Michael Harrison's Outlook: BT unbundles but sooner or later the rationale for breaking up will return

Breaking up is hard to do. But doing time is not much fun either. Ofcom could have chosen to end BT's stranglehold over the telecoms market by forcibly separating its network from its retail arm in much the same way that British Gas voluntarily carved itself up a decade ago. Instead, the industry regulator has opted to wave the Enterprise Act at BT by making its directors personally liable if the company fails to open up its local exchanges to rival operators on equal and transparent terms.

Breaking up is hard to do. But doing time is not much fun either. Ofcom could have chosen to end BT's stranglehold over the telecoms market by forcibly separating its network from its retail arm in much the same way that British Gas voluntarily carved itself up a decade ago. Instead, the industry regulator has opted to wave the Enterprise Act at BT by making its directors personally liable if the company fails to open up its local exchanges to rival operators on equal and transparent terms.

In theory, this could result in fines and even imprisonment for the BT board. In practice it won't, although the sight of the chairman Sir Christopher Bland being led away in handcuffs and an orange boiler suit is one that his competitors would surely pay good money to witness.

It is now more than 20 years since BT was privatised and liberalisation of the UK telecoms market began and yet competition has progressed at a snail's pace. BT still controls about four-fifths of the residential market and of the 25 million or so exchange lines in the UK, a paltry 59,000 have been unbundled - which means that a provider other than BT is responsible from cradle to grave for the telephone service the customer receives.

A break-up of BT would have been the nuclear option - physically separating its wholesale business from its retail arm - and as such was never on the cards. Ben Verwaayen, BT's chief executive, says it would not be practicable in any case and challenges the proponents of break-up to cite any country anywhere in the world where it has been carried out successfully.

Interestingly, there does not seem to have been a great deal of appetite on the part of BT's competitors for an enforced break-up either - largely on the grounds that by the time it was achieved the horse would have bolted. Take broadband, for example. The tens of thousands of households signing up each week with Wanadoo, Virgin or Bulldog may think they are cocking a snook at BT but in reality, all they are doing is buying a re-branded BT product.

Ofcom has chosen instead to create a ring-fenced business within BT which will have its own staff, own buildings, own uniform and vehicles and even its own executive bonus scheme. This business, snappily entitled Access Services, will ensure that everyone can plug into BT's local loop on the same basis as BT Retail, safe in the knowledge that they are receiving the same product and service at the same price.

It is a tacit acknowledgement that up until now BT has been discriminating against its rivals, not that Mr Verwaayen will ever admit it. But as a starter, he has agreed to cut 25 per cent of the price charged to other operators for access to a BT exchange.

As well as being regulated by Ofcom, this new business unit will have its own compliance board, chaired by one of BT's non-executive directors, charged with blowing the whistle if it starts flouting the rules. The new arrangements have the force of law - Ofcom can take the BT board to the High Court if it misbehaves and third parties can sue for damages.

Mr Verwaayen could scarcely contain his delight at the outcome, declaring it a victory for the company, the consumer, the competition and Ofcom, which makes it plain who he thinks has come out best. The brisk rise in the BT share price also tells its own story. For, ring-fenced as it is, the business will still be part of BT and its directors will still report to Mr Verwaayen, who will sit on the board next to the head of BT Retail, its biggest customer.

For Mr Verwaayen, it also cuts a swathe through the regulatory spaghetti in which BT still finds itself tangled. Henceforth, regulation will focus largely on this newly created division within BT which will account for some 20 per cent of overall revenues. That brings much greater regulatory clarity and certainty for BT and its shareholders alike.

But it also creates a clearer dividing line between the monopoly service which BT provides and the rest of the business which is exposed to normal commercial pressures. In fact, just the sort of businesses ripe for separation.

Will Francesco say ciao to Energis?

One side-effect of opening up BT's local loop is that the stronger the competitor, the better chance there is of taking maximum advantage. That would suggest a wave of consolidation among the remaining players in the industry, perhaps starting with the takeover of Energis by Cable & Wireless. At a mooted price of £700m or more, C&W would be paying top dollar for Energis. What would it get in return? A blue-chip list of business customers, ranging from the BBC and Tesco to IBM and the RAC for a start. Then there is the legacy of Energis dial-up internet customers which C&W would hope to convert to its own Bulldog broadband service. The estimated £150m in savings which could come from combining the C&W and Energis networks would help finance the deal but it would still be an expensive exercise for C&W's Francesco Caio.

The one clear winner would be Archie Norman, who was brought in by the banks to save Energis from extinction three years ago. The plan to sell the business to Apax and Carlyle fell through when they could not match the price demanded by Energis's banks. Since then, the former Freeserve chief executive John Pluthero has been minding the business while the banks seek an alternative exit. Market valuations make a flotation a non-starter, but a trade buyer such as C&W could clearly afford to pay more because of the resulting savings. At as take-out price of £700m, Archie would become a very fat cat indeed. Will it give him the taste for more private-equity style deals or will it give him a big enough financial cushion to take on the poisoned chalice at Wm Morrison? Watch this space.

Greenspan's take on Chinese revaluation

The head of steam which is building up in America for sanctions against the Chinese to force them to revalue the renminbi was elegantly deflated yesterday by Alan Greenspan. Far from increasing manufacturing activity and US employment, the Fed chairman said it would protect few jobs if any and lead to a material lowering in living standards as cheap products were priced out of the market.

Nor, he suggested, would a revaluation of the Chinese currency have any great impact on overall US imports and its towering trade deficit since the economy would simply suck in goods from other low-cost sources of supply. At the same time, ending the peg between the dollar and the renminbi would tend to redirect trade elsewhere in Asia, hurting US exporters competing with Chinese products.

It is not necessarily the kind of message which the Bush administration wants to hear, desperate as it is to see the Chinese allow their currency to float. For all that, the Fed chairman expects the Beijing to move sooner rather than later, not to placate its critics in America but to strengthen the Chinese economy. An over-valued currency creates an unstable inflationary environment and mis-allocation of capital which can only cause serious problems for China in the long run, said Mr Greenspan in testimony to the US Senate Finance Committee. External threats to the Chinese will only harden their resolve. Appealing to their own self-interest is a more profitable furrow to plough.

m.harrison@independent.co.uk