QUEENS BENCH DIVISION
Strand, London, WC2A 2LL
B e f o r e :
| THE QUEEN on the Application of
(1) T-MOBILE (UK) Ltd
(2) VODAFONE Ltd
(3) ORANGE PERSONAL COMMUNICATION SERVICES Ltd
|- and -
|(1) THE COMPETITION COMMISSION
(2) THE DIRECTOR-GENERAL OF TELECOMMUNICATIONS
Mr Ian Glick QC, Mr Javan Herberg and Mr Andrew George (instructed by Herbert Smith) for Vodafone Ltd
Mr Mark Brealey QC and Marie Demetriou (instructed by Field Fisher Waterhouse) for Orange Personal Communications Services Ltd
Mr Thomas Sharpe QC and Mr Matthew Cook (instructed by The Treasury Solicitor) for the Competition Commission
Mr Richard Fowler QC, Jemima Stratford and Kelyn Bacon (instructed by The Treasury Solicitor) for The Director General of Telecommunications
Mr David Pievsky (instructed by Freshfields) for 02
Mr Philip Sales and Mr Ben Hooper (instructed by Treasury Solicitor) for The Department of Trade and Industry
Hearing dates: 9th – 13th June 2003
Crown Copyright ©
Mr Justice Moses:
Current legislative regime – basic provisions
Current legislative regime – licence modifications
New legislative regime
a. The European Commission must adopt a Recommendation identifying product and service markets whose characteristics justify the imposition of regulatory obligations, and must publish Guidelines for market analysis and the assessment of SMP.
b. NRAs must analyse the relevant markets recommended by the Commission, taking account of the Guidelines, and determine whether or not they are effectively competitive.
c. If a relevant market is not effectively competitive, the authority must identify undertakings with SMP, and impose, maintain or amend obligations as appropriate.
Commencement date and transitional provisions
UK implementation of new regime
Background to Commission investigation and Report
The Commission's conclusions
a. The termination charges of each of the MNOs operate against the public interest, with the adverse effects that termination charges in 2002/3 are 30 to 40% in excess of the Commission's estimate of the Fair Charge.
b. In the absence of a charge control, the termination charges of the MNOs may be expected to operate against the public interest, with the adverse effect that termination charges may be expected to be up to double the level of the Fair Charge by 2005/6, if such charges were retained at their current levels in real terms
c. As a result, absent charge controls, a number of specified detriments to consumers occur and might be expected to occur over at least the next three years.
d. The specified adverse effects could be remedied by licence modifications effecting a 15% reduction in termination charges in real terms to take effect before 25 July 2003, and by further recommended reductions of RPI-15% (Vodafone and O2) and RPI-14% (Orange and T-Mobile) for each of the years 2003/4, 2004/5 and 2005/6.
The Director's position
Significant Market Power (T-Mobile)
"3. An organisation shall be presumed to have SMP when it has a share of more than 25% of a particular telecommunications market in the geographical area in a Member State within which it is authorised to operate.
National regulatory authorities may nevertheless determine that an organisation with a market share of less than 25% in the relevant market has SMP. They may also determine that an organisation with a market share of more than 25% in the relevant market does not have SMP. In either case, the determination shall take into account the organisation's ability to influence market conditions, its turnover relative to the size of the market, its control of the means of access to end-users, its access to financial resources and its experience in providing products and services in the market."
"2. An undertaking shall be deemed to have SMP 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."
"(2) Whereas a general framework for interconnection to public telecommunications networks and publicly available telecommunications services … is needed in order to provide end-to-end interoperability of services for Community users …;".
"in accordance with Community Competition Rules, where the licensee has SMP, as defined in Article 4(3) of the Interconnection Directive...."
Article 8 of the Licensing Directive provides:-
"Conditions attached to individual licences
1. The conditions which, in addition to those set out for general authorisations, may, where justified, be attached to individual licences are set out in points 2 and 4 of the Annex.… .
Such conditions shall relate only to the situations justifying the grant of such a licence, as defined in Article 7.
4. Member States may amend the conditions attached to an individual licence in objectively justified cases and in a proportionate manner. When doing so, Member States shall give appropriate notice of their intention to do so and enable interested parties to express their views on the proposed amendments."
