Price variations will be by reference to specified formulae

3.10  BT's prices will be adjusted over the ten year period according to different Variation of Prices formulae for each service. The formula for each service contains combinations of labour, materials, and transport, and telecommunications prices which reflect the underlying cost base in providing that service (Figure 13). The weight attached to the different elements varies in each formula in recognition of the different elements used to provide each service. For example, labour has a relatively high weighting in the formulae for BOXER and UNITER, compared with other services.

3.11  Changes in the costs of labour, transport and materials are calculated by reference to published price indices as defined in the contract (Appendix 6 details the relevant indices). Changes in the costs of telecommunications services are calculated by reference to a series of "price baskets", which were specially put together for this contract, and are based on selections of published tariffs of BT and other leading suppliers. The Department are paying lower rates than some published tariffs, and they will benefit from indexing annual price adjustments to changes in published tariffs if prices fall quickly in the telecommunications industry.

3.12  At the time of the contract award in July 1997, the Department and BT had agreed only one price basket, for Point-to-Point services. They did not agree the baskets for the other telecommunications services until September 1998. Mason Communications noted that some of the baskets were weighted in BT's favour as they contain a large element of published tariffs for BT's services, which are regulated by the Office of Telecommunications. BT's regulated prices may not fall as quickly as unregulated telecommunications operators, so the baskets may not reflect the whole market for each service. The Department have the opportunity to review each price basket each year to ensure that the baskets continue to reflect the market accurately. If necessary, both parties can agree changes to the composition of the baskets, to include new services available in the market, if appropriate.