UK set to lose battle on phone competition

The Government looks set to lose a long-running battle with the European Commission over the shape of phone competition, in a move that could herald severe turbulence for the UK telecommunications market.

The Department of Trade and Industry is stepping up its lobbying of other European governments over the proposals in a draft EC directive which would harmonise the system of telephony competition across the EU from 2000. The Commission will finalise the plans, which cover the way customers access rival phone companies in a competitive market, in the next few months.

But it has emerged that the ultimate decision on the directive will be made through qualified majority voting, which means Britain will be forced to sign up to the new system unless it can persuade other governments to vote against it.

"We hope to explain that our system would be much more beneficial, but at the end of the day if we lose the vote we will have to implement the EC directive," said a DTI source.

The Commission is urging countries to adopt the "equal access" approach to competition pioneered in the US following the break up of AT&T in 1984. Consumers in America "pre-select" a company like AT&T or MCI as their nominated supplier for long distance and international calls. All long distance calls would then be automatically routed to the chosen service provider. The local phone monopolies, the so-called Baby Bells, are only just being opened to competition.

The UK's watchdog, Oftel, took a different route to competition, developing a system known as "indirect access". British Telecom customers can access any number of different long distance companies, including Mercury and Energis, but only by dialling a special three-number code before each call.

The seemingly arcane difference between the two systems hides a complete gulf between the UK and US approaches to competition. Oftel has long argued that the UK system encouraged new companies like the cable operators to spend billions of pounds building rival local networks to BT's.

Since full competition arrived in the UK in 1991, the cable companies, and more recently the fixed line wireless operators like Ionica, have steadily eaten into BT's stranglehold on local connections. The alternative, according to the DTI and Oftel, would see intense competition for long- distance business, but leave monopoly local operators unscathed.

With just 18 months to go before the directive would come into force, the cable companies are becoming more and more concerned that their carefully crafted investment assumptions could be overturned. The industry has already been hit both by intense competition from BT and disappointing subscriber numbers and could now see share prices and borrowing forecasts disrupted again.

Yet long-distance networks such as Energis and AT&T, which is growing its UK base substantially, would derive huge benefits as more and more BT customers switched their long-distance business. BT, according to analysts, would also benefit because its base in the local market would be more secure.

The stakes were raised further when the US watchdog, the Federal Communications Commission, made its approval of BT's pounds 11bn merger with MCI conditional on the UK adopting the directive.