Oftel turns screw on BT for cheaper calls

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Telephone charges for domestic consumers will fall in future under sweeping changes to BT's price controls proposed yesterday by Oftel, the industry regulator.

Oftel, which launched a consultation on what the new controls should be, plans to clamp down on BT's rate of return and also said the group must improve efficiency to match the best companies in the US.

The proposals prompted warnings from BT that demands for further sharp efficiency gains would present an "enormous challenge" and would result in further job losses. Peter McCarthy-Ward, price review director, said that simply to sustain the level of efficiency gains over recent years "we would need negative manpower". BT has shed 100,000 jobs over the past four years.

The changes proposed yesterday by Don Cruickshank, director-general of Oftel, include for the first time in 1997 an overall cap on the charges for BT's rivals to use its wires. At the same time the regulator will introduce a new cap for domestic consumers from mid-1997, replacing the existing control, which limits price increases to inflation minus 7.5 percentage points.

Mr Cruickshank said: "It will mean cheaper telephone calls for consumers but by how much we will not know until next June." BT must then agree the new controls or be referred to the Monopolies and Mergers Commission.

He added: "We will take a very bullish view of BT's potential for efficiency improvements [in setting the caps]."

Mr Cruickshank also said that some services where there was competition, such as international calls, may be removed from the price control. Others, such as calls from BT telephones to mobiles, which carry a relatively high charge, may be included for the first time.

The regulator said the aim was to remove or reduce from BT's control formula services where competition was thriving while keeping a cap in areas where BT still dominated. Even where services are exempt from the cap Oftel is likely to maintain a basic inflation-linked "safeguard" for consumers.

Mr Cruickshank surprised BT by saying that in working out the exact controls he will use a lower rate of return than the 15 per cent assumed today. One City analyst said: "This is nasty for BT if you read the detail. Oftel is saying that BT's profit levels need to be lower or can be lower than they have ever said before. I would not accept this if I were BT."

Separately, Mr Cruickshank said prices for other operators to use BT wires would fall 20 per cent this year, backdated to April. Much of the reduction was due to a better allocation of costs following demands BT produce separate accounts for different parts of the business.