JUDGMENT
British Telecommunications Plc (Appellant) v
Telefónica O2 UK Ltd and Others (Respondents)
before
Lord Neuberger, President
Lord Mance
Lord Sumption
Lord Toulson
Lord Hodge
JUDGMENT GIVEN ON
9 July 2014
Heard on 3 and 4 February 2014
Appellant
Daniel Beard QC
1st Respondent (Telefonica
O2 UK Ltd)
Sarah Lee
Ligia Osepciu
(Instructed by BT Legal)
Jonathan Crow QC
Robert O’Donoghue
(Instructed by King &
Wood Mallesons LLP)
Interested Party (Office of
Communications)
Javan Herberg QC
Mark Vinall
(Instructed by
Ofcom)
Intervener (Gamma
Telecom Holdings Ltd)
Sarah Love
(Instructed by Charles
Russell LLP)
2nd
, 3rd and 4th Respondents
(EE Ltd, Vodaphone Ltd
and Hutchison 3G UK Ltd)
Jon Turner QC
Philip Woolfe
(Instructed by EE Limited,
Herbert Smith Freehills
LLP; Constantine Cannon
LLP)
LORD SUMPTION (with whom Lord Neuberger, Lord Mance, Lord Toulson
and Lord Hodge agree)
Introduction
1. These appeals arise out of a dispute between British Telecommunications Plc,
whom I shall call “BT”, and four mobile network operators. The dispute is about the
termination charges which BT is entitled to charge to mobile network operators for
putting calls from the latter’s networks through to BT fixed lines with associated 08
numbers. The dispute is a highly technical one, both factually and legally, and like
most such disputes involves a surfeit of acronyms. But it raises issues of great
importance to the telecommunications industry, to its regulator, and indirectly to
millions of consumers.
2. The following summary is a gross over-simplification but is sufficient for
present purposes. In principle, the cost of a call is charged to the caller by the
originating communications provider to which he subscribes (a “CP”, in the jargon
of the business). Out of its charges to the caller, the originating CP must pay charges
to the terminating network or to an intermediate carrier if there is one. 08 numbers
are known as non-geographic numbers. They are allocated to fixed line subscribers,
and automatically translated into the appropriate geographic number in the course
of transmission. Where the call originates from another fixed line, an 08 number
allows the subscriber to whom that number has been allocated to receive it on the
basis that the caller will be charged at a standard, and generally reduced, charge.
Calls to 080 numbers are free to fixed line callers except where charges are notified
at the beginning of the call. Calls to 0845 numbers are charged to fixed line callers
by the originating CP at its standard local call rate. Calls to 0870 numbers are
charged to fixed line callers by the originating CP at its standard national call rate
except where different charges have been published. In each case, the terminating
CP will collect a termination charge from the CP from which it received the call.
However, where calls originate from a mobile network operator, that operator will
commonly charge the caller for a call to a 080 number, or charge him more than the
standard local or national rate for a call to a 0845 or 0870 number.
3. In 2009 BT notified mobile network operators of a revised scheme of
termination charges for 08 numbers. The defining feature of the new scheme was
that mobile network operators would be charged at a rate which varied according to
the amount which the originating network charged the caller. The higher the charges
to the caller, the greater the termination charge. The new scheme was rejected by
the four mobile network operators party to these appeals. The issue was submitted
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to the Office of Communications (Ofcom) under a statutory dispute resolution
procedure. Appeal lies from Ofcom to the Competition Appeal Tribunal, and from
them on points of law only to the Court of Appeal. Ofcom decided that BT should
not be allowed to introduce the new charging scheme. The Competition Appeal
Tribunal overturned that decision and decided that they should. The Court of Appeal
restored the original decision of Ofcom.
The legal framework
4. The sector is regulated under a pan-European regulatory scheme known as
the Common Regulatory Framework. The objective of the scheme is to ensure endto-end connectivity on a common basis throughout the EU, without distortions
arising from anti-competitive behaviour or restrictions arising from national law or
practices. It is contained in a number of Directives, all issued on 7 March 2002. Two
of these are important for present purposes. They are Directive 2002/21/EC, known
as the Framework Directive and Directive 2002/19/EC known as the Access
Directive. They were amended in 2009, with a deadline for transposition in 2011,
after the time which is relevant for the present appeal. I shall refer to them below in
their unamended form. They refer to each other, and have to be construed together.
The Directives
5. The background to the Directives, and previous Directives on the same
subject, is the progressive liberalisation of the European telecommunications market
which had previously been dominated by state-controlled monopolies. The
Framework Directive recites, at Recital (1), that the current regulatory framework
under previous Directives “has been successful in creating the conditions for
effective competition in the telecommunications sector during the transition from
monopoly to full competition.” Recital (25) records that it may still be necessary to
impose ex ante obligations on CPs to ensure the development of a competitive
market, where CPs exceed a given “threshold” of market power, but that the relevant
threshold should now correspond to the concept of “dominance” as defined in the
case-law of the Court of Justice, i.e. the possession of significant power enabling a
CP to operate unconstrained by competitive pressure. Recital (27) recites:
“(27) It is essential that ex ante regulatory obligations should only be
imposed where there is not effective competition, i.e. in markets where
there are one or more undertakings with significant market power, and
where national and Community competition law remedies are not
sufficient to address the problem.”
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Subject to ex ante regulation in circumstances where there is not effective
competition, the scheme of the Directives is permissive. The Access Directive
recites:
“(5) In an open and competitive market, there should be no restrictions
that prevent undertakings from negotiating access and interconnection
arrangements between themselves, in particular on cross-border
agreements, subject to the competition rules of the Treaty. In the
context of achieving a more efficient, truly pan-European market, with
effective competition, more choice and competitive services to
consumers, undertakings which receive requests for access or
interconnection should in principle conclude such agreements on a
commercial basis, and negotiate in good faith.
(6) In markets where there continue to be large differences in
negotiating power between undertakings, and where some
undertakings rely on infrastructure provided by others for delivery of
their services, it is appropriate to establish a framework to ensure that
the market functions effectively. National regulatory authorities
should have the power to secure, where commercial negotiation fails,
adequate access and interconnection and interoperability of services
in the interest of end-users. In particular, they may ensure end-to-end
connectivity by imposing proportionate obligations on undertakings
that control access to end-users.
