In 1884, the prevailing public discontent in connection with the Government's treatment of the situation manifested itself in the press and in the House of Commons. The Post Office was accused of practising a policy of strangulation toward the companies, and the Postmaster-General, Mr. Fawcett, acknowledged that there was some truth in the charge. He advised the Treasury that the companies' areas of operation should be unlimited, and that their operations should be confined to the transmission of oral communications. The restricted licences were withdrawn and new, unrestricted licences granted, terminable in 1911 with the same qualifications with reference to royalties and government purchase that were inserted in the old licences. Nominally the result produced free competition, but actually competition was impossible until the expiration of the fundamental patents in 1892. The year before their expiration, the companies succeeded in getting control of the situation by an amalgamation of the United Telephone Company with its licencees under the name of the National Telephone Company. Mr. Dickinson, Deputy Chairman of the London County Council, stated that the nominal capital of the United Telephone Company, £900,000 (with an actual capital expenditure in 1887 within the Metropolitan District of £228,180) was taken over by the National Telephone Company at a cost of £1,484,375, and the Duke of Marlborough said in the House of Lords that of the £3,250,000 capital of the new company over £2,000,000 was "water." Mr. Raikes, the Postmaster-General, who was in favour of competition, wrote to the United Company, disapproving of the whole transaction. With the expiration of the patent rights, the New Telephone Company was resuscitated, with the Duke of Marlborough as chairman, an agreement having been concluded with the Telephone Subscribers' Protective Association for a twelve guineas' service in London, but it in turn was absorbed by the National Company, much to the disgust of the members of the Association. So far as way-leave rights were concerned the position of the companies remained in a very unsatisfactory condition. A committee of the House of Commons advised that certain way-leave rights should be granted, but nothing was accomplished, although a bill was introduced in the House of Commons in 1885 to enable the companies to erect posts without the consent of the road authorities.[828]

Mr. Forbes, the chairman of the National Telephone Company, said to the Committee of 1892: "I am prepared to concede that the telephone company which conducts about 93 or 94 per cent of the whole telephonic business of the country conducts a great deal of it monstrously badly, but it is not their fault, it is the fault of Parliament"; and again in referring to the lack of way-leave power: "Take London for instance; London is very badly served, but why is it very badly served? Because everything depends upon the caprice of the individual." As a result of the complaints that the telephone system was giving an inadequate service because of the high rates on an inflated capital, because the utility of the telephones was impaired in that they could not be used in connection with the telegraph and postal services, and because of the lack of powers to erect poles in the streets or to lay underground wires or to connect their exchanges by trunk lines, the Government announced a change of policy in 1892.[829] This change was set forth in a Treasury Minute of the 23d of May, 1892, and in two memoranda of agreement of the same year to which the National and the New Companies were respectively parties, the arrangements being sanctioned by Parliament in the Telegraph acts of 1892 and 1896. So far as it affected the National Company the arrangement was embodied in detail in an agreement dated the 25th of March, 1896, no similar agreement being made with the New Company because that company went into liquidation in 1892, and in 1896 surrendered its licence. By the agreement of 1896 the National Telephone Company surrendered its previous licence except for certain definite districts called "Exchange Areas," a large number of which were specified in the agreement. These areas were as a rule coterminous with the urban districts, but comprised in addition certain areas made up of two or more urban districts together with the intervening country. Power was reserved to the Postmaster-General to specify other exchange areas, the understanding being, both with regard to areas already specified and those to be specified, that industrial areas of wide extent should be recognized in cases where there were no considerable towns forming centres of business, that neighbouring towns intimately connected in their business relations should be placed in the same area, and that small towns and villages should also be so grouped when each by itself would not pay. Outside these areas the Postmaster-General alone was entitled to carry on telephone business, no more licences being granted for the whole Kingdom, and for any particular town only with the approval of the corporation or municipal authority. Call offices for the use of the public were to be opened at the company's exchanges and connected with the post offices in order that exchange subscribers might telephone over the trunk lines to exchange subscribers in other towns. Where intercommunication took place between the systems of the company and the Post Office, a terminal charge on the part of the receiving system was allowed. Telephonic messages could be sent to the post offices for transmission as telegrams and delivery as such or for delivery as letters. Express messengers could also be sent for by telephone, and telegrams received at the post offices might be transmitted by telephone.

