Functional Separation: The UK ExperienceSeminar on the Creation of a Competitive Environment in the Telecoms Sector

Karen NortheyDirector, Global Government Affairs

BT Global Services

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Overview

• BT’s undertakings– Functional Separation– Equivalence of Input– Independent Oversight

• The Undertaking 3 years later

• The “myths” of Functional Separation

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– Phase 1 Assessment and prospects .2 months consultation from April 2004

– Phase 2: Options “The current market and regulatory structure is unsustainable” 2 months consultation from November 2004

– February 2005 BT proposes detailed Undertakings.

– February to June Undertakings refined in discussion with Ofcom

– June 2005 Ofcom consult on proposed Undertakings

– June - September BT and Ofcom review Undertakings in light of industry response.

– Phase 3: September 2005 Final Statements and Undertakings

Ofcom’s Telecommunications Strategic Review (TSR)

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Primary Issues

Competition is restricted in wholesale markets for access and backhaul services

BT has substantial wholesale market power and is a vertically integrated provider with a presence in the directly related retail markets

this combination gives BT the ability and the incentive to discriminate against downstream competitors who are also wholesale customers

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Key elements of BT’s Undertakings

1. Functional Separation – Openreach

2. Equivalence of inputs (EoI) with Transparency and separate accounting

3. Independent audit and oversight

Legally binding - breaches can lead to:

• Directions from Ofcom &/or court enforcement • Reference to the Competition Commission• Third party action for damages

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Equivalence of Input

Same products & services Same time-scales, Ts and Cs, incl. price Same systems & processes Same reliability & performance Same commercial information Subject only to trivial or agreed differences

Key elements of BT’s Undertakings

Establishment of “functionally separate” business unit: Openreach

Focus on key access and backhaul bottlenecks

Provision on an equivalence of inputs (EoI) basis

Transparency, information sharing constraints and duty of confidentiality

Clear separation between upstream and downstream divisions: operational separation, systems separation, asset register split and accounting separation

Independent oversight and enforcement

Next Generation Networks to be implemented in an “equivalent” manner

Functional Separation – the UK Model

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Scale and scope of Openreach

Regulated asset value c.£ 9.6 billion

Demarcation Points

Backplate ofNTE

Customer premises ~26m homes

MainDistribution

Frame

PrimaryConnection Point

~90,000 cabinetsSecondary

Connection Point

Distribution Point (DP)~8m poles

Copper Cables

Openreach is also responsible for all duct, access fibre and copper & fibre backhaul

openreach

LLUOSpace

LineCardBTW

CoreNode

CPCoreNode

Backhaul products

Core Node.Local Telephone Exchange

5,600

E-side Cables

Overheadand

undergrounddistribution

D-side Cables

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Openreach- product set

Wholesale Analogue Line Rental• customer access for analogue voice services

Wholesale ISDN2 and ISDN 30 Line Rental• customer access for digital voice services

Local Loop Unbundling (full and shared)• copper pairs

Wholesale Extension Service• Ethernet partial private circuits from customer to first

exchange Backhaul Extension Service• Ethernet partial private circuits from first exchange to

POP or second exchange

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Equivalence of Inputs

The same: products & services for BT & others time-scales, terms & conditions, incl. price systems & processes reliability & performance commercial information and influence

Backed by Enhanced monitoring Separate management incentives Transparent accounting

Creating a pro-competitive incentive structure

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Independent Monitoring and Oversight

Equality of Access Board– Monitors, reports and advises on BT’s compliance with

the Undertakings;– Chaired by BT Group non-exec director, with three

independent members plus one senior BT manager– reports directly to BT Group plc Board– reports annually to Ofcom and publishes a summary

report as part of BT’s annual compliance report

Ofcom– Quarterly implementation reports– Annual Report on impact of TSR

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Openreach: Organisation and governance

Equality of Access Board

Monitors, reports and advises on BT’s compliance with the Undertakings

Chaired by BT Group non-exec director, with three independent members plus one senior BT manager

reports directly to BT Group plc Board

reports annually to Ofcom and publishes a summary report as part of BT’s annual compliance report

Ofcom

Existing regulatory and competition frameworkremains

Review implementation plus agree anyUndertakings variations

The Undertakings – 3 Years Later

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Separation +3: Financial performance

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Separation +3: Market and Regulatory Impacts

• Clear focus on access and backhaul network• Improved service levels • Greater transparency and confidence for our

customers• Regulation focused on bottlenecks with scope for

downstream deregulation• Clear incentives for BT and industry to invest and

innovate• Openreach provides platform for development of

NGA products and services

The “Myths” of Functional Separation

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The Myths of Functional Separation

1. Destroys the efficiency of vertical integration• Where is the evidence that a vertically integrated incumbent is

efficient?• Many businesses choose: outsourcing, right-sourcing

2. Suppresses investment• Return on investment is determined independent of FS• Greater certainty supports wider investment from incumbent

and entrants

3. Suppresses investment in fibre• UK is leading in fibre deployment• UK committed to green-fields FTTP on an EOI basis – no

“Regulatory Holidays”

4. Creates a monopoly• EOI only for enduring bottlenecks – i.e. exiting monopoly• Entrants free to invest where opportunities exist / business case

work

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The Myths of Functional Separation

5. Duct sharing is a better alternative• Practical issues rule it out for more than a select few• How is equivalence of access to be delivered? FS?

6. Too costly• To whom ? Costs of competition always “too costly” when

imposed• Incremental cost of EOI not significant vs other systems costs

7. Destroys the share value of the incumbent• Ask the shareholders and the analysts• Not the experience of BT

8. Eliminates jobs and results in worse pay and conditions– Openreach: increased number of employees employed,

increased the value of individual remuneration provided

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For more information

About BT’s Undertakings to Ofcom http://www.undertakingsbulletin.com Ofcom http://www.ofcom.org.uk/telecoms/btundertakings/ About the EAB http://www.btplc.com/Thegroup/Theboard/Boardcommittees/Equ

alityofAccessBoard/EqualityofAccessBoard.htm Office of the Telecoms Adjudicator

http://www.offta.org.uk/

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Thank you