Ofcom deregulates retail fixed telephony

Johanna Hellstrom, Research Analyst

UK telecoms regulator Ofcom has decided to remove retail price regulation on line rental and call charges for incumbent telco BT. This ends a 22-year-old piece of regulation, implemented when the UK fixed telecoms monopoly was privatised.

The changes will come into effect on 1 August 2006. BT has agreed to limit increases to line rental to avoid punishing those customers for whom it makes up a large part of the monthly bill.

The decision comes after the conclusion of both the Telecom Strategic Review in 2005 and a specific consultation on retail price regulation in March 2006.

The latest announcement from Ofcom should not come as a tremendous surprise to anyone who has been following the ongoing debate. After the finalisation of the market review in 2002, Ofcom stated that retail price controls were to be fixed for four years and then reviewed. Scrapping retail regulation has been debated since the Telecom Strategic Review in 2004. The European Commission notes in its 11th implementation report that the UK fixed line market is one of the most competitive in Europe. BT has a comparatively low market share (around 74% according to our estimates) and retail prices are below the EU average.

Since the introduction of wholesale line rental (WLR), alternative service providers have claimed an increasing share of the market. With the introduction of Equivalence of Inputs (EoI) in 2005, BT is now required to use the same wholesale products and services that it provides to other communications providers. EoI for WLR must be fully introduced by the end of June next year, and if it is not perfectly functional at the end of this year BT will be forced to compensate other operators financially per line per month until EoI is fully implemented.

Particularly vulnerable customers such as low-income earners are still protected via the Universal Service Obligation, and Ofcom has announced that it is to carry out another review of the retail market, thus evaluating the impact of this latest action.

In the review of the European framework, one of the proposals is to remove the seven retail markets from the list. Ofcom has now found that there is no need for price regulation in these markets, and we agree. Ofcom's approach of regulating bottlenecks on the wholesale side while allowing for competition on the retail market appears appropriate, particularly as BT's market share in this area has declined steadily over the last few years. Increased freedom for BT could lead to more innovative product offerings and result in lower costs for customers. As long as Ofcom continues to regulate bottleneck elements on the wholesale side, and ensures that EoI is implemented, a free market could be to everyone's advantage.

Johanna is a research analyst for the Regulation@Ovum advisory service, our leading regulatory advisory product with more than 40 clients worldwide. She regularly contributes to the service with her analysis and research, as well as contributing to consulting projects advising regulators and telecoms operators about regulatory policy issues.