London, UK. March 10, 2017 — The UK communications regulator, Ofcom has agreed a deal with BT for a major reform of Openreach, meeting Ofcom’s requirements for the legal separation of BT’s network division.

Under its terms, Openreach will become a distinct company with its own staff and management, together with its own strategy and a legal purpose to serve all of its customers equally. Jeremy Cowan reports.

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 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.

BT’s commitments (combined with regulations imposed by Ofcom through its regular market reviews) will say the two organisations, form a comprehensive solution to problems in the market that Ofcom had identified.

Analysts have initially welcomed the deal as a good alternative to the more radical option of total divestment by BT of its Openreach interests, a proposal that would likely have involved lengthy legal challenges by BT. BT’s rivals such as Sky, TalkTalk and Vodafone, which use Openreach’s network to offer broadband to consumers, have welcomed the deal.

A spokesperson for analysts Ovum said: “BT and the regulator have reached a tough but fair voluntary agreement over the future of Openreach. The settlement will see Openreach become a distinct, legally separate company with its own board within the BT Group. Crucially, ownership of assets remains with BT. This had been a sticking point but it appears that Ofcom have been flexible and have listened to the concerns around the pension scheme.

“A voluntary agreement has always been the preferred outcome over a forced legal separation, not least because the EU route that Ofcom were planning to use is uncertain, is untested, and would likely have taken much longer to conclude. The situation is also made more complex by the decision of the UK to leave the EU (European Union),” said Ovum.

How the new Openreach will work

• Openreach will become a distinct company. Openreach will be incorporated as a legally separate company within BT Group, with its own ‘Articles of Association’. Openreach – and its directors – will be legally required to make decisions in the interests of all Openreach’s customers, and to promote the success of the company.
• The Openreach Board will run the company. The Openreach Board that BT has already established in recent weeks, which has a majority of directors independent of BT, will become the Board of the new company. It will be truly responsible for running Openreach, under a new governance agreement.
• A separate strategy and control over budget allocation. Openreach will develop its own strategy and annual operating plans, within an overall budget set by BT Group.
• Executives will be accountable to the new Board. Openreach’s chief executive will in future be appointed by, and accountable to, the Openreach Board. BT Group will be able to veto the appointment of the Openreach CEO, but only on notification to Ofcom. The Openreach chief executive will then be responsible for other executive appointments, and will report to the Openreach chair – with a secondary accountability to the Chief Executive of BT, limited to necessary legal, fiduciary or regulatory obligations.
• Staff will work for Openreach. The new Openreach will directly employ all its 32,000 staff, who will be transferred across from BT. This will allow Openreach to develop its own distinct organisational culture.
• Assets will be controlled by Openreach alone. Openreach will have control of those assets – such as the physical access network – required to deliver on its purpose. The Openreach Board will make decisions on building and maintaining these assets: BT will hand these powers to Openreach while retaining a title of ownership.
• Consultation and confidentiality for Openreach’s customers. Openreach will be obliged to consult formally with customers such as Sky, TalkTalk and Vodafone on large-scale investments. In future, there will be a ‘confidential’ phase during which customers can discuss ideas without this being disclosed to BT Group, as well as further protections for confidential customer information.
• Distinct branding. BT will be removed from Openreach branding, to reflect these changes and the company’s greater independence.

The new model will be supported by careful, continual monitoring to ensure it is effective. As part of this, BT will provide Ofcom with additional transparency on the nature of interactions between 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.

Why Openreach needs reform

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

This followed its 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.

Commenting on the agreement, Kester Mann, principal analyst, Operators at CCS Insight, says: “Today’s 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 publically claim that the regulator should have gone further by enforcing a full structural separation. However,” Mann adds, “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.”

The BT logo will be removed from Openreach’s branding.

Shares in BT rose 4.3% to 344.2p in early trading in London.

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