"Conditions which may be attached to all authorisations, where justified and subject to the principle of proportionality:
....2.3 conditions intended to prevent anti-competitive behaviour in telecommunications markets, including measures to ensure that tariffs are non discriminatory and do not distort competition;"
Paragraph 4 of the Annex contains:
"Specific conditions which may be attached to individual licenses, where justified and subject to the principle of proportionality:
4.6 conditions applied to operators having SMP, as notified by Member States under the Interconnection Directive, intended to guarantee interconnection or the control of SMP".
"Whereas pricing for interconnection is a key factor in determining the structure and the intensity of competition in the transformation process towards a liberalised market; whereas organisations with SMP must be able to demonstrate that their interconnection charges are set on the basis of objective criteria and follow the principles of transparency and cost orientation, and are sufficiently unbundled in terms of network and service elements offered; whereas publication of a list of interconnection services, charges, terms and conditions enhances the necessary transparency and non-discrimination; whereas flexibility in the methods of charging for interconnection traffic should be possible, including capacity-based charging; whereas the level of charges should promote productivity and encourage efficient and sustainable market entry, and should not be below a limit calculated by the use of long-run incremental cost and cost allocation and attribution methods based on actual cost causation, nor above a limit set by the stand-alone cost of providing the interconnection in question; whereas charges for interconnection based on a price level closely linked to the long-run incremental cost for providing access to interconnection are appropriate for encouraging the rapid development of an open and competitive market."
Recital 12 emphasises the important role of national regulatory authorities in encouraging the development of the competitive market and in particular provides:-
"Whereas national regulatory authorities have an important role in encouraging the development of a competitive market in the interests of Community users, and of securing adequate interconnection of networks and interoperability of services; whereas adequate interconnection takes account of the requests of the operator wishing to interconnect, in particular concerning the most appropriate interconnection points, with each operator having responsibility for carrying calls and setting charges to each other up to the interconnection point; whereas negotiation of interconnection agreements can be facilitated by national regulatory authorities setting down certain conditions in advance."
"Organisations authorised to provide public telecommunications networks and publicly available telecommunication services as set out in Annex 1 which have SMP shall meet all reasonable requests for access to the network including access at points other than the network termination points offered to the majority of end users."
"1. Member States shall ensure that the provisions of paragraphs 2 to 6 apply to organisations operating the public telecommunications networks and/or publicly available telecommunications services as set out in Parts 1 and 2 of Annex I, which have been notified by national regulatory authorities as having SMP.
2. Charges for interconnection shall follow the principles of transparency and cost orientation. The burden of proof that charges are derived from actual costs including a reasonable rate of return on investment shall lie with the organisation providing interconnection to its facilities. National regulatory authorities may request an organisation to provide full justification for its interconnection charges, and where appropriate shall require charges to be adjusted. This paragraph shall also apply to organisations set out in Part 3 of Annex I which have been notified by national regulatory authorities as having SMP on the national market for interconnection."
"1. National regulatory authorities shall encourage and secure adequate interconnection in the interests of all users, exercising their responsibility in a way that provides maximum economic efficiency and gives the maximum benefit to end-users. In particular, national regulatory authorities shall take into account:
- the need to ensure satisfactory end-to-end communications for users,
- the need to stimulate a competitive market,
- the principles of non-discrimination (including equal access) and proportionality,
3. In pursuit of the aims stated in paragraph 1, national regulatory authorities may intervene on their own initiative at any time … in order to specify issues which must be covered in an interconnection agreement, or to lay down specific conditions to be observed by one or more parties to such an agreement. National regulatory authorities may, in exceptional cases, require changes to be made to interconnection agreements already concluded, where justified to ensure effective competition and/or interoperability of services for users.
Conditions set by the national regulatory authority may include inter alia conditions designed to ensure effective competition, …. tariffs,
The national regulatory authority may, on its own initiative at any time … also set time limits within which negotiations on interconnection are to be completed…."
"The provision of ....other networks involving the use of radio frequencies".
