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Retail price controls - proposals

A summary of a consultation

Issued on 21 March 2006
Closing date for responses: 30 May 2006

We (Ofcom) are the independent regulator of television, radio, telecommunications and wireless communications services in the UK. Our role is to look after customers’ interests.

This booklet is a summary of our consultation on the future of British Telecom’s retail price control (RPC). You can find the full consultation on our website at www.ofcom.org.uk. The retail price control limits the amount by which BT can change their prices in any year for a basket of services (line rentals and calls from BT lines). We would like your views on the important proposals, set out in this document, which would end these controls.

The prices that British Telecom (BT) charge residential customers for line rental and calls have been controlled since BT was privatised in 1984.

This approach has been successful in reducing prices and, as a result, the UK has some of the lowest prices for telephone services in the world.

However, the last 20 years have seen many changes in technology and in regulation. As a result, there are now many different companies who supply the same services to customers in the same way as BT. The increased competition may allow us to remove some of the controls on BT’s charges, and instead allow prices to be set by competition in the market.

Our consultation is about:

• changes in the telecoms market; and
• how these changes may allow us to end controls because you will instead benefit from, and be protected by, increasing competition in these markets.

Your views count

We hope you’ll take a few minutes to read this summary and tell us what you think. We’ve also included some questions about the things we are especially keen to get your views on.

Our deadline for receiving your responses is 5pm on 30 May 2006. After considering those responses, we will publish another document this summer, containing final decisions on all the suggestions.

If you want to look at our suggestions in more detail, you can find the full consultation document on our website at www.ofcom.org.uk.

Introduction

The prices that British Telecom (BT) charge for line rental and phone calls have been controlled since BT was privatised in 1984. The price control acts as a limit on the amount BT can change their prices in any year. The aim is to protect consumers from BT’s strength in the market compared with their competitors.

However, over the last 20 years, there has been growing competition to provide services to residential customers, with changes in technology and regulation making it easier for other suppliers to offer line rental and phone calls. As a result, we are proposing to remove this control on prices paid by BT’s residential customers. For the first time since BT were privatised, prices will be set by competition rather than regulation. (However, BT will continue to provide a special-tariff scheme for those on low incomes or with special needs as part of their obligations under the Communication Act 2003. )

Obviously some people, who may not use the phone very much, may worry that BT’s competitors will offer the best deals to high spenders. As a result, to compete for them, BT will have to follow suit. Because of this, we and BT have agreed certain assurances to protect the low spenders.

We plan to review the fixed telephone market in 2007 to check how successful this proposal has been. If necessary, we can then place price controls on BT again.

Background

The current price control was set in June 2002 and is due to finish at the end of July this year. Originally this control prevented BT from raising their prices for a basket of services including line rental and phone calls. However, we agreed that there would be a change when BT introduced a product known as wholesale line rental (WLR), which allowed other companies to rent lines from BT and then these companies could provide lines to customers at competitive prices compared with BT.

We encouraged BT to provide WLR by relaxing the controls once we saw competitors taking up WLR in significant numbers. We agreed that this was the case in December 2005 and, as a result, from January this year, we have allowed BT to increase their prices for that basket of services in line with general inflation.

Market developments

The fixed telecoms market in the UK has seen many changes over the last 20 years. Before 1984 people could only get a phone from BT, whereas now they have the choice of many different suppliers.

This competition has led to prices falling rapidly and BT’s share of the market reducing.

We recently reviewed the whole telecommunications market in the UK and published a document called the Strategic Review of Telecoms (known as the TSR). In this review, we said that we need a policy to focus regulation on areas where it is most needed and remove regulation wherever possible.

A number of regulatory changes have made it easier for people to use companies other than BT for line rental and calls.

• WLR – this allows a telecoms company to rent a line from BT and then provide their own phone line services to customers.
• Carrier pre-selection (CPS) – this allows you to rent a line from BT but use a different company to make your calls.
• BT Openreach – BT have separated their business into two parts – one that runs the telecoms network delivering services to your home and the second part which deals with the rest of their business. This allows for more free and open competition.

We have also done some market research which shows that most people know that there are alternatives to BT. It also shows that many have either already switched to a new company or have not done so because they are happy staying where they are.

Currently, those on low incomes or with special needs (such as the elderly or disabled) are protected by a special-tariff scheme provided by BT. This scheme will continue, but we are concerned that there may be some customers who, while not protected by this scheme, may still be at risk from price increases because:

• they don’t make many calls and so don’t spend a lot; and
• competition to provide services to these customers may not be very strong.

As a result, BT have made a number of promises on how they will set prices for certain line rental products, and we are happy that these will protect low-spending customers.

Because of the growth in competition and the protection given by the special-tariff scheme and BT’s promises, we are proposing to remove pricing regulation on BT line rental and calls for consumers.

The options

We have considered a number of options we could go for when the current control comes to an end at the end of July. We have set these options out below.

• Option 1 – no control for line rental and calls for residential customers.
• Option 2 – continue with the existing controls.
• Option 3 – a control only on BT’s basic price for line rental.
• Option 4 – no controls from August 2006 but an agreement by BT to protect low spenders.

Our assessment

We think that option 4 is the best option. We believe that the promises BT have given, (taking account of the amount of competition) will protect low spenders, and that changes in regulation, technology and the market should make sure that prices will stay low. For people on low incomes and with special needs, there will be other protection.

We will review the situation in 2007. If competition has not developed enough or people have concerns over prices, we could consider reintroducing the price controls.

We believe that ending the control is a major and very positive change for the telecoms market in the UK. However, many people may not be aware of this change or what it means for them. For this reason, we plan to begin a public information campaign to raise consumer awareness about the change.

Some questions for you

We are particularly interested in your answers to these questions. We also welcome any other comments you want to give.

A Do you think that there are other forms of regulation that we should consider?

B Do you agree with our conclusion, and the assessment on which that conclusion is based?

How to respond

Phone prices affect us all, so please tell us what you think of our proposals.

If you have any comments on the issues raised in this booklet, please e-mail your comments to geoff.brighton@ofcom.org.uk.

If possible, please attach your response to your e-mail as a Microsoft Word document. Please also attach the response cover sheet, which you can download separately from the ‘Consultations’ section of our website: www.ofcom.org.uk/consult/244504/codoc_cov_sheet.doc

You can also post or fax your response, marked ‘Retail Price Control – consultation’, to:

Geoff Brighton
4th Floor
Ofcom
Riverside House
2A Southwark Bridge Road
London
SE1 9HA.

Fax: 020 7981 333

The closing date for responses is 5pm on 30 May 2006.

To simplify the process, we do not usually let you know that we have received your response.

We think it is important that anyone interested in our consultation can see the views we receive. For this reason, we will put all responses on our website. We will treat your response as confidential only if you ask us to.

After the consultation period, we will publish a statement. This will be in summer 2006.

Any general comments

We also welcome any comments you may have on the way we have organised this consultation process. Please contact:

Vicki Nash
Ofcom (Scotland)
Sutherland House
149 St Vincent Street
Glasgow
G2 5NW.

Phone: 0141 229 7401
Fax: 0141 229 7433
E-mail: vicki.nash@ofcom.org.uk

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