BT 2003 Annual Report Download - page 22

Business review
BT Annual Report and Form 20-F 2003 21
calculated by reference to the UK Retail Prices Index
(RPI) and a factor, X.
For services covered by the controls, the weighted
average of base prices cannot increase in each year
beginning 1 August by more than the annual change in
RPI minus X. The current retail price control for public-
switched telephony, applying from August 2002 to July
2006 is RPI minus RPI (i.e. the value of X is RPI and
prices cannot increase). It is measured on services used
by the lowest 80% of our residential customers
classified by bill size. From August 2002 the services
covered by the control were extended to include BT’s
share of the revenue for calls to all four mobile
networks, replacing the previous separate control on
BT for calls to Vodafone and O
2
. The price control
formula and our performance against the formula are
set out in the table below.
Under the new controls, we have also given an
assurance that increases in line rental for business
customers will be no more than the annual change in
RPI. Under the price controls for private circuits that
applied from August 1997 to July 2001, prices for
domestic analogue and low-speed digital private
circuits could not increase by more than the change
in the RPI in any year. The application of the analogue
price cap has been extended until July 2005 and the
low-speed digital private circuits cap was removed in
July 2001.
Review of retail price controls
In July 2002, BT accepted Oftel’s proposals for
changes to its licence to introduce new retail price
controls of RPI minus RPI (i.e. no price increase) from
1 August 2002 until 31 July 2006. Under the changes:
&BT is required to provide a cost-based wholesale
line rental product to other service providers at a
regulated price and in a way that does not discriminate
between BT’s retail business and service providers.
This product (Wholesale Access) has been available
from BT since 1 September 2002. Oftel has since
issued a further consultation regarding enhancements
to this product and BT, Oftel and industry are
discussing the proposed requirements.
&for those services covered by the previous control,
BT’s prices to the lowest spending 80% of its
customers would be pegged at their current level and
not allowed to rise with inflation, using an RPI minus
RPI price control. The services covered by the control
have been extended to include BT’s share of the
revenue for calls to all four mobile networks, replacing
the previous separate control (RPI minus 7%) on BT
for calls to Vodafone and O
2
UK.
&once Oftel is satisfied that the new wholesale line
rental product is fully implemented and starting to have
an impact in the retail market, the retail price control
will be further revised to allow prices to increase at the
rate of inflation.
&there are some minor changes to the workings of
the Light User Scheme designed specifically for people
making fewer calls, including provisions to extend the
number of customers potentially qualifying if the
standard exchange line rental rises significantly.
Network charge control
We operate under interconnection agreements with
most other licensed operators. A new network charge
control period began on 1 October 2001 and will last
for four years from that date. It requires us to set
reasonable charges based on long-run incremental
costs for our standard interconnection services.
Depending on the degree of competition for these
services, charges are cap controlled each year by RPI
minus X (where X ranges from 7.5% to 13%) for
services Oftel considers unlikely to become competitive
in the near future; safeguard cap controlled (i.e. no
increases above RPI during any relevant year of the
overall control period) for services likely to become
competitive; and those services considered fully
competitive are not subject to direct charge controls.
The network charge controls that ended on
30 September 2001 capped charges for services
unlikely to become competitive in the near future at
RPI minus 8%. On 12 July 2002, a new condition was
included in the Licence. The effect was to set charges
for, and bring under regulatory control, BT’s fixed
portability services. Number portability allows
customers to change the company providing their
telephony services without changing their telephone
number. Fourteen non-conveyance Portability Standard
Services were identified. The charge control runs from
1 August 2002 until 31 July 2006. The charges are
controlled by a RPI minus X formula, with X set at 5%.
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.
Wholesale Access Charge Control
The charges for the Wholesale Access services agreed
by BT in July 2002 are subject to price control. The
charges for the line rental (residential and business
Price control formula (RPI-X)
Years commencing 1 August
1997 1998 1999 2000 2001 2002
% RPI movement for the relevant period
a
2.94 3.75 1.35 3.32 1.93 2.33
Xinprice control formula
b
4.50 4.50 4.50 4.50 4.50 2.33
% required reduction in base prices
cd
(1.56) (0.73) (3.15) (1.09) (2.45) –
% increase (reduction) in base prices overall (1.56) (0.73) (3.24) (1.20) (2.50) 0.14
ef
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% of BT’s residential customers by bill size
c
After permitted carry forward of any unused allowance or shortfall from previous years
d
From 1 August 2002, the RPI formula covers the change in average prices (including residential discount packages)
e
Base and package price changes implemented up to 31 January 2003
f
Regulation allows any unused allowance or excess reduction remaining at the end of the price control year (31 July) to be carried forward