Mercury forced to slow expansion

MERCURY Communications is being forced to slow the expansion of its share of the telephone market to avoid making massive compensation payments to BT.

The company may be driven to radical action, which could involve splitting itself up.

Once Mercury takes more than 25 per cent of the international market - which it could do this year - it will have to pay BT an estimated pounds 70m annually to help to compensate BT for its alleged losses in maintaining local telephone networks.

Mercury regards the payments as a tax on success and a threat to competition in the market place. A split of the company into smaller units is thought to have been discussed at board level in an effort to avoid the financial burden. Other options include a revised pricing policy as market share is calculated on call revenues rather than the volumes of calls made.

The payments, known as access deficit charges, are part of the regulatory system laid down by Oftel. They are levied on BT's rivals to compensate it for maintaining local telephone lines and for supporting its universal service obligation.

BT says it loses about pounds 2bn a year because regulation does not allow it to increase line rental and connection charges as quickly as is needed to cover costs.

Rivals say it is not clear how BT calculates the loss and that the so- called access deficit is an accounting fiction. The access deficit payments are in addition to basic interconnection charges covering the cost of connecting calls through BT's network.

Oftel can waive access deficit payments completely when companies have less than 10 per cent of the market in which they operate. After that there may be a partial waiver, but only until an operator's share of any particular market reaches 25 per cent.

Mercury has about 20 per cent of the international call market and already pays BT about pounds 35m a year. Company sources believe this will at least double once the waiver goes completely.

Don Cruickshank, who took over last year as director-general of Oftel, is examining the issue of access deficit contributions and is expected to report this year.

But one industry source said that changing the system could prove complex and might involve an adjustment to BT's licence. This in turn would require BT's agreement, without which it would be referred to the Monopolies and Mergers Commission.

Mercury believes that access deficit charges will be maintained at least until 1997. It is unwilling to pay increasingly large amounts of money in the coming years.

The charges are also of concern to cable television companies, many of which are also offering telephone services, and to Energis, the National Grid Company subsidiary, which plans to launch a long-distance telephone network later this year.

Mercury is increasingly uncomfortable with the entire regulatory framework. Although the company's prices are not capped it must try to keep a competitive edge over BT, which has to cut charges by 7.5 per cent a year after allowing for inflation. This forces Mercury into price cuts.

Mercury is also involved in a court challenge to a recent ruling by Oftel on its payments to BT for interconnection to the network.

Under the ruling Mercury pays BT by the minute for the cost of connecting calls, which ties Mercury to BT's tariff structure. Mercury wants a more flexible system that would allow it to pay in bulk for capacity on BT's network.

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