…
(14) Directive 97/33/EC laid down a range of obligations to be
imposed on undertakings with significant market power, namely
transparency, non-discrimination, accounting separation, access, and
price control including cost orientation. This range of possible
obligations should be maintained but, in addition, they should be
established as a set of maximum obligations that can be applied to
undertakings, in order to avoid over-regulation.
…
(20) Price control may be necessary when market analysis in a
particular market reveals inefficient competition. The regulatory
intervention may be relatively light, such as an obligation that prices
for carrier selection are reasonable as laid down in Directive
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97/33/EC, or much heavier such as an obligation that prices are cost
oriented to provide full justification for those prices where
competition is not sufficiently strong to prevent excessive pricing. In
particular, operators with significant market power should avoid a
price squeeze whereby the difference between their retail prices and
the interconnection prices charged to competitors who provide similar
retail services is not adequate to ensure sustainable competition….”
6. The general objectives of the scheme are identified by Articles 7.1 and 8 of
the Framework Directive (as in force at the relevant time). They provide:
“Article 7
Consolidating the internal market for electronic communications
1. In carrying out their tasks under this Directive and the Specific
Directives, national regulatory authorities shall take the utmost
account of the objectives set out in Article 8, including in so far as
they relate to the functioning of the internal market.
…
Article 8
Policy objectives and regulatory principles
1. Member States shall ensure that in carrying out the regulatory tasks
specified in this Directive and the Specific Directives, the national
regulatory authorities take all reasonable measures which are aimed at
achieving the objectives set out in paragraphs 2, 3 and 4. Such
measures shall be proportionate to those objectives.
Member States shall ensure that in carrying out the regulatory tasks
specified in this Directive and the Specific Directives, in particular
those designed to ensure effective competition, national regulatory
authorities take the utmost account of the desirability of making
regulations technologically neutral.
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National regulatory authorities may contribute within their
competencies to ensuring the implementation of policies aimed at the
promotion of cultural and linguistic diversity, as well as media
pluralism.
2. The national regulatory authorities shall promote competition in
the provision of electronic communications networks, electronic
communications services and associated facilities and services by
inter alia:
(a) ensuring that users, including disabled users, derive maximum
benefit in terms of choice, price, and quality;
(b) ensuring that there is no distortion or restriction of competition in
the electronic communications sector;
(c) encouraging efficient investment in infrastructure, and promoting
innovation;
…
4. The national regulatory authorities shall promote the interests of
the citizens of the European Union by inter alia:
(a) ensuring all citizens have access to a universal service specified in
Directive 2002/22/EC (Universal Service Directive);
(b) ensuring a high level of protection for consumers in their dealings
with suppliers, in particular by ensuring the availability of simple and
inexpensive dispute resolution procedures carried out by a body that
is independent of the parties involved;
…”
7. Detailed provision for the terms of interconnection between CPs is contained
in the Access Directive. Article 1 provides:
“Article 1
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Scope and aim
1. Within the framework set out in Directive 2002/21/EC (Framework
Directive), this Directive harmonises the way in which Member States
regulate access to, and interconnection of, electronic communications
networks and associated facilities. The aim is to establish a regulatory
framework, in accordance with internal market principles, for the
relationships between suppliers of networks and services that will
result in sustainable competition, interoperability of electronic
communications services and consumer benefits.”
8. The key element of the system for achieving these objects is the legal
relationship between CPs. This is embodied in interconnection terms agreed
between them, generally in a series of bilateral contracts. The relevant provisions of
the Access Directive are Articles 4 and 5.
“Article 4
Rights and obligations for undertakings
1. Operators of public communications networks shall have a right and
when requested by other undertakings so authorised, an obligation to
negotiate interconnection with each other for the purpose of providing
publicly available electronic communications services, in order to
ensure provision and interoperability of services throughout the
Community. Operators shall offer access and interconnection to other
undertakings on terms and conditions consistent with obligations
imposed by the national regulatory authority pursuant to Articles 5, 6,
7 and 8.
Article 5
Powers and responsibilities of the national regulatory authorities
with regard to access and interconnection
1. National regulatory authorities shall, acting in pursuit of the
objectives set out in Article 8 of Directive 2002/21/EC (Framework
Directive), encourage and where appropriate ensure, in accordance
with the provisions of this Directive, adequate access and
interconnection, and interoperability of services, exercising their
Page 7
responsibility in a way that promotes efficiency, sustainable
competition, and gives the maximum benefit to end-users.
In particular, without prejudice to measures that may be taken
regarding undertakings with significant market power in accordance
with Article 8, national regulatory authorities shall be able to impose:
(a) to the extent that is necessary to ensure end-to-end connectivity,
obligations on undertakings that control access to end-users, including
in justified cases the obligation to interconnect their networks where
this is not already the case;
…
3. Obligations and conditions imposed in accordance with paragraphs
1 and 2 shall be objective, transparent, proportionate and nondiscriminatory, and shall be implemented in accordance with the
procedures referred to in Articles 6 and 7 of Directive 2002/21/EC
(Framework Directive).
4. With regard to access and interconnection, Member States shall
ensure that the national regulatory authority is empowered to intervene
at its own initiative where justified [or, in the absence of agreement
between undertakings, at the request of either of the parties involved,]
in order to secure the policy objectives of Article 8 of Directive
2002/21/EC (Framework Directive), in accordance with the
provisions of this Directive and the procedures referred to in Articles
6 and 7, 20 and 21 of Directive 2002/21/EC (Framework Directive).”
The words in square brackets in Article 5.4 were removed by Directive
2009/140/EC.
9. Articles 9 to 13 of the Access Directive represent the most intrusive parts of
the regulatory scheme. They require member states to ensure that national regulatory
authorities are empowered to impose obligations of transparency, nondiscrimination, accounting separation, access to and use of specific network
facilities, and price control and accounting obligations in certain cases. Article 8.3
provides that without prejudice to (among other provisions) Article 5.1,
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“…national regulatory authorities shall not impose the obligations set
out in Articles 9 to 13 on operators that have not been designated in
accordance with paragraph 2.”
