Keeping price controls (2 February 2001) OFTEL has released its Proposals for Network Charge and Retail Price Controls from 2001. As you might expect, they are tough going and long (97 pages). However, there are some gems hidden amongst the masses of financial analysis. The most obvious conclusion from the document is that price controls, on many services, will be kept on BT for at least another year. What that means is that BT is allowed to increase prices by, at maximum, N per cent below the rate of inflation for services deemed, by OFTEL, to have insufficient competition, or the rate of inflation for services deemed to have competition. Normally N is 7.5 which means that many services will continue to decrease in price given current low rates of inflation. BT had argued that price controls were not necessary in a competitive market and should be replaced by voluntary agreements; OFTEL gave that argument fairly short shrift and commented: It is notable that BT still earns above the cost of capital even when measured over access and calls combined ... In the case of BT, competition from indirect access operators, who do not have to finance large contributions to the common costs of access and calls out of call profits, should tend to erode BT's ability to maintain high call prices. The fact that it has not yet done so to a great extent is consistent with muted competition. Quite, and the extent of the 'muting' comes out in a long analytical passage which states, among many other measurements, that according to OFTEL's market model BT's market share of Internet calls will decrease from 68 per cent to 40 per cent in the next four years and its share of residential lines will decrease from 79 per cent to 72 per cent in the same period! So there is a long way to go. We are pleased that both flavours of FRIACO - FRIACO (to the DLE) and FRIACO Single Tandem - will have price controls imposed on them, albeit with a rather complicated structure, as they are obviously non-competitive with BT being the sole vendor. More importantly, many of the costs regarding FRIACO are now being written into BT's telecommunications licence and, when finalised, FRIACO Single Tandem will be similarly embedded.