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Summary

Almost two years to the day since Ofcom started its review of digital communications, BT and the regulator have reached a tough but fair voluntary agreement over the future of Openreach. The settlement will see Openreach become a distinct, legally separate company with its own board within the BT Group. Crucially, ownership of assets remains with BT. This had been a sticking point but it appears that Ofcom have been flexible and have listened to the concerns around the pension scheme.

A voluntary agreement gives BT the platform it needs for its investment program

A voluntary agreement has always been the preferred outcome over a forced legal separation, not least because the EU route that Ofcom were planning to use is uncertain, is untested, and would likely have taken much longer to conclude. The situation is also made more complex by the decision from the UK to leave the EU.

The expectation is that this agreement will provide BT with the regulatory certainty and clarity required to look at its investment program, particularly in terms of extending the fiber footprint. Separately, BT has also said that it stands ready to support the government's universal service obligation for broadband, conditional upon reaching the right settlement with Ofcom. Now that has been achieved, plans can be developed.

There is no doubt that not everyone will be satisfied with this conclusion. Although, from Ofcom's point of view, BT have complied with everything the regulator asked for, some of BT's largest competitors were still holding out hope for a full structural separation of Openreach from BT Group. Throughout the process, Ofcom has reiterated that a structural separation is off the agenda. Only if Ofcom's monitoring suggests that a legal separation is not delivering sufficient benefits for the wider telecoms industry and its customers, will it return to the question.

As is often the case, the devil will be in the detail

Although the announcement on March 10, 2017 marks an important end to a prolonged and protracted period of uncertainty, questions remain around how Ofcom proposes to monitor and enforce the change. It's expected that Ofcom will conduct a short consultation on the removal and replacement of the existing undertakings that govern Openreach. There are also issues for the government to address with regard to the BT pension scheme. One of the biggest sticking points has been around the transfer of assets from BT to Openreach and the impact for BT's pension scheme members.

BT's pension scheme is protected by a Crown guarantee, which is a piece of legislation that ensures the government would meet BT's obligations to the scheme in the unlikely event that the company should be wound up. To implement the voluntary agreement with the smallest possible effect on BT's pension scheme, the existing Crown guarantee would need to be maintained for Openreach staff that are members of BT's pension scheme. Maintaining the Crown guarantee is a matter for the UK government and requires a change to existing legislation. It remains to be seen how quickly those changes can be achieved and, ultimately, how quickly all of this can be implemented.

Appendix

Author

Matthew Howett, Practice Leader, Regulation

matthew.howett@ovum.com

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