International Benchmark

United Kingdom

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Form of separation: LEGAL

Infrastructure: Openreach

Retail: BT

Non-Discrimination: EoI

Supervisory Committee: YES

United Kingdom's separation: from functional to legal 

  • Separate legal entity (2017): Openreach, the wholesale distinct company, is a 100% BT owned subsidiary 
  • Governance: Openreach has its own chairman and board, with the majority of members having no affiliation with BT Group
  • Elements of equivalence: EoI > LLU and VULA. Falling short of full EoI > ducts and poles access
  • Supervisory board: Board Audit, Risk and Compliance Committee (OBARCC) and the BT Compliance Committee (BTCC) are respectively responsible for monitoring compliance by Openreach and BT with the commitments
  • Openreach Monitoring Unit (OMU): Ofcom has established the OMU to oversee the new BT’s undertakings for legal separation

 

Key facts

  • Fixed broadband subscriptions by technology: xDSL – 78%, FTTH/B – 2%, cable – 20%
  • Incumbent’s retail broadband market share: Overall 34% – EU average 40% xDSL 44% - EU average 53%
  • Major competitor: Virgin Media (cable)

 

Model of separation adopted

The UK adopts a legal separation model. This model was implemented in July 2017 when the telecoms regulator, Ofcom, accepted commitments from the incumbent British Telecommunications (BT) to reform and legally separate its network division Openreach. In October 2018, Ofcom officially released BT from its 2005 undertakings that had established the previous regime of functional separation.

Openreach is now a distinct company within the BT Group with its own staff, management and board, together with its own strategy and a legal purpose to serve all of its customers equally. Openreach also has its own brand without the BT logo.

Before implementing legal separation in July 2017, the British incumbent had adopted functional separation. This model arose in 2004/05 when Ofcom conducted a strategic review of telecommunications, finding that there were reasonable grounds to suspect that competition was being restricted in the markets for the supply of wholesale access and backhaul network services in the telecommunications sector in the UK and in the directly related downstream retail markets.

For this reason, BT offered certain undertakings to Ofcom under section 154 of the Enterprise Act 2002 and Ofcom accepted those undertakings instead of making a (threatened) reference to the Competition Commission. BT’s undertakings took effect in September 2005. Pursuant to the undertakings, BT established Openreach as a functionally separate line of business within BT.

In accordance with the undertakings of 2005, BT established the Equivalence of Access Board (EAB). The EAB had a proactive role in monitoring, reporting and advising on compliance but was not able to take any executive operational decisions.

The EAB had five members, three independents and two from BT’s internal managerial staff, and was chaired by a BT non-executive board member.

The EAB actively monitored and reported on compliance, investigated complaints, carried out own-initiative investigations, set and monitored key performance indicators (KPIs) and made recommendations for change. It had a duty to inform Ofcom of breaches, to send periodic meeting minutes and to publish an annual report.
The Equality of Access Office (EAO, staffed by approximately eight people), which was a separate unit within BT, supported the work of the EAB and reported solely to the board. It had ready access to BT systems and information so as to carry out investigations and monitoring activities.

In February 2016, after the functional separation had already been completed, Ofcom published initial conclusions from a new strategic review of digital communications, setting out its competition concerns that BT had the incentive and ability to favour its own retail business when making strategic decisions about new network investments by Openreach. Ofcom announced in November 2016 that it was preparing a formal notification to the European
 
Commission to mandate the legal separation of Openreach from BT, after BT failed to address voluntarily the regulator’s competition concerns.

In March 2017, BT agreed to Ofcom’s requirements for the legal separation of Openreach, notifying the regulator of voluntary commitments under section 89C of the Communications Act 2003 for the further reform of Openreach. According to Ofcom, BT agreed to all the changes needed to address the regulator’s competition concerns. As a result, Ofcom did not need to impose separation through regulation, agreeing to release BT from its 2005 undertakings once the new commitments were fully in place.

 

Organisational and governance structure

Openreach, BT’s legally separated network division, has its own chairman and board, with the majority of members having no affiliation with BT Group. Openreach also established a process for engaging with other telecoms companies on its planned services and investments.

