Ofcom Digital Communications Review – a Cwu Perspective

CWU BRIEFING:

OFCOM DIGITAL COMMUNICATIONS REVIEW – A CWU PERSPECTIVE

Dear Member,

I am writing to up-date you on the Ofcom Digital Communications Review (DCR). The details of the review are extremely complex, and difficult to condense into a short briefing. Gavin Patterson (BT CEO) has written to BT employees and that has triggered a number of questions. We therefore thought it important to set out our views on the DCR very clearly to you.

There are some very major issues in the latest Ofcom proposals – issues that may potentially have a substantial impact on the pensions, terms and conditions and job security of all members; particularly those in Openreach but potentially all BT employees. So I do urge you to take the time to read this carefully. I hope this will assist in any opportunities you may have to lobby politicians and opinion formers.

The current situation

You will recall that Ofcom announced its formal proposal to reorganise Openreach, following its decision in February to increase Openreach’s independence from BT. Although Ofcom hasn’t opted for full structural separation of Openreach from BT it has proposed that Openreach should become a legally distinct company as a wholly owned subsidiary of BT plc, with its own purpose, board of directors and governance arrangements.

Throughout the review the union has been meeting with Ofcom (jointly with Prospect) to put forward the union’s views. You can read the various documents relating to the review at the end of this briefing.

Many of BT’s direct competitors (who are often customers too) and other stakeholders have put forward their views. You may have read some of the press coverage and interventions from politicians. The review has become a highly politicised process with many appearing to have a go at BT. This is often motivated by their own self interest, particularly where BT’s competitors are concerned. You may have read the latest campaign by TalkTalk, Sky, Vodafone and others, which can be found here: http://www.fixbritainsinternet.co.uk/page/speakout/fix-britains-internet.

It’s important to note that the current regulatory regime has not failed, as the UK has the highest penetration of high speed broadband of any of the big five European economies. Ofcom’s own recent research on the UK’s position relative to other large European countries shows it in top position on most metrics. The issues for the future are (a) how do we reach the final few in hard to reach areas of the UK, (b) how do we implement a realistic USO and (c) how do we make real progress on customer service?

The current proposals from Ofcom, as they stand, are deeply troubling for the union. We believe that, should they be implemented, they will damage the development of the UK’s telecoms infrastructure and in terms of BT’s ability to invest further in the network and provide decent

customer service. They could also bring a series of challenges to you as BT employees – particularly for Openreach employees, and potentially for all employees.

Currently BT and Ofcom are in talks to come to a mutual agreement on the future governance of Openreach. Should no agreement be reached, Ofcom will need to put its final proposals to the European Commission for, in effect, the final say about the future of the UK’s telecoms industry. That in itself is a matter of both concern and uncertainty. In the light of the decision of the British electorate on 23 June to leave the EU, it is troubling that the European Commission could be asked effectively to arbitrate on this critical issue and have a massive influence for the UK’s telecoms infrastructure for a decade, and perhaps for many years beyond the end of the UK’s membership of the EU.

Ofcom’s Current Proposals

Ofcom’s proposals are lengthy and detailed which makes it difficult to summarise. But in essence Ofcom is currently proposing the maximum possible degree of so-called ‘functional’ separation of Openreach from the rest of BT. Essentially, whilst Openreach would remain owned by BT, it would be operated as a separate entity and would be separately legally incorporated from the rest of BT as virtually a stand-alone and independent company. Legally, it would be a wholly owned subsidiary of BT, with its own board and articles of association making it legally binding on directors to act in the interests of all customers. It is also very important to recognise that, should in Ofcom’s view this approach not work out as it hopes, it reserves the right to force BT to move to full structural separation from Openreach, presumably forcing it to divest itself completely.

A very worrying feature of Ofcom’s proposals is that BT and Openreach would be subject to a continuous review; with at first six-monthly and then yearly reports from Ofcom. This would generate uncertainty as BT would be unsure from one year to the next that it will even continue to own and operate Openreach, a scenario which would not be conducive to creating an environment in which BT would be confident to invest in the UK’s telecoms infrastructure. This level of uncertainty for our members would not get the best from them which could have a knock on effect on service for BT customers. It would also be a situation which would be unacceptable for the union.

What does this mean for employees and the future of BT?

