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||Neutral Citation Number:  EWHC 2134 (Admin)
||Case No: CO/6370/2016
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
THE HON. MR JUSTICE CRANSTON
|| EE LIMITED
||- and -
||OFFICE OF COMMUNICATIONS
- and -
(1) SECRETARY OF STATE FOR CULTURE, MEDIA AND SPORT
(2) VODAFONE LIMITED
(3) TELEFÓNICA UK LIMITED
(4) HUTCHISON 3G UK LIMITED
Lord Pannick QC, Philip Woolfe and Stefan Kuppen (instructed by James Blendis at EE Ltd) for the Claimant
Pushpinder Saini QC and Jessica Boyd (instructed by Ofcom) for the Defendant
Michael Fordham QC and Emily Neill (instructed by Towerhouse LLP) for the 2nd Interested Party
Thomas de la Mare QC and Tom Richards (instructed by DWF LLP) for the 3rd Interested Party
Tristan Jones (instructed by Constantine Cannon LLP) for the 4th Interested Party
Hearing dates: 12 July, 13 July and 14 July 2016
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
Mr Justice Cranston:
- This is a claim for judicial review of the decision of the Office of Communications ("Ofcom"), the defendant, regarding the annual licence fee payable for the use of two bands of radio spectrum, the 900 MHz and 1800 MHz bands. The decision challenged is contained in a statement entitled Annual Licence fees for 900 MHz and 1800 MHz spectrum, dated 24 September 2015 and given legislative force in regulations which were made on 23 September and came into effect on 15 October 2015 (together "Ofcom's 2015 decision"). The decision gave effect to a direction to Ofcom by the Secretary of State for Culture, Media and Sport, contained in Article 6 of the Wireless Telegraphy Act 2006 (Directions to OFCOM) Order 2010, SI No 3024 ("the Secretary of State's 2010 direction") to revise the annual licence fees payable for 900 MHz and 1800 MHz licences so that they reflected the full market value of the frequencies in those bands. The decision increases the annual licence fee payable for these spectrum bands, in the claimant's case from approximately £25 million to £75 million per annum, and for all mobile network operators, from approximately £65 million per annum to £200 million per annum.
- The frequency bands used by mobile network operators to provide mobile voice and data services are licensed by Ofcom. It is the statutory body responsible for the management and licensing of radio spectrum in the United Kingdom. In the main, mobile telephony is currently provided in the UK over frequency bands between 800 MHz and 2.6 GHz. The 900 MHz and 1800 MHz bands, with which this claim is concerned, were initially allocated to operators in the 1980s and 1990s at no cost, and for an indefinite period, either on a first-come, first-served basis or by means of "beauty contests". In the 1990s, the mobile operators started using these frequencies to provide the second generation of mobile services ("2G services"). Licences for these frequencies were liberalised, first, in January 2011, to permit use of third generation ("3G") mobile services and then, in 2012-2013, to permit use of fourth generation ("4G") technologies. Frequencies in the 900 MHz and 1800 MHz bands are all now licensed for use by 2G, 3G and 4G technologies.
- The claimant is the largest of the four mobile network operators in the UK. Since early this year it has been a wholly owned subsidiary of BT Group Plc. It provides retail mobile services through the EE brand as well as its legacy T-Mobile and Orange brands. It also provides wholesale mobile services to third parties such as Virgin Mobile, which as a mobile virtual network operator is hosted on the claimant's network. As well as 1800 MHz frequency bands, the claimant has been allocated spectrum in other bands, including the 800 MHz, 2.1 GHz and 2.6 GHz bands. The claimant does not hold any 900 MHz spectrum. The claimant obtained these spectrum holdings following auctions in 2000 (for the 2.1 GHz band) and 2013 (for the 800 MHz and 2.6 GHz bands).
- The claimant is supported by the interested parties, which are the other mobile network operators holding licences for 900 MHz and 1800 MHz spectrum. Vodafone UK Limited ("Vodafone") and Telefónica UK Limited ("Telefónica") hold predominantly 900 MHz spectrum and very little 1800 MHz spectrum. Hutchison 3G UK Limited ("Three") holds 1800 MHz spectrum but does not hold any 900 MHz spectrum.
- The challenge to Ofcom's 2015 decision is advanced on two grounds. In summary, the first is that Ofcom wrongly interpreted the Secretary of State's 2010 direction as requiring it to set the annual licence fees for 900 MHz and 1800 MHz bands at market value, to the exclusion of other factors which Ofcom is required to consider as a matter of EU and domestic law. The claimant's second ground of challenge is that in determining these annual licence fees, Ofcom wrongly failed to consider evidence regarding the value of this spectrum according to cost modelling. Instead, Ofcom relied on a benchmarking exercise using the price achieved in auctions for other spectrum bands in the UK, and in auctions elsewhere for the same and other spectrum bands.
- Ofcom's response to ground 1 is that its 2015 decision simply implemented the 2010 direction of the Secretary of State, who was empowered by primary legislation to make it. That direction meant Ofcom had to set annual licence fees at the level of its estimate of the full market value of the relevant frequencies. The direction was not challenged at the time and Ofcom in deciding on fees in 2015 was required by statute and under the English and EU principles of regularity to treat it as lawful. As to ground 2, Ofcom's response is that it considered whether to supplement its benchmarking analysis by reference to cost modelling, and its decision not to use it was a matter of economic judgment on which views may reasonably differ but cannot be said to be wrong.
(a) Domestic legislation
- Ofcom is constituted under the Office of Communications Act 2002 and exercises functions under, inter alia, the Communications Act 2003 ("the 2003 Act") and the Wireless Telegraphy Act 2006 ("the 2006 Act").
- Section 3(1) of the 2003 Act sets out Ofcom's principal duty, in carrying out its functions, to further the interests of citizens in relation to communications matters and those of consumers in relevant markets, where appropriate by promoting competition. Under section 3(2), Ofcom is required to secure, inter alia, the optimal use of the spectrum, and the availability throughout the UK of a wide range of electronic communications services. In performing its duties, section 3(3) requires Ofcom to have regard to the principles that regulatory activities should be transparent, accountable, proportionate, consistent, and targeted only at cases in which action is needed. It must also have regard to a wide range of matters, including the desirability of promoting competition and encouraging investment and innovation in relevant markets: section 3(4). In performing the duty of furthering the interests of consumers, Ofcom is required to have regard, in particular, to the interests of consumers in respect of choice, price, quality of service and value for money: section 3(5).
- Section 4(1)(b) of the 2003 Act requires Ofcom to perform its functions under enactments relating to the management of the radio spectrum (which by definition in section 405 includes the Wireless Telegraphy Act 2006) in accordance with specified EU requirements. These, as stated in section 4(2),
"give effect, amongst other things, to the requirements of Article 8 of the Framework Directive and are to be read accordingly."
As expressed in section 4(3) the EU requirements are sixfold and include promoting competition, securing that Ofcom's activities contribute to the development of the European internal market, promoting the interests of EU citizens, not favouring particular networks, services or facilities, encouraging network access and interoperability, and encouraging compliance with EU and international standards.
- There is a power of the Secretary of State in section 5 to give directions to Ofcom but this is confined, in section 5(3), to the interests of national security, foreign relations, securing compliance with international obligations and public safety and health.
- Where Ofcom makes a proposal the implementation of which would be likely to have a significant impact on business, it must carry out an impact assessment: section 7(2)(b), (3)(a). Otherwise it must publish a statement to explain why it is unnecessary to do so: section 7(3)(b).
- Appeals against Ofcom's decisions and the Secretary of State's directions under both the 2003 Act and the 2006 Act are provided for in section 192 and Schedule 8.
- The 2006 Act consolidates enactments about wireless telegraphy. Part 1 contains general provisions about the radio spectrum. Part 2 deals with the regulation of radio spectrum, including the licensing provisions of section 8.
- Sections 1-6 in Part I fall under the heading "Radio spectrum functions of Ofcom". Under section 3(1), Ofcom must have regard primarily to the extent to which the electromagnetic spectrum is available for use, or further use, for wireless telegraphy, and to the current and likely future demand for such use. Under section 3(2), Ofcom must also have regard, in particular, to the desirability of promoting the efficient management and use of the part of the electromagnetic spectrum available for wireless telegraphy, the economic and other benefits that may arise from the use of wireless telegraphy, the development of innovative services, and competition in the provision of electronic communications services. In the application of the section to its radio spectrum functions, section 3(4) confers on Ofcom a discretion to disregard these matters other than in relation to its functions under sections 13 and 22: section 3(3). Section 3(5) states:
"Where it appears to Ofcom that a duty under this section conflicts with one or more of their duties under sections 3 to 6 of [the 2003 Act], priority must be given to their duties under those sections".
