ON Tuesday this week the Cabinet formally decided to enter negotiations with the two bidders interested in buying a 35 per cent stake in Telecom Eireann. Two days later Mr Sean McMahon, the regulator in the Department of Communications, wrote to all the Irish telecommunications companies warning them that there was "a growing abuse" of Telecom's position as the sole provider of voice telephony.

In future, the letter says, the Minister Mr Lowry, has directed that Telecom is not to connect services which use a particular device known as a router. Routers have been used by some private companies, such as Esat, to compete with Telecom for business customers. They are important because they allow calls to be "routed" through the Telecom network and thus save companies like Esat the cost of leasing lines to serve their customers.

There is a clear link between the negotiations on the 35 per cent Telecom stake and the new regulatory move. While the use of routers has been controversial for some time, the timing of the Department's move appears far from coincidental.

Talks on the sale of the Telecom Eireann stake with the Dutch/Swedish consortium of KPN and Telia and the Danish company Tele Danmark are now to get underway in earnest, after Department officials decided that the initial bids were worth pursuing.

A key attraction for the two bidders is Telecom's monopoly position in providing voice telephony services, which the Government has promised to protect until January 1st, 2000. The latest regulatory move is designed to underpin this monopoly position and thus support the price the Government will get for the stake. However, the inevitable result of blunting competition in the market is that the cost of calls to business customers will not fall as fast as they otherwise would.

Private telephone companies compete with Telecom Eireann in the provision of services to business using two mechanisms. One is the use of lines leased from Telecom, which take the traffic from the customers premises to the private companies' headquarters, where it is then directed on to its destination.

However, leasing lines from Telecom is expensive and a cheaper way for the private telecommunications company to operate is to use a device called a router or autodialer. This directs the traffic straight from the customer's PABX through the Telecom local network to the private company's "node" or central communications device, thus saving it the expense of leasing a line.

Esat, which has 1,500 business customers in Ireland, has been the main user of these routers, always arguing that it was perfectly within its rights to do so. However, Mr Lowry has now told Telecom Eireann not to connect such services using routers or autodialers in future.

The letter makes no mention of existing customers using routers and Esat has said that it is "business as usual". However, while Esat's existing routers will presumably continue to operate, Telecom has said it will comply with the Ministerial directive and not connect new ones.

Esat has said it is confident that the issue can be sorted out before it needs new capacity. But, given the definitive text of the Minister's letter, it is not clear how this will happen. Esat - also part of the winning consortium now in talks with the Government on the second mobile phone licence - could, of course, opt to use more costly leased lines.

Other private companies which already solely use leased lines, such as Cable & Wireless, will be pleased by the decision.

The Department's move shows its determination to underpin Telecom Eireann's monopoly in the provision of the main voice telephony services up to January 1st, 2000.

While Mr Lowry's hard line may help in the sale of the Telecom Eireann stake, it will also reduce the pressure on the State owned company to further cut costs to business customers.

Telecom points out that it has already reduced costs to customers considerably and will continue to do so, in tandem with a programme of making itself more efficient. But if competition in the market is reduced, inevitably the costs to customers will not fall as rapidly.