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  Financial review: Regulation and prices

BT has been operating under the existing retail price control from 1 August 1997, under which a cap of RPI minus 4.5 applies to the services used by the lowest 80% of BT's residential customers by bill size. This retail price control is estimated to have covered services representing about 13% of the group's turnover from continuing activities for the 2002 financial year. In the nine month period to May 2002 BT has reduced its prices by 2.73%, which compares to the required reduction of 2.44% for the price control year to 31 July 2002. The equivalent reduction in the previous control year was 1.20% against the required reduction of 1.09%.

Most of BT's interconnect (network) charges to other UK operators are based on long-run incremental costs. Until 30 September 2001, there were annual reductions in these charges based on a RPI minus 8 price cap. Since that date, the broad structure of the interconnect (network) services has been retained but the "X" within the RPI minus X price-cap formula now varies between 7.5 and 13, this new price control runs until 2005.

The Competition Commission (CC) required BT to reduce charges from a BT line to mobile phones by around 25% in the 1999 financial year and an effective annual RPI minus 7 reduction for the 2000 and 2001 financial years.

The regulatory environment in the UK has had, and is expected to continue to have, a significant adverse impact on the group's turnover and operating profit. As the group has extended its activities to other countries, BT is required to consider the regulatory regimes in those countries.
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