Watchdog's plan could halve profit, BT warns

Fighting back: Tough new Cruickshank proposals 'could costs thousands of jobs and frighten investors away from Britain'
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Industrial Correspondent

BT warned its profits could be halved and that many thousands of jobs would be lost under tough new pricing proposals by the telecoms watchdog, Don Cruickshank.

Launching its offensive against the regulator, BT called for a staged end to pricing controls as competition becomes more established, beginning next year with caps on national calls.

Unless BT and Mr Cruickshank can agree on pricing changes, the company will be referred to the Monopolies and Mergers Commission.

Peter McCarthy Ward, BT's project director on price controls, said:

"The old approach to setting prices may be losing its validity.

"The next price control will last until 2001 or 2002. That is a long period, encompassing a great deal of change."

Under Mr Cruickshank's proposals, BT's rate of return would be cut to between 9 and 13 from around 19 per cent at present.

The company alleges that it faces increased risk in a rapidly changing marketplace and that any reduction is wholly unjustified.

BT also warns that the clampdown would force it to cut back on investment and that other companies, whose pricing is set to compete with BT, may be forced to follow suit.

John Butler, BT's director for regulatory affairs, added: "It is not going to be good news for jobs - not just for BT but across the industry".

He warned that a deterioration in Britain's telecommunications sector would also prompt potential investors in this and other industries to channel their money elsewhere.

Mr Butler said: "It is not just brave entrepreneurs but major companies such as AT&T of the US that are tilting their lances against us.

"I find it very hard to come up with a case that says our risk is diminishing."

The onslaught of cable companies and newcomers, including Energis and Ionica, meant that BT could be no longer considered a low-risk utility.

Mr Butler also pointed to the opening up of the European market and the speed of technological change in the marketplace as adding to the uncertainties in the industry.

Under the present regime, which ends next year, BT must keep overall price changes on a range of basic services to inflation minus 7.5 percentage points.

Mr Cruickshank's office, Oftel, is consulting on what should follow. But it has made it clear that it will assume a much lower cost of capital and rate of return in deciding the new scheme.

Mr Cruickshank has also said he expects BT to show marked improvements in efficiency, but the company, which has shed 100,000 jobs in recent years, argues that there is a limit to how much it can do.

BT wants not only a higher cost of capital but a strict timetable under which services should be released from any cap.

From 1997 onwards, it says that private circuits and national calls should be freed from controls, followed a year later by international calls.

By "the millenium" local calls, line rentals and connections should be released, leaving controls only on charges levied by BT on rival operators for using its wires to complete their customers' calls.

The company's initial response to the regulator was delivered yesterday and no final decision is likely until the middle of the year.

Separately, BT also responded to Mr Cruickshank's plan to take on a "sweeping" new anti-competitive power. This would replace a myriad of powers against specific types of behaviour and would allow Mr Cruickshank to act much more rapidly where he sees fit.

BT says it recognises the need for change but that Oftel's proposals give Mr Cruickshank too much power.

It wants, at the very least, the right to an independent review of any decisions he takes, with the ability to have them referred to the Monopolies and Mergers Commission.

British Telecom versus the regulator

What Oftel is demanding

1. Rate of return on capital to be reduced to between 9 per cent and 13 per cent. At present BT's prices are capped at a level which assumes a 15 per cent return, so the proposal would certainly mean more onerous pricing controls

2. New catch all fair trading powers enabling the regulator to act swiftly against any alleged abuse of monopoly power by BT. No right of appeal accept through the courts.

3. That BT give competitors adequate notice of new services and products enabling them to respond accordingly.

4. Present regulatory safeguards to remain in place until competition sufficiently well developed to allow a gradual rolling back of price controls and other constraints.

What BT says about it

1. Rate of return assumption, far from being cut, should be raised to 18 per cent to take account of increased risks in the marketplace. Lower rates of return could endanger adequate spending on telecoms infrastructure.

2. That Oftel's powers in this field be properly defined and limited. There should also be an adequate appeals proceedure before Oftel is allowed to act with the ultimate arbiter remaining the MMC.

3. Has Oftel gone mad? In no other industry would any player be obliged to give notice of new products. It removes all incentive to produce any.

4. There should be a detailed timetable to release each service from price controls with almost all controls ending by 2001. BT to be allowed to send entertainment product across its lines from 1997 onwards.