The UK telecommunications regulator, Oftel, is launching an industry-wide consultation process to review the pricing structures for Internet access following the runaway success of Dixons' Freeserve service.

The company announced on Wednesday it now had 900,000 accounts of which 700,000 are active. The service only launched in September. In 16 weeks it has overtaken what was the UK's biggest Internet Service Provider, AOL, which took nearly three years to build up a membership of 500,000.

The spectacular performance of the Freeserve business model has sent shock waves through the ISP industry. Hundreds of thousands of people picked up free CDs from Dixons stores and the Currys, PC World and The Link subsidiaries.

There is no monthly subscription payable for Freeserve and users can dial up at a local call rate. But if they need technical support over the phone they are charged at £1 a minute.

Profits are in the phone calls

Although Dixons can make money on tech support and has the potential to profit from hundreds of thousands of users seeing advertisements on its home page, the short-term key to profitability is a cut of the phone call charges.

The Dixons chairman, Sir Stanley Kalms, said on Wednesday that active users were already making millions of pounds of Web purchases through the service. This was still peanuts, he said, but small profits were being made from its share of the phone charges.

Freeserve's calls are carried by Energis, but the final leg from a local exchange to the home, the local loop, is controlled by British Telecom. Dixons gets a share of what Energis is receiving for the call to an 0845 number, and BT collects an interconnection charge.

Nearly all ISPs have such non-geographic numbers to give their users access at local rates. The process of routing these numbers to a network termination point is known as Number Translation Services (NTS).

BT wants a bigger share

Oftel will issue a consultation document in February on NTS and the pricing issues that are being raised. Both Oftel and Energis denied a report in The Guardian newspaper on Thursday that Oftel was brokering a dispute between Energis and British Telecom. The story implied that BT was trying to deal a blow to Freeserve by seeking a bigger share of the call charges.

"A lot of consultations are going on about interconnect. We're not having a row with BT. We are in discussion with Oftel and others on changes to NTS interconnect services - it's very much in negotiation," an Energis spokeswoman told BBC News Online.

Telinco, which also offers a free Net access service, says BT's network business is indeed arguing it needs to retain a higher proportion of 0845 call charges.

"They say it's to assist them in making more investments in the local loop and providing higher bandwidth to consumers in the future," said Telinco's marketing director, Simon Preston.

"If they are able to keep more money, the question is how do we then charge customers and Oftel has been looking at a series of price points depending on what is being offered in terms of services."

Preston predicts the debate will not mature until towards the end of the year, by which time some two million people may be members of free ISPs and it may be too politically sensitive to regulate for increased prices.

BT pay-as-you-go service under review

Oftel, which aims to look after consumers' interests by ensuring fair competition in the industry, has already issued a consultation document on the BT Click+ service.

Launched in October, it avoids monthly charges by adding a penny a minute to the local call charges so users pay for the service through their quarterly phone bills.

Oftel said it suspected that these interconnection charges were not covering BT's costs. It could therefore be judged to be competing unfairly by subsidising the service and ordered to increase its costs.

Traditional ISPs welcome market expansion

Traditional Internet Service Providers may be quaking in their boots at the encroachment of Freeserve, BT Click+ and other such services, but they are not admitting it.

Nicholas Lansman of the Internet Service Providers Association (ISPA) says the market is being expanded by the newcomers. "This encourages lots of people to get onto the Net. Nine hundred thousand is an incredible figure and a marvellous achievement and many are brand new to the Internet," he said.

"These people may want Website design, local office connectivity, more added value that other ISPs are providing, so this could be to the long-term benefit of the UK industry."

• AOL has announced the release on millions of CD-Roms of the long-awaited new UK version of its software. Gold-coloured disks containing AOL 4.0i are being sent out to members and non-members alike over the next three months.