In July, Ofcom proposed reforms to make Openreach, the wholesale arm of the company, more independent from BT, through a process of ‘legal separation’. This would require Openreach to become a distinct company with its own board. The board would comprise a majority of non-executive directors, including the chair, who are not affiliated with BT. Openreach would be guaranteed greater independence to make decisions on strategic investments, with a duty to treat all of its customers equally.
BT made its own proposals in July and has also just named its first chairman for Openreach, to lead a new board with independent members. However, Ofcom said this was not enough to meet its competition concerns that BT's rivals were at a disadvantage when it comes to services over the Openreach network. Some progress was made in talks with the company, but this was not enough, Ofcom said, adding "action is required now to deliver better outcomes for phone and broadband users".
Ofcom published responses to its public consultation on the proposal. Most of BT's rivals had supported greater separation of Openreach, saying the current structure led to poor wholesale services and slow broadband roll-out, while supporting BT's dominance in the retail broadband market. Around 90,000 of the 94,000 online responses to the consultation called for full structural separation of Openreach; these were template letters collected by the 'Fix Britain's Internet' campaign started by BT rivals TalkTalk and Sky.
Ofcom said it considered the structural separation model, but found it could generate much greater costs and risks to implement. The legal separation rather "is likely to achieve the greatest improvements for everyone in the shortest amount of time", the regulator said. The reforms will be subject to monitoring, and if this finds that legal separation is not delivering sufficient benefits for the wider industry and its customers, the regulator said it would "return to the question of structural separation – fully breaking up the companies".
The regulator also published an analysis of how it sees the implications for BT's pension fund from the separation of Openreach, an issue BT had warned could be difficult and costly to implement.
Ofcom has sent its proposal to the European Commission, which must clear the plans before they can take effect. The regulator said it also remains "open to BT bridging the gap between its proposal and what is required to address our strong competition concerns".
BT said in a short statement that it would continue to work with Ofcom on a voluntary settlement, while moving ahead with its own proposals made in July. The company said it believes its own plans are "fair and sustainable" and "meet Ofcom's objectives without disproportionate costs". BT added it remains in discussions with Ofcom on two outstanding issues, the reporting line of the Openreach CEO and the form of legal incorporation.
TalkTalk reiterated that it did not think legal separation went far enough, but welcomed Ofcom's decision as a "step in the right direction". The company said Ofcom's plan must deliver "real, meaningful improvements quickly", and if not, it would push again for structural separation. Sky gave a more caution response, saying only that it will "watch closely as to how Ofcom executes its proposals".
Vodafone UK published research that it said underlined why Openreach needed to be separated from BT. The report by Frontier Economics says that BT has been generating excess profits from its regulated services, giving it an advantage over rivals. The excess profit reached over GBP 1 billion in the year to March 2016 - the same amount the UK government has just said it will invest in supporting fibre roll-out, Vodafone noted.
Vodafone said it will study Ofcom's proposals and BT's response. The operator called for Openreach to be separated from BT as soon as possible, "so BT’s customers and other providers can be better protected from the excessive charges" highlighted in the Frontier report.
