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Ofcom paves way for BT to lift wholesale charges by 4 per cent

BT could pass on cost of plugging its £9.4bn pensions deficit, regulator suggests

The communications regulator Ofcom could allow BT to increase its charges to wholesale customers such as BSkyB and Carphone Warehouse to help plug its £9.4bn pensions deficit.

The watchdog signalled yesterday that one outcome of its review into potentially taking pension costs into account when setting BT's wholesale charges could allow the group to raise its prices by 4 per cent.

BT welcomed Ofcom's move, saying it was "entirely reasonable that we should be able to recover an appropriate share of our pension deficit costs through regulated charges".

The telecoms group pointed to such precedents as Ofwat's approach to the water industry, Ofgem's approach to the power transmission and distribution companies, and the Office of Rail Regulation's stance on similar issues at Network Rail.

Morten Singleton, an analyst at Collins Stewart, said it was "another area where regulation could benefit" BT after the company was allowed to offer bundled telephony, internet and television services. BT recently agreed to pay £525m a year into its pension fund until 2011 to make good the deficit and this represented "no small cost at BT", Mr Singleton added. Ofcom sets the prices BT's wholesale business can charge; in the past this has excluded such pension deficit "repair" costs.

"In recent years, pension deficit payments have become an issue for many companies across the whole of the UK economy," Ofcom said in its statement yesterday.

"Because of the financial significance of these payments in the case of BT, Ofcom considers it right to consult on whether or how such payments should be factored in when setting BT's regulated prices."

BT offers wholesale services to rival telecoms companies through its Openreach division, whose network covers 30 million home and business customer lines in the UK.

Its customers reacted angrily to Ofcom's move yesterday. A spokesman for Sky said: "Forcing customers to bail out BT for the mismanagement of its pension fund would be plain wrong. This would be a reward for failure that discourages BT from managing down its deficit." The pension fund is managed by Hermes, and BT sources pointed out that Ofcom had said the returns were in line with the market.

The regulator said it had not taken a view yet but that changes "would not necessarily be felt proportionately by consumers".

Ofcom will publish a further consultation next spring. Will Draper, an analyst at Execution, said: "There is sure to be massive resistance from the likes of Carphone Warehouse and Sky, which means the outcome of the review is not a forgone conclusion."