The inquiry, which will last until the end of March, is designed to make sure that residential and small business telecoms users do not miss out on the benefits of the rapid technological advances in the industry.
Oftel is concerned that BT's local network - known as the local loop - is not sufficiently hi-tech to give users access to new services, such as high-speed Internet and video on demand.
The watchdog is proposing that BT be forced to open up its network to rivals, who would be allowed to start offering unique services over the telecoms giant's lines.
Oftel is consulting on five options, which range from forcing BT to sell its lines to rivals to requiring the company to make a high-speed service available to others.
David Edmonds, Oftel director-general, said the watchdog was open-minded about the likely best options. It also wants to make sure that any measures it adopts do not discourage BT from investing in its network in future.
Industry experts said there was likely to be plenty of interest in the move. "Anything consumers buy now, such as video and audio, could be delivered down a pipe if the capacity was there," said Roger Runswick, a director of Schema, the telecoms consultancy.
At the moment BT's network is only capable of delivering voice calls. But new digital technologies, such as the new digital technology ADSL, would allow operators to deliver high-speed data over existing copper wires.
The move is a recognition that BT's rivals have failed to mount a credible challenge to the power of the former monopoly telephone company. "BT is likely to maintain its dominance in the local access area," said Mr Edmonds.
The paper also pre-empts possible European Commission directives designed to force former telephone monopolies around the continent to yield to competition.Reuse content