Operators are designated in accordance with paragraph 2 of Article 8 if they have
been shown to have significant market power in a specific market by a market
analysis carried out in accordance with Article 16 of the Framework Directive.
Significant market power is defined by Article 14.2 of the Framework Directive:
“2. An undertaking shall be deemed to have significant market power
if, either individually or jointly with others, it enjoys a position
equivalent to dominance, that is to say a position of economic strength
affording it the power to behave to an appreciable extent
independently of competitors, customers and ultimately consumers.”
BT has not been designated as having significant market power in the market
relevant to this case, and the present appeal has nothing to do with Articles 9 to 13
of the Access Directive, which are relevant only by way of background.
10. The scheme of the Directives has been considered on a number of occasions
by the Court of Justice of the European Union, notably in Case C-227/07
Commission of the European Communities v Republic of Poland [2008] ECR I-8403
and Case C-192/08 TeliaSonera Finland Oyj [2009] ECR I-10717. It can fairly be
summarised as follows. The objectives of the scheme are set out in Article 8 of the
Framework Directive, and in particular in Article 8.2, which assumes that consumer
welfare will generally be achieved by competition and requires national regulatory
authorities to promote both. The telecommunications sector is assumed to have
become competitive except in those cases where a CP can be identified as having
significant market power in a relevant market. In a competitive market, the
objectives in Article 8 of the Framework Directive are to be achieved through the
terms of the interconnection agreements between CPs. CPs operating in such a
market are left to negotiate their own interconnection terms in good faith, with the
minimum of regulatory interference. But they are required by Article 4.1 of the
Access Directive to offer interconnection terms “consistent with the obligations
imposed by the national regulatory authority pursuant to Articles 5, 6, 7 and 8.”
Under Article 5.4 of the Access Directive, these obligations of the regulator include
its obligation to secure the policy objectives in Article 8 of the Framework Directive.
The result is that interconnection terms consistent with the objectives in Article 8 of
the Framework Directive must be available to any CP which asks for them.
11. Reserve powers are required to be conferred on national regulatory
authorities by Article 5 of the Access Directive to impose “objective, transparent,
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proportionate and non-discriminatory” terms calculated to achieve the objectives in
Article 8 of the Framework Directive. In summary, these powers are exercisable
where it is necessary to do so in order (i) to achieve end-to-end connectivity in a
case where the parties have failed to agree interconnection terms (Articles 5.1 and
5.4 of the Access Directive); or (ii) to achieve the objectives in Article 8 of the
Framework Directive, in a case where interconnection terms have been agreed but
are not calculated to achieve those objectives (Article 5.4 of the Access Directive);
or (iii) in order to impose certain kinds of term on parties with significant market
power (Articles 8 to 13 of the Access Directive). It should be noted that the
promotion of efficient and competitive markets is one of the overarching objectives
in Article 8.2 of the Framework Directive, and is therefore potentially relevant in all
three cases. Although price control may not be imposed by regulation on CPs
without significant market power, this does not mean that competition
considerations are irrelevant in a competitive market. As the Court of Justice pointed
out in Case C-192/08 TeliaSonera [2009] ECR I-10717, para 55, a national
regulatory authority may intervene to prevent the imposition by a CP of
interconnection terms likely to hinder the emergence of a competitive market even
if that CP does not have significant market power. This is a point of some practical
importance, because a CP without significant market power nevertheless has a
monopoly of access to its current customers.
Dispute resolution
12. Arrangements for dispute resolution are an integral part of the scheme. I have
already referred to Article 5.4 of the Access Directive, which deals with the
resolution of disputes about access and connectivity and cross-refers to Article 20
of the Framework Directive. Article 20 contains the principal provision governing
dispute resolution. It provides so far as relevant:
“Article 20
Dispute resolution between undertakings
1. In the event of a dispute arising in connection with obligations
arising under this Directive or the Specific Directives between
undertakings providing electronic communications networks or
services in a Member State, the national regulatory authority
concerned shall at the request of either party, and without prejudice to
the provisions of paragraph 2, issue a binding decision to resolve the
dispute in the shortest possible time frame and in any case within four
months except in exceptional circumstances. The Member State
concerned shall require that all parties cooperate fully with the
national regulatory authority.
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2. Member States may make provision for national regulatory
authorities to decline to resolve a dispute through a binding decision
where other mechanisms, including mediation, exist and would better
contribute to resolution of the dispute in a timely manner in
accordance with the provisions of Article 8. The national regulatory
authority shall inform the parties without delay. If after four months
the dispute is not resolved, and if the dispute has not been brought
before the courts by the party seeking redress, the national regulatory
authority shall issue, at the request of either party a binding decision
to resolve the dispute in the shortest possible time frame and in any
case within four months.
3. In resolving a dispute, the national regulatory authority shall take
decisions aimed at achieving the objectives set out in Article 8. Any
obligations imposed on an undertaking by the national regulatory
authority in resolving a dispute shall respect the provisions of this
Directive or the Specific Directives.”
13. Article 4 of the Framework Directive requires that there should be a right of
appeal from any decision of a national regulatory authority, whether under its
regulatory or its adjudicatory powers. This is not just a right of judicial review. The
appeal must “ensure that the merits of the case are duly taken into account.”
The Communications Act 2003
14. Effect is given to the Directives in the United Kingdom by the
Communications Act 2003. Under the Act, Ofcom is the “national regulatory
authority” for the purposes of the scheme. Since it is common ground that the
Directives are accurately transposed in the Act, it will generally be convenient to
refer to the European rather than the domestic legislation. It is, however, appropriate
to refer to section 190 of the Act of 2003, which deals with the resolution of disputes
by Ofcom. Section 190(2) provides:
“(2) Their main power… is to do one or more of the following-
(a) to make a declaration setting out the rights and obligations of the
parties to the dispute;
(b) to give a direction fixing the terms or conditions of transactions
between the parties to the dispute;
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(c) to give a direction imposing an obligation, enforceable by the
parties to the dispute, to enter into a transaction between themselves
on the terms and conditions fixed by Ofcom; and
(d) for the purpose of giving effect to a determination by Ofcom of the
proper amount of a charge in respect of which amounts have been paid
by one of the parties of · the dispute to the other, to give a direction,
enforceable by the party to whom the sums are to be paid, requiring
the payment of sums by way of adjustment of an underpayment or
overpayment.”
