1. Coping With Major Regulatory Change Functional Separation in the UK Peter McCarthy-Ward Director, Equivalence

2. © British Telecommunications plc Ofcom’s Primary Issue  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  this combination gives BT the ability and the incentive to discriminate against downstream competitors who are also wholesale customers

3. © British Telecommunications plc The remedy  Undertakings offered in lieu of reference to Competition Commission  Supported by the industry  Signed 22 September 2005  Legally binding: breaches can lead to: Directions from Ofcom &/or court enforcement Reference to the Competition Commission Third party action for damages

4. © British Telecommunications plc The Process –Regulatory analysis: “The current market and regulatory structure is unsustainable” 8 months –BT proposes detailed Undertakings – 3 months. –Line by line review with Ofcom – five months –Ofcom Consult – June 2005 –June - September BT and Ofcom review Undertakings in light of industry response. –September 2005 Final Statements and Undertakings –January 2006 – implementation begins

5. © British Telecommunications plc Key elements of BT’s Undertakings Functional Separation – Openreach Equivalence of inputs (EoI) Transparency and separate accounting Independent audit and oversight

6. © British Telecommunications plc Openreach PSTN Service Demarcation Points Backplate of NTE Local Telephone Exchange Customer premises Main Distribution Frame Primary Connection Point (Cabinet) Secondar y Connection Point Distribution Point (DP) Copper Cables Openreach is also responsible for all duct, access fibre and copper & fibre backhaul openreach LLUO Space Line Card BT Core Node CP Core Node Backhaul products Core Node. 30K people14 million jobs per year 120M km copper2M km fibre

7. © British Telecommunications plc Execution 100+ distinct deliverables Tight timescales Incremental to existing budgets and objectives Counterintuitive Complex, open to interpretation Managed through: Small Central Programme Office Functionally Based Satellite Programme Offices Policy Executive Programme Board Interpretation Authority

8. © British Telecommunications plc Independent monitoring and oversight  Equality of Access Board –Monitors, reports and advises on compliance; –Independent majority –reports to BT Group plc Board –reports annually to Ofcom and industry

9. © British Telecommunications plc Openreach Performance Full Year to March 31 2007 200820072006 £M 886685318 43804,5384,824 52665,2235,142 33283,2923,156 193819311,983 689707800 12491,2241,183 1,1081,038 External Revenue Internal revenue Total revenue Operating Costs EBITDA Amortisation and Depreciation Operating Profit Capital Expenditure

10. © British Telecommunications plc Consumer ARPU* 2004/52005/62006/72007/8 * Consumer household rolling 12 months Impact on Downstream Businesses 24 Business Revenue Growth

11. © British Telecommunications plc Overall performance * Before specific items and leavers 33 Revenue 17th quarter of growth EBITDA* 9th quarter of growth EPS* 24th quarter of growth Dividends

12. © British Telecommunications plc Lessons Internal Communication Budget by-pass Leadership Zealotry Unintended Consequences Constituency management Philosophical continuity Desensitisation