Opinion: regulator needs to act on mid-contract price hikes

Many customers are completely unaware they'll soon face huge increases to their monthly telecoms bills. Thank goodness the regulator is finally taking a closer look at the practice of mid-contract price hikes, writes John Fitzsimons.

The last thing any of us need right now, given the financial pressures, is to have our regular bills increased.

Yet this is the time of year when communication providers ‒ the firms that deliver broadband, mobile phone networks, pay TV and the like ‒ announce the price hikes they will implement from April.

We have had a host of recent examples of it happening too.

Just last week Sky announced an 8.1% price hike for broadband and TV customers, while Virgin has introduced inflation-linked price hikes to its contracts for the first time.

These mid-contract price rises have become commonplace, but they are now under investigation from Ofcom, the communications regulator.

Ofcom said that it wanted to examine the “unpredictability” inflation-linked price rises provide for customers, and whether providers do enough to make clear the likelihood that the price we sign up for at the start of our contract will be increased before the agreement is through.

Why are these price rises even allowed?

It's good to see that Ofcom is carrying out this study.

Frankly, I think there are big questions to be asked about the practice of mid-contract price increases. 

First and foremost, I don’t really understand why these price hikes are even permitted in the first place.

It’s one thing to increase costs at the end of an initial contract; it’s something that we face commonly in various other areas of our lives.

When my fixed rate on my mortgage comes to an end, I’ll move to a costlier deal, and it’s much the same with energy bills.

That doesn’t make it right for firms to rip people off once they come to the end of that initial deal, obviously, but equally it’s not something particularly out of the ordinary.

Hiking bills halfway through that initial contract is another matter entirely.

If I sign up for a two-year phone contract, then that price should not change during those two years.

It’s up to the provider to price that properly so that, irrespective of what happens in the economy, they make enough from my bill payments to cover their costs.

It’s not like I get a letter from my mortgage lender, two years into a five-year fixed rate, to say that because inflation is high they are upping my monthly repayments. It’s a farce that this is permitted at all.

Which inflation measurement?

It would be bad enough if these price rises were limited to the rate of inflation alone, yet that isn’t happening either.

Instead, providers are writing it into the contracts that they are able to hike our bills by inflation PLUS a couple of percentage points.

That would be painful enough in normal times, but given the eye-watering rates of inflation we have now, it translates into massive increases to our bills.

It gets even worse too, given the measurement of inflation used by providers.

The retail prices index (RPI) is effectively a dead measurement ‒ it’s acknowledged that it doesn’t give a great insight into what’s actually happening with inflation, and has effectively been dropped.

The only reason the Office for National Statistics continues to publish the figure is because it's still used in contracts for these sorts of price rises, and it is always higher than the likes of the consumer prices index (CPI).

So in January, CPI was 10.5%, while RPI was a monster 13.4%.

If your provider linked their bills to the RPI measurement for January, at a couple of percentage points above, then you’re looking at a 15% plus increase.

Treating customers fairly

Ofcom is right to highlight its concerns over how well providers make clear their ability to implement these sorts of bill hikes partly through a contract.

I have no doubt that many customers are completely in the dark about the potential for their bills to increase, through no fault of their own, mid-contract.

As a result, providers need to do a much better job of improving awareness.

Sadly, I’m not holding my breath for Ofcom to do the right thing and ban the practice entirely. Indeed, in announcing the investigation, the regulator actually outlined why such bill increases may be justified, pointing to things like investment in infrastructure.

The idea that this can only happen if providers can increase costs part way through a contract, rather than setting a price at the outset and sticking to it, is for the birds in my view.

However, so long as Ofcom is making the case for these bill hikes on behalf of suppliers, there’s little chance of it changing. 

For now, the best we can hope for is for suppliers to be more transparent about when and by how much our bills will increase, even if the practice itself is a disgrace.