overall benefit should not significantly exceed that available from the best combination of single site-based discounts. In the price control years from August 1991 to July 1993, the overwhelming proportion of real price cuts took the form of such discounts which benefitted only large, especially business customers. In order to prevent a continuation of this practice, which denied most customers the benefits of price reductions, OFTEL proposed, and BT accepted, that for the purposes of computing price reductions to satisfy the new RPI- $ 7\frac{1}{2} $ price cap, any further discounts from August 1993 should be excluded. BT is still entitled to offer further packages, and continues to do so, but such additional reductions are additional to the general decline in rates necessary to satisfy the price control regime. In other words, they are “out of the basket”.

### 1.5 Interconnection

Interconnection has proved one of the most controversial elements in telecommunications regulation in the United Kingdom, as elsewhere. As competition has developed, its importance has grown, as has the complexity of regulation. The Condition in BT's Licence which governs interconnection arrangements now exceeds thirty printed pages.

The regulatory arrangements governing interconnection of other operators with BT are that initially the parties try to negotiate an arrangement. If they are unable to do so, either side can invite OFTEL to make a determination of charges. The basis for setting charges is that the interconnecting operator pays to BT “the cost of anything done pursuant to or in connection with the agreement including fully allocated costs attributable to the service to be provided and taking into account relevant overheads and a reasonable rate of return on attributable assets”.

When Mercury was initially licensed, interconnection with BT was clearly essential for its survival. The two companies were unable to agree on charges, and OFTEL determined them in October 1985 (see Table 1.6). It has been asserted that the DGT made that initial determination in a way which had the effect of favouring Mercury; however, in the absence of the relevant cost information, this cannot be verified. In any case, the indexing procedure for interconnection charges (broadly, RPI-3) probably understated the cost reductions which BT was achieving in conveyance and switching. As a result, even if interconnection charges in 1985 fell short of fully allocated costs, they would have moved towards, and potentially overtaken them, in the course of the subsequent years.

After 1985 OFTEL made a number of other determinations involving interconnection rates for telex and interconnection between fixed and mobile operators. In other cases, the parties were able to reach agreement without seeking a determination.

In 1991, as part of the agreement between BT, the Government and OFTEL at the time of the duopoly review, it was agreed that, in the light of the continued restriction on BT's capacity to raise quarterly rentals, operators interconnecting with BT should make contributions to the resulting "access deficit", proportional to the profitability of the service which the interconnecting operator was providing. It soon became apparent, however, that the need to make such contributions would have an adverse effect upon other operators (both Mercury and new entrants).