Ofcom has released an update on its proposals to seek to strengthen Openreach’s strategic and operational independence from the rest of BT. That update, issued only a day after BT announced a new independent chairman for Openreach, signals an intensification in the battle between BT and Ofcom over the future of Openreach. Ofcom’s decision to press for legal separation is explored in the article below.

On 28 November 2016, BT announced that a new independent chairman would join Openreach in January 2017. The press reported this as an attempt by BT to stave off a breakup of the company. That same day Ofcom wrote to the European Commission indicating that it would be bringing forward a notification to the Commission to legally separate Openreach. This was followed by a press release the next day announcing this move.

The timing of Ofcom’s press release and the fact that the announcement was not accompanied by a full consultation document but only excerpts of a consultation document suggest that Ofcom had lost patience with BT and chose to go public on the matter earlier than it would otherwise have liked.

The lack of a full consultation document clearly indicates that Ofcom was not expecting to make a statement so early. One of the most controversial issues surrounding a legal separation of Openreach has been the impact of separation on the BT pension deficit and this is perhaps the key issue addressed by Ofcom in the released excerpts. Importantly, Ofcom makes clear that it views the pensions issue as soluble and that it does not see that issue as constituting a roadblock to legal separation or indeed to structural separation. In this context, legal separation refers to Openreach being constituted as a legally separate company within the BT Group as opposed to just a division of BT, while structural separation refers to the requirement for BT to divest itself entirely of the separate legal entity.

Ofcom, in its press release signalling legal separation, makes great play of the fact that approximately 94,000 people using a pro forma online form responded to Ofcom’s earlier consultation on the future of Openreach. Approximately 90,000 of these responses were a standard response calling for a change in Openreach’s structure whilst some 4,000 respondents raised particular issues about slow broadband, availability of fibre broadband and quality of service. There is no question that the heat on issues around fibre broadand and quality of service has been turned up in the last 12 months but there remains an interesting question as to how much weight (if any) Ofcom should put on these responses in the context of making its decision. The decision as to the future structure of Openreach is a complex economic and legal one and is not one that can or should be decided merely by weighing up the number of voices calling for separation.

So what will happen next?

Ofcom has stated that it is working on its notification, and that they intend to consult on it in the early part of next year. Following that consultation Ofcom will then approach the Commission under Article 8(3) of the Access Directive on the basis that it intends to utilise a remedy (functional separation) that requires the approval of the Commission. Functional separation, which is dealt with in Article 13A of the Access Directive, allows NRAs to impose an obligation on vertically integrated undertakings requiring them to place activities related to the wholesale provision of relevant access products in an independently operating business entity. This can only occur where “there are important and persisting competition problems and/or market failures identified in relation to the provision of wholesale provision of certain access product markets.”

Accordingly, Ofcom will need to draft its notification in relation to the relevant access markets and it is likely to focus on the wholesale local access markets amongst others. The fact that there must be important and persisting competition problems however raises interesting questions about whether Ofcom will be able to justify requiring the movement of all the products that Openreach currently provides into the new legally separated Openreach. Our view is that they may not be able to make out this justification for all the product sets and this may result in some products falling out of Openreach and back into BT Wholesale.

Of greater interest is the fact that Ofcom may well submit their notification to the Commission for approval post March 2017. If this occurs then the United Kingdom is likely to have triggered Article 50 and be engaged in negotiating its exit from the European Union. How concerned the European Commission will be to focus on and move forward Ofcom’s request in a timely fashion therefore remains to be seen.

If the European Commission accedes to Ofcom’s request quickly (having taken into account the views of the Body of European Regulators for Electronic Communications (BEREC) and the Communications Committee then BT will have the opportunity to appeal the decision under section 192 of the Communications Act and to have the benefit of a full merits appeal before the CAT, with the potential of an appeal to the UK and ultimately the EC courts (depending on the UK’s standing in Europe at that stage).

If however, the European Commission rejects Ofcom’s request, our view is that Ofcom will then play for time until the UK leaves the European Union. Following an exit from the EU, the Government will most likely be free to introduce primary legislation to address the issue (without any requirement to abide by the terms of the enlisting European Directives).

Indeed, this may well be the reasoning behind Ofcom’s decision to notify the Commission. Despite stating that they want to implement the Openreach reforms as soon as possible, Ofcom may well be pleased to push the separation off into the long grass of the European Commission, until such time as the United Kingdom leaves the European Union, when the UK will have more freedom to deal with these issues.

Given that the UK currently seems on track for a hard Brexit, the UK is likely to be in a far stronger position to deal directly with the issue of legal separation. Without the oversight of the European Commission, the Government could indeed go further and require BT to divest itself of a legally separated Openreach (ie structural separation).

Of course we may never get this far. The wording of both Ofcom’s letter and their press release indicates that they are open to receiving further voluntary proposals from BT on the future of Openreach.

BT must decide

BT’s dilemma is whether to stick or twist. Should it make further concessions now so as to try and resolve the issues ahead of a Brexit or should it stick to its guns. BT will be all too well aware that much of the industry is still seeking structural separation and that without the constraint of the European Commission, the threat level for it is likely to be much higher. Like many a celebrity divorce we can expect plenty of twists and turns in this legal separation.