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.

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.

BT’s voluntary proposal

In July, alongside our proposals, we published BT’s voluntary plan, which the company argued should address our concerns. We were clear that BT’s plans did not go far enough.

We have continued to discuss with BT potential changes to its voluntary proposal. Although we have made some progress, BT has so far failed to offer proposals that would adequately address our concerns. BT’s proposals still fall short in important areas. These include the transfer of people and assets, and the level of influence that BT Group executives could exert over the management of Openreach.

Preparing a notification to the European Commission

We remain open to further voluntary proposals from BT that address these outstanding concerns. However, we are now preparing a notification to the European Commission to require the changes to increase Openreach’s independence.

We have already discussed this with the European Commission and expect to consult publicly on a submission to the Commission in the early part of next year.

We then intend to proceed quickly to submit a detailed plan to the Commission and, subject to its decision, implement the reforms of Openreach so the UK can benefit as soon as possible.