BT may be allowed to increase wholesale prices to offset pension costs

The UK’s communications regulator on Tuesday opened a consultation looking at allowing incumbent telco BT to increase its wholesale charges in order to offset its enormous pension deficit.

At the end of September, BT’s mammoth pension cost came in at £6.8bn net of tax, compared with a net deficit of £2.9bn at the end of March 2009, suggesting that the UK incumbent is in danger of becoming a pension fund that happens to sell telecoms services.

The additional cash top-ups that BT has to pay into its pension fund to reduce the deficit, currently stand at £525m per year for three years, prompting Ofcom to ask the market whether BT should be allowed to charge more rent on its copper in order to help it offset this cost.

Ofcom sets the prices that Openreach, BT’s wholesale access division, can charge other providers to deliver services to consumers and Ofcom uses BT’s reported pension costs, excluding deficit payments, when determining these regulated prices. The question is, should Ofcom take BT deficit charges into account?

If it does, wholesale regulated charges could increase by up to 4 per cent, but if deficit repair payments continue to be excluded, and Ofcom amends its calculations in line with estimated ongoing service costs, regulated charges could even fall by a small amount.

Commenting on the move, Will Draper, analyst at investment house Execution Ltd, said: “Even if Ofcom does allow BT to increase monthly line rental charges to cover its pension deficit payments, we think this would be much lower than the market has been expecting and there is sure to be massive resistance from the likes of CPW and Sky, which means the outcome of the review is not a foregone conclusion.”

Meanwhile, BT chairman Mike Rake is causing uproar among his neighbours in the sleepy village of Hambleden, Oxfordshire. While locals have been waiting for broadband for years, Rake has moved in and got hooked up on a BT trial of SHDSL, which delivers broadband speeds to endpoints further from the exchange than ADSL. The locals claim it’s preferential treatment, but you can probably pull a few strings if you’re the chairman.