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Executive Summary

1.1 On 22nd September 2005, BT Group plc ('BT') offered and Ofcom accepted a set of undertakings ('the Undertakings') pursuant to Section 154 of the Enterprise Act 2002 in lieu of a reference of certain markets to the Competition Commission. The acceptance of the Undertakings was aimed at addressing Ofcom’s competition concerns in these markets through, inter alia, the implementation of what has been termed “Equality of Access” for all communications providers.

1.2 The physical separation of Operational Support Systems ('OSS') currently shared between Openreach and the rest of BT is a key part of Equality of Access as it reduces the capability and incentive of BT for non-price discrimination. As such Section 5.44 of the Undertakings requires BT to:

• Physically separate Openreach Operational Support Systems from the rest of BT by 30th June 2010;
• Design all new Openreach systems to be separate from the rest of BT;
• In the interim, until full physical separation is achieved, deliver a logically separate Operational Support System capability for certain product groups according to binding milestones; and
• Review regularly with Ofcom a roadmap for achieving physical separation by 30th June 2010.

1.3 In reviewing BT's roadmap, Ofcom gained an increased understanding of the challenges that the physical separation of Operational Support Systems represents. As a result of the review, Ofcom consulted on proposals to vary Section 5.44 of the Undertakings. The aim of the proposed Variation was to strengthen the effectiveness of the Undertakings in the long term by introducing a series of binding interim milestones from now until the completion date of 30th June 2010. These binding milestones would enable progress towards physical separation to be measured at key stages in the programme, thereby providing visibility of, and the opportunity to mitigate, any risks that might jeopardise either the final delivery of full physical separation by 30th June 2010, or the customer experience in the interim.

Consultation proposals

1.4 Given the technical complexity of physical separation, the changes it requires to BT's business and the role Operational Support Systems play in enabling BT to interact with and manage its customers, there is a risk of detrimental impact on the consumer service experience. A key objective in the development of the roadmap and its review with Ofcom was to understand and mitigate this risk. To this end ‘Ready to Mass Migrate’ milestones were included; they mark the point at which the preparation and testing of the operational capability to support mass migration between systems at the required volumes without detriment to consumers will have been completed.

1.5 The protection of the consumer experience during the migration process is one of our primary objectives: customers must have uninterrupted access to service even as data is migrated. Considerable emphasis was therefore placed on balancing the speed of physical separation with minimising the risk of customer disruption.

1.6 In developing the proposed Variation, Ofcom examined BT’s approach to systems separation. BT is implementing physical separation in accordance with their long term strategy for their systems estate, that is to say, it is building new physically separate operational systems for Openreach and the rest of BT, and moving data that is currently in shared systems to these new systems, closing legacy systems where possible. It is Ofcom's view, supported by independent expert scrutiny, that at this stage, this approach is the most effective in terms of achieving physical separation as early as possible consistent with minimising the risk to the consumer experience.

1.7 BT will implement physical separation progressively; volume migration began in June 2006, and peaks in 2008/9 leaving a “tail” to be completed in 2010. It will therefore take several years, but will have to be achieved by 30th June 2010, the date originally set in the Undertakings. In the interim BT will implement strengthened user access controls for Equivalence of Input ('EOI') products supported on shared systems. Given this, and the increased transparency resulting from the binding milestones, Ofcom proposed it was no longer necessary to require the implementation of a logically separate Operational Support Systems capability, previously included to reflect the need to protect against non-price discrimination in the period up to full physical separation. It was Ofcom’s view that, with the appropriate audit measures in place, BT's implementation of user access controls together with other measures set out in the Undertakings would provide proportionate protection against non-price discrimination prior to full physical separation by 30th June 2010. We therefore proposed that the Variation require regular internal audit and at least two external audits, the results of these audits to be reported to the Equality of Access Board ('EAB') and Ofcom.

1.8 Ofcom consulted on a Variation to the Undertakings incorporating the binding milestones indicated in the table below. In this table, customer-side relates to the migration of data records pertaining to real end-customers, e.g. other communication providers ('CPs') and consumers, and supply-side relates to the migration of BT Wholesale data records in its role as supplier to Openreach (e.g. for the supply of electronics used in Openreach products).

