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Summary

On November 29, 2016, Ofcom announced that it is proceeding with a formal notification to require the legal separation of Openreach from BT. This next step is in keeping with the proposals made in July 2016 in the event Ofcom was not able to secure a voluntary agreement with BT on the necessary reforms. This next stage involves a notification to the European Commission to require the changes to increase Openreach's independence.

Ofcom and BT must square their differences to prevent this from becoming a protracted battle

This announcement will undoubtedly come as a blow to BT, which thought it was making progress with Ofcom; however, the door remains open for both sides to reach a voluntary agreement. In many ways, a voluntary agreement remains a better outcome than a forced legal separation, not least because the EU route is uncertain, untested, and likely to take much longer to achieve. It is also made more complex by the decision from the UK to leave the EU.

In the summer of 2016, BT and Ofcom appeared to be close to reaching an agreement. However, it is clear that the issues around the transfer of people and assets, and the level of influence that BT Group executives could exert over the management of Openreach remain sticking points, including the complex issues surrounding BT's pension scheme. These will be the areas that BT needs to focus on to avoid the imposed legal separation that Ofcom stands ready to implement.

In the time between the July 2016 consultation and this recent announcement, there have been repeated calls for a full structural separation of Openreach from the BT group. Ofcom has once again reiterated that 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 of structural separation.

Appendix

Further reading

"Ofcom and BT appear to be close to a deal over Openreach," TE0007-001052 (July 2016)

Author

Matthew Howett, Practice Leader, Regulation

matthew.howett@ovum.com

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