That is a situation which applies to operators of mobile networks who do not have SMP. Paragraph 2 of the Annex contains those conditions which may be attached to all authorisations and includes measures to ensure that tariffs do not distort competition. It is true that paragraph 4.6 of the Annex overlaps with the conditions identified in paragraph 2.3. That provides no warrant, in my view, for reading paragraph 4.6 as restricting the power of tariff control to those with SMP. The terms of paragraph 4.6 which refer to the "guarantee" of interconnection, are consistent with the scheme of the Directives which requires those with SMP to provide interconnection services, subject to restrictions in relation to tariffs. I conclude that paragraph 2 of the Annex to the Licensing Directive and Article 9(3) of the Interconnection Directive confer power upon the Director to impose restrictions on the charges for termination.
"regulators have taken a range of measures within the margins set by the current framework to regulate tariffs."
"The cost of call termination on a mobile network is in most cases not subject to price regulation under the Interconnection Directive. The one exception occurs if the mobile operator is designated by its NRA as having SMP....
The implications of this statement are that the Commission does not support on the basis of the Interconnection Directive a general obligation for cost orientated interconnection tariffs on mobile operators that do not have SMP...."
"The imposition, on a case-by-case basis and following a specific investigation, of some form of price control on interconnection charges of individual mobile operators that do not have SMP on the national market for interconnection, is not precluded. National regulatory authorities (NRAs) are specifically empowered to do this on the basis of paragraphs 1 and 2 of Article 9(3) of the Interconnection Directive." (Quoted at paragraph 25 of Appendix 2.1 of the MMC's 1998 Report).
"When such authorisation appears necessary in order to facilitate the introduction of competition and further the interests of users".
"28. the Directive permits Member States to limit the freedom of those operators to decide whether to enter into interconnection agreements in order to ensure the adequacy of those agreements.
29. On the other hand, as stated in Recital 2, the directive merely puts in place the general framework within which its objective must be pursued, without seeking to achieve complete harmonisation…
31. As regards Article 4(2), it is clear from its wording that it merely imposes obligations on operators having SMP.
32. However the fact that such operators are required under Article 4(2) of the Directive to satisfy only reasonable requests for interconnection does not mean that Member States are precluded under that provision from permitting their national regulatory authorities to impose ex ante on those operators conditions or obligations with regard to access.
35. It cannot be inferred from the wording of that provision [Article 9(2)] that it is only in the areas set out in Part 1 of Annex VII to the directive, that the Member States may authorise their national regulatory authorities to lay down ex ante conditions or obligations."
"The Directive recognises.. that there will be different types of market players in the Member States. For each type it aims to strike a balance between rights and obligations in accordance with their relative position in the market." (Paragraph 64).
He pointed out the distinction between those with SMP referred to in Annex 1 and others in Annex II (see paragraphs 67 and 68). But he did identify the significant margin of manoeuvre, open to Member States, for implementation of the Directive (see paragraph 69). He said:-
"73. That flexibility is perhaps a necessary corollary of the speed of technological and economic developments in the field of telecommunications and the divergent degrees of liberalisation in the Community. In Member States, where as a result of former special or exclusive rights, the incumbent has a very strong position in the market, asymmetric regulation and strict supervision of access and interconnection agreements is indispensable in order to create competitive markets. In other countries in which markets are already competitive, a heavy-handed regulatory approach might on the contrary have detrimental effects on investments in infrastructure. Member States must thus necessarily enjoy a certain margin of appreciation to adapt their regulatory framework to the evolving economic features of their national telecommunications market.
74. It follows that Directive 97/33 is essentially characterised by … asymmetric provisions which impose special obligations on players with a strong position in the market".
Legislative transition. No power to introduce New Regulation after 24 April 2002.
"2. Where a national regulatory authority is required under … Articles 7 or 8 of Directive 2002/19/EC (Access Directive) to determine whether to impose, maintain, amend or withdraw obligations on undertakings, it shall determine on the basis of its market analysis referred to in paragraph 1 of this Article whether a relevant market is effectively competitive."
Article 16(3) provides:-
"3. Where a national regulatory authority concludes that the market is effectively competitive, it shall not impose or maintain any of the specific regulatory obligations referred to in paragraph 2 of this Article."
