BT changes spots but rivals remain suspicious of its Openreach

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The Independent Online

The vans and their new livery are the physical manifestation of a company created by BT, at the behest of Ofcom, the telecoms regulator, called Openreach. It is an attempt to end a dispute that has raged for years between BT and its rivals, notably the likes of Cable & Wireless (C&W).

The argument has been over how, and at what cost, C&W and BT's other competitors can make use of BT's local network, the 120 million kilometres of copper wire that connects homes and businesses to their local telephone exchanges and which will now become Openreach's main asset, worth about £8bn.

If Openreach succeeds then it should lead to cheaper calls and a greater choice of products and services for consumers and businesses. If it fails to deliver a level playing field it will spell trouble for Mr Verwaayen and his Openreach management, who will ultimately end up in the High Court to answer for their shortcomings.

BT's rivals need access to the local network to sell their telecoms services, such as calls and internet connections, in competition to BT. But because this crucial piece of the nation's economic infrastructure is under BT ownership, there have been accusations hurled at the former state monopoly that it treats rivals unfairly compared with its in-house provider of telephone and internet services, BT Retail.

Francesco Caio, the chief executive of C&W, does not share Mr Verwaayen's bullishness about Openreach as a panacea to the industry's apparently insoluble competition issues. He said: "The undertakings that Ofcom has won and the new division BT has had to create demonstrate the effect its monopoly control of access [to the local network] has had in undermining competition to date. Together they present an opportunity to drive real change but there is still a difficult journey ahead."

With sales of at least £4bn and assets worth twice that, Openreach will be one of the UK's biggest businesses - bigger than many FTSE 100 companies - employing 30,000 people, 25,000 of which are BT's army of engineers. BT is reallocating £200m of its resources to cover the cost of setting up Openreach which will be operational in four months. It will be in charge of supplying BT Retail and its 200-plus rivals, including Thus, Wanadoo, TalkTalk, easynet and many more, with the services they need to access the local network.

What was an amorphous part of BT's Wholesale division will become a separate corporate entity with its own published accounts operating under a strict set of rules and regulations agreed with Ofcom. These rules, or undertakings of which there are nearly 250, are designed to ensure that BT Retail is given no unfair advantages and everybody competing in the provision of telecoms services will get equal access to the local network. Chinese Walls have been imposed between the other divisions within BT Group and Openreach that stop the flow of commercially sensitive information.

Openreach will be run by a new chief executive, Steve Robertson, and a new management board which, in turn, will be overseen by a second board, called the Equality of Access Board (EAB), staffed by the great and the good who will try to make sure Openreach follows the new rule book. Although supposedly independent, the EAB will be paid for by BT.

Mr Robertson and his team will be well incentivised to make Openreach work, and their bonuses will deliberately not be paid in BT shares, but cash, to accentuate their separation from BT Group.

If they do earn bonuses then their physical separation from BT in a new Openreach head office in Mayfair's Farm Street means they will be able to spend the cash in one of London's swankier neighbourhoods. If Mr Robinson fails to ensure Openreach treats everyone fairly, then he can be forced to make changes or be fined by Ofcom. Failing that, the new measures are enforceable under the Enterprise Act 2002 and a case can be brought in the High Court. Any failure by BT and Openreach to comply with a court order would involve its own penalties related to contempt of court.

Stephen Carter, Ofcom's chief executive, said: "After a full year of detailed consultation, Ofcom has accepted BT's commitments. The new management of Openreach and the Equality of Access Board must now deliver - and be seen to deliver."

Apart from leaving things alone, Ofcom's alternative to agreeing to Openreach would have been a referral to the Competition Commission. This would have been accompanied by a recommendation that BT should be split up and the part that has become Openreach separated even further by requiring a sale of the business, almost certainly through a stock-market flotation.

So why did Ofcom reject the break-up option - it has worked in the gas and electricity industries, so why not in telecoms? After all, Professor Stephen Littlechild, the first electricity industry regulator, has publicly backed the breaking up of BT and Philip Hampton, the chairman of J Sainsbury and a former BT finance director no less, also believes it can be done.

"Ofcom believes that it would not be proportionate to break up BT at this time because we think the package of undertakings that we have accepted is sufficient to address the problems that we identified in the market," the regulator said yesterday.

Mr Verwaayen argues that there is no precedent anywhere in the world for carving up a country's main telecoms provider, so why start now? As Professor Littlechild has pointed out, that was also true of the UK gas and electricity industries until it was tried and successfully completed, delivering significant benefits to households and businesses.

Mr Verwaayen also argues that to survive, Openreach needs to be part of BT because it requires the guaranteed business from its core customer, BT Retail. But the reason for its separation from the rest of BT, says the break-up lobby, is precisely because it now has so many more customers other than BT Retail and anyway, BT Retail would still be its customer regardless of whether it was a separately quoted company on the stock market.

All this talk of a potential Openreach demerger makes Mr Verwaayen very cross. "I'm ending this debate," Mr Verwaayen said yesterday. "I'm not going to start all over again. There is no way in the world [it will be demerged]. It's an integral part. Steve Robertson will not become an alien to BT."

The people who will decide whether Mr Verwaayen is right will be BT's shareholders. From next year they will be able to feast their eyes on the profits and sales of Openreach and decide from there whether the BT Group share price accurately reflects the value of its constituent parts.

Talking telephone numbers

* Sales of at least £4bn.

* Its copper-wire network is 120 million kilometres long and could stretch round the globe 3,000 times.

* 300 million calls and 350 million internet connections are made across the network every day.

* It carries 30 million customer lines.

* It employs 30,000 people including 25,000 engineers who access the network through 200,000 manholes and 2.5 million telegraph poles.

* 3.6 million visits a year are made to homes and offices by Openreach engineers.

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