- Section 5(1) provides that the Secretary of State may, by order, give general or specific directions to Ofcom about the carrying out by Ofcom of its radio spectrum functions. Section 5(2) permits the Secretary of State to direct Ofcom to secure that certain frequencies are made available for specified uses or users. Section 5(3) provides that an order under section 5 may require Ofcom to exercise its powers under, inter alia, sections 12-14,
"(a) in such cases, (b) in such manner, (c) subject to such restrictions and constraints, and (d) with a view to achieving such purposes, as may be specified in, or determined by the Secretary of State in accordance with the order".
- Section 6 details the procedure for making a direction under section 5. First, the relevant order must state the purpose for which the direction is given: section 6(1). Secondly, section 6(2) provides that, before making an order under section 5, the Secretary of State must consult Ofcom and such other persons as she thinks fit. Thirdly, draft orders under section 5 must be laid before Parliament and approved by a resolution of both Houses: section 6(4).
- Charges and licence fees are dealt with in sections 12-16. Section 12 provides that a person to whom a wireless telegraphy licence is granted must pay to Ofcom (a) on the grant of the licence, and (b) if regulations so provide, such sums subsequently as are prescribed. Section 13(2) reads:
"(2) Ofcom may, if they think fit in the light (in particular) of the matters to which they must have regard under section 3, prescribe sums greater than those necessary to recover costs incurred by them in connection with their radio spectrum functions."
Auctions for licences are provided for in section 14 "[h]aving regard to the desirability of promoting the optimal use of the electromagnetic spectrum". Under section 15 fees are payable to Ofcom as soon as they become due. Fees are set out in regulations made in accordance with sections 16 and 122.
(b) EU law
- The background to the UK legislation is EU law governing the regulation of telecommunications in Europe. Central is Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services ("the Framework Directive"). Other directives include Directive 2002/20/EC ("the Authorisation Directive").
- Under Article 3 of the Framework Directive, Member States must have National Regulatory Authorities ("NRAs") to give effect to the common regulatory framework and must notify the European Commission which body is their NRA. Ofcom is the designated NRA in the UK; the Secretary of State has no role as an NRA.
- Article 4 of the Framework Directive sets out what Member States must provide in relation to the right of appeal against a decision of an NRA. It reads in part:
"1. Member States shall ensure that effective mechanisms exist at national level under which any user or undertaking providing electronic communications networks and/or services who is affected by a decision of a national regulatory authority has the right of appeal against the decision to an appeal body that is independent of the parties involved. This body, which may be a court, shall have the appropriate expertise available to it to enable it to carry out its functions. Member States shall ensure that the merits of the case are duly taken into account and that there is an effective appeal mechanism…"
- Under Article 7 of the Framework Directive, NRAs must take "utmost account" of the objectives set out in Article 8, including so far as they relate to the functioning of the internal market. Under Article 8(1), Member States must ensure that NRAs take all reasonable measures aimed at achieving the objectives set out in the Article, such measures being proportionate to the objectives. Article 8(2) requires NRAs
"to 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, elderly users, and users with special social needs 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, including the transmission of content;
(d) encouraging efficient use and ensuring the effective management of radio frequencies and numbering resources."
- Article 8(3) requires NRAs to contribute to the development of the internal market, and Article 8(4) requires them to promote the interests of the citizens of the EU. In pursuit of these policy objectives, Article 8(5) requires NRAs to:
"apply objective, transparent, non-discriminatory and proportionate regulatory principles by, inter alia,
(a) promoting regulatory predictability by ensuring a consistent approach over appropriate review periods;
(b) ensuring that, in similar circumstances, there is no discrimination in the treatment of undertakings providing electronic communications networks and services;
(c) safeguarding competition to the benefit of consumers and promote infrastructure-based competition;
(d) promoting efficient investment and innovation in new and enhanced infrastructures ...;
(e) taking due account of the variety of conditions relating to competition and consumers that exist in the various geographic areas within a Member State;
(f) imposing ex ante regulatory obligations only where there is no effective and sustainable competition and relaxing or lifting such obligations as soon as that condition is fulfilled."
- As to the Authorisation Directive, Article 12 permits NRAs to impose administrative charges on holders of spectrum licences designed to cover the costs of administration. Article 13 provides for the setting of fees for the right to use radio frequencies. It reads, in part:
"Member States may allow the relevant authority to impose fees for the rights of use for radio frequencies… which reflect the need to ensure the optimal use of these resources. Member States shall ensure that such fees shall be objectively justified, transparent, non-discriminatory and proportionate in relation to their intended purpose and shall take into account the objectives in Article 8 of [the Framework Directive]."
- Article 13 of the Authorisation Directive has been considered on several occasions by the Court of Justice of the European Union. In Joined Cases C-55/11, C-57/11 and C-58/11, Vodafone España SA v. Ayuntamiento de Santa Amalia, Judgment of 12 July 2012,  EUECJ C-55/11, the court held that Article 13 is unconditional and sufficiently precise to have direct effect in Member States, irrespective of its implementation into national law: at -.
- Case C-375/11, Belgacom SA and others v. Belgian State  3 CMLR 7 is a leading authority. There the Belgian Constitutional Court asked the CJEU whether the Authorisation Directive prevented Member States from charging mobile telephone operators a one-off fee for both a new acquisition of rights and the renewal of those rights, when the one-off fee was in addition to an annual fee and an administration fee. The purpose of the one-off fee and the annual fee was to encourage optimal use of frequencies. The court further asked about the compliance with the Authorisation Directive of the detailed rules for fixing the amount of the one-off fee. It was determined either by reference to the former one-off licence fee calculated on the basis of the number of frequencies and months to which the rights of use related, or through auction when the frequencies were assigned. The Fourth Chamber of the CJEU stated:
"46. Article 13 ... require[s] Member States to ensure that fees for the use of radio frequencies are objectively justified, transparent, non-discriminatory and proportionate in relation to their intended purpose and take into account the objectives, including the promotion of competition and efficient use of radio frequencies, as laid down in Article 8 of the Framework Directive.
47. It is also apparent from Article 13 of and recital 32 in the preamble to the Authorisation Directive that a fee charged to operators of telecommunications services for the use of resources must pursue the purpose of ensuring optimal use of such resources and not hinder the development of innovative services and competition on the market…
49. … the Authoritative Directive lays down the requirements with which Member States must comply in determining the amount of a fee for the use of radio frequencies, without thereby expressly providing a specific method for determining the amount of such a fee…
50. It should be remembered that the authorisation to use public property which constitutes a scarce resource enables the holder of that authorisation to make significant economic gains and grants that holder advantages as compared with other operators who are also seeking to use and exploit that resource, which justifies imposing a charge which reflects, inter alia, the value of the use of the scarce resource at issue…
54. In the light of all the foregoing considerations, the answer to the first two questions is that Articles 12 and 13 of the Authorisation Directive must be interpreted as not precluding a Member State from charging mobile telephone operators holding rights of use for radio frequencies a one-off fee payable for both a new acquisition of rights of use for radio frequencies and for renewals of those rights, in addition to an annual fee for making the frequencies available, intended to encourage optimal use of the resources while at the same time also covering the cost of managing the authorisation, provided that those fees genuinely are intended to ensure optimal use of the resource made up of those radio frequencies and are objectively justified, transparent, non-discriminatory and proportionate in relation to their intended purpose and take into account the objectives in Article 8 of the Framework Directive, which it is for the national court to assess.
55. Subject to that same condition, the fixing of the amount of a one-off fee for rights of use for radio frequencies by reference either to the amount of the former one-off licence fee calculated on the basis of the number of frequencies and months to which the rights of use relate, or to the amounts raised through auction, may be an appropriate method for determining the value of the radio frequencies."
- Under Article 14 Member States must not amend licences except in objectively justified cases and a proportionate manner.
(c) The Secretary of State's 2010 direction
- In exercise of powers conferred by section 5 of the 2006 Act, the Secretary of State gave a number of directions to Ofcom in the Secretary of State's 2010 direction. The purpose of the directions was contained in Article 2 as follows:
"The Secretary of State gives these directions for the purposes of: ensuring the release of additional electromagnetic spectrum for use by providers of next generation wireless mobile broadband; allowing early deployment and maximising the coverage of those services; creating greater investment certainty for operators; and implementing Directive 2009/114/EC and the Decision on the liberalisation of frequencies in the 900MHz and 1800MHz bands."
- Article 4 required Ofcom to vary the 900 MHz and 1800 MHz licences to allow their use for 2G and 3G systems. It reads:
"4. OFCOM must exercise their powers under –
(a) section 2 of the [2006 Act] to designate the 900MHz and 1800MHz bands for use for both GSM and UMTS systems;
(b) section 10 of and paragraph 6 of Schedule 1 to the WTA to vary each 900MHz and 1800MHz licence to permit the licensee to use the licensed frequencies for both GSM and UMTS systems…"
- Article 5 contained further directions to Ofcom about variations in existing wireless telegraphy licences - to vary the 900 MHz and 1800 MHz licences so as to extend the notice period for revocation from one year to five years (Article 5(1) and (2)) and to vary the 2.1 GHz licences, which were due to expire on 31 December 2021, to make them of indefinite duration (Article 5(3)(b)).
