UKSC 42
On appeal from:  EWCA Civ 1002
British Telecommunications Plc (Appellant) v Telefónica O2 UK Ltd and Others (Respondents)
Lord Neuberger, President
JUDGMENT GIVEN ON
9 July 2014
Heard on 3 and 4 February 2014
Daniel Beard QC
(Instructed by BT Legal)
|1st Respondent (Telefonica O2 UK Ltd)
Jonathan Crow QC
(Instructed by King & Wood Mallesons LLP)
|2nd, 3rd and 4th Respondents (EE Ltd, Vodaphone Ltd and Hutchison 3G UK Ltd)
Jon Turner QC
(Instructed by EE Limited, Herbert Smith Freehills LLP; Constantine Cannon LLP)
|Interested Party (Office of Communications)
Javan Herberg QC
(Instructed by Ofcom)
|Intervener (Gamma Telecom Holdings Ltd)
(Instructed by Charles Russell LLP)
LORD SUMPTION (with whom Lord Neuberger, Lord Mance, Lord Toulson and Lord Hodge agree)
The legal framework
"(27) It is essential that ex ante regulatory obligations should only be imposed where there is not effective competition, i.e. in markets where there are one or more undertakings with significant market power, and where national and Community competition law remedies are not sufficient to address the problem."
Subject to ex ante regulation in circumstances where there is not effective competition, the scheme of the Directives is permissive. The Access Directive recites:
"(5) In an open and competitive market, there should be no restrictions that prevent undertakings from negotiating access and interconnection arrangements between themselves, in particular on cross-border agreements, subject to the competition rules of the Treaty. In the context of achieving a more efficient, truly pan-European market, with effective competition, more choice and competitive services to consumers, undertakings which receive requests for access or interconnection should in principle conclude such agreements on a commercial basis, and negotiate in good faith.
(6) In markets where there continue to be large differences in negotiating power between undertakings, and where some undertakings rely on infrastructure provided by others for delivery of their services, it is appropriate to establish a framework to ensure that the market functions effectively. National regulatory authorities should have the power to secure, where commercial negotiation fails, adequate access and interconnection and interoperability of services in the interest of end-users. In particular, they may ensure end-to-end connectivity by imposing proportionate obligations on undertakings that control access to end-users.
(14) Directive 97/33/EC laid down a range of obligations to be imposed on undertakings with significant market power, namely transparency, non-discrimination, accounting separation, access, and price control including cost orientation. This range of possible obligations should be maintained but, in addition, they should be established as a set of maximum obligations that can be applied to undertakings, in order to avoid over-regulation.
(20) Price control may be necessary when market analysis in a particular market reveals inefficient competition. The regulatory intervention may be relatively light, such as an obligation that prices for carrier selection are reasonable as laid down in Directive 97/33/EC, or much heavier such as an obligation that prices are cost oriented to provide full justification for those prices where competition is not sufficiently strong to prevent excessive pricing. In particular, operators with significant market power should avoid a price squeeze whereby the difference between their retail prices and the interconnection prices charged to competitors who provide similar retail services is not adequate to ensure sustainable competition…."
Consolidating the internal market for electronic communications
1. In carrying out their tasks under this Directive and the Specific Directives, national regulatory authorities shall take the utmost account of the objectives set out in Article 8, including in so far as they relate to the functioning of the internal market.
Policy objectives and regulatory principles
1. Member States shall ensure that in carrying out the regulatory tasks specified in this Directive and the Specific Directives, the national regulatory authorities take all reasonable measures which are aimed at achieving the objectives set out in paragraphs 2, 3 and 4. Such measures shall be proportionate to those objectives.
Member States shall ensure that in carrying out the regulatory tasks specified in this Directive and the Specific Directives, in particular those designed to ensure effective competition, national regulatory authorities take the utmost account of the desirability of making regulations technologically neutral.
National regulatory authorities may contribute within their competencies to ensuring the implementation of policies aimed at the promotion of cultural and linguistic diversity, as well as media pluralism.
