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England and Wales Court of Appeal (Civil Division) Decisions
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Cite as:  EWCA Civ 1002
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ON APPEAL FROM THE COMPETITION APPEAL TRIBUNAL
MARCUS SMITH Q.C., PETER CLAYTON, PROFESSOR PAUL STONEMAN
 CAT 24 AND 26
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE ETHERTON
LORD JUSTICE ELIAS
| (1) TELEFÓNICA O2 UK LTD
(2) EVERYTHING EVERYWHERE LTD
(3) VODAFONE LTD
(4) HUTCHISON 3G UK LTD
|- and -
|BRITISH TELECOMMUNICATIONS PLC
OFFICE OF COMMUNICATIONS
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
for the Appellant Telefónica O2 UK Ltd
Jon Turner Q.C. and Philip Woolfe for the Appellants Everything Everywhere Ltd (instructed by Everything Everywhere Ltd), Vodafone Ltd (instructed by Herbert Smith LLP) and Hutchison 3G UK Ltd (instructed by Baker & Mackenzie LLP)
Graham Read Q.C., Sarah Lee and Richard Eschwege instructed by BT Legal
for British Telecommunications plc
Javan Herberg Q.C. and Mark Vinall instructed by Ofcom
for the Office of Communications
Hearing dates: 1-3 May 2012
Crown Copyright ©
Lord Justice Lloyd:
"185 Reference of disputes to OFCOM
(1) This section applies in the case of a dispute relating to the provision of network access if it is—
(a) a dispute between different communications providers;
(3) Any one or more of the parties to the dispute may refer it to OFCOM.
(8) For the purposes of this section—
(a) the disputes that relate to the provision of network access include disputes as to the terms or conditions on which it is or may be provided in a particular case; …"
The CRF – relevant provisions
"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; and
(d) encouraging efficient use and ensuring the effective management of radio frequencies and numbering resources."
"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.
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."
"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."
"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."
"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 2003 Act
"3(1) It shall be the principal duty of OFCOM, in carrying out their functions—
(a) to further the interests of citizens in relation to communications matters; and
(b) to further the interests of consumers in relevant markets, where appropriate by promoting competition.
(3) In performing their duties under subsection (1), OFCOM must have regard, in all cases, to—
(a) the principles under which regulatory activities should be transparent, accountable, proportionate, consistent and targeted only at cases in which action is needed; and
(b) any other principles appearing to OFCOM to represent the best regulatory practice.
(4) OFCOM must also have regard, in performing those duties, to such of the following as appear to them to be relevant in the circumstances—
(b) the desirability of promoting competition in relevant markets;
(d) the desirability of encouraging investment and innovation in relevant markets;
(6) Where it appears to OFCOM, in relation to the carrying out of any of the functions mentioned in section 4(1), that any of their general duties conflict with one or more of their duties under sections 4, 24 and 25, priority must be given to their duties under those sections."
"4(1) This section applies to the following functions of OFCOM—
(c) their functions under Chapter 3 of Part 2 in relation to disputes referred to them under section 185;
(2) It shall be the duty of OFCOM, in carrying out any of those functions, to act in accordance with the six Community requirements (which give effect, amongst other things, to the requirements of Article 8 of the Framework Directive and are to be read accordingly).
(3) The first Community requirement is a requirement to promote competition—
(a) in relation to the provision of electronic communications networks and electronic communications services;
(b) in relation to the provision and making available of services and facilities that are provided or made available in association with the provision of electronic communications networks or electronic communications services; …
(7) The fifth Community requirement is a requirement to encourage, to such extent as OFCOM consider appropriate for the purpose mentioned in subsection (8), the provision of network access and service interoperability.
(8) That purpose is the purpose of securing—
(a) efficiency and sustainable competition in the markets for electronic communications networks, electronic communications services and associated facilities;
(b) the maximum benefit for the persons who are customers of communications providers and of persons who make such facilities available.
