Latest Oftel price cap could slash phone bills by 27%

Telephone bills could fall by up to 27 per cent in real terms in the four years from 1997 under tough new pricing proposals by the watchdog, Oftel. Don Cruickshank, director general of Oftel, said yesterday that a typical household paying pounds 50 per quarter now could be paying pounds 20 less in the year 2001 for the same use of the telephone.

The proposals were attacked as "severe" and "disappointing" by BT, which had called for a much more lenient regime and an early end to all controls on international and trunk calls. The company has warned that a heavy continued cap on prices will hit investment in the industry and could result in the loss of thousands of jobs.

Mr Cruickshank said that his proposals, which are open to consultation, aim to squeeze up to pounds 1.5bn in cumulative excess profit from BT's regulated business over the four years from 1997 to 2001.

The new cap will replace the present regime which limits price changes to inflation minus 7.5 percentage points. Oftel's plan is to set a cap for the future between "RPI minus 5" and "RPI minus 9" and, following the consultation, will decide the precise formula in July.

Oftel may consider ending the new cap in 1999 or focusing it on customers who most need protection. But the preferred option is to keep the basic control in place for four years. It is expected that -with increasing competition - price controls for customers will end in 2001.

Yesterday's announcement also included the first price-capping formulae on BT's charges for rival companies which use its wires. At the same time the regulator is also demanding sweeping new anti-competitive powers over BT and will present these proposals to the company in a package with the price controls. Should BT fail to agree with Mr Cruickshank, the issue will be referred to the Monopolies and Mergers Commission.

BT said that in setting out the proposals, Oftel had been "extremely optimistic" in its assumptions on market growth and in the company's ability to cut costs, adding: "We find it hard to believe that some of the figures are achievable. Oftel's view of market growth will require a major change in consumer and business use of telephone lines in the UK."

Mr Cruickshank said that he is seeking real reductions in unit costs of 4.5 per cent per year while BT argues that it can do about half that, having already cut 100,000 jobs in recent years and gone through major structural change.

"BT must appreciate that what they have done so far is only for starters," Mr Cruickshank said. "We are looking at a 4.5 per cent real reduction in unit costs. That is a reasonably tough target -but that is where the telecommunications industry is going at this point in time."

BT also attacked as unacceptable Oftel's view that its rate of return should be about 12 to 13 per cent compared with the company's present figure of about 16 per cent overall and 20 per cent for the regulated businesses. John Butler, BT's director for regulatory affairs, said: "We are disappointed and the more we analyse the detail in Oftel's report the more disappointed I become."

BT's shares fell by 7.5p to 344.5p on the view that the proposals are tougher than had been expected. Some City analysts said that Mr Cruickshank's plans are "bad news for BT" but others said that they represent "steady as you go".

James Dodd, an analyst at Kleinwort Benson, said: "The industry may have been hoping for something more lenient but it seems to me that this is really quite gentle compared with some of Oftel's previous ideas. This is business as usual."

Shares in Cable & Wireless rose by 8p to 491p in spite of the knock-on effect on its Mercury Communications subsidiary of BT price cuts. Peter Howell-Davies, Mercury's chief executive, said: ``Price controls are necessary but they should be focussed on those areas where there is least choice for the consumer. The danger of carrying on with the existing `blunt instrument' approach to price controls is that it will stifle the competition that already exists and limit consumer choice."

The Cable Communications Association said that Oftel should not underestimate the success already achieved by new operators in delivering "the protection consumers need from monopoly pricing."

The National Consumer Council gave a cautious welcome. A spokeswoman said: ``It is good that the regulator has not buckled under pressure from industry to lift the overall cap on BT. How good it turns out for consumers depends on how BT juggles prices on individual services within the umbrella cap. The NCC wants to see local call charges come down sharply but fears that - as in the past - businesses and those making international calls will benefit most.

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