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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
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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 • The Undertaking 3 years later • The “myths” of Functional Separation
Ofcom’s Telecommunications Strategic Review (TSR) • 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
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
Key elements of BT’s Undertakings • Functional Separation – Openreach • Equivalence of inputs (EoI) with Transparency and separate accounting • 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
Functional Separation – the UK Model • 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 • 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
Scale and scope of Openreach Customer premises ~26m homes Local Telephone Exchange 5,600 Core Node. DistributionPoint (DP)~8m poles Main Primary Distribution Secondary Connection Point Connection Point CP Core Node Frame ~90,000 cabinets LLUO Space Line Card Overheadand underground distribution BTW Core Node E-side Cables D-side Cables Backplate of NTE Backhaul products Copper Cables openreach Openreach is also responsible for all duct, access fibre and copper & fibre backhaul Regulated asset value c.£ 9.6 billion Demarcation Points
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
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
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
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
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 • Destroys the efficiency of vertical integration • Where is the evidence that a vertically integrated incumbent is efficient? • Many businesses choose: outsourcing, right-sourcing • Suppresses investment • Return on investment is determined independent of FS • Greater certainty supports wider investment from incumbent and entrants • Suppresses investment in fibre • UK is leading in fibre deployment • UK committed to green-fields FTTP on an EOI basis – no “Regulatory Holidays” • Creates a monopoly • EOI only for enduring bottlenecks – i.e. exiting monopoly • Entrants free to invest where opportunities exist / business case work
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
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/EqualityofAccessBoard/EqualityofAccessBoard.htm • Office of the Telecoms Adjudicator http://www.offta.org.uk/