Ofcom state that it’s their strong preference that all the people that work for Openreach become employees of the new company, rather than BT Group. They state that they wish to reinforce a more independent organisational culture. Therefore they propose that all Openreach employees would need to TUPE transfer to Openreach, thereby becoming Openreach, as opposed to BT, employees. They also state that remuneration of employees should remain solely related to the performance of Openreach. This is a worrying feature of the proposal, at the very least it will create a limit on career development and people movement between BT and Openreach, but more worryingly there could be an impact on future terms and conditions and more seriously could undermine job security in Openreach and potentially for all BT employees.

Ofcom is also proposing that Openreach would become the ‘owner’ of its assets – meaning owning its physical network infrastructure. This proposal has the capacity to create a very complex, costly and difficult environment, which will explained further below.

It is however, very important to note that Ofcom has recognised a number of our (and also BT’s) arguments, to the effect that aspects of its proposals could create disproportionate cost, complexity and uncertainty. A central tenet of the unions’ arguments to Ofcom has been that its proposals could cause immense collateral damage. It could have implications for the financial position of BT Group and its ability to support and meet its liabilities in particular the BT pension scheme and to longer-term investment. They could also damage employee and industrial relations, as some aspects of their proposals could be deeply unacceptable to our and Prospect’s members. Ofcom’s latest report specifically references the unions’ arguments in this respect.

It is also apparent from their latest report that they have put forward proposals that they recognise could in effect inadvertently cause this collateral damage, and have gone on record as accepting that, if there is evidence to support this, then they may re-consider. This is, we think, potentially helpful and we are going to be arguing strenuously to the effect that their proposals could indeed cause this collateral damage.

The Unions’ Arguments

1 - Pensions

We believe Ofcom’s proposals could have serious negative implications for the covenant. The proposals could impact BT’s financial strength and ability to stand behind the BTPS as the sponsoring employer. In the current environment, any weakening of the covenant could be a serious issue for BT and for the members of the BTPS. Should the covenant be weakened in any way that could result in higher repair payments from BT, possibly over a shorter period, this would inevitably reduce the amount available for investment in the UK telecoms infrastructure, including of course in Openreach, and as such would be self-defeating in relation to Ofcom’s own stated objectives for the Digital Communications Review.

We are also very concerned about whether or not our members in Openreach – if it becomes a separately incorporated body (albeit wholly owned by BT) - would be able to continue in active membership of the BTPS. Any attempt to cease active membership of the BTPS for Openreach employees would be highly likely to create irresistible pressure for a major industrial dispute (which in itself would have significant implications for the covenant). We believe that Ofcom recognises this distinct possibility as they have repeatedly stressed in their meetings with us that they do not want to create a ‘breakdown in labour relations’ (a direct quote). Nevertheless, as things currently stand, we cannot be certain about the ability of Openreach employees to remain active members of the BTPS.

We have also pointed out to Ofcom that there could be serious and complex implications for the Crown Guarantee arising from their proposals. (In 1984, when BT was privatised, the UK government gave a guarantee – the so-called Crown Guarantee – that it would ultimately stand behind the BT pension scheme, in the unlikely event that the company goes under.) It is not clear to us that this guarantee would any longer stand behind Openreach members of the BTPS if Openreach were to be separately incorporated. Ofcom has told us that they have approached the Treasury over this issue 3

and believe it can be relatively simply resolved. We are far less sanguine. Given the huge amount of time merely legally clarifying the Crown Guarantee took, we are concerned that this issue could result in protracted, expensive and complex legal issues again. Moreover, since we know that the Treasury has always sought to minimise the extent of the Crown Guarantee, we are also concerned that any formal approach on this issue to the Treasury could well open a Pandora’s Box.

2 – TUPE – transferring employees from BT Group to Openreach

We are deeply concerned at the suggestion that all Openreach employees would need to TUPE transfer to Openreach. This would be, we believe, the largest TUPE of all time. It would be extremely complex and difficult to do and would take significant time and resource to get right.

It would create inflexibility in a way that would potentially seriously undermine our members’ job security, in Openreach and indeed throughout the company. BT plc has always applied a voluntary redundancy approach. This is of utmost importance to both unions. In order to manage this, there are well tested long-term agreements in place to enable surplus staff to be redeployed between BT’s various operating divisions. Over the last ten years, some 20,000 BT employees have been through the redeployment process. Had these arrangements not been in place it arguably would not have been possible for BT to avoid compulsory redundancy. Openreach employs some 32,000 BT employees – prior to the purchase of EE that represented some 40% of BT’s UK workforce. Inevitably there has been much redeployment involving people in Openreach. TUPE could well effectively remove Openreach from the BT redeployment process, with very serious consequences for job security across the whole of BT. Such a change would simply not be acceptable.