The Postmaster-General was authorized to grant to the company all such powers of executing works within its exchange areas (other than works under, over, or along any railway or canal) as were conferred upon him by the Telegraph acts of 1863, 1878, and Section 2 of the act of 1892. If required by the company, he must provide underground wires between different exchanges in the same exchange area, and must allow the company to conclude agreements with railway and canal companies over whose property he had exclusive right of way. In exchange for these privileges the company agreed to sell its trunk lines to the Postmaster-General, their value being fixed at a later date at £459,114, which amount was paid to the company on the 4th of April, 1895, the length of trunk line taken over being 2651 miles having 29,000 miles of wire. In order to remove a serious handicap to the success of competing companies, the trunk lines were henceforth to be controlled and extended by the Post Office, the company to receive five per cent of any gross charges for trunk-line tolls which it might collect as an agent of the Post Office. The rates charged by the Post Office for trunk-line conversations in 1896 were, for distances of 125 miles and under, the same as those previously charged by the company, and were lower than the old rates for distances in excess of 125 miles.[830]

In the mean time there was evidence of considerable opposition to the practical monopoly of the company within the exchange areas. A motion introduced in the House of Commons by Doctor Cameron, member of Parliament for Glasgow, in favour of government purchase of the telephones, received considerable support, but was rejected by the Government on the ground that the resulting increase in the number of civil servants, not paid at market wages and constantly trying to bring pressure to bear on members, was too serious an evil to receive the sanction of the Government.[831] The claim was also made by some of the towns and by Glasgow in particular that the municipalities should be allowed to install their own telephone systems in opposition to those of the company. A select committee was appointed to consider this demand on the question of "whether the provision made for telephone service in local areas is adequate, and whether it is advisable to grant licences to local authorities or otherwise," but, owing to the dissolution of Parliament, the committee did not present a report. Considerable evidence was heard, however, and the committee recommended that another committee should be appointed during the next session to consider and report upon the evidence already taken and, if necessary, take more evidence. The witnesses examined were as a rule of the opinion that the telephones should be taken over by the state; but there was a difference of opinion as to whether municipal licences should be granted. Dissatisfaction with existing conditions seemed to be widespread. The Glasgow Corporation expressed disgust with the service of the company on account of the difficulty of getting into communication with subscribers, frequent interruptions and noises, and the chance of being overheard by a third party, the first complaint being due in their opinion to inadequate exchange accommodations, the second and third to the one-wire system. The corporation was accused on the other hand of attempting to dislocate the company's system by refusing them permission to lay underground wires, while the overhead wires were unfavourably affected by the electric tramway currents. The Deputy Town Clerk of Liverpool was in favour of government telephones, but opposed municipal licences on the ground that they would increase the expense of telephoning between a municipal exchange and one belonging to the company. The London County Council advised that severe restrictions should be laid upon the company by imposing maximum rates, etc., or that the state should take over the company's system or that the municipality should do so. Questions were sent to subscribers in London by the County Council, by the company, and by the Commissioner of Sewers, asking for their opinion on the service rendered by the company there. As may be imagined, the replies sent to the County Council and the Commissioner were on the whole unfavourable to the company, while those sent to the company were generally favourable to them. It was shown that the number of subscribers in English and Scotch cities was fewer than in most continental cities, and that, comparing the population of the United Kingdom with that of the United States, the number of subscribers in the former should be about 145,000 instead of about 50,000; but nothing was said of the superior postal and telegraphic facilities of the United Kingdom as compared with the majority of foreign countries, facilities which would naturally reduce the demand for a comparatively new and in many cases unpopular method of communication. The rate of the company in the Metropolitan area for a business connection was £20 for a yearly agreement, with substantial reductions for second and additional connections, and £12 for private houses. On a five years' agreement the rates were £17 and £10 respectively. The rate in Paris at the same time was £16. For the provincial cities in England, such as Manchester, Liverpool, etc., the rate was £10 for a first connection and £8 10s. for second and additional connections, and for the large towns, such as Norwich, Chester, Exeter, etc., £8 within half a mile of the exchange, £9 within three quarters of a mile, £10 within one mile, and an additional £2 10s. for each additional half-mile, with reductions for extra connections. For small outlying and isolated towns the half-mile rate was £6 10s., one mile £8, and £2 10s. for every additional half-mile.[832]