Article 16(4) provides:-
"4. Where a national regulatory authority determines that a relevant market is not effectively competitive, it shall identify undertakings with SMP on that market in accordance with Article 14 and the national regulatory authority shall on such undertakings impose appropriate specific regulatory obligations referred to in paragraph 2 of this Article or maintain or amend such obligations where they already exist."
Article 16(6) provides:-
"Measures taken according to the provisions of paragraphs 3, 4, and 5 of this Article shall be subject to the procedures referred to in Articles 6 and 7."
Recital 12 of the Access Directive provides:-
"(12) In order to ensure continuity of existing agreements and to avoid a legal vacuum, it is necessary to ensure that obligations for access and interconnection imposed under Articles 4, 6, 7, 8, 11, 12, and 14 of Directive 97/33/EC of the European Parliament and of the Council of 30 June 1997 on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of open network provision (ONP), obligations on special access imposed under Article 16 of Directive 98/10/EC of the European Parliament and of the Council of 26 February 1998 on the application of open network provision (ONP) to voice telephony and on universal service for telecommunications in a competitive environment, and obligations concerning the provision of leased line transmission capacity under Council Directive 92/44/EEC of 5 June 1992 on the application of open network provision to leased lines, are initially carried over into the new regulatory framework, but are subject to immediate review in the light of prevailing market conditions. Such a review should also extend to those organisations covered by Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop."
Article 7 provides:-
"1. Member States shall maintain all obligations on undertakings providing public communications networks and/or services concerning access and interconnection that were in force prior to the date of entry into force of this Directive under Articles 4, 6, 7, 8, 11, 12 and 14 of Directive 97/33/EC, Article 16 of Directive 98/10/EC, and Articles 7 and 8 of Directive 92/44/EC, until such time as these obligations have been reviewed and a determination made in accordance with paragraph 3.
2. The Commission will indicate relevant markets for the obligations referred to in paragraph 1 in the initial recommendation on relevant product and service markets and the Decision identifying transnational markets to be adopted in accordance with Article 15 of Directive 2002/21/EC (Framework Directive).
3. Member States shall ensure that, as soon as possible after the entry into force of this Directive, and periodically thereafter, national regulatory authorities undertake a market analysis, in accordance with Article 16 of Directive 2002/21/EC (Framework Directive) to determine whether to maintain, amend or withdraw these obligations. An appropriate period of notice shall be given to parties affected by such amendment or withdrawal of obligations."
Article 8 provides:-
"1. Member States shall ensure that national regulatory authorities are empowered to impose the obligations identified in Articles 9 to 13.
2. Where an operator is designated as having SMP on a specific market as a result of a market analysis carried out in accordance with Article 16 of Directive 2002/21/EC (Framework Directive), national regulatory authorities shall impose the obligations set out in Articles 9 to 13 of this Directive as appropriate.
3. Without prejudice to [various provisions not relevant in the present case] 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."
Article 13 provides:-
"1. A national regulatory authority may, in accordance with the provisions of Article 8, impose obligations relating to cost recovery and price controls, including obligations for cost orientation of prices and obligations concerning cost accounting systems, for the provision of specific types of interconnection and/or access, in situations where a market analysis indicates that a lack of effective competition means that the operator concerned might sustain prices at an excessively high level, or apply a price squeeze, to the detriment of end-users. National regulatory authorities shall take into account the investment made by the operator and allow him a reasonable rate of return on adequate capital employed, taking into account the risks involved.
2. National regulatory authorities shall ensure that any cost recovery mechanism or pricing methodology that is mandated serves to promote efficiency and sustainable competition and maximise consumer benefits. …"
Power to require changes in exceptional cases. Article 9.3
The incompatibility of a one-day price cut with the Directives
"a) be reduced by 15% in real terms before 25 July 2003; and
b) be subject to further reductions of RPI-[14 or 15] from 25 July 2003 to 31 March 2004, RPI-[14 or 15] from 1 April 2004 to 31 March 2005 and RPI-[14 or 15] from 1 April 2005 to 31 March 2006".
