UK: UK Telecoms Regulator Falls Short Of Proposing BT Breakup, But Introduces New Regulatory Framework Promoting Network Competition

Last Updated: 4 March 2016

Ofcom, the UK's communications regulator, has published the initial conclusions of its Strategic Review of Digital Communications consultation (which we discussed in a prior alert on this consultation. The most contentious issue raised by this review is whether to separate Britain's incumbent telecoms monopolist BT from its network division, Openreach, which provides wholesale broadband network access services to BT's rivals. On that issue, Ofcom has refrained from making a reference to the Competition and Markets Authority (CMA) for such a breakup, despite repeated calls from some of BT's rivals in favor of a reference.

Such market references are a powerful tool. CMA has the power to push through wide-ranging remedies to address perceived market failures, including structural separation of individual businesses. Although there are recent examples of CMA using this power (e.g., in the aggregates, cement and ready-mix concrete markets), it generally considers this type of structural separation a measure of last resort, to be used only where all other remedies are deemed insufficient or too costly. CMA has resisted political pressure to use this authority in other cases (e.g. retail banking and energy markets).

Ofcom declined to make a reference to CMA because it found it would be too costly and extreme at this stage. Instead, Ofcom has proposed a new regulatory framework aimed at promoting network competition across the UK.

New regulatory framework

Ofcom's proposal has several key components:

  1. Ofcom proposes to require incumbent BT to share its telephone wire poles and underground cable ducts with alternative carriers, to motivate new entrants to deploy and connect their fiber cables directly to the customer's premises (FTTP) in competition with BT's copper lines.
  2. To complement the encouragement of FTTP deployment, Ofcom intends to introduce measures aimed at guaranteeing that BT provides its competitors with equal access to Openreach services. First, Ofcom proposes to make Openreach more independent from BT, with a separate board of directors and greater independence in taking its own decisions on budget, investment and strategy, and tougher non-discriminatory access conditions in favor of BT's competitors, including better dispute resolution mechanisms and higher penalties for non compliance (see our alert on Ofcom penalty guidelines). Second, Ofcom stated that a complete split between Openreach and BT is not out of the question, and it remains an option should the proposed measures prove to be unworkable or should BT repeatedly fail to comply with the improved open access regime.
  3. Where network competition already exists or successfully emerges, Ofcom will roll back government regulation in favor of the application of general competition rules to resolve any remaining competition concerns. For example, Ofcom has proposed to deregulate leased lines in central London, as it believes that there is sufficient network competition in this area.
  4. Ofcom also intends to improve the quality and availability of fixed and mobile broadband services, by imposing a universal service obligation on selected operators to provide fixed line broadband of at least 10 Mbits per second; extended mobile coverage obligations in return for new spectrum licenses; and new transparency and minimum quality obligations for all operators. Ofcom also proposes to relax or repeal existing regulatory constraints for the roll-out of mobile repeaters and wi-fi networks.

Industry's reaction

These proposals have been met with mixed reaction. BT likely sighed in relief for having escaped structural separation, at least for now, but it faces the prospect of even greater scrutiny from Ofcom and rivals potentially for a long time to come. First, the obligation to open up cable ducts and telephone poles to competitors has not yet been implemented in the UK and so it is a novelty in UK telecoms regulation. Secondly, should the new Openreach access regime prove to be ineffective in preventing competitors' foreclosure, the possibility of imposing structural separation will become again a real threat. This means that BT's efforts to ensure that the proposed regime work effectively will be carefully scrutinized. In the meantime, BT rivals like Sky, Talk Talk, and Vodafone reportedly are disappointed; but the new requirement of opening BT's cable ducts and telephone poles may potentially bring new network investment opportunities even for them and other stakeholders.

Next steps

Ofcom described its proposals as a "fundamental reform of the telecoms market – more competition, a new structure for Openreach, tougher performance targets and a range of measures to boost service quality." The details of implementation have not yet been published and will be contained in various regulatory instruments, each of which will be subject to its own consultation with stakeholders before being adopted. Some of these reforms also are subject to consultation with the European Commission and BEREC (Body of European Regulators for Electronic Communications), including the imposition of the new Openreach access regime – at least so long the UK remains in the EU. There is therefore still work to do not just for Ofcom but for all stakeholders who want to help shape UK telecoms regulation for the next decade to come.

Ofcom's February 25 initial conclusions are available on its website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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