1993/94 median residential bill have fallen at an annual rate of about 2% since 1988. Calling rates have, however, increased very substantially over this period.

It is instructive to analyse further the relationship between BT's and Mercury's call charges. A recent study by Analysys (1994) has compared call charges of BT and Mercury customers over time in a number of categories. Table 2.8 gives the comparisons for an average and high usage residential customer, for a six-line business customer and for a fifty-line business customer. The data clearly show a pattern in which Mercury maintained a consistent price differential compared with BT until about 1991, which was larger for bigger customers. This differential was based upon an estimate of the switching costs of BT's customers. From 1991, however, the pattern changed. In that year, BT began to make substantial discounts available to its larger customers, subject to the regulatory conditions described in Section 1.4 above. Mercury found it difficult to match these price cuts, and its discount to BT declined. At the same time, new entrants in the market, such as Energis in long distance and international resellers, altered market conditions considerably. Energis, for example, claims in its advertisements to offer substantial price reductions compared with all other operators.

### 2.3 Profits, Investment, Employment and Productivity

BT's financial performance since privatisation has been strong. As Table 2.9 demonstrates, its return on capital employed has fluctuated between 17% and 22%, except for the financial year ending March 1993, when the company made a substantial provision for restructuring. The relatively high returns have attracted some unfavourable comment. The system of price control described above is operated by OFTEL in such a way that it periodically has to reset the cap in a manner calculated to enable BT, on the basis of an exogenous forecast of efficiency growth, to attain a rate of return equal to its cost of capital at the end of the following control period. OFTEL's analysis of performance and outturn during the period following the 1988 price review suggested that the two were reasonably close together. But this finding has not silenced criticism of the regulatory regime.

Some insight into the profitability of BT's separate businesses is provided by the data on financial returns by service which OFTEL has published. The data show revenues and fully allocated costs of access (business and residential) and local (long distance and international calls). They are shown in Table 2.10. Clearly competition is driving down the rate of return in international markets. It is also noticeable that the rate of decline of the access deficit is slow.

These data on BT's systems business also make it possible to establish the profitability of the company's other activities - unregulated businesses in the UK and overseas business. Table 2.11 shows this information for 1993/94 both on an historic cost and a current cost accounting basis. The key point is that BT's turnover of over $ £2 $ billion outside its systems business generates either no operating profit at all (on a CCA basis) or a small loss (on a HCA basis).

Over the period since privatisation BT has maintained capital investment at high levels, particularly during the late 1980s, when digital exchanges were being installed and a fibre