Licence modification references to the Commission
(1) The Director may make to the Competition Commission (in this Act referred to as "the Commission") a reference which is so framed as to require the Commission to investigate and report on the questions –
(a) whether any matters which relate to the provision of telecommunication services or the supply of telecommunication apparatus by a person authorised by a licence under section 7 above to run a telecommunication system and which are specified in the reference operate, or may be expected to operate, against the public interest; and
(b) if so, whether the effects adverse to the public interest which those matters have or may be expected to have could be remedied or prevented by modifications of the conditions of that licence.
(8) In determining for the purposes of this section whether any particular matter operates, or may be expected to operate, against the public interest, the Commission shall have regard to the matters as respects which duties are imposed on the Secretary of State and the Director by section 3 above.
Reports on licence modification references
(1) In making a report on a reference under section 13 above, the Commission –
(a) shall include in the report definite conclusions on the questions comprised in the reference together with such an account of their reasons for those conclusions as in their opinion is expedient for facilitating proper understanding of those questions and of their conclusions;
(b) where they conclude that any of the matters specified in the reference operate, or may be expected to operate, against the public interest, shall specify in the report the effects adverse to the public interest which those matters have or may be expected to have; and
(c) where they conclude that any adverse effects so specified could be remedied or prevented by modifications of the conditions of the licence, shall specify in the report modifications by which those effects could be remedied or prevented."
"We have found the question of the actual design of the licence modifications difficult. Although this is a difficult question generally, the difficulty is made more acute by legal circumstance. The model licence modification presented by the DGT sought to regulate termination charges within the period to 31 March 2006. During the course of the enquiry it has become clear that the current licences of the MNO's will be abolished by 25 July 2003. Consequently, any licence modification that we are able to recommend will have a very short life. Indeed, it is likely to have effect for a few months at best. Nonetheless, it is our view that a licence modification which lasts but a few months could remedy the problem of excess termination charges for the period of the duration of the licence and that the sums involved are sufficiently material to warrant such a modification."
At paragraph 2.530 it considered the imposition of immediate and complete reduction of termination charges to the level of the fair charge. But it rejected such a modification on a number of grounds, particularly that it would lead to significant disruption (see paragraph 2.530). It concluded that a 15% reduction should be imposed:-
"to take effect within the period 1 April to 25 July 2003." (paragraph 2.537).
It then stated that:-
"This is to be followed by a reduction in the average termination charge [over the following years to 31 March 2006]. The effect of these reductions will be to bring termination charges down to the level of the fair charge by the end of the period, as shown in Table 2.12."
"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.
2. National regulatory authorities shall contribute to the development of the internal market by cooperating with each other and with the Commission in a transparent manner to ensure the consistent application in all Member States, of the provisions of this Directive and the Specific Directives. To this end, they shall, in particular, seek to agree on the types of instruments and remedies best suited to address particular types of situations in the market place.
3. In addition to the consultation referred to in Article 6, where a national regulatory authority intends to take a measure which:
(a) falls within the scope of Articles 15 or 16 of this Directive, Articles 5 or 8 of Directive 2002/19/EC (Access Directive) … and
(b) would affect trade between Member States,
it shall at the same time make the draft measure accessible to the Commission and the national regulatory authorities in other Member States, together with the reasoning on which the measure is based, in accordance with Article 5(3), and inform the Commission and other national regulatory authorities thereof. national regulatory authorities and the Commission may make comments to the national regulatory authority concerned only within one month or within the period referred to in Article 6 if that period is longer. The one-month period may not be extended."
Article 7.5 provides:
"The national regulatory authority concerned shall take the utmost account of comments of other national regulatory authorities and the Commission and may, except in cases covered by paragraph 4, adopt the resulting draft measure and, where it does so, shall communicate it to the Commission."
Article 7(6) provides:
"In exceptional circumstances, where a national regulatory authority considers that there is an urgent need to act, by way of derogation from the procedure set out in paragraphs 3 and 4, in order to safeguard competition and protect the interests of users, it may immediately adopt proportionate and provisional measures. It shall, without delay, communicate those measures, with full reasons, to the Commission and the other national regulatory authorities …".
"The national regulatory authorities shall promote competition and the provision of electronic communications networks…by inter alia:
b) ensuring that there is no distortion or restriction of competition in the electronic communications sector."
