BT 1999 Annual Report Download - page 22

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Pricing regulation
BT is subject to price controls on its fixed network
services in the UK at two levels: retail and network.
Competitors are generally not subject to price controls.
Retail price controls
BT is subject to two sets of UK retail price controls, one
on certain public switched telephony call charges and
exchange line rentals, and one on certain private circuits.
Each price control is based on a formula calculated by
reference to the UK Retail Prices Index (RPI). The
weighted average decreases in prices charged for the
services covered by the controls, in each twelve-month
period beginning 1 August, cannot be less than a fixed
percentage below the change in RPI (referred to as
“RPI minus” the fixed percentage) for the twelve months
to the preceding 30 June. The retail price control for
public switched telephony, applying from August 1997
to July 2001, is RPI minus 4.5. Although it is measured
on services used by the lowest 80% of BT’s residential
customers classified by bill size, controlled prices must
be offered to all customers.
BT has also given an assurance that a normal residential
bill will (for the same level of usage) not increase by more
than RPI and that a “control” price package will be made
available to business customers. The “control” package for
business customers provides that call charges, which are
no higher than the prices used for calculating adherence
to the residential price control, and line rental increases
will be no more than the increase in RPI.
The price control for private circuits, applying from
August 1997 to July 2001, applies to analogue and lower
speed digital private circuits, the prices of which cannot
be increased by more than the change in the RPI in any
year. Each discrete international private circuit price is
subject to a safeguard cap of RPI.
Network charge control
The company operates under interconnection agreements
with most other licensed operators.
A network charge control regime running to
30 September 2001 gives BT the freedom to set
reasonable charges based on long-run incremental costs
for its standard interconnection services. Depending on
the degree of competition for these services, charges
are basket controlled (i.e. at RPI minus 8), price cap
controlled (i.e. no increases above RPI), or no longer
subject to price controls. Those services considered
unlikely to become competitive in the near future are
subject to basket controls; those likely to become
competitive are subject to price cap control; whereas fully
competitive services are not subject to price controls.
The network charge controls are based around RPI minus
‘X’ rules. The value of ‘X’ in the ‘RPI minus’ formula has
been set at 8% for the period of control. BT must publish a
notification to the Director General and other licensed
operators if it intends to amend existing charges or to
offer new services.
BT is not allowed to discriminate unduly among operators
or between BT’s retail operations and other operators with
respect to both price and quality of service. BT is also
The price control formula and the company’s performance against the formula since 1 August 1994 have been as follows:
YEARS COMMENCING 1 AUGUST
)))%!!!!!))%!!!!!!!)%!5011000110051111
Price control formula 1994 1995 1996 1997 1998
)))%!!!!!))%!!!!!!!)%!5011000110051111
% RPI movement for the relevant period (a) 2.62 3.52 2.14 2.94 3.75
RPI formula in effect (b) (7.50) (7.50) (7.50) (4.50) (4.50)
% required reduction in prices (c) (4.86) (1.38) (4.92) (1.56) (0.73)
% reduction in prices overall (7.35) (1.82) (4.92) (1.56) (0.73)
00051111100500!!!1111011000110051111
(a) Annual increase in RPI to previous June.
(b) From 1 August 1997, the RPI formula covers the main switched telephone services provided to the lowest 80% by bill size
of BT’s residential customers. The previous formula covered such services supplied to all residential and business customers.
(c) After permitted carry forward of any unused allowance or shortfall from previous years.
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