BT faces tighter regulation over domestic customers

British Telecom's drive overseas, including its planned pounds 13bn merger with US long-distance carrier MCI, could prejudice the service to its traditional domestic consumer base, the industry regulator warned yesterday.

Don Cruickshank said he could toughen regulation over BT to compensate for the "uncertainty" generated by its international expansion. The new conditions, which could be incorporated into BT's operating licence, would prevent the company from making any moves which would threaten service standards for 16 million households which make smaller numbers of phone calls.

"The market has changed to such an extent that BT is going to be a genuine global company. Its implications are potentially quite profound. It was a company which was almost exclusively UK-focused until recently," Mr Cruickshank said.

Further licence changes would require BT executives and auditors to conduct an annual review to prove the new conditions were being complied with.

Mr Cruickshank insisted his proposals were not directly linked to the BT-MCI deal, over which he has no formal regulatory control. However, he highlighted potential risks with the costs involved in BT's expansion, including the possibility that MCI would have greater-than-expected difficulty in its move into the $100bn US local phone market. There were also uncertainties over the legal framework in the US following last year's landmark bill which opened up the monopoly local phone companies to competition.

The new regulations, which would last no more than seven years, would mean BT would have to improve its domestic service each year in line with technological advances in other countries. Mr Cruickshank said: "The ambition we have in the UK is that customers should be best served. I would expect the standards by which BT is judged to be increasing." He agreed that the decisions involved would be subjective. "I think it's a degree more difficult than the usual judgements I have to make, I'll admit that."

But he stopped short of proposing strict investment targets for BT or for ring-fencing the domestic phone business in the same way as the regulatory structure used by the electricity and water watchdogs.

BT and consumer groups have until 1 May to respond to the proposals. Though the company said the announcement was "no surprise", a spokesman said he did not see the need for licence modifications.

"BT is committed to the UK. We've invested billions of pounds and we're not about to abandon our key market."

The latest regulatory move follows last year's long-running feud between BT and the regulator. It ended when the company accepted new powers at the eleventh hour, narrowly avoiding an investigation by the Monopolies and Mergers Commission. They gave Mr Cruickshank the ability to ban any behaviour by BT which he feared could thwart competition.