Openreach: move to functional and legal separation

Ofcom¹ and BT announced on Friday that they have agreed that Openreach (the functionally separated part of BT responsible for the copper and fibre access network) should become a legally separate entity with its own staff, branding (no more brand association with BT), articles of association and its own board. In this way, it is hoped that Openreach will develop its own internal culture, and be more responsive to the needs of its other non-BT customers. This is particularly relevant in the context of major investments (i.e. fibre closer to the home) where Openreach will have a formal duty to consult with other customers.

By agreeing the deal in this way, it does not have to be imposed using exceptional remedy powers available under the EU regulatory framework (which would need the European Commission also to be convinced of its necessity and merits), meaning that there is less uncertainty about the outcome.

The deal seems to have resolved BT’s major concerns about Ofcom’s original proposals regarding functional and legal separation, in the following ways:

• Before the deal can take place, legislation is needed to allow the Government guarantee to the BT pension scheme to cover relevant BT employees transferred to Openreach.
• While Openreach will control, build and maintain the network, BT will continue to have “a title of ownership of the network assets”. This may be to avoid having to renegotiate contracts, wayleaves etc.

One aspect that is not yet known is the way in which the current Undertakings will change; Ofcom say these will be published shortly. These Undertakings are the rules under which the current functional separation is operated, and manages (for example) the way in which information is controlled within Openreach and what information can be shared with certain persons within BT Group. However, the Undertakings also cover (for example) rules about other parts of BT and how these rules change if markets are no longer those in which BT has significant market power. These changes to the Undertakings might simply reflect the new “functional and legal” separation structure, or might be more material, for example allowing other parts of BT additional freedoms compared to today.

Whether this functional and legal separation will in fact change Openreach’s business case for investment in fibre to the home (FTTH) is much less clear. Openreach still has a copper/fibre to the cabinet (FTTC) network which has a remaining useful lifetime, which means to justify full-fibre investment it needs to expect incremental revenue relative to the counterfactual investment case (“do nothing”). It is possible that this business case could be made more viable by improved communication with the major wholesale customers, assisted by the provisions of the new agreement, especially if this led to some committed level of volume for future FTTH.

If interested in understanding our capabilities in this area, please contact James Allen, Head of Regulation.

1 See https://www.ofcom.org.uk/about-ofcom/latest/media/media-releases/2017/bt-agrees-to-legal-separation-of-openreach