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Thank heavens the wrangling over BT's Openreach separation has ended

Might not be everyone's best option, but at least we're not going to Brussels

By Kat Hall, 13 Mar 2017

Analysis When Ofcom announced it had finally reached a settlement with BT over the future of Openreach on Friday, you could practically hear the collective sigh of relief.

Exactly how the former state monopoly’s broadband unit would become a "legally separate entity" has been a tediously drawn-out process since Ofcom decided that was its preferred option over a year ago.

Had a voluntary agreement not been reached, Ofcom would have had to seek approval from Brussels to force a new structure in place. A process that would have taken another year at least.

Mark Shurmer, managing director of regulatory affairs at Openreach, said he hopes the process of legal separation will now happen “within months rather than years”.

Tough talks

In a conference call after the announcement, Shurmer said: “It’s been a tough negotiation with Ofcom, which has taken two years [since separation was first raised]. The reason is because this is a very complex issue and it is very important we have the right framework going forward."

He added: "The sticking point was getting a balance between desire for more independence for Openreach, but also find a solution that would not drive substantial costs... particularly around pensions and assets.”

Ofcom had said it wanted Openreach to control its assets: i.e. the network but BT reckoned doing so much be costly and incur further pension debt. That currently stands at £9bn and growing.

The regulator has since agreed that Openreach can lease the assets from BT, but will have ultimate control over them, with Shurmer noting that Ofcom had changed its position on assets.

Shurmer said a wholesale transfer of assets to Openreach would have a negative impact on the business "including a funding deficit and that would have impacted on our ability to invest going forward. We’d like to thank Ofcom for being flexible."

Chris Pateman, chief exec of representative body the Federation of Communication Services, noted that the issue of asset control was important, "although I'm not convinced about BT Group ultimately owning them."

He said: "If Openreach has control of the dark fibre and the ducts/poles/passive infrastructure, then Openreach ought to be able to decide how, how swiftly, and hopefully at what price, subject to Ofcom control these assets can be made available to third parties.

"This has huge potential to free up deployment bottlenecks, because the control of the assets lies with a company charged to deliver, rather than to defend the status quo. We await to see how this will play out in reality.”

Dotted lines

The other point of contention which has been resolved was Ofcom’s objection to having "a dotted line of reporting" between the Openreach chief exec Clive Selley and BT Group chief exec Gavin Patterson.

Under the agreement on Friday, Selley will report to the Openreach chairman, but will still be accountable to Patterson for fiduciary matters. Crucially for Ofcom, Selley's discussions with Patterson must not include confidential matters with customers. Openreach will produce a report that will describe what is said on those meetings.

What hasn’t changed under the legal separation, as opposed to a structural one, is where Openreach’s profits go, with Shurmer noting they "will flow back to the BT Group”. The group's budget will also be controlled by BT.

In terms of investment, the announcement will make no difference to BT’s current broadband roll-out plans. “This agreement is based on the guidance we have already given the city around our investment plans, so there is no change there."

The biz is currently connecting 10 million customers to its ultrafast hybrid fibre and copper G.Fast and 2 million "pure fibre" connections by 2020. Critics have said the biz is relying too much on G.Fast over full fibre.

However, Shurmer hinted the new structure could help boost further investment. "But what we do have now with this new consultation process is this new approach to developing a business case for future network investment.

"So I do think it is possible that [under this new] process we will come up with new ideas of generating better business cases that will be good for BT 's shareholders, but will also be true for Openreach’s customers as well. So I think it is a case of watch this space in terms of that.”

A fibre future?

Kester Mann, analyst at CCS Insights, said a question remains to what extent the company will purse full fibre versus other technologies such as G.fast. "That is a recurring theme among those that called for a formal break up."

However, he said ultimately the legal separation was a good move. “For consumers, it should go a long way to addressing accusations of poor customer service and sub-standard investment.

"It also offers certainty for BT, which can now press ahead with its planned broadband investment without the threat of separation hanging over it. And of course it removes the concern Ofcom had that BT could favour its own retail service over other providers like Sky and Vodafone.”

No doubt it was expedient for BT to go down this route, rather than wait another year for Ofcom to force the issue through Brussels. Not least given the other difficulties it is facing, such as a major drop in its share price following the £530m accounting write-down scandal in Italy.

Many will continue to believe the legal separation won’t do enough to address the many issues raised over Openreach.

However, seen as the regulator has been clear this has been its preferred option for some time: we can at least be thankful that the endless wrangling has stopped. For now. ®

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