(11) Where it appears to OFCOM that any of the Community requirements conflict with each other, they must secure that the conflict is resolved in the manner they think best in the circumstances."
i) The MNOs should not be denied the opportunity to recover their efficient costs of originating calls to the relevant numbers hosted on BT's network. In practice that meant that it was not fair or reasonable for BT to impose variable termination charges unless the average retention by each of the MNOs (the average retail price minus the termination charge) is sufficiently large relative to the retention obtained on geographic calls.
ii) The charges imposed in the NCCNs should (a) provide benefits to consumers, taking into account (i) the impact on retail prices of calls to the relevant numbers (the Direct effect) (ii) the impact on service providers and, through improved services, callers, i.e. consumers of such calls (the Indirect effect) and (iii) the impact on the overall MNO offering to its customers (the Mobile Tariff Package effect), and also (b) avoid a material distortion of competition among terminating CPs, transit operators, originating CPs in retail services and MNOs in wholesale sales to Mobile Virtual Network Operators (MVNOs).
iii) The changes in the NCCNs should be reasonably practical to implement.
"Our final conclusion on Principle 2
1.23 Principle 2 relates to consumer and competition effects. Our final conclusion that Principle 2 is not met, for the following reasons:
1.24 As set out in the Supplementary Consultation, we consider that it is more likely that NCCNs 985 and 986 will lead to price decreases for 0845/0870 calls rather than price increases. This represents a change from our provisional conclusion in the Draft Determination. However, we are still uncertain about the magnitude of the Direct effect and still consider that there will be a negative Mobile tariff package effect, which leads us to consider that there is a risk of an overall adverse effect on consumers. We consider it reasonable, in light of our overriding statutory duties to further the interests of consumers, to place greater weight on this potential risk than on the potential benefits of allowing the charges in NCCNs 985 and 986 to stand.
1.25 Our final conclusion is the same as our provisional conclusion in the Draft Determination. The risk of competitive distortions between TCPs is relatively low and there may be no significant distortion to competition in MNOs' wholesale sales to MVNOs. However, there are possible concerns about the potential distortion of OCPs' choice of transit provider, and about competition between MNOs and MVNOs in retail services (relating to disincentives to pricing innovations and potential for the range of retail packages to be reduced, although the nature of these effects depends on the method to derive the MNOs' average retail price).
1.26 Taking the issues raised by our analysis of consumer benefits and competitive distortion in the round, we consider that, on the evidence currently before us, Principle 2 is not sufficiently likely to be met. A more detailed statement of our conclusion on Principle 2 is set out in Section 9 below."
"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 986 and 986, particularly in the 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 appropriate for us to place greater weight on this potential risk to consumers from NCCNs 985 and 986."
The Tribunal's decision
"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 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."
"The ability to price differently, and to introduce innovative pricing structures, is a key aspect of competition between suppliers. If too restrictive a test is imposed on the introduction of innovative pricing structures, then competition will not be enhanced, but restricted."
"395. It is clear that, in promulgating a stringent test that must be satisfied before BT can introduce its NCCNs, which will be applied to other terminating CPs should they seek to introduce similar measures, OFCOM is significantly restricting communication providers' commercial freedom to price which – absent the Dispute Resolution Process – is not constrained by regulation. It might be said that a test that simply seeks to assess whether a price change provides benefits to consumers (Principle 2(i)) and does not materially distort competition (Principle 2(ii)) is not especially stringent. But that is to overlook the lack of empirical evidence as to what BT's pricing would do in this market, and the sheer difficulty (in the absence of such evidence) of demonstrating through modelling that the NCCNs would be beneficial to consumers.
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.
397. In the Determinations, Ofcom clearly opted for the first choice. But it did so without articulating or considering the alternative. We consider that this is a matter that Ofcom should have considered during the course of its Determinations."
"We are mindful that price control is an intrusive form of control which, elsewhere in the 2003 Act, can only be introduced by SMP condition. None of the parties to the dispute were subject to regulatory control as regards the prices for 080, 0845 or 0870 calls nor as regards the prices for terminating such calls."
"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) 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 a 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."
Dispute resolution by Ofcom
"(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;
(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.