15. Sections 3 and 4 provide, in terms corresponding to the Directives, for the
matters to which Ofcom must have regard in performing its functions generally.
Section 3(3) reflects the permissive character of the regulatory scheme, by providing
that Ofcom must have regard, in all cases, to “the principles under which regulatory
activities should be transparent, accountable, proportionate, consistent and targeted
only at cases in which action is needed” (emphasis added).
The contract
16. BT provides connection services to other CPs on the terms of its Standard
Interconnect Agreement. Clause 12 of this document deals with BT charges. It
provides:
“12. BT SERVICES
12.1 For a BT service or facility the Operator shall pay to BT the
charges specified from time to time in the Carrier Price List.
12.2 BT may from time to time vary the charge for a BT service or
facility by publication in the Carrier Price List and such new charge
shall take effect on the Effective Date, being a date not less than 28
calendar days after the date of such publication, unless a period other
than 28 calendar days is expressly specified in a Schedule.
…
12.5 As soon as reasonably practicable following an order, direction,
determination or consent… by Ofcom of a charge (or the means of
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calculating that charge) for a BT service or facility, BT shall make any
necessary alterations to the Carrier Price List so that it accords with
such determination.
…
12.9 If there is a difference between a charge for a BT service or
facility specified in the Carrier Price List and a charge determined by
Ofcom, the charge determined by Ofcom shall prevail.”
A change in BT charges is notified to the counterparties by a Network Charge
Change Notice (or “NCCN”).
17. The reference in Clause 12 to determinations by Ofcom is to determinations
under Clause 26, which reflects the terms of Article 20 of the Framework Directive.
It provides that subject to any other mode of dispute resolution available to the
parties, disputes are to be resolved as far as possible by agreement, but failing
agreement either party may refer the dispute to Ofcom. The combined effect of
Clauses 12 and 26 is that variations to BT’s charges are introduced unilaterally by
BT and take effect automatically from the date proposed, subject to the
counterparty’s right to object. If agreement cannot be reached, the dispute is referred
to Ofcom for determination, unless both parties elect some other form of dispute
resolution. Meanwhile, the variation is treated as provisionally valid.
The Change Notices
18. On 3 June 2009, BT issued Network Charge Change Notice 956 in respect of
calls to 080 numbers. This was on its face an exercise by BT of the powers of
variation conferred on BT by Clause 12.2 of the Interconnection Agreement. The
revised tariffs proposed in the Change Notice provided for BT to make a payment
to the originating network if that network charged zero for the call. If the originating
network charged the caller, there were no charges either way provided that the
charge was below a given threshold. Above that threshold, the CP interconnecting
with BT was required to pay a progressively rising termination charge depending on
the band into which the charge to the caller fell. On 2 October 2009, BT issued
corresponding notices numbered 985 and 986 relating to calls to 0845 and 0870
numbers. These provided for BT to charge CPs a variable proportion of the charge
made by the originating network to the caller, again depending on the band into
which the charge to the caller fell. All of these notices were disputed and referred
by one or more mobile network operators to Ofcom.
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Ofcom’s determinations
19. Ofcom issued a final determination dated 5 February 2010 in relation to 080
numbers, and a second final determination dated 10 August 2010 in relation to 0845
and 0870 numbers. For present purposes, it is possible to concentrate on the
determination relating to 0845 and 0870 numbers, because it is common ground that
that determination may be taken to represent Ofcom’s position in relation to all three
number ranges.
20. Ofcom decided that it would permit the changes to be made only if they were
“fair and reasonable”, judged by three governing principles. Principle 1 was that
mobile network operators should be able to recover their efficient costs of
originating calls to the relevant numbers. Principle 2 was that the new charges
should (i) provide benefits to consumers, and (ii) not entail a material distortion of
competition. Principle 3 was that implementation of the new charges should be
reasonably practicable. All three principles can be related to objectives set out in
Article 8.2 of the Framework Directive. No one has challenged this as an appropriate
analytical framework. Ofcom found that Principle 1 was satisfied. It found that
Principle 3 was not satisfied, but it was overruled on that point by the Competition
Appeal Tribunal, and there has been no appeal against its decision on that point.
Accordingly the outcome of this appeal turns on the application of Principle 2.
Ofcom found that Principle 2 was “not sufficiently likely to be met”.
21. As regards Principle 2(i), which is known as the “welfare test”, Ofcom
distinguished between three potential effects on consumers: the “direct effect”,
essentially the effect on consumer prices for calls to 08 numbers; the “indirect
effect”, which referred to the possibility that revenue gains by BT would feed back
to the consumer in the form of lower charges or higher standards of service by
service providers who use 08 numbers; and the “mobile tariff package effect” (or
“waterbed effect”), by which it meant the potential for mobile network operators
deprived of one revenue stream to try to compensate themselves by seeking to raise
prices elsewhere. It thought that the direct effect was likely to be positive for
consumers, because a tariff based on the originating network’s charge to the caller
was likely to lead mobile network operators to reduce their charges to callers,
although it could not say by how much. It thought that the indirect effect was also
likely to be positive, because over time some of the benefits to BT would be passed
on to service providers using the 08 numbers in question, although callers to 08
numbers would not necessarily benefit. Ofcom’s concern was about the mobile tariff
package effect. It thought that this was likely to be negative because mobile network
operators would probably try to recoup the higher termination charges by raising
charges for other services. Taking the three effects together, Ofcom’s conclusion
was as follows:
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“9.30 As set out above, there is uncertainty about the sizes of each of
the Direct, Indirect and Mobile tariff package effects. However, as
shown in Table 9.1, the overall effect on consumers depends on the
relative sizes of these offsetting effects (even though we place more
weight on the Direct effect than the Mobile tariff package effect,
because of our policy preference for 0845/0870 prices to be aligned
with geographic call prices).