Table 1 Binding milestones towards physical separation

User Access Controls	WLR Analogue, SMPF, MPF(-1-) 30th June 2007	WLR ISDN2(-1-) 30th Sept 2007	WLR ISDN30(-1-) 30th Dec 2007
Ready to Mass Migrate	PSTN Customer Side 31st March 2008		Featureline Customer Side 30th June 2009
Migration Progress	Customer Side		Supply Side
	50% migrated 30th Nov 2008	90% migrated 30th Sept 2009	50% migrated 31st May 2009	90% migrated 31st Jan 2010
Physical Separation Complete	June 2010

Consultation responses

1.9 Ofcom received four responses to the consultation: BT, Cable and Wireless (‘C&W’), Carphone Warehouse (‘CPW’), and Scottish and Southern Energy (‘SSE’).

1.10 C&W, although welcoming the milestones and the greater transparency they provided, was critical of the proposals to remove the requirements for logical separation, which in C&W’s view represented the removal of the obligations to implement measures against non-price discrimination. C&W sought further reassurance as to the programme of engagement for reviewing progress against the roadmap.

1.11 CPW believed the Variation would relax the obligations on BT and undermined the effectiveness of the Undertakings. CPW did not believe that user access controls were as effective a measure against non-price discrimination as the requirement to "logically separate" systems and therefore believed that the proposals would weaken the Undertakings. In CPW’s view, the Variation sent the wrong message to CPs reliant on Ofcom to enforce the Undertakings. If the Variation was implemented, then CPW requested an immediate audit of the effectiveness of user access controls.

1.12 BT and SSE were supportive of the Variation as proposed in the consultation. SSE, a vertically integrated company in the energy sector, subject to systems separation requirements by its regulator, stated they were comfortable with the approach taken. SSE added that the proposed application of user access controls represented a workable solution.

1.13 BT suggested a sub-clause to the effect that physical separation would be required unless an alternative was agreed with Ofcom. BT stated its intention was to allow flexibility in the implementation of physical separation in relation to systems and processes for the supply of services by BT Wholesale into Openreach, given ongoing discussions as to the position of the boundary between the two organisations.

Ofcom’s conclusions

1.14 Ofcom recognises legitimate CP concerns as to the effectiveness of user access controls and shares CPW’s view that an immediate audit of BT’s implementation of user access controls would help provide reassurance. To this end, Ofcom proposed to BT the inclusion of an additional internal audit as soon as practicable immediately following 30th June 2007, the date from which the first obligation for the application of user access controls comes into effect. BT agreed to this proposal. This audit is incorporated in the Variation in clause 5.44.5 (b). The audit is to be completed by 31st December 2007. The results of this audit will be shared with the EAB and Ofcom.

1.15 Ofcom believes that transparency of the programme of engagement with BT is important in maintaining industry confidence that physical separation will be delivered on schedule and without detrimental impact to the customer experience. We therefore set out in the ‘Next Steps’ section of this Statement further detail of our proposed engagement.

1.16 Ofcom recognises BT’s concern that the ongoing discussions with BT regarding the boundary for the supply of electronic components of Openreach products by BT Wholesale might impact the boundary for the physical separation of Operational Support Systems. Further dialogue with BT revealed a related issue centred on the shared use of network assets between Openreach and BT Wholesale in the provision of optical fibre transmission services^(-2-) to their respective customers. The Undertakings do not prohibit the shared use of network assets in the provision of optical fibre transmission services; they are closely tied into certain Operational Support Systems, which are also currently shared. Physically separating these Operational Support Systems whilst maintaining existing levels of service - in fault management, for example – for both Openreach and BT Wholesale customers may prove problematic. This issue applies to fewer than 20 out of around 6,000 BT Operational Support Systems.

1.17 Ofcom considers these concerns may prove to be well founded. We have therefore, for reasons of transparency, accepted the inclusion of a sub-clause similar to that suggested by BT. This sub-clause will allow flexibility in the implementation of physical separation of Operational Support Systems with regard to supply-side boundary changes and for certain systems related to the supply of optical fibre transmission services. The inclusion of this sub-clause does not alter the obligation on BT to physically separate Operational Support Systems shared between Openreach and the rest of BT by 30th June 2010, or the nature of that separation. Ofcom will work with BT to determine whether it is possible to separate the systems concerned without significant impact on the end-user experience.

1.18 As the Variation does not change the obligations of the Undertakings, but seeks to strengthen their effectiveness in the long term, it is Ofcom’s view that the proposed Variation does not constitute a material change to the Undertakings and that the Undertakings continue to represent a comprehensive solution as is reasonable and practical to the adverse effects on competition identified. Ofcom has therefore agreed with BT to vary the Undertakings as set out in our consultation and summarized above. The exact wording of the Variation can be found in Annex 1 to this statement.

Footnotes:

1.- Applicable to EOI products

2.- Optical fibre transmission services carry high capacity data services

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