Recital 12 of the Access Directive provides:-
"In order to ensure continuity of existing agreements and to avoid a legal vacuum, it is necessary to ensure that obligations for access and interconnection imposed under Articles 4, 6, 7, 8, 11, 12, and 14 of Directive 97/33/EC of the European Parliament and of the Council of 30 June 1997 on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of open network provision (ONP), obligations on special access imposed under Article 16 of Directive 98/10/EC of the European Parliament and of the Council of 26 February 1998 on the application of open network provision (ONP) to voice telephony and on universal service for telecommunications in a competitive environment, and obligations concerning the provision of leased line transmission capacity under Council Directive 92/44/EEC of 5 June 1992 on the application of open network provision to leased lines, are initially carried over into the new regulatory framework, but are subject to immediate review in the light of prevailing market conditions. Such a review should also extend to those organisations covered by Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop".
Article 5(1) of the Access Directive provides:-
"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".
If there is no power to issue a Continuation Notice imposing pre-25 July 2003 price regulation in the period of the new regime from that date, the new Directives, by virtue in particular of the penultimate sentence in Article 7(3) of the Framework Directive, permit a one-month regulatory holiday. Such a holiday is contrary to the objectives of the new regime, in particular effective competition, protection of consumer's interest and a coherent and seamless transition from the old to the new regulatory system. Those seeking to imply a prohibition against the Continuation Notice have failed to identify any sensible objective promoted by their argument.
"Measures taken according to the provisions of paragraphs 3, 4 and 5 of this Article shall be subject to the procedures referred to in Articles 6 and 7."
The reference to Article 7 incorporates a reference to Article 7(6). The last words confer a power on the Director to act under Article 7(6) following market analysis in accordance with Article 16. In short, it is open to the NRA to identify operators with SMP on a provisional basis.
Section 3(1) of the 1984 Act
"(1) The Secretary of State and the Director shall each have a duty to exercise the functions assigned or transferred to him by or under Part II or Part III of this Act in the manner which he considers is best calculated –
(a) to secure that there are provided throughout the United Kingdom, save in so far as the provision thereof is impracticable or not reasonably practicable, such telecommunication services as satisfy all reasonable demands for them including, in particular, emergency services, public call services, directory information services, maritime services and services in rural areas; and
(b) without prejudice to the generality of paragraph (a) above, to secure that any person by whom any such services fall to be provided is able to finance the provision of those services.
(2) Subject to subsection (1) above, the Secretary of State and the Director shall each have a duty to exercise the functions transferred to him by or under Part II or Part III of this Act in the manner which he considers is best calculated –
(a) to promote the interests of consumers, purchasers and other users in the United Kingdom (including, in particular, those who are disabled or of pensionable age) in respect of the prices charged for, and the quality and variety of, telecommunication services provided and telecommunication apparatus supplied;
(b) to maintain and promote effective competition between persons engaged in commercial activities connected with telecommunications in the United Kingdom;
(c) to promote efficiency and economy on the part of such persons;
(d) to promote research into and the development and use of new techniques by such persons."
"It is clear that Section 3 draws a distinction between "means" (namely how the demand is to be met) and "ends" (the satisfaction of reasonable demands) and that as a matter of language, whilst the Director is expressly made the arbiter of the means to the end, he is not so made the arbiter of the ends. Section 3 recognises that there is a public interest in reasonable demands for telecommunication services being met and the court is intended to be the guardian of that public interest. The exercise in deciding whether a demand is reasonable or not requires no sophisticated exercise necessitating the Director's experience, expertise and fund of knowledge of this and other markets. The court is well equipped and experienced in deciding questions of reasonableness."
"We do not accept that we are putting the Section 3(2) duty above the Section 3(1) duty or that the Section 3(1) principle… necessitates a Ramsey approach. Nor do we accept Vodafone's view that "best calculated" means we have to elevate efficiency considerations above those of equity. It is clear that the Act requires us to pursue the primary duties laid down in Section 3(1) in whatever rational way we see fit, taking all the relevant factors into account, of which efficiency may be one; and that once we are satisfied that we have, we can consider the Section 3(2) duties. We are satisfied that our own recommendation not only satisfies all the requirements of Section 3, but may be expected to fulfil the duties in Section 3(1) while bringing about a more equitable distribution of benefits among fixed and mobile callers than would be obtained under a Ramsey system of pricing."