9.31 Our judgement in respect of Principle 2 is therefore finely
balanced. We recognise the possibility that consumers could benefit
from NCCNs 985 and 986. However, we also recognise the risk of
harm to consumers from NCCNs 985 and 986, particularly in light of
our conclusions on the Mobile tariff package effect.
9.32 Given the uncertainty which we have identified as to whether
BT’s NCCNs would result in a net benefit or net harm to consumers,
and in light of our overriding statutory duties to further the interests of
consumers, we consider it is appropriate for us to place greater weight
on this potential risk to consumers from NCCNs 985 and 986.”
22. Turning to the competition test at Principle 2(ii), Ofcom concluded that while
there were some concerns on this count, the risk of a material distortion of
competition arising from the changes was “relatively low”.
23. Taking the welfare test and the competition test together, Ofcom concluded
that Principle 2 was not satisfied, because BT could not positively demonstrate that
the proposed tariff changes would be beneficial to consumers. In summary, what
Ofcom decided was that although the direct and the indirect effect of BT’s proposed
price changes could be expected to result in lower prices for consumers, BT should
not be allowed to make the changes because it was not possible to forecast how far
mobile network operators would be able to compensate themselves by increasing
other charges.
The decision of the Competition Appeal Tribunal
24. Under section 192 of the Communications Act 2003, an appeal to the CAT is
an appeal on the merits. It is a rehearing, and is not limited to judicial review or to
points of law. This reflects the requirements of Article 4 of the Framework Directive.
25. The CAT allowed BT’s appeals. The tribunal agreed with the approach
embodied in Ofcom’s three principles, but they had a different starting point. In their
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view, BT was prima facie entitled to change its charges for three reasons. I list them
in the order in which they will be addressed below. The first was that BT had a
contractual right to vary its charges, subject to Ofcom’s determination if the dispute
resolution procedure was operated. The second was that the introduction of
innovative charging structures was itself a mode of competing, and that interference
with it would restrict competition. The third was that “price control is an intrusive
form of control which elsewhere in the 2003 Act can only be introduced by SMP
condition” (para. 442). It was therefore inappropriate for Ofcom to use its dispute
resolution powers as a way of controlling the charges of a CP like BT which did not
have significant market power in a relevant market. Summarising their view of these
points, the CAT said:
“396. The crucial question is what is a regulator to do in the context
of such uncertainty? Essentially, the regulator has two choices:
(1) To prevent change unless it can be demonstrated that the
change is beneficial- in which case it may well be said that
the dead hand of regulation is constraining behaviour which
may actually be beneficial to consumers. We stress that our
conclusion regarding Principle 2(i) was that the welfare
assessment was inconclusive, not that consumers would be
harmed.
(2) Alternatively, to allow change despite the uncertainty, even
though there is a risk that the change may result in a
disbenefit to consumers, recognising that an undue fetter on
commercial freedom is itself a disbenefit to consumers.”
It followed that, if Principles 1 and 3 were satisfied (as they were), Ofcom could
reject a proposed change in a CP’s termination charges only if the welfare test
distinctly showed that they would adversely affect consumer welfare.
26. The CAT reached substantially the same conclusions about the welfare test
as Ofcom did, namely that it was inconclusive. They expressed their conclusion as
follows at paragraph 379:
“Fundamentally, the welfare analysis is inconclusive, due to a lack of
empirical evidence. Even with the assistance of the simplifying
assumptions that we have described, a reliable assessment of elasticity
of demand is not possible. Whilst it is possible to conclude that prices
for 080, 0845 and 0870 calls will, on balance, fall, it cannot be said
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how far they will fall, nor what volumes of calls there will be at any
given price. Equally, the extent of the Mobile Tariff Package Effect is
essentially unknown.”
27. An inconclusive welfare test could not in the CAT’s view be enough. The
CAT’s conclusion on this point is conveniently summarised at paragraphs 447-448
of their judgment:
“447. If, therefore, the test to be applied is whether the NCCNs can be
shown to provide benefits to consumers, then that test is not met.
However, we do not consider this to be the correct test in the
circumstances of the present case, because it places undue importance
on Ofcom’s policy preference, at the expense of the two other relevant
factors that we have identified as forming a part of Principle 2 (namely
Principle 2(ii) [the risk of a distortion to competition arising from
restricting CP’s commercial freedom to price] and BT’s private law
rights.
448. We consider that whilst Ofcom’s welfare analysis could override
these other factors, it should only do so where it can clearly and
distinctly be demonstrated that the introduction of the NCCNs would
act as material disbenefit to consumers. In short, given the presence of
the two other factors that we have identified, it is not enough for the
welfare analysis to be simply inconclusive. The welfare analysis must
demonstrate, and demonstrate clearly, that the interests of consumers
will be disadvantaged.”
The decision of the Court of Appeal
28. Appeal lies from the CAT to the Court of Appeal on a point of law only. The
Court of Appeal (Lloyd, Etherton and Elias L.JJ) overruled the CAT and restored
the decision of Ofcom. The leading judgment was given by Lloyd LJ, with whom
both the other members of the Court agreed.
29. In summary, Lloyd LJ rejected the CAT’s starting point. In the first place, he
held that the tribunal had been wrong to treat BT as having a prima facie right to
change its charges, which needed to be displaced. It had no more than a right to do
so subject to the determination of Ofcom if the counterparty objected. Secondly, he
held that they had been wrong to attach weight to their view that a restraint on BT’s
freedom to set its own charges would itself distort competition. Thirdly, he held that
the CAT had been wrong to attach weight to the fact that BT, not having significant
Page 17
market power in a relevant market, was not subject to ex ante control of its prices
on competition grounds. Having disposed of the three considerations that led the
CAT to put the burden of justifying their objection to the new charges on the mobile
network operators, Lloyd LJ held that it was for BT to justify its charges as being
fair and reasonable. This, he thought, required them to establish positively that
consumers would benefit by them, something which the inconclusive outcome of
the welfare test made it impossible for them to do.
