BT’s Undertakings to Ofcom: An overview David Gribble Chief Counsel, 21CN BT Global Services

1. BT’s Undertakings to Ofcom: An overview David Gribble Chief Counsel, 21CN BT Global Services September 2007

2. Introductory • Functional Separation: restructuring of incumbent operator to support equality of access to network, without breaking up the company • September 2005 – Functional separation of BT, as part of package of undertakings to Ofcom, the UK regulator • Openreach – new functionally separated entity • Next Generation Network (NGN) – a converged network, allowing multiple services on a single IP platform

3. Agenda • Ofcom’s Telecoms Strategic Review • BT’s Undertakings & Implementation • BT’s NGN - 21st Century network (21CN)

4. Ofcom’s Telecommunications Strategic Review (TSR) • Ofcom commenced TSR in Jan 2004 • Phase 1 Assessment and prospects • Phase 2: Options • Phase 3: Strategic review framework • TSR concluded by agreement of BT’s Undertakings to Ofcom 22 Sept 2005 • In lieu of Enterprise Act reference • contain a series of commitments made voluntarily by BT • legally binding • in addition to existing regulation/competition law

5. TSR - the issues, as seen by Ofcom • 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 • Ofcom believed this combination gave BT the ability and the incentive to discriminate against its downstream competitors who are also wholesale customers

6. Key elements of BT’s Undertakings • Establishment of Openreach • Focused on key access bottlenecks • Provision on an equivalence of inputs (EoI) basis • Operational separation, transparency and systems separation (Chinese walls) • Independent oversight • Enforcement • NGN provisions Complementing, not replacing existing regulation Not just functional separation

7. Openreach - assets PSTN Service PSTN & ADSL Service Customer premises Core Node. Local Telephone Exchange Distribution Main Primary Point (DP) Distribution CP Core Node Secondary Connection Point Frame LLUO Space Connection Point (Cabinet) Line Card BTW Core Node Backplate of Copper Cables NTE Backhaul products openreach openreach is also responsible for all duct, access fibre and copper & fibre backhaul Demarcation Points

8. Openreach productsEquivalence of Inputs • Same products & services for BT & other CPs • Same time-scales, terms & conditions, incl. price • Same systems & processes • Same reliability & performance • Same commercial information • Subject only to:- • Trivial differences, or • Other differences agreed by Ofcom

9. Sanctions and oversight • Breaches can lead to: • Directions from Ofcom &/or court enforcement • Reference to the Competition Commission • Third party actions for damages • Openreach is supervised by an Equality of Access Board, which will: • Monitor, report and advise on compliance with the Undertakings; • Have three independent members, one BT Group plc non-executive director and one senior BT manager; • Supported by its own office • Report regularly to the BT Group plc Board; • Send a detailed report to Ofcom annually; and • Publish a summary report as part of BT’s annual compliance report.

10. Openreach in BT structure Main BT PLC Board BT CEO Management reporting Compliance oversight Operating EAB Committee Global Retail OpenreachBoard Wholesale Board Board Board Global Openreach Wholesale Retail Services

11. Openreach vision • ‘We are the proud guardians of the nation's local access network - the copper wires connecting homes and businesses to telephone exchanges.’ • ‘Our remit is to ensure that the UK telecommunications industry, including other parts of BT, has fair and equal access to our local access and backhaul networks.’

12. BT’s Undertakings: 2 Years On • Strong record of delivery on commitments by BT • Formation of Openreach • Greater transparency and independent oversight • Systems transformation bringing benefits to industry and to downstream BT • Rate of change in UK market, itself driven by the Undertakings, has presented challenges • Openreach allows greater focus and speed to fix • Rest of BT focus on new services and revenue streams • Has helped create confidence to allow downstream deregulation We are delivering on a commercially valuable objective not simply complying with a regulatory mandate

13. Driving Growth in UK Telecoms • 11.2m broadband connections in the UK • 2.4m local loop unbundling (LLU) lines (over 2m since creation of Openreach) • Openreach handles 55k LLU external orders per week • More than 20 LLU operators • Unbundled services provided from nearly 1,700 local exchanges • Vibrant, competitive market in BB

14. OTA2 at http://www.offta.org.uk/charts.htm

15. Openreach Performance Full Year to March 31 2007 External Revenue Internal revenue Total revenue Operating Costs EBITDA Amortisation and Depreciation Operating Profit Capital Expenditure

16. BT Share Performance • BT share price remained stable over course of negotiations and has improved since Openreach launch • Openreach did not frighten investment community

17. New era of regulation • Increased clarity • Regulation focused on bottlenecks • Reduced retail regulation • Incentive to invest in next generation networks and innovate • Infrastructure-based competition • Benefits the consumer and UK economy • BT can compete fairly Creating confidence for infrastructure competition, investment and innovation

18. BT’s 21CN : A Business Transformation BTs 21CN Objectives…. BT is addressing the tough telecoms challenges of today with our 21CN NGN Programme; this is not just a network replacement, it is a total business transformation 21CN is made up of a number of inter-linked & inter-dependant initiatives: • Remaking our Portfolio • Transforming Systems • Core Network Convergence • 21C Customer Experience A total business program to optimise NGN benefits • Empower the customer with control, choice and flexibility like never before • including communications from anywhere to any device • Offer exciting new services for customers faster than before • Reduce costs and grow cash cost savings • Not just UK – global project The vision is for a ‘zero-touch’ network where services are software defined, automated & initiated by customers

19. BT’s NGN • Reducing complexity • Eliminating 100,000 network components • A single platform that is multi-service and future proof on IP • Optimised for reliability and performance • Undertakings: BT to ensure • not to foreclose network design • future SMP products on 21CN are on an EOI basis • Consultation with and fair treatment for CPs

20. Consult21 21CN – Transparency throughout the process Engagement with the regulator was key. • Entire section of Undertakings dedicated to NGN • Close working with Ofcom and with EAB BT wholesale customers were invited to understand, question and input into our 21CN plans • It’s the largest voluntary consultation of its kind ever undertaken in our industry with around 650 people from across industry actively involved • Launched Summer 2004, with the public announcement of 21CN • Director recruited from industry • Each Work Group has BT and Industry Co-Chairs • Industry Steering Board (Ofcom monitors) • All proceedings published on the Internet

21. Conclusion • Functional separation addresses long-term issues in the UK telecoms market • Functional separation a means to a wider goal – equality of access • Undertakings have helped transform relations with regulator, industry • We believe benefit to BT, the UK telecoms market, and consumers • Have helped create regulatory certainty and confidence to enable innovation

22. Thank you