- Article 6 provided for licence fees and reads:
"(1) After completion of the [4G] Auction, Ofcom must revise the sums prescribed by regulations under section 12 of the [2006 Act] for 900 MHz and 1800 MHz licences so that they reflect the full market value of the frequencies in those bands.
(2) In revising the sums prescribed Ofcom must have particular regard to the sums bid for licences in the [4G] Auction..."
- Article 7 required Ofcom to make 900, 1800 and 2100 MHz licences fully tradable. Article 9 directed Ofcom to conduct the auction of the 800 MHz and 2600 MHz bands, in other words, the 4G auction.
(d) Ofcom's 2015 decision
- As its preamble states, Ofcom made the Wireless Telegraphy (Licence Charges for the 900 MHz frequency band and the 1800 MHz frequency band) (Amendment and Further Provisions) Regulations 2015, 2015 SI 1709 ("the 2015 Regulations"), under sections 12, 13(2) and 122(7) of the 2006 Act, "and as required by article 6(1) and (2) of the Wireless Telegraphy Act (Directions to Ofcom) Order 2010." The regulations set out the fees payable. The explanatory note to the regulations explains that a full Impact Assessment had not been produced since one had been prepared in relation to the 2010 Order, "which this instrument implements".
Secretary of State's 2010 direction in context
- Until 2000 the UK government adopted a command and control approach to spectrum management. In 1983 it allocated second generation (2G) mobile spectrum at 900 MHz to Vodafone and O2, and in 1991 the majority of 2G mobile spectrum at 1800 MHz to T-Mobile and Orange, with the rest being distributed between Vodafone and O2. The Wireless Telegraphy Act 1998 authorised the Secretary of State to charge licence fees for spectrum for the first time at a level above administrative cost. Prices were initially set at only 50 percent of the opportunity cost of the spectrum in order to enable the industry to adapt gradually to fee increases.
- From 2000 the government switched to a more market-based approach with three so-called pillars: spectrum liberalisation; spectrum pricing; and spectrum trading. In 2000, the government auctioned third generation (3G) licences at 2.1 GHz. The Cave Review in 2002 recommended that spectrum fees in general should be set at more realistic levels, and that where demand exceeded supply users of spectrum should face a charge equivalent to the true market value or opportunity cost. Ofcom reviewed spectrum prices in 2004-5 but decided to retain fees at then current levels for three years in light of a number of uncertainties, and pending likely industry developments, including the anticipated liberalisation of the 900 MHz and 1800 MHz bands to enable 3G use.
- The government published its Digital Britain: Interim Report in January 2009. As regards the mobile networks, it noted that the UK had hit a temporary road block to the release of spectrum for 3G. The future of existing 2G spectrum needed to be resolved through a structured framework, allowing existing operators to re-align their holdings, re-use the spectrum and start the move to next generation mobile services. That had to be achieved whilst maintaining a competitive market. If this could be done, the economic value of the spectrum would be enhanced. Existing administered incentive pricing levels would be adjusted to reflect the enhancement. Industry-agreed trades would be a better and quicker solution but the government would impose a solution in the absence of industry agreement by April 2009. The government wanted to encourage the maximum commercially-sensible investment in network capacity and coverage.
- The report from the Independent Spectrum Broker ("the ISB report") was published in May 2009. The thrust of his report was that the government might be able to adopt a holistic combination of policies towards mobile suitable spectrum, which would achieve the objectives of Digital Britain more quickly than the regulatory approach open to Ofcom. He identified a package of proposals and a number of preferred mechanisms for achieving these objectives, the first being liberalising the 2G spectrum in the hands of the existing users but revising administrative incentive pricing to reflect the full economic value of this spectrum.
- Digital Britain: Final Report was published in June 2009. In view of the proposals in the ISB report, it said, the government was minded to implement an integrated package of measures, including "making indefinite the 3G Licence term in return for proper administrative incentive pricing from the end of that term and additional coverage obligations", and liberalising 2G licences in the hands of existing licensees, combined with "the alignment of [administrative incentive pricing] for liberalised 2G licences reflecting the full economic value of this spectrum".
The Secretary of State's 2010 direction
- On 16 October 2009, the Secretary of State for Business, Innovation and Skills published A Consultation on a Direction to Implement the Wireless Radio Spectrum Modernisation Programme ("the 2009 consultation"). He explained that he had decided that it was desirable to direct Ofcom under the 2006 Act. The consultation set out Ofcom's powers, explained that complex challenges (including legal action) had delayed the proposed 2.6 GHz auction and created uncertainty, and added at paragraph 3.14 that this had prompted the government to seek a possible alternative solution. The consultation continued:
"3.15 The Government has decided that the most effective way of implementing these proposals, and therefore delivering its policy objectives, is through a Direction. Having decided to intervene, and decided that it should support this package of proposals, it would not be sensible to ask Ofcom to consider implementation. This is because Ofcom would be required to meet their statutory duties and there is no guarantee that the outcome of this would be a full implementation of the proposals. In the Digital Britain Report, the Government stated that it saw the proposals as an integrated package and so it is using the power of Direction to ensure they are delivered as a package."
- In considering the ISB report, the consultation stated, the government had taken into consideration responses to Digital Britain: Final Report, its objectives for the UK's communications infrastructure and
"compliance with relevant national and European law (including obligations to promote competition)": paragraph 3.18.
The government considered a regulatory approach by Ofcom would take too long, and a market-based solution would be unlikely to materialise. It had concluded that its integrated proposals were proportionate, for the reasons given in paragraph 3.20. Answer D, on the proposal regarding spectrum for the next generation mobiles, contained this passage:
"In recognition that these licences [2G] were not awarded through spectrum auctions granting indefinite licences, they will be subject to revised licence fees reflecting their full economic value, and so provide an appropriate return for taxpayers and correctly incentivise the holders."
- The government's Response to the consultation, dated March 2010, noted that some respondents were concerned whether it was possible to set revised licence fees adequately to reflect full market value. Ofcom's proposals regarding 900 and 1800 MHz had met opposition and the threat of legal action. After stating that it would direct Ofcom on the basis that liberalisation of that spectrum was part of an overall package, the consultation response stated:
"17. Finally an important element that will contribute to the balance referenced above is the revision of licence fees for this liberalised spectrum. Liberalised licences in the 900 MHz and 1800 MHz bands would have an enhanced value and the circumstances in which the fees were originally set would no longer apply. The Government will therefore direct Ofcom, consulting as required, to revise these fees to reflect the full market value of the spectrum, taking into account a number of factors including the amounts bid for spectrum in the combined auction. This revision will take place after the combined auction."
- March 2010 also saw the publication of Ofcom's consultation, SRSP: The Revised Framework for Spectrum Pricing ("the SRSP"). That began by noting that, for over a decade, charges for many licences to use radio spectrum had been set by reference to the value of the spectrum as opposed to simply reflecting the cost of managing it. The consultation set out the relevant EU and domestic law and Ofcom's obligations in setting fees to take into account the range of matters set out there. When making specific fee proposals, the consultation stated, it was necessary to undertake an impact assessment of them on the parties affected. Administrative incentive pricing needed to be set at a level reflecting the value of the spectrum to others, in other words, to reflect opportunity cost.
- The government laid a draft statutory instrument before Parliament but the May 2010 general election intervened. Following the coalition government coming to office, a new draft was laid before Parliament in July 2010, together with an impact assessment.
- Dated 13 July 2010, the Impact assessment posed at the outset the questions: what was the problem under consideration and why was government intervention necessary. The answers given were, in part, as follows:
"The UK Government has been considering possible solutions to the complex set of challenges hindering the release and use of additional spectrum that could support the deployment of next generation mobile broadband and ensure that the UK mobile sector remains highly competitive. These challenges have centred around the change in use of 2G spectrum to deliver 3G mobile services.
Government intervention through a Direction to the regulatory body, Ofcom, is deemed necessary to avoid further delay. Acting now will help accelerate the process of releasing existing and new spectrum, and thereby progress towards universal coverage in 3G and next generation mobile services and the transition to next generation high speed broadband services."
- The impact assessment explained that the government had considered the following options. Option 0 was to do nothing and leave Ofcom to address the issues through "the normal regulatory process". Under Option 0 Ofcom would still be required to liberalise the 900 MHz and 1800 MHz spectrum. At the same time it would make the licences indefinite and tradable and
"would also set revised licence fees to reflect the full economic value".
- Option 1 was to give a direction to Ofcom specifying particular interventions on spectrum management. The impact assessment explained that the government had decided to take forward Option 1, following consultation and further discussions with Ofcom. That meant that Ofcom would "be directed to take actions now which may otherwise continue to be delayed." Option 1 would bring forward the timing of additional benefits since a solution would be implemented relatively sooner.
