If you read past the Openreach headlines in Ofcom’s Digital Communications Market review, you can find four paragraphs in chapter eight announcing a review of the UK’s General Conditions of Entitlement, which will affect anyone operating a telecoms network or providing telecoms services in the UK Since individual licences were (largely) abolished in the UK in 2003, providers of electronic communications networks or services have operated subject to the General Conditions of Entitlement (aka General Conditions or GCs). Continue reading
In my last post, I summarised Ofcom’s initial conclusions from its review of the UK digital communications market. One of Ofcom’s conclusions was that the functional separation of BT’s Openreach division (which provides last mile access) from the rest of BT, and the associated regulation of the relationship between BT and Openreach (implemented by binding undertakings) was not sufficiently effective in constraining BT’s ability to discriminate against its competitors. As a result Ofcom’s initial conclusion is that governance should be reformed to give Openreach increased strategic and operational autonomy, and although Ofcom very carefully avoid reaching a firm view, they seem to favour legal separation as a mechanism for reform, with lukewarm endorsement of (just) enhanced governance. If implementation of whatever is decided / agreed is ineffective to address the concerns identified, then Ofcom say that they will only then look at structural separation.
Separation options considered
Whilst many of BT’s competitors had asked Ofcom to consider structural separation of BT, Ofcom’s initial conclusion is that the issues that were raised could potentially be addressed through reform of Openreach’s governance and that at this stage structural separation would be a disproportionate remedy. In reaching that conclusion Ofcom considered eight alternative structures:
BT and Openreach currently operate under model 5, functional separation with local incentives. Ofcom’s initial paper discusses the merits of moving to model 6 (reformed governance), 7 (legal separation) and 8 (structural separation) as ways of addressing the problems they identify.
Structural Separation (model 8)
As well as considering the implications for BT, Ofcom looked at international examples of structural separation including Australia, New Zealand and Singapore. However, all of these were largely driven by a different regulatory imperative – that of ensuring that government investment and subsidy for deployment of broadband networks was made into an entity that was not part of the incumbent. As previously discussed on this blog, the Singapore example serves more to highlight the challenges of achieving true separation and its benefits rather than acting as a blue-print.
Whilst Ofcom’s paper doesn’t rule out structural separation in the future, their decision to look at reformed governance and/or legal separation in the first instance is driven by their desire to be proportionate and choose the least intrusive method of regulation. However, the experience of competition regulators is that detailed ongoing behavioural remedies can be more intrusive than one-off structural remedies, and so the question arises as to whether the same view (which of course will require ongoing regulatory oversight by Ofcom) would be reached if looked at by a competition regulator.
I also had some interesting private comments to my last post, one of which suggested that the real question was whether the boundary between Openreach and BT was in the right place, and that it was perhaps better redrawn with Openreach managing passive assets only – something only touched upon by Ofcom in their consideration of the practicalities of separation.
Enhanced Governance Reform (model 6)
Ofcom flag that one of their main concerns is that “Openreach does not have sufficient strategic and operational autonomy to ensure the equal treatment of all downstream customers.”
Ofcom go on to suggest that Openreach’s governance would need, at a minimum to be to be reformed as follows:
“… solutions to the concerns identified would need to embed further specific behaviours by Openreach in a number of areas, including:
- More independent governance, with a responsibility to serve all customers equally: Creating an Openreach Board with more independent governance within the current model of functional separation.
- Increasing Openreach’s autonomy over budget and decision-making: This could address our concerns related to decision-making by giving Openreach increased financial autonomy to take strategic decisions on network investment, network maintenance and operational systems. One way of achieving this would be to increase the delegated authority given to the Openreach Chief Executive from the BT Board to make individual decisions on the allocation and use of funds. One outcome of this increased autonomy could be the ability for Openreach to reach co-investment or risk sharing agreements with operators other than BT.
- Improving Openreach’s approach to consultation with customers: We want to ensure that Openreach listens and takes into account the views of all its customers in making decisions that could impact downstream operators. Specifically, we could establish obligations for Openreach to consult openly with downstream operators on substantial investment and innovation decisions. For example, commitments to transparency when considering new network investments, consideration of any alternative proposals and consultation at an early stage on any favoured proposals. The EAB, or another independent body, would need to check compliance with such obligations.
- Enhancing Openreach’s operational capability: Giving Openreach the ability to draw upon dedicated support services could address our concerns over its operational ability to deliver its priorities. This would ensure Openreach has sufficient internal capability to manage both its strategy and manage external supply arrangements. Such changes would have to be weighed up against any potential loss in efficiency or scale benefits. “
Ofcom then observes that these measures may be “insufficient on their own“. This is quite an interesting formulation from Ofcom – if they don’t think they are sufficient, then why raise as an option? Ofcom then go on (in a somewhat tentative way) to suggest that a stronger set of governance reforms would meet their concerns.
