Oftel ponders radical reform of regulation: Watchdog's review could lead to big shake-up among telecoms companies

OFTEL, the telecommunications industry watchdog, is looking into whether a complete overhaul of the sector's regulation is needed.

If Oftel decides to alter the system - a consultative document is due to be published in November - it may mean extensive changes for the telephone companies. This would lead to the biggest shake-up in the industry since Sir Bryan Carsberg, Oftel's former director- general, reviewed the duopoly held by BT and Mercury in 1991.

Don Cruickshank, Oftel's director-general, is deciding whether BT should continue with its universal service obligation - which prevents differential pricing around the country - and whether the company should be allowed to accelerate increases in local line rental charges. At present, these are capped at inflation plus two percentage points.

He is also assessing whether BT should continue to be entitled to millions of pounds from its rivals to help offset losses in providing and maintaining the local networks.

These payments - access deficit charges - cost Mercury about pounds 50m a year. If they remain, they will also have to be borne by new telephony companies moving into the market. Oftel may waive the payments but only until BT's rivals gain a certain market share.

Mr Cruickshank is thought to be against the access deficit payments, which are extremely complicated to calculate and act as a deterrent for new entrants. But the watchdog would then have to find other ways of allowing BT to make up its local network losses. These are estimated at pounds 1.5bn a year.

Oftel is concerned that long-distance telephone companies, including Mercury and AT&T, may undercut BT as they have no loss- making local operations to subsidise.

The result of the Oftel review could give BT the freedom to raise its rental charges but the group might then find it too politically and commercially sensitive to implement any increases.

BT faces growing competition from cable television companies, some of which offer free connections and almost all of which have lower call charges and line rentals.

An industry source said the Oftel review should be as wide as possible as local and access deficit charges could not be examined in isolation.

He added that Oftel might be forced to consider changes in the price cap for BT's basic services, currently set at inflation minus 7.5 percentage points. This cap is supposed to run for another three years.

Almost all of the possible changes being considered by Oftel would need agreement from BT or they would be referred to the Monopolies and Mergers Commission.

Mercury has welcomed the Oftel review. 'This is a multi-operator industry and the regime was not designed with that in mind. It is time for change,' a spokesman said.

He said it would be better for BT to be forced to make a commercial and marketing decision on how much it would raise local line rentals, rather than just react to what was allowed under the regulatory regime.

Mercury wants the review to also cover commercial interconnection charges for the use of BT's network. These are separate from access deficit payments and are paid by all companies that wish to use the BT network to deliver calls.