In a consultation on its review of competition in the provision of fixed retail services,.Oftel proposes to replace the current retail price controls when they run out in July 2002.

The proposals represent a significant move from a traditional price control to an approach based on enhancing competition. The aim is to reduce retail call prices through increased competition, and eventually to remove price controls altogether.

Oftel's review looks at the markets for calls (the provision of voice and data services) and for access (the provision of the line into the customer's home).

Oftel has concluded from its analysis that competition is increasing in all fixed telephony markets, but is not yet effective, and that
BT will remain dominant in the provision of access for the foreseeable future.

The current terms of access to BT's network deter service providers from entering the calls market, which restricts innovation in pricing and products.

Oftel also found that the imbalance between BT's large returns on calls (over 90%) and around zero returns on access means that rigorous competition in calls could put BT into a position where it was unable to recover its costs. The current form of price control does not address this fundamental issue.

To address these findings, Oftel has made four main proposals:

Encourage greater competition by mandating a 'wholesale line rental' product. Operators and resellers wanting to enter the fixed telephony market will be able to buy the line rental product from BT and then use BT or alternative networks for delivery of the calls (conveyance).

Customers would receive a single bill from the new supplier which would cover the charges of both the line rental and the calls made - customers will not receive a separate line rental bill from BT.

This will give operators the ability to charge in new and different ways - for example, offering virtually free calls for a high subscription fee, or no line rental up front, with all costs recovered from higher call costs.

The product BT would be required to offer is similar to BT's existing Calls & Access product, with two important differences. It will be based on wholesale costs, rather than retail prices and will be required as a condition of BT's licence, rather than provided on a voluntary basis, meaning that provision can be enforced effectively.

Safeguard customers as competition becomes effective.
As competition develops, call prices are expected to fall. Oftel is proposing a safeguard control of RPI-RPI (which means that bills cannot rise overall), to ensure that any increases in BT's line rental charges are in response to competitive pressures on call prices, and to protect low spending customers, for whom the line rental makes up a large proportion of their bill.

Remove RPI-RPI control automatically when call prices fall.
Oftel proposes that the RPI-RPI control is removed automatically when a set percentage fall in call prices is reached, rather than following a further period of regulatory review.

Maintain ongoing protection for low spending customers.
After this trigger has been activated and the RPI-RPI control removed, vulnerable customers would still be protected through the existing Light User Scheme (LUS), which offers reduced line rental for the lowest spending customers.

Oftel has proposed an additional safeguard cap of RPI-0% for other lower spending customers, which will mean that their bills can only rise by the rate of inflation. Alternatively, the LUS may be expanded so more consumers are eligible.

Once competition becomes effective, the current arrangements, under which BT alone funds the protection of vulnerable customers, will need to be reviewed.

Oftel's proposals are set out in full in Protecting consumers by promoting competition - Oftel's review of competition in the fixed telephony market, which was published on 31 January 2002. Comments are sought by 30 April 2002. A Statement is due to be published in June.

For further information contact Mike Galvin (tel: 020 7634 8869 / e-mail: mike.galvin@oftel.gov.uk).