- The impact assessment contained a heading "Rationale for Government Intervention". That explained that over the previous eighteen months, the government had been considering possible solutions to the challenges hindering the release of additional spectrum, which could support the deployment of next generation mobile broadband and ensure that the UK mobile sector remained highly competitive. Those challenges had centred around changing the use of 2G spectrum to deliver 3G mobile services, referred to in the industry as '2G refarming'. The section continued:
"Government action through a Direction to the regulatory body, Ofcom, is deemed necessary to avoid further delay. Appropriate intervention now will accelerate the process of releasing existing and new spectrum, and thereby progress towards universal coverage in 3G and next generation mobile services and the transition to next generation high-speed broadband services. It would also serve to help safeguard competition in the UK mobile sector.
Without government intervention, more time could elapse before an appropriate solution is agreed and implemented. As a result, the benefits to businesses and consumers of a modern effective wireless communications infrastructure would be delayed even further. These benefits would include efficiency gains, increased innovation and investment in mobile networks and services, including mobile broadband, and greater consumer choice."
- On 11 August 2010 the claimant sent a letter before claim to the Secretary of State for Culture, Media and Sport complaining that there had been no proper consultation on the revisions to the draft statutory instruments, especially their impact on competition. The UK was under an obligation to consider the impact of regulatory actions on competition, it said, by reason of Article 8 of the Framework Directive and sections 3 and 4 of the 2004 Act. In the event the claimant did not pursue judicial review.
- On 17 December 2010, Ofcom published a statement of its policy and practice setting administered incentive pricing ("AIP"), SRSP: The revised Framework for Spectrum Pricing ("the SRSP"). The statement was not concerned with the setting of fees to reflect full market value, as set out in Secretary of State's 2010 direction (then still in draft, although very shortly to be in force). Ofcom explained that it had used the terms spectrum value and opportunity cost interchangeably, without explaining what it meant by value. It continued:
"1.9 …When discussing setting AIP fees to reflect the value of spectrum we usually meant that these fees would be set at the price that would emerge in a well-functioning market. In a well-functioning market, the price of spectrum would be equal to the value of that spectrum in the next highest value use, rather than the value that the current user (for example, a company) might place on the spectrum. Given the possibility of continuing confusion about our meaning of the term "value" in the context of AIP fees we have redrafted our AIP principles and methodologies to clarify that we set AIP fees on the basis of opportunity cost."
- The SRSP then set out its AIP pricing principles and methodologies. Principle 7 concerned the use of market valuations from auctions and trading which would be used alongside the evidence, and with care, to set reference rates and AIP fees. Principle 8 concerned the use of market valuations. There was a problem in making like-for-like comparisons. Auction valuations were in practice affected significantly by the specific circumstances of the award, particularly by the design of the auction. Interpreting auction results from other countries also presented issues of interpretation.
- Methodology 2 in the SRSP was that reference rates would be based on the estimated opportunity cost of spectrum use
"informed, where appropriate, by the available market information (if any) and economic studies of the value of spectrum in different uses."
The least cost alternative method was the preferred method for estimating opportunity cost over the discounted profit method. Least cost alternative modelling was sensitive to input assumptions but Ofcom believed that it was the best available to estimate the price which would emerge in a well-functioning market. Reference rates should seek "to reflect the opportunity cost of spectrum…". Methodology 4, impact assessments, stated that these were required regarding fee proposals to identify potential detrimental impacts to spectrum users, consumers and citizens.
- Meanwhile, the draft 2010 Order containing the Secretary of State's directions to Ofcom was debated in the House of Lords on 16 December 2010: Hansard, Lords, v. 723, 16 December, 2010, cc.800-814. Both Houses of Parliament having passed motions to approve it, the Secretary of State's 2010 direction came into force on 31 December 2010.
From the Secretary of State's 2010 direction to Ofcom's 2015 decision
- Following the Secretary of State's 2010 direction there were various Ofcom consultations and statements before the making of its 2015 decision. In a Consultation on the 4G auction, in March 2011, Ofcom also asked about its use of benchmarks in setting annual licence fees. In response, Vodafone raised queries as to how that methodology would allow the EU regulatory objectives to be taken into account. In its second consultation of 12 January 2012 ("the January 2012 consultation"), Ofcom stated:
"8.21 We consider that our proposals for calculating [annual licence fees], which amongst other things take account of article 6 of the Direction, are compatible with our statutory duties under the domestic and EU legislative framework. As we have said, we will consult on our exact proposal for calculating [annual licence fees] after the auction."
- There was a statement of 24 July 2012 ("the July 2012 statement") about the auctioning of the 800 MHz and 2.6 GHz spectrum for 4G. In considering the legal framework for that auction, the statement canvassed the EU and domestic law duties imposed on Ofcom considered earlier in the judgment. The statement then read:
"3.47 Taking into account each of the above duties and the relevant facts and circumstances, we consider that our principal duty to further the interests of citizens, and the interests of consumers where appropriate by promoting competition, is of particular importance to the Auction."
The statement referred to other duties which it considered particularly relevant. Later in the statement, Ofcom explained that at that stage it would not detail its methodology for setting annual licence fees after the 4G auction since that would risk fettering the taking account of all relevant factors.
- Annex 12 of the statement summarised the responses to the January 2012 consultation on annual licence fees for the 900 MHz and 1800 MHz spectrum and spelt out Ofcom's answers. Vodafone had considered that Ofcom's approach was inconsistent with its obligations under EU and domestic law. Ofcom's response was, in part, as follows:
"A12.54 We do not agree that Ofcom has failed to explain why it is considering using a different methodology to set fees for 900 MHz and 1800 MHz spectrum. We have explained that the Direction requires us to revise those fees to reflect the full market value of the frequencies in those bands, and that in doing so, we must have particular regard to the sums bid for licences in the Auction. The Direction was made by the Secretary of State fully cognisant both of the duties set out in the Community law framework, and the nature of the spectrum that would be the subject of bids in the Auction."
"A12.55 We remain of the view that our proposals (which we note will be subject to further consultation by us before we make any final decisions on revised licence fees) are consistent with our obligations both under the Direction as set out above, and the European framework which permits us to set fees which reflect the need to ensure optimal use of spectrum, provided that we do so in an objectively justified, transparent, non-discriminatory and proportionate manner. We agree with Vodafone that the Direction must be interpreted consistent with the European framework. We do not however consider that the requirements of the Direction, nor our intention to set [annual licence fees] after the Auction, are inconsistent with those European law requirements."
- In November 2012 Vodafone sought clarification from the Department of Culture, Media and Sport about the meaning of the Secretary of State's 2010 direction. The Department explained:
"It is government policy to use spectrum pricing as one of the tools to ensure efficient use of radio spectrum. That's why it is essential that the licence fees for the 900MHz and 1800MHz licences are updated to properly reflect the full market value of that spectrum. This is consistent with legislation which encourages securing optimal use of the spectrum… [T]he Government directed Ofcom to have particular regard to the prices paid for spectrum in the forthcoming auction of 800MHz and 2.6 GHz spectrum in setting the [annual licence fees] for 900MHz and 1800MHz. This is because in the Government's view this provides the best available comparator for the full market value of the spectrum in the absence of direct evidence based on an auction price or trade in the market…"
- After the 4G auction held in early 2013, Ofcom published a further consultation, Annual licence fees for 900 MHz and 1800 MHz spectrum in October 2013 ("the October 2013 Consultation"). It began with the Secretary of State's 2010 direction, which it said required it to ascertain the full market value of the 900 MHz and 1800 MHz spectrum, having particular regard to the sums that had been bid in the 4G auction, prices paid in auctions abroad and technical and commercial characteristics of spectrum bands. Uncertainty about the full market value of the spectrum necessarily required an exercise of judgment to estimate it (paragraph 2.10). The consultation contained several pages on the EU regulatory framework and on Ofcom's duties both under sections 3-4 of the 2003 Act and section 3 of the 2006 Act. Then, under the heading "Application of the legal framework to revising licence fees", it stated:
"3.35 …In making these proposals we have considered our principal duty to further the interests of citizens, and the interests of consumers where appropriate by promoting competition, and we have considered our duties relating to the optimal use for wireless telegraphy of the electro-magnetic spectrum, the desirability of encouraging investment and innovation, the desirability of encouraging competition, having regard to the interests of consumers in respect of choice, price, quality of service and value for money. We consider that our proposals for implementing the requirement in the Direction are consistent with our statutory duties."
- Regarding the assessment of values, the October 2013 consultation stated that network cost modelling had not been undertaken: although there was some uncertainty in interpreting UK and international auction prices, market values derived from cost modelling were
"highly sensitive to the range of assumptions that need to be made, such that we consider that an attempt to derive point estimates of value based on this approach would be of limited additional benefit": paragraph 4.11.
