BT ordered by Ofcom to make Openreach a legally separate company

BT has been handed a proposition by Ofcom to save breaking up with Openreach. The regulator has said BT could make Openreach become "a legally separate company" within the BT Group with its own board of directors. While these new positions would not be fulfilled by executives within BT, Engadget notes Ofcom would work with the company to select and remove appointments.

Ofcom also states that Clive Salley, Openreach's CEO, should answer to the new board within the company, as opposed to anyone at BT. The reason Ofcom is suggesting a separation is due to concerns from service providers in the UK that Openreach is working in its parent company's interests, something which it's hoped this legal separation could help alleviate.

It's believed a negotiation process will proceed, but with both Ofcom and BT standing firm on either side of the fence, it could take some time for an agreement to be met. As expected, BT wishes to instead make smaller changes to how things are ran, not wanting to separate itself from Openreach.

Update: BT has since issued a press release, revealing a plan to carry out Ofcom's proposition and form an independent Openreach board of directors.

Openreach to be more independent and transparent

BT today confirmed it has volunteered significant governance changes to further increase the independence and transparency of its local network business Openreach. It believes these unprecedented changes, elements of which have been welcomed by Ofcom today, can form the basis for a fair, proportionate and sustainable regulatory settlement. They can also help Ofcom conclude its review and achieve its aims in a quicker timeframe.

The changes will enable BT to focus on its plans to further improve the UK's digital infrastructure. The UK is already the leading digital economy in the G20 and BT will help it maintain that lead by investing a further six billion pounds in its fixed and mobile networks over the next three years. Capital expenditure has risen by more than thirty per cent at Openreach over the past two years and will rise again this year as the business focuses on delivering better service, broader coverage and faster speeds.

The main governance changes include: the creation of an Openreach Board with an independent Chair and a majority of independent members; the greater delegation of strategic, operational and budgetary responsibilities; and an enhanced consultation process with industry on future investment plans.

BT believes the re-organisation of Openreach addresses the concerns relating to governance set out by the Culture, Media and Sport select committee which last week requested that BT "allows Openreach much more autonomy over what it invests, when and where". The changes also meet all of the objectives Ofcom outlined for the strengthened independence of Openreach in February1.

"More independent governance, with a responsibility to serve all customers equally". BT will establish an Openreach Board as a board committee of BT plc, BT's main operating company. It will have a majority of independent members, including the Chair, all to be appointed in consultation with Ofcom. The Board will be accountable for Openreach's strategy and operational delivery. The Openreach CEO will be accountable to this Board and will report into the BT Group Chief Executive.

An obligation for Openreach to serve all its customers equally will be included in the Articles of Association of BT plc. This will supplement the legal obligations set out in the current regulatory Undertakings and strengthen Openreach's purpose to serve all of its customers equally.

"Increasing Openreach's autonomy over budget and decision making".Openreach and its Board will enjoy a high level of autonomy. Openreach will produce Annual Operating and Medium Term Plans setting out its budgetary, strategic and operational objectives. The Openreach Board and CEO will also control how they deploy capital, within the overall budget agreed with the BT Board. This is in keeping with its wider corporate responsibilities and its legal duties as a public company "Improving Openreach's approach to consultation with customers". A formal three stage process will be introduced whereby industry will be consulted in advance on substantial investment decisions and the development of new products. This process will include an early stage during which Openreach can engage with its communications provider customers on a confidential basis. "Enhancing Openreach's operational capacity". Openreach will have access to sufficient capabilities and resources to make its own decisions and run its own operations. Gavin Patterson, BT Group Chief Executive, said: "The UK is the most digitally advanced nation in the G20 and further investment is required if it is to keep and extend that lead. That's why we are poised to invest a further six billion pounds in our UK networks over the next three years".

"We have listened to Ofcom and industry and are introducing significant changes to meet their concerns. These changes will make Openreach more independent and transparent than it is today, something both Ofcom and industry have requested.

"Openreach is committed to delivering better service, broader coverage and faster speeds and these changes will enable it to do just that. Our proposals can form the basis for a fair and sustainable regulatory settlement and we believe they can also enable Ofcom to bring its Review to a speedier conclusion."

BT's re-organisation of Openreach will provide all the benefits that Ofcom is seeking while avoiding the extensive, disproportionate costs that would be incurred if assets had to be transferred into a newly incorporated subsidiary company. It will also ensure that Openreach continues to benefit from being part of the larger BT Group, which helps to reduce the risk it faces when investing in new products.

Openreach will remain a heavily regulated business with Ofcom determining the prices for more than ninety per cent of its products. It will continue to be overseen by Ofcom which already has powers to ensure that Openreach serves all of its customers on an equal basis, supporting what is an intensely competitive retail market. BT's governance changes will serve to supplement and reinforce this existing regulation.

Patterson added: "Proportionality has to underpin any regulatory solution and we believe our proposals are a bold and appropriate response to the concerns outlined by Ofcom and others. We have considered the more extreme solutions proposed by others but they would be overly complex, disproportionately costly and time consuming to implement. They would also undermine Openreach's ability to invest and create years of uncertainty."

BT has discussed its governance changes at length with Ofcom over many months. It formally notified them on 19 July, stating that it intends to implement them within six months, subject to Ofcom agreeing to vary the existing Undertakings. It is calling on Ofcom to support these proposals as the best way forward for the country and as the foundation for the competition and investment in digital networks that the UK needs.

Rich Edmonds
Senior Editor, PC Build

Rich Edmonds was formerly a Senior Editor of PC hardware at Windows Central, covering everything related to PC components and NAS. He's been involved in technology for more than a decade and knows a thing or two about the magic inside a PC chassis. You can follow him on Twitter at @RichEdmonds.