2. The national regulatory authorities shall promote competition in the provision of electronic communications networks, electronic communications services and associated facilities and services by inter alia:
(a) ensuring that users, including disabled users, derive maximum benefit in terms of choice, price, and quality;
(b) ensuring that there is no distortion or restriction of competition in the electronic communications sector;
(c) encouraging efficient investment in infrastructure, and promoting innovation;
4. The national regulatory authorities shall promote the interests of the citizens of the European Union by inter alia:
(a) ensuring all citizens have access to a universal service specified in Directive 2002/22/EC (Universal Service Directive);
(b) ensuring a high level of protection for consumers in their dealings with suppliers, in particular by ensuring the availability of simple and inexpensive dispute resolution procedures carried out by a body that is independent of the parties involved;
Scope and aim
1. Within the framework set out in Directive 2002/21/EC (Framework Directive), this Directive harmonises the way in which Member States regulate access to, and interconnection of, electronic communications networks and associated facilities. The aim is to establish a regulatory framework, in accordance with internal market principles, for the relationships between suppliers of networks and services that will result in sustainable competition, interoperability of electronic communications services and consumer benefits."
Rights and obligations for undertakings
1. Operators of public communications networks shall have a right and when requested by other undertakings so authorised, an obligation to negotiate interconnection with each other for the purpose of providing publicly available electronic communications services, in order to ensure provision and interoperability of services throughout the Community. Operators shall offer access and interconnection to other undertakings on terms and conditions consistent with obligations imposed by the national regulatory authority pursuant to Articles 5, 6, 7 and 8.
Powers and responsibilities of the national regulatory authorities with regard to access and interconnection
1. National regulatory authorities shall, acting in pursuit of the objectives set out in Article 8 of Directive 2002/21/EC (Framework Directive), encourage and where appropriate ensure, in accordance with the provisions of this Directive, adequate access and interconnection, and interoperability of services, exercising their responsibility in a way that promotes efficiency, sustainable competition, and gives the maximum benefit to end-users.
In particular, without prejudice to measures that may be taken regarding undertakings with significant market power in accordance with Article 8, national regulatory authorities shall be able to impose:
(a) to the extent that is necessary to ensure end-to-end connectivity, obligations on undertakings that control access to end-users, including in justified cases the obligation to interconnect their networks where this is not already the case;
3. Obligations and conditions imposed in accordance with paragraphs 1 and 2 shall be objective, transparent, proportionate and non-discriminatory, and shall be implemented in accordance with the procedures referred to in Articles 6 and 7 of Directive 2002/21/EC (Framework Directive).
4. With regard to access and interconnection, Member States shall ensure that the national regulatory authority is empowered to intervene at its own initiative where justified [or, in the absence of agreement between undertakings, at the request of either of the parties involved,] in order to secure the policy objectives of Article 8 of Directive 2002/21/EC (Framework Directive), in accordance with the provisions of this Directive and the procedures referred to in Articles 6 and 7, 20 and 21 of Directive 2002/21/EC (Framework Directive)."
The words in square brackets in Article 5.4 were removed by Directive 2009/140/EC.
"…national regulatory authorities shall not impose the obligations set out in Articles 9 to 13 on operators that have not been designated in accordance with paragraph 2."
Operators are designated in accordance with paragraph 2 of Article 8 if they have been shown to have significant market power in a specific market by a market analysis carried out in accordance with Article 16 of the Framework Directive. Significant market power is defined by Article 14.2 of the Framework Directive:
"2. An undertaking shall be deemed to have significant market power if, either individually or jointly with others, it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers."
BT has not been designated as having significant market power in the market relevant to this case, and the present appeal has nothing to do with Articles 9 to 13 of the Access Directive, which are relevant only by way of background.
Dispute resolution between undertakings
1. In the event of a dispute arising in connection with obligations arising under this Directive or the Specific Directives between undertakings providing electronic communications networks or services in a Member State, the national regulatory authority concerned shall at the request of either party, and without prejudice to the provisions of paragraph 2, issue a binding decision to resolve the dispute in the shortest possible time frame and in any case within four months except in exceptional circumstances. The Member State concerned shall require that all parties cooperate fully with the national regulatory authority.
2. Member States may make provision for national regulatory authorities to decline to resolve a dispute through a binding decision where other mechanisms, including mediation, exist and would better contribute to resolution of the dispute in a timely manner in accordance with the provisions of Article 8. The national regulatory authority shall inform the parties without delay. If after four months the dispute is not resolved, and if the dispute has not been brought before the courts by the party seeking redress, the national regulatory authority shall issue, at the request of either party a binding decision to resolve the dispute in the shortest possible time frame and in any case within four months.
