Oftel review cuts BT bills for 16 million

Telephone bills for 16 million domestic customers are set to fall by an average of pounds 8-pounds 10 a year under more lenient price controls announced yesterday by the industry regulator Don Cruickshank of Oftel.

The curbs, from July next year, are not as tough as BT had feared. But if it accepts them it will also have to agree to Mr Cruickshank, Director General of Telecommunications, being granted sweeping new powers to tackle anti-competitive behaviour by BT and other telecoms operators.

The new price controls will apply only to domestic and small business customers with quarterly bills of pounds 66 or less and will cover only a quarter of BT's annual revenues. They will restrict price increases to inflation less 4.5 percentage points from 1997 to 2001 and will, said Mr Cruickshank, be the last set of retail price controls he imposes on BT.

The company's 10 million larger domestic users and most business customers will be exempt from price controls altogether.

Mr Cruickshank said that the new Fair Trading condition he wants to see written into BT's licence was "indivisible" from the price controls. If BT rejects either element of the package it will be referred to the Monopolies and Mergers Commission.

BT refused to say whether or not it would agree to Oftel's proposals. Peter McCarthy Ward, the BT director in charge of the price review ,described them as a "curate's egg" which it would need to study carefully before deciding whether to accept or reject. "It is not tanks on the lawn outside Oftel's offices but nor is it peace in our time," he added. "This is a complicted document that will take time to assess."

However the betting in the City was that BT would accept the entire regultory package, albeit grudgingly, and its shares ended 13p higher at 368.5p.

Mr Cruickshank said the price curbs would bring the median domestic bill of pounds 200 a year down to pounds 150 by the end of the control period and represented a fair balance between the short-term desire of consumers for lower prices and the longer-term need to encourage investment and greater competition in telecoms.

The new Fair Trading condition, meanwhile, would tackle any abuse by BT of its dominant market position and prevent it from engaging in anti- competitive behaviour such as predatory pricing or delays in connecting competitors to its network.

In fact, the proposals, which BT must respond to by the end of July, mark a sharp change in tack on the part of the regulator. Initially Mr Cruickshank had proposed retaining some form of price control over the bulk of BT's customers and its services.

Although the new curbs will still apply to 80 per cent of BT's 20 million domestic customers they will cover only 26 per cent of it revenues compared with the 64 per cent covered by the existing price controls which run until next July.

Mr Cruickshank said the new formula was based on BT earning a 12.5 per cent rate of return on areas of the business that would remain regulated and would require it to achieve 4 per cent annual improvements in efficiency. This is twice the level of productivity gains BT has factored in but it declined to spell out what the impact on jobs would be.

BT's competitors welcomed Oftel's proposals and in particular the more focused approach to price curbs. Peter Howell-Davies, chief executive of Mercury Communications said: "It will lead to lower bills for residential customers and allow competition to continue to develop so that all customers will carry on enjoying higher quality, more choice and greater innovation in services."

The UK's largest cable operator, TeleWest, said the deregulatory thrust of the proposals and Oftel's intention to make these the last set of retail price controls were an acknowldgement that competition would regulate the market and protect the consumer in future.

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