The function of Ofcom in resolving disputes
30. Lloyd LJ attached considerable importance to the nature of the function
which Ofcom is performing when it resolves disputes about charges under an
interconnection agreement. He considered (para 63) that “dispute resolution is a
form of regulation in its own right, to be applied in accordance with its own terms”.
In his view, the terms of the Interconnection Agreement were of little if any
relevance because their effect was that any new charges introduced by BT were
liable to be overridden by Ofcom in the exercise of its regulatory powers. This led
him to regard interconnection charges as an essentially regulatory construct. Much
of the rest of his analysis follows from these premises. Because Ofcom’s
determination of the dispute was a regulatory function, Lloyd LJ considered that the
balancing of the various factors relevant to Principle 2 was a value judgment for it.
Since it was not shown to have erred in principle, its decision should be restored.
31. The dispute resolution functions of Ofcom have often been described as
regulatory, notably by the CAT in T-Mobile (UK) Ltd v Office of Communications
[2008] CAT 12. It is unquestionably true that the dispute resolution functions of
national regulatory authorities are part of the regulatory scheme, and that in
exercising those functions the regulator is required by Article 20.3 of the Framework
Directive to promote the overarching objectives set out in Article 8, just as it is
required to do in exercising its other functions. But the description of dispute
resolution as “a form of regulation in its own right” is apt to mislead without some
analysis of what is meant by it.
32. As a national regulatory authority charged with the resolution of disputes,
Ofcom has both regulatory and adjudicatory powers. Article 20.1 of the Framework
Directive requires national regulatory authorities to have power to resolve disputes
between CPs “in connection with obligations arising under this Directive or the
Specific Directives between undertakings.” Article 5.4 of the Access Directive
requires national regulatory authorities to have a power of intervention in a dispute
about access and interconnection in accordance with (inter alia) the procedures in
Article 20 of the Framework Directive, in order to secure the policy objectives of
Article 8 of the Framework Directive. The combined effect of these provisions is
that the dispute resolution function extends to disputes of different kinds. A dispute
Page 18
may arise (i) under the existing interconnection terms, or (ii) because the parties
have been unable to agree terms and one of them wants the regulator to impose them,
or (iii) because there are binding terms but they do not satisfy (or no longer satisfy)
Article 5.3 of the Access Directive or the policy objectives in Article 8 of the
Framework Directive. In case (i) it may perform an adjudicatory or a regulatory role
or a combination of the two. The existence side by side of both adjudicatory and
regulatory functions follows from the scheme of the Directives, but is particularly
clearly spelled out in section 190 of the Communications Act, which I have already
quoted. The section distinguishes between Ofcom’s powers in the course of dispute
resolution to declare the rights and obligations of the parties (section 190(2)(a)), to
fix the terms of transactions between the parties (section 190(2)(b)) and to impose
an obligation to enter into a transaction on terms fixed by Ofcom (section 190(2)(c)).
The first of these powers is plainly adjudicatory. The second and third are regulatory.
33. As I have pointed out above, the scheme of the Directives depends critically
on the agreed interconnection terms. This is a feature of the scheme which is
fundamental to its essentially permissive character. It reflects the consistent
emphasis in the Directives on respecting freely negotiated interconnection terms in
a competitive market: see in particular Recital (5) of the Access Directive. In the
ordinary case, the interconnection terms will have been negotiated between the
parties, within the constraints imposed by law, namely that the result must be
consistent with the objectives in Article 8 of the Framework Agreement. If, however,
they were imposed or modified by Ofcom under Article 5.1, the effect is the same,
namely to create a contract or something that will be treated as legally equivalent to
a contract.
34. When Ofcom is resolving a dispute about a proposed variation of charges
under an existing agreement, it is performing a mixture of adjudicatory and
regulatory functions. The terms of the interconnection agreement are the necessary
starting point for this process. If there is no contractual right to vary the charges, it
is difficult to see how Ofcom can approve a variation unless it is necessary to achieve
end-to-end connectivity (for example to enable operators to recover their efficient
costs) or to achieve the Article 8 objectives. If there is a contractual right to a
variation, but the proposed variation is not consistent with the Article 8 objectives,
Ofcom may reject the variation. It may also modify any terms which created an
entitlement inconsistent with the Article 8 objectives. If there is a contractual right
to a variation which is consistent with the Article 8 objectives, Ofcom’s function
when the right is challenged is to give effect to it.
35. The contractual effect of the interconnection terms will of course depend on
their proper law, and in some respects this may vary from one member state to
another. But as far as the Article 8 objectives are concerned, there will be
commonality between every member state because all of them have the same
obligation to ensure that interconnection agreements are framed and applied in a
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manner consistent with those objectives, and the same obligation to require their
national regulatory authorities to give effect to those objectives both in imposing or
modifying terms and in resolving disputes about them.
Clause 12 of the Interconnection Agreement
36. Clauses 12.1 and 12.2 of BT’s Standard Interconnect Agreement confer a
power on BT unilaterally to fix or vary its charges. Although the mobile network
operators did argue in the CAT that their unilateral character was a reason why they
should not be given weight, neither they nor Ofcom argued in the CAT that clause
12 should be modified.
37. The manner in which English law ensures that contractual effect is given to
the Article 8 objectives is by treating BT’s discretion under Clause 12 as limited. As
a general rule, the scope of a contractual discretion will depend on the nature of the
discretion and the construction of the language conferring it. But it is well
established that in the absence of very clear language to the contrary, a contractual
discretion must be exercised in good faith and not arbitrarily or capriciously: Abu
Dhabi National Tanker Company Ltd v Product Star Shipping Ltd (No 2) [1993] 1
Lloyd’s Rep 397, 404 (Leggatt LJ); Gan Insurance Company Ltd v Tai Ping
Insurance Company Ltd (No 2) [2001] 2 All ER (Comm) 299, para 67 (Mance LJ);
Paragon Finance Plc v Nash [2002] 1 WLR 685, paras 39-41 (Dyson LJ). This will
normally mean that it must be exercised consistently with its contractual purpose:
Ludgate Insurance Company Ltd v Citibank NA [1998] Lloyd’s Rep (I&R) 221, para
35 (Brooke LJ); Equitable Life Assurance Society v Hyman [2002] 1 AC 408, 459
(Lord Steyn), 461 (Lord Cooke of Thorndon). Interconnection agreements are made
in a regulated environment. The regulatory scheme may change, quite possibly after
interconnection terms have been agreed (as it did in this case). But the intention of
the parties must be to comply with the scheme as it stands from time to time so far
as the contract permits. That intention necessarily informs the scope and operation
of any contractual discretions. In my opinion, it is entirely clear that the discretion
conferred by clause 12 of the Standard Interconnect Agreement is limited by
reference to the purposes set out in Article 8 of the Framework Directive. It follows
that contractually BT was entitled to set its own charges, but only within limits
which are fixed by those objectives.