"That test can be expressed as requiring OFCOM to determine what are reasonable terms and conditions as between the parties. The word "reasonable" in this context means two things. First it requires a fair balance to be struck between the interests of the parties to the connectivity agreement. It therefore requires the same kind of adjudication that any arbitrator appointed by the parties to determine a dispute about the reasonable rate would carry out. But secondly, because OFCOM is a regulator bound by its statutory duties and the Community requirements it also means reasonable for the purposes of ensuring that those objectives and requirements are achieved. OFCOM did not approach resolving these disputes on this basis and it therefore committed an error of law."
The nature of the appeal to the Tribunal
"30. I would add this: it seems to me to be evident that whether the "appeal" went to the CAT or by way of judicial review, the same standard for success would have to be shown. In either case it would not be enough to invite the tribunal to consider the matter afresh – as though the Award had never been made. …
31. After all it is inconceivable that article 4, in requiring an appeal which can duly take into account the merits, requires Member States to have in effect a fully equipped duplicate regulatory body waiting in the wings just for appeals. What is called for is an appeal body and no more, a body which can look into whether the regulator had got something material wrong. That may be very difficult if all that is impugned is an overall value judgment based upon competing commercial considerations in the context of a public policy decision."
"There is nothing in Article 4 which confines the function of the appeal body to judgment of the merits as they appeared at the time of the decision under appeal. The expression "merits of the case" is not synonymous with the merits of the decision of the national regulatory authority."
BT's contractual rights
The regulatory regime – "regulatory absence" as regards dispute resolution
"We would only say this in addition: we regard the presence or absence of a power to regulate by condition, and the fact that that power has, or has not, been exercised, as highly material. (Of course, the Dispute Resolution Process is itself a form of regulation, and in resolving disputes, OFCOM is acting as a regulator and not simply as an arbitrator.) But, essentially, the point is this. Where a power to regulate by rule or condition does not exist, or does exist, but has not been exercised, then it must be asked why this question should be revisited through the Dispute Resolution Process. The power to regulate by rule or condition is curtailed for a reason, and it is our view that this is something that OFCOM needs to take into account in the Dispute Resolution Process. A "regulatory absence", of this sort is an important indicator, for the purposes of the Dispute Resolution Process, suggesting that a price set by a communications provider should not be interfered with."
The relevance of the promotion of competition in itself
"The risk of competitive distortions between TCPs is relatively low and there may be no significant distortion to competition in MNOs' wholesale sales to MVNOs. However, there are possible concerns about the potential distortion of OCPs' choice of transit provider, and about competition between MNOs/MVNOs in retail services (relating to disincentives to pricing innovations and potential for the range of retail packages to be reduced, although the nature of these effects depends on the method used to derive the MNOs' average retail price). As set out in the Supplementary Consultation, we consider that it is more likely that NCCNs 985 and 986 will lead to price decreases for 0845/0870 calls rather than prices increases. … However, we are still uncertain about the magnitude of the Direct effect and still consider that there will be a negative Mobile tariff package effect, which leads us to consider there is a risk of an overall adverse effect on consumers. We consider it reasonable, in light of our overriding statutory duties to further the interests of consumers, to place greater weight on this potential risk than on the potential benefits of allowing the charges in NCCNs 985 and 986 to stand."
The correct test
Lord Justice Etherton
Lord Justice Elias
. . .
This paragraph 26 does not apply to disputes relating to:
. . .
Note 1 The section has since been amended, as have other provisions relevant to this appeal. It was common ground before us that the issues turned on the unamended text, as set out and referred to here and elsewhere in this judgment. [Back] Note 2 What, for example, is the question referred to as “this question” in the fourth sentence? It may be the question stated at paragraph 241: “if there is a clear contractual right in a person [to change the charges under the contract], in what circumstances is it right for Ofcom to override it?” [Back] Note 3 My emphasis. [Back] Note 4 The odd numbering is in the original. [Back]
Note 1 The section has since been amended, as have other provisions relevant to this appeal. It was common ground before us that the issues turned on the unamended text, as set out and referred to here and elsewhere in this judgment. [Back]
Note 2 What, for example, is the question referred to as “this question” in the fourth sentence? It may be the question stated at paragraph 241: “if there is a clear contractual right in a person [to change the charges under the contract], in what circumstances is it right for Ofcom to override it?” [Back]
Note 3 My emphasis. [Back]
Note 4 The odd numbering is in the original. [Back]