Legal separation of Openreach (model 7)
Ofcom then go on to suggest what appears to be their favoured option, the hive-down of the Openreach business to a wholly owned subsidiary within the BT group i.e. legal separation of Openreach, with the retention of economic ownership by BT, and restrictions on the influence and control by BT of Openreach. Ofcom summarise it as follows:
- “Separate Openreach Board: Openreach would become a wholly owned subsidiary of BT Group, making the relationship between it and BT’s other divisions more transparent. The Openreach Board would be separate of the wider group and hold executive powers of decision-making over Openreach’s activities in the interests of the legally separate Openreach, rather than the wider interests of BT Group.
- Responsibility to serve all customers equally: An explicit responsibility for Openreach to treat all downstream customers equally might be established through the objects and purposes of the company in its articles of association.
- Autonomy over investments and decision-making: The new Openreach Board might be given more autonomy over capital investments and the broader use of cash within the business.
- Ability to raise funds: There are different options for how a wholly owned subsidiary could raise funds. There may also be appropriate ways for BT Group to finance Openreach without directly influencing how the funds are spent. Alternatively, Openreach could raise funds directly from the market or fund network investments through contributions from downstream providers, secured by contract.
- Statutory accounts: An important aspect of the model is that BT Group shareholders would retain full ownership of Openreach and continue to benefit from any associated profits. As a legally separate subsidiary Openreach would be required to file full statutory accounts, including a separate balance sheet, profit and loss statement, and cash flow. This would improve transparency of cost and asset allocations.”
Whilst Ofcom recognise that this approach creates some implementation challenges it remains to be seen if they have fully appreciated the costs and complexity of this option, which involves many of the downsides of structural separation, but without removing the incentive to discriminate, which means that it will still require ongoing intrusive behavioural regulation.
On 25 February 2016 Ofcom published its initial conclusions from its strategic review of the UK’s digital communications market. Whilst much of the headline press coverage has focused on BT being able to retain Openreach, provided its governance is reformed, Ofcom’s review goes much wider than the regulation of Openreach and sets the strategic direction for UK telecoms regulation for the next decade.
However, as someone who has seen successive regulators try alternatives including accounting separation, functional separation and now reformed functional separation whilst technology has moved from cellular telephones that could only be said to be mobile if you drove the car carrying them to modern smart-devices what is striking is the persistency of incumbency, and in particular the ‘last mile’ connection. Whilst Ofcom’s proposals go wider than just addressing this bottleneck, the most interventionist regulation is aimed at this problem, which of course tacitly admits that the last strategic review, done just after Ofcom was formed, failed.
The rest of this post explains how Ofcom reached its conclusions.
What is Ofcom trying to achieve?
Ofcom is of course a statutory body and the Communications Act 2003 sets out Ofcom’s duties, with Ofcom’s primary duties being:
to further the interests of:
(a) …citizens in relation to communications matters; and
(b) …consumers in relevant markets, where appropriate by promoting competition.
The challenge for Ofcom is understanding how to turn this duty into something that allows it on a day to basis to take decisions, all of which involve trade-offs. This is where the vision comes in, as Ofcom can then test each of its decisions and see whether they help or hinder it achieving its vision. Ofcom explains that in 2016 its ten-year vision is that:
everyone in the UK will enjoy fast, reliable broadband services. Most consumers and businesses will move from ‘superfast’ to ‘ultrafast’ broadband, based increasingly on competing networks, and the latest mobile phone technologies will be rolled out across the UK’s geography;
the UK will move towards a new fibre future, with widespread availability of competing ‘fibre to the premise’ and cable networks to homes and businesses. As more consumers and businesses enjoy a greater choice of networks, competition will drive both innovation and affordable prices;
people who do not have a choice of providers, do not enjoy even a basic level of service (whether through social circumstance or simply due to where they live), or find it hard to take advantage of offers in the market, will be protected through effective, targeted intervention; and
the UK will be a world leader in the availability and capability of its digital networks.
Areas of strategic focus
Ofcom then explains that it will organise its work into five main areas to achieve its vision, with a final sixth theme of seeking to reduce regulation being applied across everything that Ofcom does.
The five areas are:
- securing a wide availability of services;
- promoting investment and competition;
- delivering a step-change in quality of service;
- strengthening Openreach’s independence; and
- empowering and protecting consumers.
Each of these areas are then examined by Ofcom, and its analysis of the issues to be addressed and form the basis for Ofcom’s proposals. In Ofcom’s own words they are:
Securing a wide availability of services
“From a UK-wide perspective, the availability of fixed and mobile services is good. Most consumers can now access high broadband speeds at home and in their place of work, as well as mobile voice and data services while on the move.
However, some areas of the UK do not have access to an acceptable level of service. The starting point for any future communications strategy must be to ensure that everyone shares in the benefits of a modern digital society.
The Government’s plan for a right to decent, affordable broadband is central to our availability strategy. We will prioritise supporting plans for a 10Mbit/s broadband Universal Service Obligation (USO) to ensure that all people and small businesses have access to decent broadband speeds. Over time, we expect that the USO will need to evolve to ensure all consumers and businesses benefit as technologies and services improve.