38. By virtue of clause 12.5, BT’s power to set its own charges within those limits
is subject to any “order, direction, determination or consent” of Ofcom. But this
does not mean that Ofcom can do what it likes. It is bound to start from the parties’
contractual rights and may override them only if that is required by the Article 8
objectives. However, under Clause 12 of the Interconnection Agreement, this is a
conflict which cannot arise, because BT has no contractual right to require a price
variation which is not consistent with the Article 8 objectives. In this case, therefore,
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Ofcom’s function was to determine whether BT’s proposed charges exceeded the
limits of its contractual discretion. That depends on whether they were in fact
consistent with the Article 8 objectives. This is where the three principles applied
by Ofcom, including the welfare test and the competition test, come in.
Clause 13 of the Interconnection Agreement
39. At this point, it is necessary to make a short excursion into Clause 13 of the
Interconnection Agreement. Whereas Clause 12 is concerned with charges for BT
services, Clause 13 deals with charges payable by BT to the Operator for Operator
services. It provides by Clause 13.1 that the charges are to be “those specified from
time to time in the Carrier Price List”. The remainder of Clause 13 is concerned with
variations to the Operator’s charges in the Carrier Price List proposed by the
Operator. But it works in a different way from the corresponding provisions of
Clause 12 relating to variations proposed by BT. In particular, there is no direct
equivalent of Clause 12.2. The Operator has no unilateral right to introduce a
variation. He must request one. If the request is rejected by BT and the parties fail
to agree upon a modified version of the proposed variation, the issue is referred to
Ofcom. Under Clause 13, the variation is not treated as provisionally valid pending
a determination.
40. The Court of Appeal attached importance to these differences because it
considered that the way in which Ofcom determined a dispute about pricing must be
the same whether the issue arose under Clause 12 or Clause 13. It drew attention to
the fact that the bottom rung of BT’s proposed 080 pricing ladder involved a
payment by BT to the CP and might therefore be said to represent an Operator
service, and that at the next rung up no payment was due either way, which made it
difficult to say whether it represented an Operator service or a BT service. It might,
thought Lloyd LJ, be a matter of chance which clause applied. He regarded this as a
reason for treating BT’s right to vary its charges under Clause 12.2 as being of very
limited importance.
41. Mr Daniel Beard QC, who appeared for BT, declined to go into this question
at all, and there was little argument upon it even after the Court called for further
submissions on the point. In my opinion we need not enter into it either, because it
is irrelevant. Clause 12 is concerned with variations proposed by BT to charges for
a BT service. The fact a variation proposed by BT comprises a tariff in which some
payments for the BT service are negative or nil while others are positive does not
alter the character of the tariff as a scheme of charges for the BT service, or take it
outside Clause 12. The only variations before us are those proposed by BT under
Clause 12. We are not concerned with the effect of Clause 13. There is no obvious
reason why Ofcom’s treatment of the two cases should necessarily be the same
notwithstanding differences between the relevant contractual provisions. I am
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therefore disinclined to attach much practical importance in the present case to the
differences between them. Difficult questions may arise in a case where the Article
8 objectives neither preclude nor require a variation and the relevant party has no
contractual right to require one. The resolution of those questions must await a case
in which they arise.
The welfare test
42. Leaving aside Principle 3, which it is now common ground was satisfied, the
sole basis on which Ofcom rejected the new charges was that the welfare test having
been inconclusive, it had not been demonstrated that BT’s new schedule of charges
would produce consumer benefits. In my opinion, this was wrong in principle, for
substantially the reasons given by the CAT. BT were contractually entitled to vary
their charges unless the proposed variations were inconsistent with the Article 8
objectives, including the objective of ensuring consumer benefit in accordance with
Article 8.2(a). Ofcom have not found that they were inconsistent with those
objectives. They have found that they would produce direct and indirect consumer
benefits of unquantifiable value, and that these benefits might or might not be
exceeded by disbenefits arising from the attempts of mobile network operators to
increase revenue in other directions. The latter factor was found by the CAT to be
“essentially unknown”.
43. In my opinion, it is not consistent with either the contract or the scheme of
the Directives for Ofcom to reject charges simply because they might have adverse
consequences for consumers, in the absence of any reason to think that they would.
It is not consistent with the contract because it prevents BT from exercising its
discretion to alter its charges in circumstances where there is no reason to suppose,
and Ofcom has not found, that the limits of that discretion have been exceeded. It is
inconsistent with the scheme of the Directives because it involves applying an
extreme form of the precautionary principle to a dynamic and competitive market,
in a manner which is at odds with the Directives’ market-oriented and essentially
permissive approach. Logically, given the inherent difficulty of forecasting the
extent of any direct or indirect effects, and the practical impossibility of forecasting
the mobile tariff package effect, it would rule out any increases in termination
charges other than those justified by reference to underlying costs. On this point,
therefore, I think that the CAT were right and that the Court of Appeal were wrong
to overturn them.
44. In its submissions on the appeal, Ofcom submitted that the degree of risk
which is acceptable must be related to the gravity of the adverse effect if the risk
materialises. It expressed concern that it should not, for example, be inhibited from
blocking a price variation which on a balance of probabilities was unlikely to be
adverse, but which if things went wrong would be catastrophic. I agree. This would
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be an example of a case where the existence of the risk was itself adverse to the
interests protected by Article 8. But on the facts found by Ofcom and the CAT, we
are a long way from that kind of situation in the present case. It is right to add that
if and when sufficiently adverse effects were to materialise at some point in the
future, Ofcom has power to intervene to address them at that stage.
