Charles Dunstone, the chief executive of Carphone, emphasised that he would claw back every penny that he stands to lose if BT fails to deliver by June 30 an automated process for local loop unbundling.

At present the process, under which BT’s rivals instal their own equipment into BT’s local exchanges and take control of the customers, is manual. Mr Dunstone is relying on the new automated system process to help him to make his free broadband product a success.

“If it is not ready, BT will owe the difference between IPStream (the broadband product that it sells to competitors) and LLU for every customer that should have been switched over,” he said.

A spokeswoman for BT’s Openreach division, which is overseeing the introduction of the new automated process, said that it recognised there are “always risks” with delivering new IT systems. However, she said that Openreach had a full contingency plan that “has been discussed and agreed with Carphone and other players to ensure LLU orders are processed as normal”.

Carphone is expected to spark a new price war in the fiercely competitive high-speed internet market with its offer of a free unlimited broadband service of up to 8 megabits per second for customers who also take its fixed-line calls service.

Customers who take up the offer will pay £20.99 each month — £9.99 for unlimited calls and £11 for line rental. In addition, they must pay a one-off £29.99 connection fee. BT’s cheapest free calls at any time package is currently £25.50, including line rental. An 8-megabit broadband package would cost an additional £26.99 per month, meaning that Carphone essentially is throwing in broadband at no extra cost.

Carphone, which wants to overtake the cable companies to become the main rival to BT in the residential telecoms market, launched the service, which is available to nearly 70 per cent of the population, yesterday. The company, which has become a formidable force in the telecoms market since it launched its TalkTalk residential telephone brand in February 2003, with 2.6 million customers, will initially offer a re-sold BT product. It will offer its own “unbundled” product from July. The group says that offering a service via local loop unbundling costs it about £9 per month less than re-selling a BT product.

However, experts said that rivals were unlikely to leave Carphone unchallenged for long. Although BT is hampered by price controls that limit its ability to offer aggressively priced combined broadband and calls packages, these controls are set to be removed in the summer.

BSkyB, the satellite broadcaster in which News Corporation, parent company of The Times, owns a 37.9 per cent stake, is gearing up to offer its first broadband internet service after a tie-up with Easynet.

NTL, the cable player, hopes to add impetus to its broadband offering with a “four-play” service of high-speed internet, subscription television, fixed-line and mobile following its tie-up with Virgin Mobile.

Richard Ireland, head of telecoms at Ernst & Young, said: “Carphone is positioned well to compete on price with BT. However, it is just one of many competitors to BT with a strong hand to play.”

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