BT, Ofcom agree Openreach ‘split’

BT and Ofcom have reached agreement on a long-term regulatory settlement that will see the telco’s infrastructure unit Openreach become a distinct, legally separate company with its own Board, within the BT Group. The agreement is based upon voluntary commitments submitted by BT that the regulator has said meet its competition concerns.

Once the agreement is implemented:

  • Around 32,000 employees will transfer to the new Openreach Limited following TUPE [Transfer of Undertakings (Protection of Employment)] consultation, and once pension arrangements are in place.
  • Openreach Limited will have its own branding, which will not feature the BT logo.
  • The Openreach CEO will report to the Openreach Chairman with accountability to the BT Group Chief Executive with regards to certain legal and fiduciary duties that are consistent with BT’s responsibilities as a listed company.

Openreach, which builds and maintains the tens of millions of copper and fibre lines that run from telephone exchanges to homes and businesses across the UK, will assume greater independence under its own Board of Directors.

The agreement is intended to be comprehensive and enduring, helping to ensure the UK telecommunications market remains one of the most competitive in the world. Hundreds of telecoms companies already use Openreach and its national network on an equivalent basis, and many others are competing with them. That will continue with enhanced safeguards to ensure all of Openreach’s customers are treated equally.

Gavin Patterson, BT Chief Executive, said: “I believe this agreement will serve the long-term interests of millions of UK households, businesses and service providers that rely on our infrastructure. It will also end a period of uncertainty for our people and support further investment in the UK’s digital infrastructure.

“This has been a long and challenging review where we have been balancing a number of competing interests. We have listened to criticism of our business and as a result are willing to make fundamental changes to the way Openreach will work in the future.”

The agreement, when in place, will provide BT and other companies with greater regulatory clarity and certainty which is vital for investment. This will help the UK retain its position as the leading digital economy in the G20 by share of GDP, with the largest superfast network among major European nations.

The transfer of around 32,000 employees, under TUPE regulations, will be one of the largest such transfers in UK corporate history. It will take place once the agreement has been implemented and pension arrangements are in place for these employees. Under the agreement, Openreach will manage and operate its assets and trading but ownership of those assets and trading will remain with BT.

The agreement builds on changes that BT has already made to the governance of Openreach in recent months. These include the creation of an Openreach Board with a majority of independent members.

This Board will set Openreach’s medium term and annual operating plans and determine which technologies are deployed, within a strategic and financial framework defined by BT. Openreach will be free to explore alternative co-investment models in private with third parties.

The Openreach CEO will report into the Openreach Chairman, with accountability to the BT Group Chief Executive with regards to certain legal and fiduciary duties that are consistent with BT’s responsibilities as a listed company.

BT has agreed to all of the changes needed to address Ofcom’s competition concerns. As a result, Ofcom will no longer need to impose these changes through regulation. The reforms have been designed to begin this year.

To implement this agreement with the smallest possible effect on BT’s pension scheme, the existing Crown Guarantee would need to be maintained for Openreach staff who are members of BT’s pension scheme.

According to Ofcom, the new Openreach will have the greatest degree of independence from BT Group possible without incurring the delays and disruption – to industry, consumers and investment plans – associated with structural separation or the sell-off of Openreach to new shareholders.

BT’s commitments, combined with regulation imposed by Ofcom through its regular market reviews, will form a comprehensive solution to problems in the market that Ofcom had identified.ween the new Openreach and the rest of BT Group.

Sharon White, Ofcom Chief Executive, said: “This is a significant day for phone and broadband users. The new Openreach will be built to serve all its customers equally, working truly independently and taking investment decisions on behalf of the whole industry – not just BT.

“We welcome BT’s decision to make these reforms, which means they can be implemented much more quickly. We will carefully monitor how the new Openreach performs, while continuing our work to improve the quality of service offered by all telecoms companies.”

BT’s commitments also include reforms to how BT works in Northern Ireland, where Openreach does not operate. These will extend the benefits of the Openreach changes to BT Northern Ireland – including greater independence, confidentiality, and independent branding. BT Northern Ireland will also remain able to take account of specific local circumstances and opportunities.

Ofcom announced plans in 2016, as part of its Digital Communications Review, to overhaul Openreach’s governance and strengthen its independence from BT.

This followed the regulator’s concerns that BT has retained control of Openreach’s decisions, while other telecoms companies have not been consulted sufficiently on investment plans that affect them.

Openreach reform is one part of Ofcom’s work to ensure that all providers meet the growing demands of customers. Ofcom is also finalising measures to ensure better value for customers who only take a landline; deliver automatic compensation for landline and broadband customers when things go wrong; and bring about faster fault repairs and installations by Openreach.

Ofcom will shortly publish further detail on how the agreement addresses its competition concerns, together with proposals to release BT from its previous undertakings around Openreach once the new commitments are fully in place. At the same time, Ofcom will set out how it will monitor and enforce the new structure for Openreach.

A spokesperson for Sky said: “This is a welcome step that we have long called for on behalf of our customers. A more independent Openreach is a step towards delivering better service to customers and the investment that the UK needs. It’s important that today’s agreement is now implemented by BT in good faith and without delay.”
“We welcome the agreement to create a legally separate Openreach,” commented Dido Harding, Chief Executive Officer, TalkTalk. “The new company will be better placed to deliver the improved investment and service that consumers and businesses deserve. This deal will require robust Ofcom monitoring and enforcement to ensure it delivers the improvements the regulator expects. We hope this is the start of a new deal for Britain’s broadband customers, who will be keen to see a clear timetable from Openreach setting out when their services will improve.”

According to Kester Mann, Principle Analyst, Operators, CCS Insight, the news provides welcome certainty after a long-running and bitter dispute over the future of the UK broadband network. “Resolving it now, without having to go to Brussels to enforce a new structure, will bring much-needed stability to a UK market still reeling from the Brexit referendum.”

“The agreement reflects Ofcom’s determination to improve BT’s performance and clear concern that the UK broadband market has not been as competitive or operated as effectively as it would have liked. Its determination in negotiations with BT under the increasingly impressive stewardship of Sharon White, should be applauded.”

“BT’s rivals, notably Sky and TalkTalk, will publicly claim that the regulator should have gone further by enforcing a full structural separation. However, this option was always the most radical and controversial the regulator could have taken. In private they should be more than satisfied with the changes Ofcom has pushed through.”

Virgin Media CEO Tom Mockridge said: “Openreach is just the same old snail’s paced network with a new shell. Call it what you like but it’s still BT, four times slower than Virgin Media.”

EDITOR’S COMMENT:
This was always the most likely outcome. BT’s ability to push back had been weakened by the scandal and losses in Italy and its determination to continue spending heavily on TV rights while underinvesting in infrastructure and customer service. It always claims TV investment comes from a completely separate business, but even now, after the ‘split’, CEO Gavin Patterson has been quick to point out in interviews that BT will decide Openreach’s overall budget. Now it is all about the good faith and speed shown in execution and the delivery monitoring processes that Ofcom comes up with. The regulator and the government must stand ready to ‘cut the cord’ if BT doesn’t stand by both the letter and the spirit of the agreement.

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