The In-House Lawyer

On 20 April 2010, the Court of Appeal upheld an appeal by mobile operators Telefónica O2, T-Mobile, Vodafone and Orange, challenging the Competition Appeal Tribunal’s (CAT) power to direct Ofcom to revise its price controls on mobile termination fees with retrospective effect (Vodafone Ltd & ors v British Telecommunications (BT) plc & anor [2010]). The ruling coincides with an Ofcom consultation on the level of price controls for mobile call termination for the period 2011-15, which proposes to dramatically reduce the maximum level of fees by adopting a new calculation methodology recommended by the European Commission.


BACKGROUND


In March 2007, following its review of the market for wholesale mobile call termination, Ofcom imposed new price controls on the mobile operators requiring them to progressively reduce the amounts charged to other fixed and mobile operators to connect incoming calls to their network (a service known as call termination) over a four-year period from 1 April 2007 to 30 March 2011. 


BT appealed Ofcom’s decision to the CAT, arguing that the charges permitted by Ofcom were too high as a result of the inclusion of 3G spectrum auction fees within Ofcom’s calculations. Pursuant to the scheme for such appeals in the Communications Act (CA) 2003, the CAT referred these ‘price control matters’ to the Competition Commission. Following a detailed inquiry, the Competition Commission issued its determination that Ofcom had set the price controls too high.1 


As nearly two years of the four-year price control had elapsed by this stage, during which time the mobile operators had complied with the rates set out in Ofcom’s 2007 decision, there was argument over whether the CAT could direct Ofcom to reset the price controls from the start of the price control period (a retrospective amendment) or only from the conclusion of the appeals, ie to years three and four of the price control (a forward-looking amendment).


The CAT held that in disposing of Vodafone it would have the power to direct Ofcom to reset the price control for the whole period as to do otherwise would not give effect to BT’s successful appeal.2 Ofcom then revised the 2007-11 price controls in accordance with the CAT’s directions, which involved amendments to the figures for each of the four years.


The mobile operators appealed the CAT’s decision to the Court of Appeal, arguing that it was not within the CAT’s powers to direct Ofcom to revise price controls in respect of periods that had elapsed during the course of the appeal as to do so would retrospectively alter their legal obligations. 


COURT OF APPEAL JUDGMENT


In a relatively brief judgment, the Court of Appeal allowed the mobile operators’ appeals finding that the CAT has no power to direct Ofcom to impose revised price controls on a retrospective basis. Richards LJ, with whom the other Lord Justices agreed, concluded that s195(5) of CA 2003 circumscribed the CAT’s jurisdiction in appeals such that it could not direct Ofcom to take action that Ofcom itself would not have the power to take in normal circumstances. Richards LJ found that Ofcom’s powers must be considered at the conclusion of the appeal, not at the time when the original decision under appeal was taken. 


The Court of Appeal found that the purpose of the regulatory regime under the European framework (as evidenced by the drafting of the relevant legislation) is to regulate the future behaviour of undertakings with significant market power in markets where there is a lack of effective competition. Ofcom’s power to modify a price control condition under the regulatory regime is subject to the same constraints and is exercised for the same purposes as Ofcom’s power to set a price control condition. Consequently the power to modify existing conditions is also a power with prospective, not retrospective, effect. The Court found that Ofcom’s modification to the price controls at the direction of the CAT, would have had a true retrospective effect on the legal obligations of the mobile operators as they would technically have been in breach of the conditions for the first two years of the price control and could consequently have been subject to enforcement provisions of CA 2003 for this period. If such a result had been intended, clear statutory language would have been necessary. 


Furthermore, the CAT was not empowered to take action not granted by statute simply to give effect to its decision in view of the length of time that it had taken for the appeal to be resolved. Richards LJ rejected BT’s contention that the lack of a power to direct the retrospective revision of price controls would render the statutory appellate regime ‘toothless’. Despite the protracted length of the proceedings in question, Ofcom could have made a forward-looking modification for at least half the price control period, and the judge considered that the CAT should in future use its case management powers to speed up proceedings and avoid abusive delaying tactics. 


OFCOM CONSULTATION 


This judgment was handed down in the same month that Ofcom published for consultation the preliminary conclusions of its third review of the wholesale mobile call termination market, which anticipates the methodology it is likely to adopt in setting rates for the next price control period beginning in April 2011. Ofcom will continue to cap mobile termination fees based on cost, but is proposing to adopt a new charging methodology so as to conform with the Commission’s recommendation of May 2009 on fixed and mobile termination rates, which is designed to cap rates at a very low level by using a ‘pure long-run incremental costs (LRIC)’ model to calculate costs. Should Ofcom adopt this model, rates would be capped at 0.5p per minute in 2015 in contrast to 1.5p per minute under Ofcom’s current ‘LRIC+’ model. As Ofcom heavily criticised the recommendation at the time of its adoption, Ofcom’s change of approach is likely to prove controversial.


COMMENT


The judgment serves as a timely illustration of the impact that the determination of price controls for mobile termination fees can have on telecoms providers. BT had claimed during the CAT proceedings that it had paid hundreds of millions of pounds to mobile operators for charges that the Competition Commission had ruled were set too high. As a result of the judgment, Ofcom is likely to be under increased pressure to set the new rates at the right level as operators that are subject to pay termination fees and ultimately consumers, will pay the prevailing rates during the course of any appeals to the CAT irrespective of whether they are later found to have been set at too high or too low a level. It remains to be seen whether in its final review, expected during the second half of this year, Ofcom will follow the Commission’s recommended methodology, which would lead to a dramatic reduction in fee levels over the coming years and whether there will potentially be any further appeals.


SJ Berwin LLP acted for Telefónica O2 in the appeal.


By Niamh Grogan, partner, and Amy Barcroft, associate, SJ Berwin LLP.


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