Further price cuts proposed for BT

David Edmonds: "BT's call prices can fall still further"

Industry watchdogs, criticised for taking a soft line with BT, have stepped up pressure on the telecoms giant by proposing further cuts to the prices it can charge.

Telecoms regulator Oftel has ignored pleas by BT for the removal of the price cap on charges to household callers, and proposed extending the regime until July 2002.

The move would save BT's 20 million domestic customers an average of £13 each.

And customers of other phone firms may see their bills cut through Oftel plans to slash the rates BT can charge competitors for using its lines.

Further to fall

"BT's call prices can fall still further," said Oftel director general David Edmonds, who said that domestic phone bills had fallen by 20% in real terms since 1997.

Oftel has decided to protect consumers by continuing retail price controls

David Edmonds, director general, Oftel

"Oftel has decided to protect consumers by continuing retail price controls."

He rejected claims by BT that, thanks to increased competition, consumers no longer need the protection of official price controls introduced when the firm was privatised in 1984.

And he withheld the right to introduce tougher measures if the new proposals proved ineffective.

BT inefficiency

Existing price controls, which had been scheduled to be axed next July, limit annual price rises to 4.5% less than inflation - which currently equates to a cut of 2.3% a year.

BT's returns on calls... remain substantially above a reasonable level

David Edmonds

Yet BT's "returns on calls... remain substantially above a reasonable level", Oftel said on Thursday in the consultation document Price Control Review.

"The overall level of profitability exceeds what BT requires to cover its full costs and make a reasonable return."

While competition has increased, BT's share of the fixed-line call market has fallen less quickly than expected, the report said.

Yet BT is 2-4% less efficient than comparative US companies, Oftel was told by consultants.

"Persistently excessive profits should not occur in competitive markets unless a particular firm is much more efficient or innovative than its rivals," the Oftel report said.

"It is not clear that either of these conditions for high profits apply [here]."

Plea rejected

Oftel, which has opened a six week consultation period on its proposals, rejected a pledge by BT not to lift callers' bills faster than inflation if the price cap were lifted.

The regulator also proposed to set the telecoms giant a tougher target for charges to other operators for using the firm's phone networks.

The existing regime forces BT, at current levels of inflation, to reduce prices by more than 5% a year.

But Oftel has proposed forcing BT to cut charges by up to a further 3.5% per year.

Rivals approve

The idea was welcomed by rival phone firm Colt Telecom, which had been expecting restrictions on BT to be relaxed.

Overall we feel this is a positive move for Colt

John Doherty, Colt Telecom

"Overall we feel this is a positive move for Colt," John Doherty, the firm's investor relations director, told BBC News Online.

But BT said it was "disappointed" by Oftel's proposal, and would press for amendments before the watchdog publishes final regulations in January.

The extra 3.5% cut in interconnection charges would be "challenging" to meet, BT spokesman David Orr told BBC News Online.

And there was "enough evidence of competition" to allow price controls on domestic phone charges to be relaxed, he said.

But BT shares shrugged off the report to close 45½p up at 783p in London on Friday.

Market changes

The Oftel report also said BT's revenues from domestic calls fell by one fifth for local calls, and one quarter for national calls, in the first three months of 2000, compared to the same quarter last year.

Speaking up - market growth 2001-05

0800/0345 calls: 31.8%

Calls from mobiles: 24.7%

Premium rate (0898) calls: 23.8%

Calls to mobiles: 17.4%

International calls: 10.2%

National calls: 5.9%

Local calls: 1.0%

The watchdog sees mobile phones as one of the fastest growing sectors in the call market.

The number of calls made by mobile phone users is increasing by a rate of 50% a year, with calls received rising by 40%.

About 5% of householders now use a mobile phone in place of a fixed line unit.

But growth in the 0800 freephone and 0345 local rate services will lead the call market overall between 2001 and 2005, Oftel believes.

Oftel slammed

Oftel's proposals follow criticism from telecoms firms and European Union officials that the watchdog should have taken a tougher line with BT over opening up local exchanges to competition.

Senior EC adviser Olli Rehn warned the UK could drop into the "relegation zone" of European telecoms if Oftel failed to prise open the markets.