Phone charges could rise and free Internet services could be scrapped in the wake of sweeping reforms by the UK's telecomms regulator, expected next month.
Oftel's proposals are being developed to deal with the unprecedented Internet explosion in the UK, accelerated by the arrival of Dixons' free dialup service, Freeserve.
Freeserve said this week it now has over 900,000 subscribers who pay nothing for Net access other than the cost of a local telephone call. Freeserve now claims to be the UK's largest ISP.
However BT, which initiates most of the 0845 calls to Freeserve, is not allowed to make a profit on them. This was acceptable at first, but now it says the huge demand is clogging up its network and it needs to make a profit to keep improving its network.
Oftel will next month publish a document outlining changes to how the revenue from calls made to ISPs is distributed. At present, the local operator like BT gets 30 per cent, while the rest goes to the terminating operator - in Freeserve's case, Energis.
"There is a distortion in payments that are being made at the moment," said a BT spokesperson. "We would like to see what the proposals are for making it more balanced," she added.
Oftel's control over the way 0845 local call revenue is split was introduced in 1996 to spur the growth of the Internet. Cable & Wireless Communications (CWC), in the same position as BT on the local network, but also a terminating operator like Energis, said the model is now outdated.
"When Oftel introduced the regulatory price structure in 1996, traffic volume was low and the structure was set to encourage investment in key areas," said Roy Payne, head of corporate communications at CWC, "If we carry on in the current format, the Internet market will collapse."
But Energis, which hosts Freeserve through its Planet Online division, says it does not want BT's share of the revenue to change because the growth of Freeserve has been good for the Internet.
"Energis sees Freeserve as a particularily good thing for the UK and ecommerce and it's keen to sustain this market growth," said an Energis spokesperson. She said Energis would not comment on whether Freeserve could be sustained if its share of the call revenue was reduced.
So, there are two main options for Oftel. One, supported by BT is to increase the share of the call revenue given to the initiating operator, thereby cutting the revenue for terminating operators like Energis and making free Internet services less viable.
Another option would be to keep the structure the same, thereby forcing operators to increase the local call charge. This method would give BT room to make a profit from its 30 per cent share and would sustain the arrival of more free ISPs like Freeserve.
But increasing call charges could have exactly the negative effect that Oftel's existing structure has been designed to avoid. Whatever happens, BT says customers will carry on paying existing local call rates, but CWC said it could not rule out call charge increases.
Analysts say call charge increases would be unwelcome. "Proposing increases of price would seem to be at odds with other government objectives in terms of Internet growth," said Ade Ajibulu, a consultant at Analysys in Cambridge.
"A full investigation is needed on the additional costs BT is incurring. If BT can't cover its costs it is the interconnect rates that are out of synch rather than the price," said Ajibulu.
Energis says the bottom line is that BT is being greedy. Citing a recently quoted anonymous telecom analyst, the Energis spokeswoman said BT has been, "spectacularly unsuccesful at the Internet, so it is trying to coin revenue from others' success."
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