- Ofcom's reasoning about the contribution of cost modelling in estimating the market value of 900 MHz and 1800 MHz spectrum was further developed in Annex 6. Vodafone's contrary view was noted. The document repeated that Ofcom did not intend to use cost modelling because of the uncertainty about its specifications and assumptions (paragraph 3.14). Moreover,
"we consider that the range of evidence on this matter from UK and international benchmarks has enabled us to take a balanced view of the market value of spectrum in the 900 MHz and 1800 MHz bands. It is far from clear that generating additional estimates of spectrum value based on network cost modelling would allow us to reach a better-informed view, particularly because of the complexity of the modelling, the sensitivity of any such estimates to assumptions about the underlying parameters, and because the intrinsic value of spectrum may not be fully captured by such modelling, which typically focuses on the scope for reductions in infrastructure costs."
- Vodafone responded to Ofcom's 2013 consultation in January 2014. Among the points made was that Ofcom's failure even to attempt cost modelling was inexplicable and in error. A model would generate a value for the 900 MHz spectrum, or for that matter the 1800 MHz spectrum, nothing like as high as currently estimated by Ofcom. Vodafone referred to a model developed by the consultants Analysys Mason regarding the value of the 900 MHz spectrum. That, it asserted, appeared to have similarities to what was necessary and could be adapted.
- There was a further consultation document dated 1 August 2014 ("the August 2014 Consultation"). Ofcom set out its revised proposals since the October 2013 consultation. It said that it would exercise regulatory judgment by adopting a conservative approach to interpreting the evidence. First, it considered that there was an asymmetry of risk in relation to the potential effects of revised fees on spectrum efficiency as between inadvertently setting annual licence fees above, and inadvertently setting them below, market value; and secondly, it wished to take account of the possibility that forward-looking values as at the time of assessment would be lower than at the time of auction, due to expectations that more spectrum would become available in future: paragraph 1.34.
- As regards an impact assessment, the document stated:
"1.42 In response to our October 2013 consultation, a number of stakeholders said that we should carry out a full impact assessment of our proposals for revising [annual licence fees]. In essence, their view was that we should not revise [annual licence fees] to reflect full market value unless we could demonstrate that taking this approach to setting [annual licence fees] (and the specific levels of [annual licence fee] that we propose) was necessary to promote efficient use of spectrum, and that the potential benefits in terms of spectrum efficiency would outweigh any potential adverse effects on consumer prices, investment in infrastructure, innovation and competition. They considered that unless we did carry out such an impact assessment any decision we made would be unlawful.
1.43 We do not agree with this view. We have been directed by the Government to revise [annual licence fees] to reflect full market value, and we are required to implement that direction. We do not have any discretion to decide whether or not to set [annual licence fees] at full market value. For this reason, we consider it is unnecessary for us to carry out an impact assessment of the type argued for by stakeholders (and to this extent this is a statement for the purposes of section 7(2)(b) of the Communications Act 2003."
- The consultation repeated that Ofcom did not intend to use cost modelling because of the uncertainty about its appropriate parameter assumptions, "leading to valuation estimates that vary over a wide range" (paragraph 3.14).
- As a result of Ofcom's August 2014 consultation, Vodafone wrote on 11 August 2014, expressing its concern that Ofcom appeared to have decided that it would not publish an impact assessment despite section 7 of the 2003 Act. The letter stated that the Secretary of State's 2010 direction had to be considered in the hierarchy with EU law. Moreover, the Secretary of State's 2010 direction did not require Ofcom to set fees at full market value, but to set fees that reflected full market value of the spectrum in question. Vodafone suggested that the sensible way forward was for Vodafone not to bring judicial review proceedings at that stage, challenging Ofcom's failure to undertake a section 7 impact assessment. Rather, it should address the legal point and technical economic analysis in answer to the consultation. Legal proceedings would be brought, if at all, only after the publication of Ofcom's final statement.
- Ofcom's general counsel replied on 20 August 2014, confirming that paragraph 1.43 of the 2014 consultation was its statement pursuant to section 7(3) of the 2003 Act that no impact assessment was necessary. She added that should Vodafone decide not to bring a claim for judicial review of Ofcom's decision at that stage, Ofcom would not take a point on delay in the event that Vodafone brought a claim after publication of Ofcom's final statement.
Ofcom's 2015 decision
- Ofcom planned making its final decision following the August 2014 consultation. However, towards the end of 2014 the mobile network operators agreed with the government to amend their respective 900 MHz and 1800 MHz licences to include a 90 percent geographic coverage obligation. Ofcom therefore published its Provisional decision and a further consultation in February 2015 ("the February 2015 provisional decision and consultation"). Ofcom explained:
"1.4 As a result of this agreement, we confirmed in an exchange of letters with the Secretary of State of 17 December 2014 our view that all interested parties should be given a reasonable opportunity to comment on whether they consider that the geographic coverage obligation, taking account of the associated incremental costs incurred by the [mobile network operators], should impact future [annual licence fees].
1.5 This consultation is intended to afford all interested parties that opportunity to comment."
- The February 2015 document then set out Ofcom's provisional view as to full market value and, on that basis, the appropriate level of annual licence fees. It also stated its provisional view that the geographic coverage obligation was unlikely to have a material effect on the market value of either 900 MHz or 1800 MHz spectrum. Among other points, Ofcom reiterated its view on cost modelling in Annex 9:
"A9.42 We remain of the view that a purpose-built 900 MHz model would be subject to significant uncertainty about the specification of the model and appropriate parameter assumptions, and would be unlikely to be helpful in deriving a point estimate lump-sum value for the [annual licence fees] bands. Therefore, we do not place significant weight on modelling results in informing our estimates."
- The claimant's response to the February 2015 provisional decision and statement canvassed its objections to Ofcom's proposed approach. It also stated that it considered it appropriate to seek judicial review once Ofcom published its final statement, but not at that stage. Ofcom responded on 31 March 2015 that should the claimant seek judicial review,
"we would not argue that the action should have been brought against our provisional decision on the level of ALF set out in the February Document. We reserve our position on any other procedural matter and ground."
Three responded to the February 2015 provisional decision and consultation that the 90 percent geographic coverage obligation would have a disproportionate impact on it, and thus Ofcom should phase in annual licence fees over a longer period than a year.
- On 24 September 2015 Ofcom published its final decisions, Annual licence fees for 900 MHz and 1800 MHz spectrum ("the September 2015 statement"). It set out lump-sum estimates of the market value of the 900 MHz and 1800 MHz frequencies, £18m per MHz and £13m per MHz respectively. These were established by reference to the sums bid in the UK 4G auction for 800 MHz and 2.6 GHz spectrum, and international benchmarks derived from 12 countries, indicating the relative values of spectrum in bands. It then applied a discount rate to arrive at a determination of annual licence fees, to be phased in over two years.
- Ofcom's September 2015 statement explained that the mobile network operators had all advocated that an impact assessment be undertaken. However, Ofcom remained of the view, as set out in earlier consultations, that this was unnecessary
"1.22 …because we did not have any discretion to decide whether or not to set [annual licence fees] at full market value, since we had been directed by the Government to do so and we were required to implement that direction.
1.25 None of the comments provided in response to the August 2014 and February 2015 consultations have caused us to change our decision in relation to impact assessments as set out in the August 2014 consultation. Further, having now concluded that the geographic coverage obligation is unlikely to have a material effect on the market value of either 900 MHz or 1800 MHz spectrum for the purpose of [annual licence fees], we remain of the view as set out in the February 2015 consultation that it is unnecessary for us to carry out an impact assessment in that regard."
The statement explained that a conservative approach to the assessment of the evidence had been adopted:
"1.41 …We have always recognised that there is inherent uncertainty in deriving [annual licence fees] for the 900 MHz and 1800 MHz bands to reflect full market value. Nevertheless, in order to implement the Government Direction we must conclude on an appropriate amount for [annual licence fees] going forward, and that process necessarily involves us exercising regulatory judgment when considering the evidence.
1.42 Where there are alternative approaches to interpreting the available evidence that we consider could be appropriate for the purpose of deriving revised [annual licence fees] that reflect full market value, we have taken into account whether the alternative approaches are more likely to understate full market value or to overstate it. We have generally preferred approaches which we consider are more likely to understate full market value than to overstate it, where such a choice arises."
- The statement further explained that Ofcom defined full market value for the purpose of annual licence fees as the market-clearing price in a well-functioning market, or the forward-looking marginal opportunity cost of the spectrum: paragraph 2.3. The statement contained the results from 17 auctions across 14 European countries, and tables of benchmarks drawn from this data. The introduction of a 2015 German benchmark meant a 22 percent lower lump-sum value for 900 MHz spectrum than had been calculated earlier and contained in the February consultation. The statement rejected the notion of a longer phase-in period because of the financial impact of the geographic coverage obligation:
"Having concluded that the geographic coverage obligation is unlikely to have a material effect on the market value of either 900 MHz or 1800 MHz spectrum for the purpose of [annual licence fees]… and noting that the licensees agreed with Government the inclusion of the geographic coverage obligation in their licences, we do not consider it appropriate to modify our approach of adopting a two-stage phase…"
- In an annex to the statement, Ofcom reiterated that estimates of spectrum value based on network cost modelling would only be of limited additional benefit. It said that modelling of the 900 MHz spectrum produced a wide range of valuations, although the width of the range was driven in large part by traffic assumptions which were not relevant to 1800 MHz spectrum. It rejected the use which the claimant had made of Ofcom's own mobile call termination cost model ("MCT") as a basis for estimating the market value of 1800 MHz spectrum. The sensitivity of network cost modelling estimates to underlying parameter assumptions meant, it said, that there was only limited additional benefit over and above the market-based evidence used in estimating the lump-sum value of the spectrum.