The Governance Protocol and the commitments BT made to Ofcom in March 2017 define the governance structure and the relationship between BT and Openreach. Specifically, the Governance Protocol and the commitments set out the details of the membership and appointment of the Openreach Board, its Chairman, CEO and Board Audit, Risk and Compliance Committee (OBARCC), while also requiring the establishment of the BT Compliance Committee (BTCC).

OBARCC and the BT Compliance Committee (BTCC) are independent internal bodies responsible for monitoring compliance by Openreach (OBARCC) and BT (BTCC) with the commitments. OBARCC effectively replaced the EAB under the new organisational and governance structure.

OBARCC consists of three independent non-executive directors and the Openreach chairman. The Openreach chairman or one of the independent non-executive directors, at the discretion of the Openreach chairman, acts as the independent chairman of the OBARCC. The OBARCC meets at least four times a year and at any other times at the request of the OBARCC chairman. OBARCC receives reasonable resources from Openreach and enjoys internal support from the Commitments Monitoring Office (CMO).

The BTCC is a sub-committee of the BT Group Board Audit Risk Committee. The BTCC comprises three BT Group non-executive independent directors. Members of the committee are appointed by the Board Audit & Risk Committee or the BT Group Board. The BTCC meets at least three times a year, and otherwise as required. The BTCC receives internal support from the Commitments Assurance Office (CAO).

Both OBARCC and BTCC publish annual reports, which cover breaches, complaints, and overall compliance with the commitments. Both committees also publish summary bulletins during the year.

In addition to OBARCC and BTCC, Ofcom established the Openreach Monitoring Unit (OMU) to oversee the new arrangements. The OMU assesses whether the new rules are being observed, focusing on three key areas:

  • implementation of the new arrangements;
  • compliance with the commitments and new rules; and
  • whether the arrangements provide Openreach with the level of independence necessary for it to make its own strategic decisions, and whether it is treating all of its customers equally.

In June 2018, Ofcom published an implementation report, which outlined the key steps taken by BT and Openreach to implement the new arrangements, alongside the regulator’s observations and feedback from external stakeholders. Ofcom found that material progress had been made, particularly on culture and senior leadership. However, the regulator considered there was more to do to fully realise the vision of independence and to achieve better service for consumers.

Ofcom published its interim monitoring report in November 2018. The regulator remained broadly satisfied with progress, although it recognised that the changes need some time to be fully effective and that continued commitment from Openreach and BT is crucial to ensure the new arrangements are a success.

In July 2019, the regulator published its first annual monitoring report, which explored how the new arrangements between BT and Openreach are working in practice. Ofcom found that real progress has been made in implementing the new arrangements but that there is more to be done. Continued focus is required by both BT and Openreach to strengthen Openreach’s strategic independence and engagement with its customers.
 

Elements of equivalence and non-discrimination

In accordance with Ofcom's 2018 WLA decision (wholesale local access - market 3a), Openreach has to provide key WLA services (VULA and LLU) on an EoI basis.

In regard to duct and pole access, Ofcom imposed a no undue discrimination condition, falling short of full EoI. While the non-discrimination remedy is not as comprehensive as full EoI, Ofcom interprets the condition as requiring strict equivalence in respect of all processes and sub-products that contribute to the supply and consumption of ducts and poles, unless BT can demonstrate that a difference in respect of a specific process step or sub-product is justified.

Telecoms providers also must have access to digital maps with BT’s (Openreach’s) duct and pole network records, including detailed location information and the extent of any spare capacity.

In June 2019, Ofcom issued a decision on the review of a new market for wholesale access to fixed telecoms physical infrastructure. The decision gives telecoms operators unrestricted access to BT’s (Openreach’s) network of underground ducts and telegraph poles.

Once again, the regulator imposed an obligation of no undue discrimination falling short of EoI. BT must offer all customers the same terms and conditions, including prices, and apply the same processes unless there is a reason to justify acting otherwise.