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Chris Godsmark reviews the legacy of the telecoms consumer champion

Of all the UK utility watchdogs it is the oldest, Oftel, that has emerged with the strongest reputation. Over the past five years the image of the telecoms watchdog became inextricably linked with ever tougher public pronouncements by its director general, Don Cruickshank. An irascible Scot, Cruickshank carefully moulded his image as a consumer champion who boldly stood up to BT's giant lobbying machine and emerged with a strong and coherent regulatory regime.

I have often wondered whether Cruickshank spared a thought for the troubles faced by his counterparts who struggled to regulate more mundane industries such as water or electricity. In the five years to "retirement" in April 1998, Cruickshank's reputation with politicians, consumer groups and, most importantly, the business press (though not the telecoms companies) went from strength to strength. At the same time Professor Stephen Littlechild, the acerbic free-market economist responsible for electricity regulation, saw his image severely damaged after changing his mind over the price formula for power distributors.

The other watchdogs fared little better. Clare Spottiswoode emerged from a courageous struggle with British Gas with few friends in new Labour's ranks. And the urbane water regulator, Ian Byatt, was widely criticised for his lenient price formula for the big privatised water groups, which allowed bills to rise by far more than prices to boost investment in the UK's archaic water and sewerage infrastructure.

So what was Cruickshank's secret? Last December he came closest to making what amounted to a valedictory speech at a Financial Times conference in London. It was one of those normally dry occasions, when delegates pay at least [pounds]1,000 to listen to a day of speeches on such subjects as "wholesale accounting rates" or "long-run incremental cost accounting": the sort of subjects devised by economists to justify their existence.

Yet this event was unusual. Cruickshank's speech came after a series of self-congratulatory addresses by executives from the incumbent continental monopolies, praising the medicine of competition. "They would, wouldn't they?" was Cruickshank's response. He lost no time in cutting his audience down to size with the prediction that, by 2001, BT would account for only half of UK telecommunications revenues, a move that would be replicated on the continent.

Cruickshank's boldest claim was that the most vulnerable consumers of telecoms services - domestic and small business customers - were being given a choice of supplier over the so-called "last mile" route for the local exchange into the home or office. He told the conference that in the UK we had something "amazing and rare", adding that we have "real competition in what many said was a monopoly". By 2000, he reckoned that 70-80 per cent of the population would have access to at least three competing local access providers.

With hindsight, this seemingly golden legacy was far less conclusive. Historically Oftel had been obsessed with fostering local network competition, a policy initiative accelerated by Cruickshank. The aim was to encourage cable companies and others to invest billions in rival local networks to BT. It was only by providing a choice of local telecoms networks, Oftel argued, that operators could offer value-added services to customers. Yet the bold projections of the cable industry, like those of Eurotunnel, proved grossly inflated. Seven years after the UK domestic market was fully liberalised, with the break-up of the controversial "duopoly" between Mercury and BT, cable companies are still struggling to persuade more than 30 per cent of their potential customers to buy their services. More than a quarter of those who do sign up "churn off" the cable networks again each year.

The US, which deregulated AT&T at a similar stage, chose a different route to competition. Customers were able to "pre-select" a rival long-distance carrier of choice to AT&T, while local services remained a de facto monopoly until recently, under the control of the so-called Baby Bells. The result was a sudden one-off surge in long-distance competition, as companies such as MCI and Sprint rapidly carved out a substantial share of the market.

This apparently subtle variation in regulatory emphasis made a surprising amount of difference in practice. It is true that many large businesses now have a choice of at least two suppliers of direct telecoms services. But by the time Cruickshank walked out of Oftel for the last time, BT still accounted for 88 per cent of residential exchange lines - and this after 14 years of competition in one form or another. Worse still, Oftel has recently agreed to allow the cable companies to cut investment spending in the face of huge debt burdens. The policy change means long-suffering customers outside major conurbations will have to wait much longer to see their streets cabled up.

It is no coincidence that on the continent, where telecoms com- petition was introduced in a "big bang" on 1 January 1998, the regulators chose something closer to the US system. Few in the European Commission expect the local monopolies of France Telecom or Deutsche Telekom to be broken up. But customers will be able to pre-select a bewildering variety of medium- and long-distance networks. It is competition of a sort, an d at a much quicker pace than in the UK.

Despite Cruickshank's excellent relations with new Labour, when the crunch came the new government abandoned the Oftel policy. Late last year Barbara Roche, the telecoms minister, signed up to an EC directive that will bring the UK telecoms access system into line with the rest of Europe from 2000. Cruickshank would argue that the UK experiment still managed to produce far more local choice than the continental or US systems will. But this view cannot hide the fact that Oftel's policy had few supporters from consumer groups.

Cruickshank's consumer credentials are also thrown into doubt in another important respect. One of the most interesting - and least reported - documents produced by Oftel in the last year of Cruickshank's tenure was a paper looking back at the impact of 13 years of price regulation over BT. The headline figures, of course, looked impressive. BT's controlled prices those regulated by Oftel - fell by 47 per cent in real terms between 1984 and 1997. The reductions were progressively larger as the years went on. Between 1993 and 1997 BT's "basket" of regulated prices, which included all residential and most business tariffs, fell each year by 7.5 per cent below inflation.

Yet behind these bold statistics a different story emerged. The bottom 80 per cent of residential customers, 16 million households, saw price reductions of just 1 per cent over the entire 13-year period. In real terms phone prices were pretty much static. The real benefit of the cuts was concentrated by BT on the top 20 per cent of residential customers and business users, where competition was most intense. In short, those of us who made lots of international calls were given much to smile about; those who only used the phone for a few minutes a day to make local calls saw little impact from regulation at all.

A big question for Cruickshank was why it took Oftel so long to work this out. The new four-year price formula, introduced last August, concentrates price cuts on the bottom 80 per cent of households, calculated by the size of their bills. Remaining households and businesses have been removed from retail price regulation. This is Oftel's belated recognition of the differential gains won to date, as well as its gamble that competition will reap bigger benefits than arcane regulatory price caps ever could.

In the future the policy will be relaxed further. Cruickshank's parting gift to consumers was the news that retail price regulation would end completely by 2001, when the current price formula runs out. The market would be sufficiently competitive by then, no longer "BT-centric". The central theme of the Cruickshank regime was that competition would ultimately make regulation redundant. Oftel will still exist, but its role will be broader: monitoring anti-competitive behaviour, rather than maintaining day-to-day control over commercial policy. Telecoms may no longer be a conventional utility business, but there is no guarantee that consumers will still be protected.

COMPANY FILE

Yorkshire Water

Roots: Yorkshire Water was privatised along with 10 other water companies in 1989. The company achieved early fame in 1993 when it was the first of the privatised water companies to be successfully prosecuted by the National Rivers Authority. Staff at a water treatment works near Sheffield had contaminated a trout stream, causing pollution which killed hundreds of fish.