Ground 1: interpretation and application of Secretary of State's 2010 direction
The claimant's case
- The claimant's case is that Ofcom wrongly interpreted and applied Article 6 of the Secretary of State's 2010 direction as requiring it to set annual licence fees at market value, to the exclusion of other relevant considerations. In short, the relevant considerations as set out in Article 13 of the EU's Authorisation directive are ensuring that fees promote optimal use of spectrum, are objectively justified, transparent, non-discriminatory and proportionate in relation to their intended purpose, and take into account the competition, consumer and the other objectives set out in Article 8 of the EU's Framework directive. The case was advanced along three lines.
- The claimant submitted, first, that the language of Article 6 did not preclude Ofcom from taking account of the relevant considerations as set out in EU law. Article 6 required Ofcom to ensure that annual licence fees should reflect market value, not that they be set at market value. By reference to the Oxford English Dictionary the claimant contended that the word reflect did not mean have exclusive regard to the one factor and not others. Reflect implied varying degrees of association. The claimant contended that, had it been the intention to exclude the consideration of other factors, Article 6 would have said so expressly. In the claimant's submission it was a striking factor that in the January 2012 consultation, the 2012 statement, and the October 2013 consultation, Ofcom took this wider perspective and stated that it was considering the implications of its EU and domestic law objectives for the setting of annual licence fees at market value. Adopting one of Vodafone's submissions, the claimant added the point that market value as a concept has to be understood in the context of a market bounded by overarching EU and domestic law duties.
- The claimant's second argument was that in any event Article 6 of the Secretary of State's 2010 direction had to be interpreted in such a way to allow for consideration of other factors. Only thus could Ofcom act conformably with its legal duties under domestic and EU law. Primary legislation, section 4(2) of the 2003 Act, requires Ofcom to act in accordance with the requirements of Article 8 of the Framework Directive. The Secretary of State's 2010 direction was made under the 2006 Act and there is no power in that Act enabling her to direct Ofcom as to the performance of its duties under the 2003 Act, in particular its duty to give effect to Article 8. Section 3(5) of the 2006 Act states explicitly that Ofcom is to give priority to its duties under the 2003 Act in the event of conflict with its 2006 Act duties. A direction of the Secretary of State under section 5 of the 2006 Act which required Ofcom to ignore the considerations in Article 8, the argument continued, would be ultra vires.
- The claimant submitted that as a matter of domestic and EU law the court must adopt a construction of Article 6 which avoided that result. From domestic law support was drawn from a passage in Bennion's Statutory Interpretation, 6th edition, 2013, at page 230, that where delegated legislation is ambiguous the court prefers the construction which renders its effect intra vires. Reference was also made to Lord Wilberforce's speech in Raymond v. Honey  1 AC 1, 12H-13B:
"In my opinion, there is nothing in the Prison Act 1952 that confers power to make regulations which would deny, or interfere with, the right of the respondent, as a prisoner, to have unimpeded access to a court. ... The Regulations themselves must be interpreted accordingly, otherwise they would be ultra vires. ... The standing orders, if they have any legislative force at all, cannot confer any greater powers than the Regulations, which, as stated, must themselves be construed in accordance with the statutory power to make them."
- From EU law the claimant invoked the Marleasing principle, requiring the Secretary of State's 2010 direction to be interpreted and applied in the light of EU law insofar as that was possible: Case C-106/89, Marleasing SA v. La Comercial Internacional de Alimentacion SA  ECR I-4135, at -. Here, the claimant contended, it was possible to do that without distortion of the language and going with the grain of the legislation: Ghaidan v. Godin Mendoza  2 AC 557, , per Lord Nicholls; Commissioners for Her Majesty's Revenue and Customs v. IDT Card Services Ireland Ltd  EWCA Civ 29, , per Arden LJ. That was because Article 6 says little and can readily be read as requiring Ofcom to have regard to the considerations contained in EU law.
- The claimant's third, and fallback, argument was that the relevant provisions in EU law had direct effect. The court had to apply them in accordance with basic constitutional principle: Case 106/77, Amministrazione delle Finanze dello Stato v. Simmenthal SpA  ECR 629, at . Moreover, Ofcom was bound to apply them as well: Case C-97/11, Amia SpA v. Provincia Regionale di Palermo  3 CMLR 16, . Article 7 of the Framework directive obliges NRAs like Ofcom to take utmost account of the objectives set out in Article 8, and although Article 8(1) imposes obligations on Member States, other parts of it, in particular Article 8(2) and 8(5), specify NRAs as being subject to its duties. Article 13 of the Authorisation directive imposes the obligation on Member States, but it refers to "such fees", and those in the UK context are the fees set by Ofcom.
- Thus, the claimant contended, Ofcom erred in law in treating Article 6 of the Secretary of State's 2010 direction as binding on it so as to override EU law objectives. Under the doctrine of supremacy of EU law Ofcom was under a duty to disapply any conflicting national law provisions such as Article 6, if Article 6 could be so regarded. In the result, Ofcom was led into a substantive error of failing to address EU law objectives in setting the annual licence fees in its 2015 decision. The failure of Ofcom to take into account the factors set out in the EU instruments when making that decision could be appealed under Article 4 of the Framework directive and domestic law provisions.
The interested parties
- In its supporting submission, Vodafone highlighted the use of the word reflect in Article 13 of the Authorisation directive, along with its appearance in various Ofcom documents, for example, the consultation, The pricing of spectrum for the maritime sector and aeronautical navigation aids (August 2009), the Statement on setting fees for aeronautical radio licences (December 2010) and the Consultation on spectrum pricing for terrestrial broadcasting (March 2013). Moreover, Vodafone submitted, Ofcom's normal regulatory processes, set out in the SRSP, meant that it identified fees reflecting opportunity cost but taking account of EU and domestic law. This taking account of EU objectives was consistent with charging fees to operators reflecting the market value of spectrum. All this, Vodafone contended, led to the conclusion that simply as a matter of domestic law Ofcom was obliged to set fees reflecting market value under Article 6 of the Secretary of State's 2010 direction insofar as that was compatible with its statutory duties. The Secretary of State could not, in promulgating the direction, disapply Ofcom's statutory and EU law duties. Importantly, Vodafone contended, the Secretary of State in making the 2010 direction had recognised in the impact assessment that full market value was reconcilable with taking domestic and EU law duties into account.
- Telefónica's supporting submissions focused on Ofcom's EU law duties, in particular that Member States cannot limit the discretion of NRAs like Ofcom to apply EU law, citing Case C-424/07, Commission v. Federal Republic of Germany  ECR I-11431. It also submitted that a national authority like Ofcom could not avoid complying with its EU law duties by contending that it was bound by some earlier national decision, in this case the Secretary of State's 2010 direction. Reliance was placed in this regard on Case C-224/97, Ciola v. Land Vorarlberg  2 CMLR 1220.
- Ciola was a reference from the Austrian court, concerning the impact of Article 59 of the EC Treaty (freedom to provide services) on an Austrian law prohibiting a boat harbour on Lake Constance from renting moorings in excess of a specified quota to boat-owners resident in other Member States. The second chamber of the CJEU held that the law itself was in breach of Article 59. However, it was also asked about the primacy of the Treaty as applied to the individual administrative decision, which had become final under national law, to fine the manager of the boat harbour for infringing the prohibition. The court held that the manager had rights under the Treaty, which took precedence over national law:
" Thus it appears from the case law, first, that all administrative bodies, including decentralised authorities, are subject to that obligation as to primacy, and individuals may therefore rely on such a provision of Community law against them (Case 103/88, Fratelli Costanzo v. Comune di Milano,  ECR 1839 ).
 Secondly, provisions of national law which conflict with such a provision of Community law may be legislative or administrative (see, to that effect, Case 158/80, Rewe v. Hauptzollamt Kiel,  ECR 1805).
 It follows from the foregoing that a prohibition which is contrary to the freedom to provide services, laid down before the accession of a Member State to the European Union not by a general abstract rule but by a specific individual administrative decision that has become final, must be disregarded when assessing the validity of a fine imposed for failure to comply with that prohibition after the date of accession."