3. In resolving a dispute, the national regulatory authority shall take decisions aimed at achieving the objectives set out in Article 8. Any obligations imposed on an undertaking by the national regulatory authority in resolving a dispute shall respect the provisions of this Directive or the Specific Directives."
The Communications Act 2003
"(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."
"12. BT SERVICES
12.1 For a BT service or facility the Operator shall pay to BT the charges specified from time to time in the Carrier Price List.
12.2 BT may from time to time vary the charge for a BT service or facility by publication in the Carrier Price List and such new charge shall take effect on the Effective Date, being a date not less than 28 calendar days after the date of such publication, unless a period other than 28 calendar days is expressly specified in a Schedule.
12.5 As soon as reasonably practicable following an order, direction, determination or consent… by Ofcom of a charge (or the means of calculating that charge) for a BT service or facility, BT shall make any necessary alterations to the Carrier Price List so that it accords with such determination.
12.9 If there is a difference between a charge for a BT service or facility specified in the Carrier Price List and a charge determined by Ofcom, the charge determined by Ofcom shall prevail."
A change in BT charges is notified to the counterparties by a Network Charge Change Notice (or "NCCN").
The Change Notices
"9.30 As set out above, there is uncertainty about the sizes of each of the Direct, Indirect and Mobile tariff package effects. However, as shown in Table 9.1, the overall effect on consumers depends on the relative sizes of these offsetting effects (even though we place more weight on the Direct effect than the Mobile tariff package effect, because of our policy preference for 0845/0870 prices to be aligned with geographic call prices).
9.31 Our judgement in respect of Principle 2 is therefore finely balanced. We recognise the possibility that consumers could benefit from NCCNs 985 and 986. However, we also recognise the risk of harm to consumers from NCCNs 985 and 986, particularly in light of our conclusions on the Mobile tariff package effect.
9.32 Given the uncertainty which we have identified as to whether BT's NCCNs would result in a net benefit or net harm to consumers, and in light of our overriding statutory duties to further the interests of consumers, we consider it is appropriate for us to place greater weight on this potential risk to consumers from NCCNs 985 and 986."
The decision of the Competition Appeal Tribunal
"396. The crucial question is what is a regulator to do in the context of such uncertainty? Essentially, the regulator has two choices:
(1) To prevent change unless it can be demonstrated that the change is beneficial- in which case it may well be said that the dead hand of regulation is constraining behaviour which may actually be beneficial to consumers. We stress that our conclusion regarding Principle 2(i) was that the welfare assessment was inconclusive, not that consumers would be harmed.
(2) Alternatively, to allow change despite the uncertainty, even though there is a risk that the change may result in a disbenefit to consumers, recognising that an undue fetter on commercial freedom is itself a disbenefit to consumers."
It followed that, if Principles 1 and 3 were satisfied (as they were), Ofcom could reject a proposed change in a CP's termination charges only if the welfare test distinctly showed that they would adversely affect consumer welfare.
"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."
"447. If, therefore, the test to be applied is whether the NCCNs can be shown to provide benefits to consumers, then that test is not met. However, we do not consider this to be the correct test in the circumstances of the present case, because it places undue importance on Ofcom's policy preference, at the expense of the two other relevant factors that we have identified as forming a part of Principle 2 (namely Principle 2(ii) [the risk of a distortion to competition arising from restricting CP's commercial freedom to price] and BT's private law rights.
448. We consider that whilst Ofcom's welfare analysis could override these other factors, it should only do so where it can clearly and distinctly be demonstrated that the introduction of the NCCNs would act as material disbenefit to consumers. In short, given the presence of the two other factors that we have identified, it is not enough for the welfare analysis to be simply inconclusive. The welfare analysis must demonstrate, and demonstrate clearly, that the interests of consumers will be disadvantaged."
The decision of the Court of Appeal
The function of Ofcom in resolving disputes
Clause 12 of the Interconnection Agreement
Clause 13 of the Interconnection Agreement
The welfare test
Anti-competitive effect of price control
Inappropriateness of restricting prices in the absence of significant market power
A hypothetical alternative analysis
Reference to the Court of Justice of the European Union