How is the BT Openreach relationship changing

Echoing consumer concerns about the lack of fibre optic data cabling able to provide broadband to residential customers in the UK, the electronic communications watchdog agency Ofcom launched a Strategic Review of Digital Communications (DCR) in March 2015. It began looking into Openreach, the infrastructure and network access arm of national telecoms provider BT, in order to investigate what had been perceived as anti-competitive practices in the operations of a division of BT that’s charged with offering access services to other communications providers (CPs).

Other voices have lent weight to the protest, notably from the consumer lobby and advocates bemoaning the poor reliability, speed and coverage of broadband services in the UK. Matters came to a head in January 2016, when Telecoms.com reported that 121 UK Members of Parliament had called for a forced sell off of Openreach.

A response from within the industry challenged Ofcom to take a more proactive stance in the matter — and the result has been an ongoing transition in the relationship between BT and Openreach, which has yet to evolve in a way that satisfies the demands of most stakeholders on this issue.

 

Independent Operators & The 10-Point Plan

Cynical about recent legislation and the UK government’s stated objective of rolling out superfast broadband to 95% of the population by the end of 2017, stakeholders in the telecoms industry have expressed only reserved optimism over the Digital Economy Bill, arguing specifically that its chances of success hinge on the willingness or otherwise of Ofcom to take a strong stand over the future and current operations of Openreach.

Looking to drive a “step change in investment, innovation, speed and quality of service”, a cross-section of industry representatives including Vodafone, Sky, and several independent service providers set out a 10-point plan for reforming the BT-Openreach relationship – with the ultimate goal of achieving a structural separation between Openreach and BT.

Their proposed framework would allow BT to retain ownership of Openreach, but would reform the governance of the infrastructure division to bring it more in line with (what the independent operators perceive as) standard business practices.

Under the plan’s terms, Openreach should be established as a legally separate company from its parent arm, with its own board of directors and a mandate to make investment decisions and act independently in the interests of the UK as a whole.

The 10-point plan insists that Openreach should employ its own staff, take ownership and control of its own budget and assets, and assume responsibility for its dealings with external agencies and stakeholders – including Ofcom.

Openness and transparency in Openreach’s dealings with suppliers and customers are also stressed, with full disclosure to the entire consumer base of any information or services made available to individual customers.

 

Legal Separation

It seems the industry’s proposals did not fall entirely on deaf ears. In July 2016, Ofcom put forward a proposal for the legal separation of Openreach from BT, which would formally bestow on Openreach the status of a separate company within the BT Group. Legal separation would be a sort of “vertical organisation”, with various constraints on Openreach’s behaviour being written into its Articles of Association.

Under the terms of a legal separation, Openreach would operate as a subsidiary of the BT Group (Openreach Ltd), having recruitment rights to its own employees, and ownership of its own assets. Equal treatment of its customers and suppliers is enforced through Openreach’s Articles of Association, with oversight provided by the Openreach Board.

 

Enhanced Functional Separation (EFS)

In its negotiations with Ofcom, BT came back with a counter-proposal – what it refers to as Enhanced Functional Separation, or EFS. It’s a concept that allows BT to retain Openreach as a division, rather than a subsidiary, while nonetheless (BT claims) offering a greater level of independence to the Openreach division.

Under this proposal, the BT Group Board must be consulted for approvals over Openreach’s operating budget and investment plans. Specifically, the division’s Medium Term Plan (MTP) and Annual Operating Plan (AOP) must first be approved by the BT Group CEO (Chief Executive Officer) and CFO (Chief Financial Officer).

There would be an Openreach Board, with a structure similar to the one proposed by Ofcom, and with similar powers to impose an obligation to treat all customers equally. But these powers would remain within the remit of the BT Group.

 

Ofcom & FTTP

All well and good – but what does this translate into, on the ground?

Ofcom’s stated objective with its Digital Communications Review (DCR) has been to improve data cabling and related provisions – and thereby increase the number of fibre to the premises (FTTP) connections active in the UK. This would achieve the desired effect of making “ultrafast” broadband available to many more customers – and hopefully enable the UK government to attain its 95% coverage target by the year’s end.

Data cabling is a physical process, and these targeted improvements will require Openreach to give open access to its cable ducts and telephone poles, so that rival operators can construct their own FTTP networks. Openreach will also be obliged to make it significantly easier for competitors to access its network.

The governance changes implemented by the Ofcom proposal mean that Openreach must provide full information on the location and nature of its ducts and poles to providers and data cabling contractors. Rival operators will also be permitted a seat at the table during Openreach’s investment planning meetings.

Quality of Service (QoS) also falls under the remit, with Ofcom’s introduction of tougher rules on faults, repairs and data cabling installations. Greater transparency in disclosing information on service quality will be supplemented by the award of automatic compensation to broadband, landline and mobile customers who suffer a reduction or loss of service.

 

An Independent Board

February 2017 saw the constitution of what’s described as an “independent majority” on the board at Openreach – a major step toward the prescribed establishment of Openreach as a “ring-fenced, ‘wholly-owned subsidiary’ of BT Group, with its own purpose and board members”.

But with issues concerning pensions and control still to be resolved, BT and Ofcom have yet to reach a final voluntary agreement on the proposals of the Strategic Review.

 

Total Separation?

Understandably, many of BT and Openreach’s rivals are sceptical about how much of a change in their market behaviour can be expected from these developments, and many are still pushing and hoping for a total separation of the two as business entities.

But with Ofcom having pushed this option to the back burner – and with the nearest review of this issue only due in nine years’ time – partial independence as defined by the current terms is what the market will have to work with, for now.