Lack of logic in the Commission's approach to externality surcharge
"involves capping the surcharge at a level that corresponds to the amount of subsidy which, targeted at marginal customers for whom it would make the difference between joining and not joining a mobile network, brings about at least as much external benefit as the amount of the subsidy."
"we take the view that the MNOs could, if required to do so, target with a broad degree of accuracy any subsidy funded through a surcharge on call termination to existing marginal subscribers and potential new subscribers." (2.370).
The second consideration is whether a mobile network operator would have any incentive to do so. This was a question which the Commission acknowledged but failed to answer. At paragraph 8.189 in the second volume of the Report the Commission said:-
"It is another question all together whether, if the MNOs were able to target the subsidy at marginal customers through price discrimination, they would have any incentive to do so or whether, in fact, they would opt to devote any extra resources to retaining more valuable infra-marginal customers. This is discussed in paragraph 8.142".
As Vodafone point out, it is not discussed in paragraph 8.142. Nowhere is there any discussion as to why a mobile network operator would have an incentive to target the subsidy effectively at marginal subscribers.
"O2 said that if a termination surcharge was passed through in higher mobile-to-mobile retail call prices this would increase the usage costs faced by mobile subscribers and in turn increase the subsidy required to induce marginal subscribers on to the network and O2 said that we had not taken this into account. However, we note that the extent to which higher usage costs affect the overall costs incurred by mobile subscribers depends on the level of usage and marginal subscribers are thought to have lower levels of usage."
"Thus, a customer whose handset was lost, stolen or broken might require a discount of almost the full price of a handset if his or her spend was very low; on the other hand, customers with very high spend might require little or no subsidy. Assuming as before that marginal customers are evenly distributed between £0 and £70 according to their personal valuations of network membership, the average discount that the MNOs would have to offer is £35. Provision of a £35 (average) discount to the 3 million current subscribers who would be marginal every year because their handset was lost, stolen or broken would require a surcharge of 0.34 ppm (see paragraph 8.234)."
"However, it should be noted that while the MNOs may in principle be able to target these marginal customers in this way, it would involve the MNOs paying most subsidy to the customers with the smallest private valuation of joining. Thus on the assumption that customers' private valuation corresponds to the number of minutes of calls made and received and thus to the revenue they will provide to the MNOs, the MNOs' incentive in practice would be to provide most subsidy to customers with the highest valuation of joining. (see paragraph 8.234)."
"We conclude that the mark-up on the termination charge that should be allowed in order to take account of externalities is 0.45 ppm, because this lies mid-way between 0.41 and 0.5."
"the MNOs would have the incentive to raise termination charges above their current levels. As we have seen, Vodafone thought that charges could rise to up to 20 ppm compared to an efficient level in the range 11 to 15 ppm. Oftel told us that termination charges might rise to more than 20 ppm in the absence of regulation. The MNOs justify the raising of termination charges on grounds of both economic efficiency and benefit to society at large, since higher termination charges, used for example to subsidize handsets, generate more subscribers for mobile networks, but we have already said that we do not accept that this is necessarily an efficient outcome. By raising termination charges the MNOs would, in accordance with their pricing strategies, enable subscription prices to be kept at levels capable of attracting and retaining subscribers. However, if the mobile sector approached saturation and new subscribers required even larger subsidies to induce them to become mobile subscribers, the MNOs' call termination charges would need to be increased commensurately (although clearly subject to some upper limit, defined by the continued willingness of fixed-line customers to call mobile phones). In these circumstances, it is possible that termination charges could exceed the 20 ppm maximum level suggested by Vodafone, if there were no regulation in place to contain them."
