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LONDON (Reuters) - BT (BT.L) will have to give rivals greater access to its infrastructure to help improve high speed broadband coverage and must meet tougher targets on fixing faults in order to avoid a break-up of the former monopoly group, industry watchdog Ofcom said on Thursday.
Rivals had lobbied hard to try and persuade Ofcom that competition would be best served by completely separating BT's Openreach 'local loop' network of connections to homes and offices from the rest of the BT group.
But the regulator said in announcing the results of its year-long industry review that for now full separation was not seen as necessary, though it warned it reserved the right in the future "to require BT to spin off Openreach as an entirely separate legal entity, with its own shareholders."
Ofcom wants to improve a British broadband market in which 2.4 million homes can't get a minimum 10 megabits-a-second service and only 2 percent has the gold standard of a fibre connection which runs all the way into the home.
Its solution is to make BT reduce its grip on the network that provides broadband to millions of homes - both through BT's own services and those of rivals - and open up its infrastructure so competitors can lay their own fibre lines if they so wish.
TalkTalk (TALK.L), Vodafone (VOD.L) and Sky (SKYB.L), all of which rely on the Openreach network to deliver broadband, say BT puts its own financial and strategic interests above delivering the best broadband. They wanted BT to be split up.
Ofcom did not take that step on Thursday, pushing for more separation rather than divorce.
That came as a relief to shareholders and means BT retains the stable cash flows provided by the unit.
BT shares closed up 4.7 percent at 479.8 pence, outperforming the FTSE 100 .FTSE, which was up 2.2 percent, and the Stoxx Europe 600 telecoms index <0#.SXKP> which was up 3.3 percent.
"The worst case has apparently been averted, though structural separation is still technically on the table, and we think that while BT won't much like legal separation of Openreach within its group, ultimately the company can live with these proposals," Citi analysts said.
Ofcom said BT had put forward its own proposals to overhaul Openreach, but they "did not cut the mustard".
"We will pursue, and hopefully succeed with, an option short of ownership change which gets us as close as we can to the benefits of independence and greater autonomy," Ofcom's Chief Executive Sharon White told reporters.
"If we can't, we are clear the option we will then go back to is structural."
BT's control of Britain's legacy telecoms networks has long riled rivals, despite them having access on equal terms at regulated prices.
Ofcom conceded that Openreach still had "an incentive to make decisions in the interests of BT, rather than BT's competitors, which can lead to competition problems", but its solution favoured more independence.
TalkTalk Chief Executive Dido Harding said the regulator had baulked at taking the obvious step.
"Ofcom is suggesting is that BT has a real and identifiable reason to favour its own business while it owns Openreach, and yet Ofcom is not moving to the obvious structural solution, which is to separate out Openreach completely," she said.
White said the regulator was proposing a "fundamental reform of the telecoms market - more competition, a new structure for Openreach, tougher performance targets and a range of measures to boost service quality".
The new model might require Openreach to become a ring-fenced subsidiary of BT Group, with its own purpose and board members, Ofcom said.
However, BT Chief Executive Gavin Patterson said creating a wholly owned subsidiary would involve a lot of work and money. "At the end of the day, what is the difference in the outcome?" he told reporters.
"The answer lies in ensuring the purposes and objective of Openreach are properly identified and then they are measured at a BT Group level."
BT's next wave of expansion in fast broadband hinges on deploying GFast, a technology that squeezes higher data speeds from the final length of copper line running into homes.
It has also promised more investment in running fibre lines all the way into homes and businesses, if Openreach remains part of BT.
"We should be thinking about outcomes, not be prescriptive about the technology," Patterson said.
"Our plans would help ensure the UK remains the leading digital nation in the G20 and we are keen to get on with the job," he said on Thursday.
"They involve large-scale investment, however, and that requires a high degree of regulatory clarity and certainty; something that is missing at present."
Editing by David Goodman, Greg Mahlich