BT pre-empts Ofcom report and offers changes to Openreach

• Governance changes to BT’s local network business Openreach
• BT willing to give Openreach greater autonomy, budgetary control and decision making powers
• An Openreach Board to be established with a majority of independent members
• New commitments from BT to improve transparency and industry consultation

BT surprised the industry this morning by proactively volunteering changes to its governance to increase the independence and transparency of its local network business Openreach. The announcement reached TelecomTV minutes before the official report from the regulator Ofcom (see today’s other story). BT believes these “unprecedented changes” can form the basis for a fair, proportionate and sustainable regulatory settlement, as well as helping Ofcom conclude its review and achieve its aims in a quicker timeframe (i.e. without threats of prolonged legal action).

Here are the proposals in brief: 

• BT will establish an Openreach Board as a board committee of BT plc
• Board to have a majority of independent members, all to be appointed in consultation with Ofcom
• Openreach CEO will will report into the BT Group CEO
• Openreach obligated to serve all its customers equally
• Openreach will produce Annual Operating and Medium Term Plans setting out its budgetary, strategic and operational objectives
• The Openreach Board and CEO will control how they deploy capital, within the overall budget agreed with the BT Board.
• 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
• Openreach will have access to sufficient capabilities and resources to make its own decisions and run its own operations

“We have listened to Ofcom and industry and are introducing significant changes to meet their concerns,” said Gavin Patterson, CEO of BT Group. “These changes will make Openreach more independent and transparent than it is today, something both Ofcom and industry have requested. 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.”

Patterson adds that BT is poised to invest a further £6bn in our UK networks over the next three years. Last year he implied he would only invest £1bn if BT remained intact. In February he pledged to increase this investment. However, he also laughed at the notion of a government-backed fibre replacement network, saying it would cost as much as £20bn.

BT believes its proposed 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 also says it will ensure Openreach continues to benefit from being part of the larger BT Group, to reduce the risk it faces when investing in new products.

“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,” added Patterson. “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 says it has discussed its governance changes at length with Ofcom over many months and formally notified the regulator on 19 July, stating that it intends to implement them within six months, subject to Ofcom agreeing to vary the existing Undertakings. It also believes the re-organisation of Openreach addresses the scathing comments and concerns raised at length by the Parliamentary Culture, Media and Sport select committee last week (see our analysis here).