- As well, Telefónica made submissions about the right of appeal in Article 4 of the Framework directive. In summary, Telefónica contended, Article 4 entitles undertakings affected by a decision of an NRA to appeal it on the basis that it is inconsistent with the duties imposed on the NRA by EU law, and that the time limit for such an appeal does not start running until the NRA takes the decision. A number of authorities were cited in support, holding that the article meant Member States have the responsibility of ensuring effective legal protection of the rights which individuals are accorded under EU law: e.g., Case C-282/13, T-Mobile Austria GmbH v. Telekom-Control-Kommission, ECLI:EU:C:2015:24, .
- Three's supporting submission, adopted by the claimant, was that Ofcom erred in failing to have regard to, in the context of setting the fees in its 2015 decision, the way that EU regulatory objectives were affected by post-2010 developments such as the geographic coverage obligation, agreed between the Secretary of State and the mobile network operators in late 2014. Obviously that geographic coverage obligation came after the Secretary of State's 2010 direction, so was clearly not taken into account. Spectrum was significantly encumbered after 2014 by its adoption. Yet Ofcom's hands were tied when it came to deciding on fees in 2015 by the direction. Three also submitted that there should be a phase-in period to take the geographic coverage obligation into account.
- In my view, Ofcom was correct to interpret Article 6 of the Secretary of State's 2010 direction as requiring it to set annual licence fees at a level representing its estimate of the market value of the spectrum in the way that it did. On its face the direction gives no scope for an interpretation according to which annual licence fees are set at other than market value by taking into account other factors. To have allowed other factors to intrude into the analysis would have meant licence fees which did not reflect market value.
- First, the word reflect is used in Article 6 in my view because Ofcom had to set annual licence fees in the absence of a true market, as where each year the mobile network operators bid against each other with how much per MHz they were prepared to pay for use of the 900 MHz and 1800 MHz spectrum. In economic terms, as the claimant's expert put it, full market value is "the market-clearing price in a well-functioning market". Vodafone's concept of a bounded market has no purchase in this context. But in the absence of a true market, with mobile network operators bidding against each other, Ofcom had to produce the equivalent result, in other words, a result reflecting what would have been realised in such a market.
- That interpretation is strengthened since Article 6 of the Direction compelled Ofcom to revise annual licence fees so that they reflected full market value. In other words, the Secretary of State required Ofcom to achieve a specific outcome, reflecting full market value, and there was no scope for it to take into account considerations which might have resulted in its setting licence fees either below or above full market value. I simply cannot see how that language can be read as a direction to Ofcom to dilute market value by taking account of other considerations.
- Dictionary definitions of the word reflect in other contexts, or use of that word on other occasions and in other Ofcom documents are, in my view, of no assistance. On ordinary principles of interpretation, effect must be given to the word as it is used in Article 6. Had the Secretary of State intended to direct Ofcom merely to take market value into account, conferring on it a discretion to set fees at other than market value, he would have used language more along the lines of Article 6(2) – "must have particular regard to" – not the unambiguous language he did use, that Ofcom was to set fees reflecting full market value.
- This notion of full market value, as the market clearing price in a well-functioning market, also puts paid to Three's submissions about matters arising after the making of the 2010 direction such as the geographic coverage obligation. The implications of that obligation would be priced by market participants into the market clearing price for the spectrum. Thus Ofcom was entitled to refuse to revise the level of fees in light of the obligation, since in accordance with the Secretary of State's direction it was setting licence fees calculated to reflect the full market value of the 900 MHz and 1800 MHz bands. In any event, in the September 2015 statement, after consultation, Ofcom concluded that the geographic coverage obligation would not have a material effect on market value, and that decision is not challenged.
- The issue becomes whether this interpretation of Article 6 of the Secretary of State's direction requires Ofcom to act in breach of its obligations under domestic or EU law. As to domestic law, there is no doubt that under section 3(4) of the 2003 Act Ofcom must have regard to various matters so far as relevant when carrying out its duties, including the desirability of promoting competition, and of encouraging investment and innovation in relevant markets. Section 4(1)(b) of the 2003 Act requires Ofcom, when exercising its functions under the 2006 Act, to act in accordance with requirements giving effect to Article 8 of the Framework directive. Then under section 3 of the 2006 Act Ofcom is required to have regard to various matters when carrying out its radio spectrum functions, including the setting of licence fees under section 12. The licence fee fixing provision in section 13 specifically requires Ofcom to have regard to the matters in section 3 when performing that function.
- But all this, which ordinarily applies, must be read against the backdrop of section 5(1) of the 2006 Act, which empowers the Secretary of State to give general and specific directions to Ofcom about the carrying out of its radio spectrum functions. Section 5(3) is a wide ranging power and includes requiring Ofcom to exercise its fee setting power in such cases, in such manner, subject to such restrictions and constraints, and with a view to achieving such purposes as the Secretary of State may determine. In other words, Ofcom's obligations under the 2003 and 2006 Acts to take certain matters into account when exercising its spectrum functions are subject to its obligation to comply with a direction by the Secretary of State under the very broad power in section 5 of the 2006 Act as to the performance of its functions.
- Significantly, in my view, such directions only have force if the Secretary of State secures the approval of both Houses of Parliament under the positive resolution procedure. As I noted earlier there was a debate in the House of Lords about the Secretary of State's 2010 direction prior to its approval. To my mind the positive resolution procedure underlines Parliament's intention that Ofcom must implement a section 5 direction, no ifs, no buts and no maybes, and certainly no consideration by Ofcom as to whether its regulatory objectives fall in favour of complying with it. In other words, under the legislative scheme the Secretary of State can take the decision out of Ofcom's hands and Ofcom must comply with a direction.
- Nothing elsewhere in domestic legislation leads, in my judgment, to a different conclusion. I accept Mr Saini's submission that the 2006 Act is the lex specialis in relation to Ofcom's duties as regards the radio spectrum. The limited powers for the Secretary of State to give directions to Ofcom contained in section 5 of the 2003 Act cannot hobble the wide power to give directions under section 5 of the 2006 Act. Ordinarily section 3 of the 2006 Act limits Ofcom from disregarding the matters set out there in fixing fees, but that does not affect the Secretary of State's powers in section 5. Section 3(5) of the 2006 Act, giving priority to Ofcom's duties under the 2003 Act, applies only when it appears to Ofcom that a duty under section 3 itself conflicts with those duties. It does not apply to Ofcom's duty under section 5 to comply with directions given by the Secretary of State.
- Thus as a matter of domestic law, once the Secretary of State has given a direction under section 5, Ofcom's duties under provisions like section 4 of the 2003 Act and section 3 of the 2006 Act are replaced by its duty to comply with it. In passing I note that in my view Ofcom published in its August 2014 consultation, and its 2015 statement, an adequate statement pursuant to section 7 of the 2003 Act, explaining why it was not issuing an impact assessment of the 2015 decision.
- What of EU law? There was no suggestion by the claimant or interested parties that section 5 of the 2006 Act was somehow unlawful in its conferring on the Secretary of State a power to give a direction to Ofcom. Nor was there a challenge to the Secretary of State's 2010 direction: the claimant had canvassed that in its letter before action of 11 August 2010 but did not pursue it. Indeed in the impact assessment for the Secretary of State's 2010 direction there is reference to the factors set out in the Framework and Authorisation directives; for example, in the passage quoted earlier in the judgment, with its reference to efficiency gains, increased innovation and investment, and greater consumer choice. For present purposes it can be assumed that the Secretary of State in making the 2010 direction acted conformably with EU law.
- Rather the focus of the challenge is on Ofcom's 2015 decision in setting annual licence fees without reference to the objectives contained in Article 8 of the Framework directive and Article 13 of the Authorisation directive. In my view the difficulty with this argument lies with the EU instruments themselves.
- First, Article 13 of the Authorisation directive imposes obligations on Member States, not NRAs, to ensure fees reflect the need to ensure the optimal use of spectrum, and are objectively justified, transparent, non-discriminatory and proportionate, and take into account the objectives of Article 8 of the Framework directive. I cannot see that it makes any difference if, as Telefónica submitted in its closing written submissions, Article 13 contemplates that it is the NRA which, as a matter of practice, ultimately imposes licence fees.
- Similarly, the obligation in Article 8(1) is on Member States. In this case it was the Secretary of State which determined the basis on which fees were to be set, the UK as the Member State having provided for that possibility in section 5 of the 2006 Act. In other words, Ofcom's discretion was lawfully constrained and it was left with the task of implementing the Secretary of State's policy decision. The burden of complying with the Article 8 obligations was with the Secretary of State and, absent any challenge to his decision, Ofcom had to treat it as lawfully made and comply with it. Certainly the obligations in Articles 8(2)-(5) of the Framework directive are imposed directly on NRAs but, given the machinery of decision-making the UK employed, the obligations in Article 8(2)-(5) did not bite.
- Nothing in the jurisprudence compels a contrary conclusion. Case C-424/07, Commission v. Germany  ECR I-11431 concerned Articles 15(3) and 16 of the Framework directive. There the fourth chamber of the CJEU held that Germany had breached the directive by adopting legal provisions expressly providing that new markets should not be regulated unless certain factors, such as the absence of sustainable competition, showed that was necessary. These Articles, the court held, place obligations squarely on the NRA and the German law encroached on its wide powers, preventing it from defining the market and adopting appropriate regulatory measures.
