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Functional Separation: The UK Experience. Seminar on the Creation of a Competitive Environment in the Telecoms Sector Karen Northey Director, Global Government Affairs BT Global Services. Overview. BT’s undertakings Functional Separation Equivalence of Input Independent Oversight - PowerPoint PPT Presentation
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Functional Separation: The UK ExperienceSeminar on the Creation of a Competitive Environment in the Telecoms Sector
Karen NortheyDirector, Global Government Affairs
BT Global Services
© British Telecommunications plc
Overview
• BT’s undertakings– Functional Separation– Equivalence of Input– Independent Oversight
• The Undertaking 3 years later
• The “myths” of Functional Separation
© British Telecommunications plc
– 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)
© British Telecommunications plc
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
© British Telecommunications plc
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
© British Telecommunications plc
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
© British Telecommunications plc
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
© British Telecommunications plc
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
© British Telecommunications plc
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
© British Telecommunications plc
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
© British Telecommunications plc
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
© British Telecommunications plc
Separation +3: Financial performance
© British Telecommunications plc
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
© British Telecommunications plc
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
© British Telecommunications plc
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
© British Telecommunications plc
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/
© British Telecommunications plc
Thank you