BT 2004 Annual Report Download - page 22

Price control formula (RPI-X)
Years commencing 1 August
1998 1999 2000 2001 2002 2003
% RPI movement for the relevant period
a
3.75 1.35 3.32 1.93 1.03 2.89
Xinprice control formula
b
4.50 4.50 4.50 4.50 1.03 2.89
% required reduction in base prices
cd
(0.73) (3.15) (1.09) (2.45) 0 0
% reduction in base prices overall (0.73) (3.24) (1.20) (2.50) (0.22) (0.16)
e
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
Price changes implemented up to March 2004 for all residential customers
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) 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 (ie 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 above.
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. For all retail analogue private
circuits and 8 Mbit/s digital private circuits, we have
voluntarily given an assurance to adhere to a RPI+0%
price cap from 30 June 2003 (ie applied
retrospectively) until 30 June 2006.
As part of the review of price controls in 2002, BT
was 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. Further consultation by Ofcom has
resulted in an enhanced wholesale access product
being available from 29 March 2004.
Network charge control
We operate under interconnection agreements with
most other operators. The current 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 Ofcom considers unlikely to become
competitive in the near future; and safeguard cap
controlled (ie no increases above RPI during any
relevant year of the overall control period) for services
likely to become competitive. Those services
considered fully competitive are not subject to direct
charge controls. Later in 2004, Ofcom will begin a
review of the network charge control to determine
what control should apply from 1 October 2005.
The main network price caps are listed below:
Basket
XFactor in
RPI – X formula Duration
Call termination 10 30 Sept 2005
Call origination 10 30 Sept 2005
Tandem layer 13 30 Sept 2005
Safeguard cap 0 30 Sept 2005
Interconnect specific 8.25 30 Sept 2005
Local exchange FRIACO 7.5 30 Sept 2005
Number portability 5 31 July 2006
The number portability 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%.
Under the new regime, General Condition 18 requires
all providers to offer number portability, among other
things, on reasonable terms and for charges to be
cost-orientated. Ofcom is currently consulting on
proposals for Condition 69A, presently maintaining the
number portability charge control, to be replaced by a
non-binding undertaking from BT that we will continue
to comply with its terms, including the RPI-5 charge
control as though the provision was still operative until
31 August 2006.
BT must publish a notification to Ofcom and other
operators if we intend to amend existing charges or to
offer new services. Notice periods range from 28 to
90 days for regulated services, depending on the
degree to which they are judged to be competitive.
FRIACO
FRIACO (flat-rate internet access call origination) is a
service that provides flat-rate charges for internet
dialled access. On 21 July 2003, Oftel issued a
Direction on the intelligent network component of the
FRIACO price that required BT to delete this
component from the charge retrospectively to 1 June
2002. BT incurred rebate payments in the 2004
financial year of around £16 million.
21 Operating and financial review BT Annual Report and Form 20-F 2004