BT’s Undertakings to Ofcom: An overview David Gribble Chief Counsel, 21CN BT Global Services September 2007

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

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

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

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 regulation Not just functional separation

Openreach - assets PSTN Service openreach PSTN & ADSL Service CP Core Customer premises Core Node. Local Telephone Exchange Distribution Main Primary Point (DP) Distribution CP Core Node Connection Point Secondary LLUO Space Frame (Cabinet) Connection Point Line Card BTW Core Node Backplate of Copper Cables BT has created a new unit, Openreach, & two new product management units within BT Wholesale; BTWS & BTS. Openreach - management & provision to other Communication Providers of local loop & backhaul services - i.e. services over the local access network & up to trunk exchanges, in markets where Ofcom has found that BT has Significant Market Power (SMP) Responsible for access & backhaul services: runs physical but not transmission layer undertakes sales, & product & service management for defined SMP services has sufficient influence over transmission layer to enable it to provide its services Openreach will control & operate duct, fibre, copper, & other non-electronic assets in BT’s access & backhaul networks The engineering field force will be at the heart of Openreach Backhaul products NTE openreach openreach is also responsible for all duct, access fibre and copper & fibre backhaul Demarcation Points

Openreach products Equivalence 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

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.

Openreach in BT structure Main BT PLC Board BT CEO Management reporting Compliance oversight EAB Operating Committee Openreach Board Wholesale Retail Global Board Board Board Openreach Wholesale Retail Global Services

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.’

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

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

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

Openreach Performance Full Year to March 31 2007 2006 2007 £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

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

New era of regulation 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

BT’s 21CN : A Business Transformation BTs 21CN Objectives…. BT 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 21CN is made up of a number of inter-linked & inter-dependant initiatives: Remaking our Portfolio Transforming Systems Core Network Convergence 21C Customer Experience A total business program to optimise NGN benefits 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 project The vision is for a ‘zero-touch’ network where services are software defined, automated & initiated by customers

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

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

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

Thank you