- But that is not our case. Article 15 (3) expressly requires NRAs to define the relevant markets in the sector in close collaboration with the Commission, and under Article 16 NRAs then carry out the analysis of the markets thus defined and determine whether they are effectively competitive. In the present case we are not concerned, as the court was in Commission v. Germany, with Articles in the directive under which certain functions are assigned exclusively to NRAs.
- As to Case C-224/97, Ciola v. Land Vorarlberg  2 CMLR 1220, that involved facts far removed from those in the present challenge, and where the applicant was raising EU law as a defence to a penalty. In my view it is no basis for a general principle that a final decision of a public authority in a Member State can be overturned because of EU law, whatever the lapse of time. That was helpfully explained by the German Bundesfinanzhof in Time-Barred Appeal Against a Tax Assessment, Re (V R 67/05)  CMLR 10, where Ciola was considered.
- In R (on the application of Noble Organisation Ltd) v. Thanet DC  EWCA Civ 782;  Env LR 8, the Court of Appeal reached a similar conclusion in a challenge to the decision of a planning authority not to require an environmental impact assessment at the reserved matters stage. Auld LJ held that this constituted an impermissible collateral challenge when, at the earlier stage, no objections had been taken to two previous outline planning permissions and a screening decision. Ciola was not considered, but Noble is a case on EU law, binding on me, since the argument about invalidity was advanced in part because a person's right under EU law to have the environmental impact of a proposal considered is of direct effect.
- Here the claimant made clear that this challenge was to the 2015 decision. Its riposte to Noble was that in that case there had been earlier opportunities to raise a challenge, whereas here the mobile network operators had to await Ofcom's decision in 2015. Until then, it said, Ofcom had no scope to perform its EU duties. For the reasons I have given I do not consider that Ofcom had any scope to exercise its EU duties: it was bound to apply Article 6 of the Secretary of State's 2010 direction. If the claimant had wished to challenge that direction it needed to do so directly, not by way of a collateral challenge through the 2015 decision. In my view any right under Article 4 of the Framework directive to challenge the decision of an NRA does not overcome this road block. There is still an effective right of challenge to Ofcom's decision, as with Ground 2, attacking Ofcom's methodology in determining in this case the market value of spectrum.
- Given my interpretation of EU law in this case, the issue of a conforming interpretation under the Marleasing principle does not arise. Still less does any notion of Ofcom having to disapply Article 6 of the Secretary of State's 2010 direction because of EU law.
- During the hearing there was considerable energy expended on whether these judicial review proceedings challenging the 2015 decision were out of time. In August 2014 Vodafone had raised Ofcom's failure to conduct an impact assessment in setting annual licence fees. Ofcom informed Vodafone that it would not raise delay as a defence were Vodafone not to bring a claim until after the final statement on annual licence fees. Ofcom adopted the same approach vis-à-vis the claimant in March 2015. In my view Ofcom was bound by what was its sensible approach that any legal claim on the issue should not be brought during the consultation process but once Ofcom had issued its final statement containing its decision. Ultimately at the hearing Ofcom accepted that the challenge to the 2015 decision was in time.
Ground 2: cost modelling
- Ground 2 concerns the methodology adopted by Ofcom for determining market value. The claimant contends that Ofcom should have considered evidence from cost modelling to assist it in determining the market value of the spectrum. It should have had regard to such evidence as complementary to, or at least as a cross-check on, the value derived through the application of its auction benchmarking methodology. Evidence from cost modelling was also relevant to the application of the EU regulatory objectives which, it submitted, Ofcom was required to consider.
- In outline, cost modelling estimates spectrum value based on the trade-off between meeting data demand by means of a given increment of spectrum as against additional mobile transmission sites and associated base stations. It has been widely used in the valuation of spectrum for pricing purposes and in regulatory impact assessments. The claimant obtained an expert report from Mr Brian Williamson, a director of Plum Consulting London LLP, who explained that cost modelling has been used in Europe, the US, Asia and Australasia. In his evidence Mr Geoffrey Myers, a senior economist with Ofcom, agreed with Mr Williamson about cost modelling being an accepted and widely used method for spectrum valuation by regulators, including Ofcom, either alongside auction benchmark data or on its own. In his witness statement, Mr Howard Roche of Vodafone set out examples of where Ofcom has used cost modelling.
- With this as background, the claimant's case was that Ofcom's refusal to carry out cost modelling in this case did not stand up to scrutiny. Ofcom has recognised its contribution as a means of valuing spectrum and had had regard to it in numerous contexts. It had also acknowledged, for example in the SRSP, that auction valuations have their drawbacks, especially if foreign auctions are involved, as in this case. The claimant submitted that it was not a persuasive objection to the use of cost modelling that it is subject to uncertainty. Uncertainty also applied to auction data and benchmarking. The uncertainty in valuing spectrum pointed to using more than one method, with cost modelling as a cross-check to inform Ofcom as to the probable range of values. The claimant's submission was not that cost modelling should be used instead of benchmarking, but that it should be used as an addition. What was in issue was not the relative value of cost modelling and benchmarking but what cost modelling could add as a further check in this area of subjective analysis.
- The interested parties supported the claimant in this regard. Vodafone underlined Ofcom's extensive use of cost modelling in a variety of contexts from its decisions on digital television and radio to valuing the 700 MHz spectrum. It characterised the need in valuing spectrum for what it described as two searchlights, not one: auction data and cost modelling. It suggested adapting existing models or a bespoke model. To the challenge that if the mobile network operators thought that cost modelling could make a significant difference, why had they not undertaken it themselves, Vodafone's reply was that the operators had only their own data for modelling purposes, not data from all the operators. Although Telefónica had not positively advanced cost modelling in the past, it associated itself with the claimant's and Vodafone's case on the matter.
- Before proceeding further it is necessary to consider briefly the standard of review to be applied to Ofcom's decision not to use cost modelling. Article 4 of the Framework directive uses the language of a review body taking the merits of a case into account. That is given effect to by section 195(2) of the 2003 Act, which provides for the tribunal to decide an appeal on the merits. It seems to me that the court should adopt the same approach. However, merits review under Article 4 of the Framework directive and section 195(2) of the Act has its limitations. As the Competition Appeal Tribunal has said, Ofcom enjoys a margin of appreciation on issues which entail the exercise of its judgment and the Tribunal should apply appropriate restraint. It is not a second-tier regulator and the fact that it might have preferred to give different weight to various factors in the exercise of a regulatory judgment would not in itself provide a sufficient basis to set aside Ofcom's determination. It should not interfere with Ofcom's exercise of a judgment unless satisfied that it was wrong: British Telecommunications plc v. Office of Communications  CAT 14, at -.
- There is no doubt that cost modelling is used widely and internationally. There are advantages to its use. It has the advantage over benchmarking of enabling the value of spectrum to be estimated taking account of the specific circumstances relating to a particular band, at a particular point in time and in a particular country. An advantage of cost modelling over auction-based benchmarking is transparency because, by adopting different assumptions about which there may be uncertainty, it can be used to produce a range which estimates the impact of that uncertainty on market value. By contrast, although the amounts bid in an auction will be clear, the basis on which bids are made is not transparent.
- Adopting the standard of review I have mentioned it is nonetheless my judgment that Ofcom's decision not to use cost modelling cannot be said to be wrong. First, the various references quoted earlier in the judgment, such as Annex 6 of the 2013 consultation, and the annex to the 2015 statement, demonstrate that Ofcom's decision on the point was carefully and extensively considered. It was also widely consulted upon, with Ofcom giving reasoned responses, for example, to Vodafone's advocacy of Analysys Mason's model for calculating the value of 900 MHz spectrum in 2013 and the claimant's case for using Ofcom's own MCT model for estimating the market value of 1800 MHz spectrum in 2015.
- Secondly, there was an accumulation of auction evidence by 2015 from the 4G auction in the UK, and from another 16 auctions elsewhere across Europe. Ofcom concluded that given this data cost modelling was unnecessary and auction results were likely to be the best source of information on full market value, being subject to smaller error margins than cost modelling. I cannot conclude that Ofcom was wrong in its conclusion that this evidence was a better reflection of market value than cost modelling when it directly reflected valuations for spectrum expressed by market participants. Nor can I fault its view that the results of cost modelling were expected to be less reliable and of questionable benefit given what was a technical and costly modelling task.
- In all, this was a decision on methodology on a complex issue, by an expert regulator. Adopting appropriate restraint, and according Ofcom the margin of discretion mandated by the authorities, I am unable to conclude that Ofcom was incorrect in deciding that the benefit that could be expected to be derived from the use of cost modelling was insufficient to justify its use when making the decision challenged in this judicial review.
- For the reasons I have given I dismiss this judicial review.
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