Privatised Utilities - British Telecom

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Privatised Utilities - British Telecom

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British Telecom (BT) as we know it today was deregulated in 1981 (i.e. separated from the Post Office). It became BT plc in 1984 and so was the first of Thatcher's major denationalisations. Barriers to entry were removed to allow competition to occur from the likes of Mercury, although realistically, both then and now BT still retains a huge market share (well over three-quarters of the market). A regulator was established called the Office of Telecommunications (OFTEL). Its job is to generally keep an eye on the industry, but most importantly it regulates prices in the industry using the following formula:

Privatised Utilities - British Telecom

Where RPI refers to the annual percentage rise in the average price level and x is a figure set by OFTEL depending on the perceived ability of BT to reduce prices given such factors as expected increases in efficiency and the benefits of any new technology. Effectively, BT is forced to cut its prices in real terms. This x factor was initially set at 3%, but as the years went by it became obvious that, of all the privatised utilities, this was the most successful in terms of enhanced competition and reduction in costs. Hence, price reductions were possible and the x factor was raised to 7%. This means that, given an inflation rate of around 3%, BT would have to reduce their prices annually at a rate at least of 4½% (i.e. 3 − 7½ = -4½). This is why one kept seeing adverts on the TV about BT cutting prices on various types of phone call.

Privatised Utilities - British Telecom

Choosing the level for the x factor is very difficult. Too high and BT will be forced to cut prices by so much that it might put them off remaining in the industry as it will be very hard for them to make any profit at all, however good they are at cutting costs. Too low and there will not be enough pressure on BT to find efficiency gains; they will simply enjoy the status quo earning a good profit. This analysis applies to the other utilities as well.

Moving away from the RPI − x formula, by the end of the 90s it was felt that there was so much competition in the industry that in certain areas the regulator will be less active in the future. This new era of 'co-regulation' means that only residential and small business calls will be subject to price controls. OFTEL will become more of a market policeman, reviewing market areas (like mobiles and access to the network) every two years.

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