BT is considering offering free local calls as part of wider plans to be more flexible in the way it charges customers.
The proposals, which would need the approval of the watchdog, Oftel, aim to fend off increasing competition from cable television firms offering telephone services.
BT has called for more pricing freedom in a submission to Oftel, which is close to completing a far-reaching consultation on the industry's future. If allowed, BT would offer tailored packages for customers, perhaps offering cheaper calls at some times of the day in return for a higher rental charge, or free off-peak local calls.
In a report due for publication within weeks, Don Cruickshank, director general of Oftel, is expected to propose abolition of the cap on line rental charges which, at present, keeps increases to inflation plus 2 percentage points.
But BT would still have to keep within the overall cap for its basic services of "RPI minus 7.5" and it is not clear how much freedom BT will have in deciding where any price cuts should fall.
BT refused to comment on the prospects for free local calls. But an industry source said: "BT believes that cable companies are taking market share because they have the freedom to charge what they like. The company feels that it is time for the regulator to accept that we have the most open market in the world and that it should be allowed to compete fully."
BT is losing between 50,000 and 60,000 customers a month to cable firms. According to the Cable Communications Association (CCA), that will rise to 75,000 per month by the end of the year. Some firms already offer free off-peak local calls.
A spokesman for the CCA said: "If BT puts up the line rental, it would not so much be free local calls, but just a way of making people pay in advance."
The prospect of an end to the cap on line rentals has alarmed some consumer groups, who fear that charges for some customers could soar. BT, which has long lobbied to be able to raise line rental charges, believes it loses pounds 1.4bn a year in maintaining the local network.
Oftel, however, sees removal of the cap as a way of being able to end the complex system under which BT's rivals - which need to use its wires to deliver calls - pay large sums of money to compensate for losses on the local networks.
Mr Cruickshank is thought to believe competitive pressures would stop BT raising rental charges too much. There may also be plans to adapt the current low-use scheme to help anyone hurt by change. Under this scheme, people pay only 40 per cent of line rentals but then pay a higher charge for calls.
The regulator has also given assurances that the overall cap of "RPI minus 7.5" will stay in place at least until 1997.Reuse content