In 1898, another committee was appointed with Mr. Hanbury as chairman, "to enquire and report whether the telephone service was calculated to become of such general benefit as to justify its being undertaken by municipal and other authorities, regard being had to local finance." The committee were of the opinion that the existing telephone system was not of general benefit either in the kingdom at large or in those portions where exchanges existed, that it could hardly be of benefit so long as monopolistic conditions existed, and that it was capable of becoming much more useful if worked solely or mainly with a view to the public interest. They condemned the flat rate subscription charge of the company as of benefit only to the wealthier commercial classes in English cities. They commented unfavourably upon the fact that in the London area there were only 237 call offices open to non-subscribers, and that as a rule messages could not be sent from them to subscribers except when the sender and recipient were in the same postal district or town, when the message might be delivered. They were of the opinion that the telephones were far more useful in other countries where the conditions were not so favourable. Conditions, they thought, were unlikely to improve under the present management. The company must pay dividends on an inflated capital; its licence would expire in 1911, and the Government was hardly likely to pay the company at that date for goodwill. In addition, there were no restrictions on charges, the company had a motive for limiting its subscribers, as expenses increased proportionately with an increase in their number, and the question of way-leaves was a source of great difficulty. Finally, they declared in favour of competition by the municipalities and the Post Office as tending to reduce rates, extend the system, and, if the Government should eventually purchase the telephones, give alternative systems to choose from. The Government adopted the committee's report, and, in a Treasury Minute of the 8th of May, 1899, laid down the principles upon which licences should be granted by the Postmaster-General to the municipalities, and announced that in London the Postmaster-General would himself establish an exchange system.[833]

In accordance with the finding of the committee and the resulting Treasury Minute, an act was passed in 1899, conferring upon the boroughs and borough districts to which the Postmaster-General might grant licences the right to borrow money upon the security of the rates for the erection and management of telephone systems. A loan of £2,000,000 was authorized for the use of the department itself in establishing telephone competition with the company in London. The act also defined the relations between the company and the municipalities (or other new licencees) in the event of competition. If the telephone company would agree to abandon the power of discriminating between subscribers and would consent to limit their charges within the maxima and minima prescribed by the Postmaster-General, the latter was to extend any way-leave rights already possessed for the period of the licence granted to the competing municipality or new licencee.

If the new licence were extended beyond 1911, the company's licence would be likewise extended, but if their licence were extended for as much as eight years beyond 1911, the company were bound, at the request of the licencee and under certain conditions, to grant interchange of communication within the area. The new licences would be granted only to local authorities or companies approved by them, and the National Company was prohibited from opening exchanges in any area in which they had not, before the passing of the act, established an effective exchange. The effect of the act was to limit competition to the municipalities, to confine the National Company to those towns and areas they were already serving, and to throw upon the Postmaster-General the duty of serving other parts of the country.[834]

The form of the licences for municipalities, among other conditions, contained provisions designed to secure for the public an efficient and cheap service. It was provided that the plant should be constructed in accordance with specifications prepared by the Postmaster-General, no preferential treatment should be allowed to any subscriber, the charges made should be within certain specified limits, neither the licence nor any part of the plant of the licencee should be assigned to or amalgamated with the business of any other licencee, and that the licence might be terminated if an exchange system were not established within two years. The provisions of the agreement of 1896 which secured coöperation between the Post Office and the National Company and combined the telephone with the telegraph and postal services were also introduced into the municipal licences. The municipalities were bound to give intercommunication between their exchanges and any established by the Postmaster-General, and terminal charges for trunk-wire communications between the exchange subscribers of any other system and those of the local authority were forbidden. About sixty local authorities made enquiries with a view to taking out licences, but only thirteen licences were accepted. That of Tunbridge Wells was surrendered in 1903, owing to an agreement arrived at between the National Telephone Company and the corporation, the municipal telephones not having proved a success.[835] In the case of seven others the licences were surrendered or cancelled. The following corporations held licences in 1905:—

Hull licence terminating 31st December, 1911
Glasgow 1913
Swansea 1920
Brighton 30th April, 1926
Portsmouth 1926