BT’s Undertakings to Ofcom:An overview

David GribbleChief Counsel, 21CNBT Global ServicesSeptember 2007

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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

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Agenda

• Ofcom’s Telecoms Strategic Review

• BT’s Undertakings & Implementation

• BT’s NGN - 21st Century network (21CN)

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

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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

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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 regulationNot just functional separation

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Openreach - assets

Backplate ofNTE

PSTN Service

Local Telephone Exchange

Customer premises

MainDistribution

Frame

PrimaryConnection Point

(Cabinet)SecondaryConnection Point

DistributionPoint (DP)

Copper Cables

Demarcation Points

openreach is also responsible for all duct, access fibre and copper & fibre backhaul

openreach

PSTN & ADSL Service

LLUOSpace

LineCardBTW

CoreNode

CPCoreNode

Backhaul products

Core Node.

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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

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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.

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Openreach in BT structure

Wholesale Retail

Main BT PLC Board

GlobalServices

Openreach

OpenreachBoard

OperatingCommittee

WholesaleBoard

RetailBoard

GlobalBoard

EAB

BT CEOManagement reporting

Compliance oversight

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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.’

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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

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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

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

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Openreach PerformanceFull Year to

March 31 2007 2006 2007

£M £M

318 685

4,824 4,492

5,142 5,177

3,156 3,289

1,983 1,884

800 707

1,183 1,177

1,038 1,108

External Revenue

Internal revenue

Total revenue

Operating Costs

EBITDA

Amortisation and Depreciation

Operating Profit

Capital Expenditure

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BT Share Performance

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

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• 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

New era of regulation

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BT’s 21CN : A Business TransformationBT 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

BTs 21CN Objectives….

21CN is made up of a number of inter-linked & inter-dependant initiatives:

• Remaking our Portfolio• Transforming Systems• Core Network Convergence• 21C Customer Experience

• 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 projectThe vision is for a ‘zero-touch’ network where services are software defined, automated & initiated by customers

A total business program to optimise NGN benefits

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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

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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

Consult21

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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

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Thank you