UK internet service providers (ISPs) have reacted with dismay to the publication of a direction statement from telecoms regulator Ofcom, which they say leaves BT free to levy high charges on the wholesale digital subscriber line services it leases to them.

In an attempt to introduce fairer competition to the broadband market, Ofcom is attempting to reduce the considerable price gap between BT's two types of wholesale services, IPStream and DataStream, to make it easier for ISPs to migrate customers from one to the other.

But the margin squeeze test set out in the regulator's direction statement is actually having the reverse effect, shoring up BT's dominant position in the market, according to Stephen Dyer, chairmain of UK ISP Mailbox Internet, as BT has taken the opportunity to raise the price of one to meet the other.

"The thing that is wrong is that Ofcom does not say how much BT must charge per month, only that the margin between the two [DataStream and IPStream] products must be this much; and BT has used this as an excuse to increase [IPStream] prices," he said.

A statement from Jessica Hendrie-Liaño, chair of the Internet Services Providers' Association council, pointed out that smaller ISPs may have no choice but to try and pass on these price rises to end-users.

"SME ISPs - already operating on tight margins - will have particular difficulty managing these price changes. Many have customers on annual contracts, and so will have great difficulty asking their customers to pay more," she said.

Dyer fears there may be another unwelcome surprise for ISPs in store on 10 September, when BT is set to introduce two new ways of charging for wholesale broadband services.

One method is for ISPs to pay a lot of money for one central connection that may have only one customer on it. This is subject to the standard IPStream pricing recently increased, but there will also be usage-based charges, and neither BT nor Ofcom have yet revealed what these will be.

"If that turns out to be high, that's a triple whammy" complained Dyer.

Historically, IPStream has been the cheaper service most readily available to smaller providers, but the more expensive and more flexible DataStream allows ISPs more scope to tailor broadband services to customers' needs.

But rather than bringing down the price of DataStream, BT looks set to raise the price of IPStream by 32 per cent or more to reduce the pricing differential between the two, a prospect that provokes outrage from ISPs.

"This could force small ISPs out of the broadband market and out of business, and also result in a market consolidation which would give a small number of large broadband providers much more control over pricing," said Dyer.