We will also secure wide availability of services by:
- enabling further investment in fixed networks, especially the transition from superfast to ultrafast broadband services, through competitive mechanisms wherever possible;
- exploring options for extending mobile coverage. We will seek to place new coverage obligations on companies who win new spectrum licences. The 700MHz band is particularly well suited to providing such coverage
- supporting the UK Government’s reform of the Electronic Communications Code; and
- providing consumers and businesses with accurate, comparable and accessible coverage information across communications services so that they can make better choices about their services.”
Promoting investment and competition
“Our strategic objective in relation to fixed networks is to encourage the large scale deployment of new fibre networks over the next decade, driving the widespread availability of competing ultrafast broadband services.
To deliver this we will:
- make it easier for competing providers to build their own fibre networks, across as much of the UK as is practicable, by providing them with access to Openreach’s network of underground ducts and telegraph poles;
- price access to BT’s network in ways that encourage providers to build their own networks while protecting consumers from excessive pricing;
- deregulate where network based competition is effective; and
- continue to promote competition based on other forms of access to Openreach’s network, where effective network competition does not arise.
In mobile, there is no change to our existing strategy. We want the UK to continue benefiting from competition between four national network providers, and a range of resellers. We will work to ensure that the necessary wireless spectrum is made available. If we see takeovers or mergers leading to fewer, bigger network operators, and consumers are worse off as a result, this could lead us fundamentally to rethink our approach to competition and investment in mobile services.”
Delivering a step-change in quality of service
“Widely available networks and services alone are not enough. Consumers and businesses also need these networks and services to be reliable and of a high quality. While most consumers report that they are satisfied with telecoms services, their expectations of quality are rising. The sector needs to deliver significantly better quality of service than it does today.
Our concerns include Openreach’s performance, but extend beyond it to all providers. For example, not only are we concerned about the volume of faults on Openreach’s copper network and about how quickly Openreach repairs them; but also about the customer service that retail providers offer when something goes wrong.
For Openreach, we intend to:
- set more demanding minimum standards, extending them to new areas as necessary; and
- set wholesale pricing controls that strengthen Openreach’s incentives to make long term investments in service quality.
For the wider sector, we will:
- drive improvements to service quality by making more information accessible to consumers and businesses; and
- publish an annual Service Quality Report showing how telecoms companies compare. Well-informed consumers who are able to make informed decisions are better able to hold providers to account for the service quality they deliver.
In addition, we intend to work with industry to improve coordination between providers where this is affecting service quality: for example, to reduce missed appointments and solve consumers’ in-home problems. Finally, we will look to introduce automatic compensation for consumers and small businesses when something does go wrong”
Strengthening Openreach’s independence
“BT has a crucial role to play in ensuring that consumers and businesses enjoy good communications services, given its market position and the continued reliance competitors will have on its network.
However, we are concerned that the current model of functional separation fails to remove sufficiently BT’s ability to discriminate against competitors. Therefore risks to competition remain.
Given the concerns identified, continuing the status quo is not an option. We have decided to reform the relationship between Openreach and BT Group to give the former greater independence and autonomy. Under this new structure, Openreach should have:
- more independent governance structures and processes, with a responsibility to serve all wholesale customers equally;
- independent technical and operational capabilities;
- greater autonomy over its budget, and over its strategic and operational decision making; and
- an ongoing responsibility to consult with all customers in the same way.
One option that might achieve this is structural separation, but we recognise that this would entail significant disruption. We will therefore consider whether a strengthened model of functional separation could deliver the greater independence and autonomy for Openreach that we believe is necessary. If functional separation cannot be strengthened, we reserve the right to take forward structural separation.
We are now developing detailed proposals, which we will discuss with the European Commission later this year.”
Empowering and protecting consumers
“Even when choices are available, people need practical information and tools to take advantage of what the market can offer. This need becomes increasingly important as communications services increase in diversity and complexity.
To help people make informed choices, we will:
- publish more detailed information, including on: service quality and customer response; fixed and mobile service availability; and broadband speeds;
- work to introduce a standard cost comparison measure, such as average monthly cost of the core elements of a service over the contract period, so consumers can more easily compare different products;
- closely monitor the impact of providers’ adherence to the Advertising Standards Authority’s broadband price advertising rules;
- work with third parties, such as price-comparison websites, to improve information consumers have to hand before they buy; and
- identify what more can be done for consumers who are not responsive to this information, for example, through stronger triggers to consider other deals when contracts expire.
We will follow up our work on Openreach network switching with proposals to make mobile switching easier. We will also complete our review of switching triple-play services (i.e., phone line, TV and broadband).
Some consumers will find it difficult to engage effectively with the market regardless of the information available them. We will therefore take more direct action to help protect such consumers, for example, by tracking market prices more closely and intervening directly to provide protections for the most vulnerable.
Finally, we will continue to protect consumers when things go wrong, from issues such as nuisance calls to various forms of fraud.”