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* Openreach infrastructure must be opened to rivals
* BT dominance remains bone of contention
* Break-up remains possible in future -regulator
* BT shares up 3 pct (Adds further Ofcom, BT CEO comments, updates shares)
By Paul Sandle
LONDON, Feb 25 (Reuters) - BT will have to giverivals greater access to its infrastructure to help improve highspeed broadband coverage and must meet tougher targets on fixingfaults in order to avoid a break-up of the former monopolygroup, industry watchdog Ofcom said on Thursday.
Rivals had lobbied hard to try and persuade Ofcom thatcompetition would be best served by completely separating BT'sOpenreach 'local loop' network of connections to homes andoffices from the rest of the BT group.
But the regulator said in announcing the results of itsyear-long industry review that for now full separation was notseen as necessary, though it warned it reserved the right in thefuture "to require BT to spin off Openreach as an entirelyseparate legal entity, with its own shareholders."
Ofcom wants to improve a British broadband market in which2.4 million homes can't get a minimum 10 megabits-a-secondservice and only 2 percent has the gold standard of a fibreconnection which runs all the way into the home.
Its solution is to make BT reduce its grip on the networkthat provides broadband to millions of homes - both through BT'sown services and those of rivals - and open up itsinfrastructure so competitors can lay their own fibre lines ifthey so wish.
TalkTalk, Vodafone and Sky, all ofwhich rely on the Openreach network to deliver broadband, say BTputs its own financial and strategic interests above deliveringthe best broadband. They wanted BT to be split up.
Ofcom did not take that step on Thursday, pushing for moreseparation rather than divorce.
That came as a relief to shareholders and means BT retainsthe stable cash flows provided by the unit.
BT shares closed up 4.7 percent at 479.8 pence,outperforming the FTSE 100, which was up 2.2 percent,and the Stoxx Europe 600 telecoms index which was up3.3 percent.
"The worst case has apparently been averted, thoughstructural separation is still technically on the table, and wethink that while BT won't much like legal separation ofOpenreach within its group, ultimately the company can live withthese proposals," Citi analysts said.
CUT THE MUSTARD
Ofcom said BT had put forward its own proposals to overhaulOpenreach, but they "did not cut the mustard".
"We will pursue, and hopefully succeed with, an option shortof ownership change which gets us as close as we can to thebenefits of independence and greater autonomy," Ofcom's ChiefExecutive Sharon White told reporters.
"If we can't, we are clear the option we will then go backto is structural."
BT's control of Britain's legacy telecoms networks has longriled rivals, despite them having access on equal terms atregulated prices.
Ofcom conceded that Openreach still had "an incentive tomake decisions in the interests of BT, rather than BT'scompetitors, which can lead to competition problems", but itssolution favoured more independence.
TalkTalk Chief Executive Dido Harding said the regulator hadbaulked at taking the obvious step.
"Ofcom is suggesting is that BT has a real and identifiablereason to favour its own business while it owns Openreach, andyet Ofcom is not moving to the obvious structural solution,which is to separate out Openreach completely," she said.
'FUNDAMENTAL REFORM'
White said the regulator was proposing a "fundamental reformof the telecoms market - more competition, a new structure forOpenreach, tougher performance targets and a range of measuresto boost service quality".
The new model might require Openreach to become aring-fenced subsidiary of BT Group, with its own purpose andboard members, Ofcom said.
However, BT Chief Executive Gavin Patterson said creating awholly 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 ofOpenreach are properly identified and then they are measured ata BT Group level."
BT's next wave of expansion in fast broadband hinges ondeploying GFast, a technology that squeezes higher data speedsfrom the final length of copper line running into homes.
It has also promised more investment in running fibre linesall the way into homes and businesses, if Openreach remains partof BT.
"We should be thinking about outcomes, not be prescriptiveabout the technology," Patterson said.
"Our plans would help ensure the UK remains the leadingdigital nation in the G20 and we are keen to get on with thejob," he said on Thursday.
"They involve large-scale investment, however, and thatrequires a high degree of regulatory clarity and certainty;something that is missing at present."
(Editing by David Goodman, Greg Mahlich)