A TUPE would create major employee and industrial relations challenges, with the potential need to establish new and separate recognition and collective bargaining arrangements, different terms and conditions and different industrial relations processes. None of that would be at all easy to do and could create a very difficult and febrile environment for both the unions and for BT. It is hard to see how any of this would add to Openreach’s, or BT’s, ability to deliver improved customer service. In fact we think it would do the opposite – it would be at best, a massive and expensive distraction and at worst, could cause a major industrial relations crisis.

Ofcom has also suggested that, rather than using TUPE, BT could ‘lend’ employees to Openreach on an employee service contract basis. We have asked Ofcom to spell out what this means (there is currently no detail) but we have not yet had a substantive response. We’ve also sought legal advice in this area as we aren’t aware of any legal precedent.

All in all, we view the combination of our pension concerns and a potential TUPE as serious threats to labour relations and to the pension scheme covenant.

3 - The UK Telecoms Network and its Future Development

The latest Ofcom proposals seem to suggest that Openreach should not in future be so reliant on BT’s research and development centre at Adastral Park. The implication is that Openreach should have its own R&D facilities. This would be extremely expensive to set up and also misunderstands the nature of network research and development. The existence of a separate ‘local loop’ (the part of the network Openreach is responsible for) is essentially a regulatory construct. It is self-evident that the local loop, on its own, is unable to provide any telecoms and data inter-connectivity. It is

only through its attachment to the back-haul network (operated by TSO) that it is actually able to provide any services at all. Likewise, of course, the back-haul network, on its own, cannot provide any customers (other than wholesale re-sellers) with any products and services. The engineering reality is that there is a unified network in the UK owned and operated by BT whilst there is a purely regulatory separation of the local and back-haul portions of this network.

It therefore completely follows that R&D divided between Openreach and TSO would be unworkable without intimate cooperation between the two. The two must collaborate if the two portions of this unified network are to inter-connect.

4 - The Separation of Assets

Separating assets between Openreach and the rest of BT would be immensely complex, time- consuming, expensive and, ultimately, a largely artificial and arbitrary process. Openreach has a presence, obviously and inevitably, in every exchange in the UK, as the local loop obviously needs to physically inter-connect with the back-haul network. Who would own these buildings? Which - TSO or Openreach – would pay for their upkeep? What about the exchange equipment itself? How would BT partition the capital and running costs of this essentially unified network? How would corporate overheads be partitioned between Openreach and BT? What about IT systems, which as an issue is potentially extremely significant – BT says in its evidence to Ofcom that it spent £1 billion on creating separate IT systems at the time of Openreach’s creation ten years ago, so do we have to go through a similar and extremely expensive exercise again?

Once again, we view Ofcom’s position on the division of assets as potentially extremely disruptive, time consuming and expensive, further undermining the company’s ability to deliver the outcomes Ofcom says it wants. This would be a major distraction, and an unnecessary one as it would do nothing to advance either investment or customer service.

Next Steps

Ofcom’s current position is that it is consulting further on its 26 July proposals, with a closing date for those consultations of 4 October.

 We and Prospect will be seeking to meet Ofcom further over the next month or so, putting forward our arguments.

 We will also be seeking to work with others – for example the BTPS Trustees and BT – on the issues the Ofcom DCR potentially creates.

 We will also be seeking as best we can to get our arguments across to opinion formers such as politicians and the media.

 We will continue to communicate with you through written mail-outs on this important issue.

You can potentially help us, by

 Understanding and discussing the issues, and by attending meetings the union organises to discuss this critical issue.

 Using any opportunities you may have to lobby local politicians and opinion formers, using the arguments set out above.

 Looking out for further communications from the union that can help you to advocate our case– and indeed from BT, as the company is making many similar arguments to us, although we are undertaking our activities separately from them.

Yours sincerely,

Andy Kerr Deputy General Secretary (T&FS)

Recent consultation documents and responses by CWU and BT

The most recent Ofcom consultation published on 26 July can be found here: http://stakeholders.ofcom.org.uk/binaries/consultations/strengthening-openreachs- independence/summary/condoc.pdf)

You can read the union’s various submissions on this page of our web site – http://www.cwu.org/departments-services/research/documents-and-consultation- responses/telecoms/

BT ‘s definitive proposals – http://stakeholders.ofcom.org.uk/binaries/consultations/strengthening- openreachs-independence/annexes/BTs_Proposal.pdf and supporting detail at http://btplc.com/ukdigitalfuture/index.htm.