Calculation of fair charge: minimum transmission equipment
"the fact that equipment is shared between services now does not necessarily mean that the cost of the equipment is common among services in the long run because if one service ceased, the amount of equipment needed could – and would – be scaled down to the level needed to run the other activity. Shared equipment that is deployed on the sites that are needed for coverage could be defined either as common or incremental. However, even if such shared equipment was found to be common, such apparently common costs can be allocated across the services in a reasonable manner on the basis of the extent to which each service makes use of the equipment. In the long run, therefore, any equipment cost should be treated as variable. We agreed with the DGT that site acquisition and lease costs for the coverage network and the network management system were strictly speaking, common costs because these costs could not be scaled down in the event that one service ceased."
Calculation of a fair charge: home location registers
"in the absence of call termination there would be no need for location updates. Hence, the fairer approach would be to allocate the costs across terminating calls including on-net calls."
Calculating a fair charge: non-network costs
Calculating the fair charge: externality surcharge
"02 said that if a termination charge was passed through in higher mobile to mobile retail call prices this would increase the usage costs faced by mobile subscribers and in turn increase the subsidy required to induce marginal subscribers onto the network and 02 said that we had not taken this into account. However we note that the extent to which higher usage costs affect the overall costs incurred by mobile subscribers depends on the level of usage and marginal subscribers are thought to have lower levels of usage."
Vodafone contend that that does not justify a failure to increase the subsidy to some extent. This seems to me an argument which goes to the merits of the Commission's conclusions. The Commission took into account the argument and rejected it. It is not open to this court to reach a different conclusion other than the one which, in my view, the Commission was entitled to reach.
"that the fact that most of the models produce large welfare gains under various assumptions lends strong support to the argument that termination charges should be regulated." (2.558)
"In summary we conclude that a price cap on termination charges to bring them down to the fair charge will benefit consumers by reducing the price of fixed-to-mobile and off-net calls and, depending how the MNOs respond, could be broadly neutral so far as concerns the effect on the MNO's financial liability. As their own business plans indicate, it is sufficient that the MNOs slow the decline of retail prices in order to recover the revenue loss from reduced termination charges that we are recommending, but average retail prices should still fall." (2.569)
Ability of T-Mobile to finance its services
Orange's inability to finance 3G mobile services
"We broadly share Oftel's and BT's views on this matter. We believe as a matter of principle that the MNO's wish to invest in 3G does not justify termination charges that are in excess of a reasonable estimate of their costs, particularly if those charges are ultimately derived from customers of FNOs."
"imply that, from the point of view of originating operators, a common price would be paid for voice call termination on the 2G network and voice call termination on the 3G network. Therefore, it would be reasonable to include them in the same economic market".
Failure to ensure that price reductions are passed on
"Because of BT's retention, Oftel expects that any reduction in termination charges by the MNOs will be fully passed through one way or another into retail prices to the FNOs' customers, although such pass-through would not necessarily be inter charges for fixed and mobile calls specifically."
1. under the Licensing and Interconnection Directives, the Director is entitled to impose price regulation on those not designated as having SMP;
2. the Commission was entitled to recommend and the Director to regulate termination charges, by way of licence modification, in the period between 24 April 2002, when the new regime came into force and 25 July 2003 when the new Directives must be implemented, pursuant to Article 9(3) of the Interconnection Directive;
3. the one-day price cut, imposed by way of licence modification for 24 July 2003, is lawful and not disproportionate;
4. the Continuation Notice proposing a continuation of the price regulation of termination charges, promulgated by the Director, is consistent with the provisions of the new Directives, in particular having regard to Article 7(6) of the Framework Directive;
5. the Commission's and the Director's interpretation of Section 3(1)(a) of the Telecommunications Act, 1984 was not unlawful; a broad interpretation, including concepts of equity and fairness is legitimate;
6. the Commission adopted a reasoned and justifiable approach to its calculation of the externality surcharge;
7. the Commission's calculation of a fair charge in respect of :-
a) minimum transmission equipment;
b) home location registers;
c) non-network costs;
d) the externality surcharge; and
e) welfare gain
was reasoned and not irrational;
8. the Commission considered the issue of T-Mobile's ability to finance the services it provides in a manner consistent with Section 3(1)(b) of the 1984 Act;
9. the Commission's rejection of Orange's arguments in relation to 3G services was adequately reasoned;
10. the Commission was entitled to expect BT to pass on price reductions flowing from the termination charge cap.