From cost plus determinations to a network price cap

Abstract

Interconnection pricing in the UK has developed as competition in telecommunications has grown. In the duopoly period, OFTEL determined a small number of charges for interconnect services on a fully allocated cost basis. When entry was liberalised in 1991, a standard price list was introduced for unbundled services. From 1997, many of BT's interconnect services will be freed from price control, as the relevant markets are regarded as effectively competitive. The remainder will be subject to two price caps, designed to allow the company to recover its long-run average incremental cost, together with a small mark-up. Prices for individual services will no longer be set, although they will be subject to ceilings and floors. The paper describes the methods of incremental cost modelling employed.