3rd Quarter Results

OTHER DEVELOPMENTS

Regulation

Wholesale Fixed Telecoms Market Review 2021-2026

In January, Ofcom published a consultation on the Wholesale Fixed Telecoms Market Review (WFTMR), which sets out how it proposes to regulate Openreach services for the five years from 1 April 2021. The review marks a change from the previous cost-based regulation, with Ofcom now looking to support investment in FTTP and a rapid switchover from copper to fibre.

We welcomed the direction of Ofcom's consultation document as an important step forward toward enabling us to increase investment in FTTP to reach millions more homes and businesses across the country. We broadly agree with Ofcom's proposals on the indexation of legacy copper services, FTTP anchor pricing, and switchover; but would like to see more clarity on fair bet. We agree with Ofcom's overall policy intent but are still assessing the detail of Ofcom's proposals on Area 3. We are also still working through the implications of Ofcom's proposals for geographic pricing and long-term contracts with CPs which underpin the scale FTTP business case.

Whilst we have taken significant steps forward, there are still some important outstanding issues to work through. If the fixed access market regulation is enacted as proposed with some further refinement, particularly around fair bet and long-term contracts, and we see progress on business rates, then together with the progress we are making on the physical build and long-term take-up discussions with customers, we should be in a strong position to increase our FTTP build targets, right across the UK.

All-IP

Openreach is committed to migrating CPs to IP voice services and withdrawing copper-based voice access by December 2025. We welcomed the proposals made in Ofcom's WFTMR to allow for stop-sell of new copper lines when 75% of premises in the relevant area have ultrafast availability and the withdrawal of price controls on copper services when ultrafast coverage in an exchange area is complete.

We acknowledge that overcoming challenges posed to vulnerable customers and critical national infrastructure are key to the successful withdrawal of copper services. We continue to work closely with industry working groups, Ofcom and Government to ensure that key users can continue to receive the services that they rely on after copper services are withdrawn.

Broadband universal service obligation (USO)

In November, Ofcom published its consultation on the mechanics of cost recovery under the Broadband USO and all other USOs, setting out how providers of the USO can apply to recover their costs and which criteria will be considered. We welcomed the consultation but think the framework could be simplified to allow USO providers to be reimbursed promptly.

Consumer fairness

We have continued to work closely with Ofcom to demonstrate our adherence to the Fairness Commitments that we signed up to last summer.  In particular we have committed to upgrading 700k BT customers from copper to superfast broadband at no extra cost, capping broadband out-of-contract price increases, and, for EE mobile handset customers, introducing a percentage discount after the end of their contract.

In January, the Competition and Markets Authority (CMA) published a Loyalty Penalty Update, covering mobile and broadband pricing across industry. On mobile pricing, the CMA criticised all major mobile operators' plans to address prices for out of contract handset customers, highlighting their concern that EE's commitment falls short of switching customers to a comparable SIM-only tariff. However Ofcom research has shown that this is a complex issue, and in fact a large proportion of handset customers would pay more if moved to an equivalent SIM-only deal, so we believe our approach is fairer. On broadband, the CMA welcomes the voluntary commitments made by providers but is concerned that their varying nature could confuse customers and have differing levels of impact on tackling the loyalty penalty. BT has gone further than other industry players here, and will continue working with Ofcom to demonstrate its commitment to fairness.

In December, Ofcom published a consultation on its proposals to implement the new European Electronic Communications Code. Proposed requirements on CPs relate to seamless switching processes, locked handsets, linked contracts, pre-contract information and rights to exit a contract early, and access to services for vulnerable customers. A further statement on fixed broadband pricing is due in March.

In November, Ofcom consulted on best practice guidance for the treatment of vulnerable customers. BT supports a regulatory framework which creates better outcomes for vulnerable customers, and we have set up an industry working group with other CPs to identify best practice in this area.

Rural mobile network coverage

Work across mobile network operators, DCMS, HM Treasury and Ofcom is progressing in order to meet a mid-March target to agree certain aspects of the Shared Rural Network proposal, including DCMS grant funding arrangements and a variation to our existing 1800 MHz spectrum licence to incorporate new coverage obligations, including 92% of UK geography within six years. We are actively supporting this initiative through a commercial proposal to other mobile operators, enabling them to share our mast infrastructure to meet their coverage obligations.

Other matters

Clarification on use of certain vendors in 5G and full fibre networks

In January, the National Cyber Security Centre (NCSC) issued guidance to UK Telecoms operators on the use of certain vendors. The NCSC stated that certain vendors should be excluded from sensitive 'core' parts of 5G and gigabit-capable networks, and limited to a 35% presence in non-sensitive parts of the network, and that legislation would be introduced at the earliest opportunity.

The new guidance will have some impact on our 5G rollout plans and the equipment used in our FTTP network build going forwards. We are in the process of reviewing the guidance in detail to determine the full impact on our plans. At this time we estimate an impact of around £500 million over the next 5 years.

Brexit

Following the general election held in December 2019, the Government has announced its intention for the UK to leave the EU on 31 January 2020 with a transition period running until 31 December 2020. We have plans in place to ensure that we're prepared for the final outcome of talks on the future UK/EU relationship, including the possibility of a disorderly exit from the transition period that could have a damaging impact on consumer and business confidence. Our contingency planning is focused on ensuring we can continue to provide uninterrupted service to our customers, including sufficient inventory to protect against potential import delays. We are also making the necessary changes to our contracts and processes so that we will continue to be able to transfer customer data to and from the EU.

BT Pension Scheme

In early 2018, the Government made a decision about how benefits are increased in public sector pension schemes, and by implementing it in a particular way it created an unintended impact on the BT Pension Scheme. We pursued a legal process as we believed there are fairer ways for Government to meet its commitments to public sector employees without creating this impact on BT's private sector scheme, and hoped the Government would reconsider the route it decided to take.

In November 2018 the Divisional Court refused BT's application for judicial review of the Government's decision. We obtained permission to appeal the judgment from the Court of Appeal and the hearing took place on 11 and 12 December 2019.  The Court of Appeal handed down its judgment on 21 January 2020, rejecting our appeal.  While we are disappointed, we accept the Court of Appeal's decision.

Contingent liabilities

Save for the updates provided below, there have been no material updates relating to the legal proceedings and regulatory matters as disclosed in the Annual Report 2019 and our Results for the half year to 30 September 2019.

Legal proceedings

Italian Business

MPP prosecutions: The first hearings to determine whether or not the 23 named Defendants should be committed to trial took place in December 2019 with further hearings scheduled during Q4.

Brazilian tax claims

The Brazilian state tax authorities have made tax demands on the exchange of goods and services (ICMS). We have disputed the basis on which ICMS are imposed and have challenged the rate which the tax authorities are seeking to apply. During the quarter the nine ICMS cases which were reported as being at an advanced stage in Q2 were remitted back to the discovery phase at the first judicial level.

Regulatory matters

Northern Ireland Public Sector Shared Network contract

On 4 April 2019 Ofcom opened an investigation into whether the award of the Public Sector Shared Network contract for Northern Ireland to BT complied with relevant significant market power conditions. We are cooperating with Ofcom's investigation.