Anti-competitive effect of price control
45. The Court of Appeal’s second reason for thinking that it was for BT to
demonstrate positively that there would be consumer benefits from the proposed
changes to their charging structure was that they disagreed with the CAT’s emphasis
on the anti-competitive effect of preventing the introduction of innovative charging
structures. The Court of Appeal did not suggest that it was economically mistaken.
But they considered that too much weight had been attached to it by the CAT. In
their view, this was a matter of regulatory policy. Since Ofcom was the regulator
and it was exercising a regulatory function in resolving the present dispute, the CAT
should not have interfered with their conclusion unless Ofcom erred in principle.
The Court of Appeal thought that since the CAT substantially agreed with Ofcom’s
conclusion on the welfare test, there was no error of principle.
46. I think that in this respect also, the Court of Appeal was wrong. In the first
place, as I have explained, in resolving this particular dispute, Ofcom was not
exercising a regulatory function, but resolving a dispute under the unchallenged
terms of an existing agreement. But the main problem about the Court of Appeal’s
view is a more fundamental one. According to the CAT’s analysis, the effect of not
allowing BT to introduce innovative charging structures was itself anticompetitive
because innovative pricing structures are an effective mode of competing. This was
clearly a relevant consideration, even if it was not a conclusive one: see Article
8.2(b) of the Framework Directive. It was not a consideration taken into account by
Ofcom. Since the right to introduce the proposed pricing package brought benefits
for competition, the mobile network operators should have to justify their demand
that the package should be rejected by pointing to some countervailing detriments
to consumers disclosed by the welfare test if it were to be accepted. An inconclusive
welfare test could not be enough for this purpose. The CAT was hearing an appeal
by way of rehearing on the merits. Their conclusion about the anti-competitive
effects of restricting price changes and the weight to be attached to it was a factual
judgment which it was perfectly entitled to make. It was, moreover, an economic
judgment by an expert tribunal which had received a substantial amount of
additional evidence, including economic evidence. Since appeal lay to the Court of
Appeal only on points of law, the CAT’s findings on the distortion of competition
liable to result from the rejection of the new charging structure were not open to
rejection on appeal.
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Inappropriateness of restricting prices in the absence of significant market power
47. These considerations are enough to resolve the present dispute in favour of
BT. It is therefore unnecessary to consider the CAT’s third reason for requiring the
mobile network operators to show a distinct disbenefit to consumers in order to
justify rejecting a proposed change to interconnection charges. This was that the
rejection of BT’s proposed charges amounted to imposing price control on an entity
such as BT which had not been designated as having significant market power in a
relevant market. This, it was argued, was wrong in principle because there was no
power under the Directives and the Act to regulate the prices of a firm without such
power. BT put this point at the forefront of their submissions. For reasons which
were never entirely clear but may have to do with their commercial and regulatory
strategies, they were anxious to avoid relying on BT’s rights under the
Interconnection Agreements or adopting those parts of the CAT’s reasoning which
were based on them, and instead sought to obtain a ruling that the Common
Regulatory Framework can never authorise Ofcom to reject a price variation unless
it would leave an efficient operator unable to cover its costs.
48. I will only say that as at present advised I am not convinced by this. It seems
to me to be irrelevant to the question on which this appeal turns, namely whether
BT must positively demonstrate consumer benefit if they are to justify their
proposed charges. Moreover, the fact that BT does not have significant market
power in a relevant market does not mean that the promotion of competition, which
is included among the Article 8 objectives, is irrelevant to a dispute about charges.
It only means that Ofcom may not exercise its regulatory power to control prices.
Ofcom has not purported to do this. There is an important difference between (i)
exercising a regulatory power to impose price control in order to correct market
failure or control the abuse of a dominant economic position, and (ii) deciding
whether a particular proposed tariff change advances consumer welfare for the
purpose of determining whether there is a right to introduce it.
A hypothetical alternative analysis
49. It will be apparent that I do not accept the basic conceptual framework within
which the Court of Appeal reviewed these questions. It is, however right, in view of
the way that the argument went and in the light of suggestions that there should be
a reference to the Court of Justice of the European Union, to point out that the result
would have been the same even if Lloyd LJ had been right to regard Ofcom’s dispute
resolution functions as purely regulatory and the interconnection terms as being
unimportant. The whole scheme of the Directives is to leave the arrangements for
interconnection to the parties unless there are grounds for regulatory intervention.
The permissible grounds of regulatory intervention in the case of a CP without
significant market power are that the interconnection terms have been framed or are
Page 24
being operated in a manner which is inconsistent with end-to-end connectivity or
conflicts with the Article 8 objectives. If the result of the welfare test and the
competition test is that there is no positive reason to believe that the effects will be
adverse, there is no justification for regulatory intervention.
Reference to the Court of Justice of the European Union
50. If this appeal turned on the point about the absence of significant market
power which BT put at the forefront of their submissions (see paragraphs 47-8
above), it would in my view have been appropriate to refer that point to the CJEU
before determining it. As it is, I would decide the appeal on less controversial
grounds, and I do not consider that a reference is appropriate. The recognition that
the interconnection terms are the starting point does not itself warrant a reference,
since the centrality of the interconnection terms in the scheme of the Directives is
obvious and no convincing reason has been put forward by any of the parties or
interveners for ignoring them. In any event, for the reasons that I have given, the
outcome would be the same even on a purely regulatory analysis. Leaving aside Mr
Beard’s argument about the absence of significant market power, there is no dispute
about the Article 8 criteria themselves. Ultimately, the problem which the
Respondents have faced on this appeal is that the CAT’s economic analysis of the
facts was that there was no reason to anticipate a net adverse effect engaging that
Article.
Conclusion
51. In my opinion there was no justification for the Court of Appeal to set aside
the careful analysis of the CAT on a matter lying very much within its expertise. I
would accordingly allow this appeal. Counsel will be invited to make written
submissions on the form of order unless this can be agreed.
Page 25
