British Telecommunications plc v Office Of Communications (OFCOM) & Ors, Court of Appeal - Civil Division, May 04, 2017, [2017] EWCA Civ 330

Issuing Organization:Civil Division
Actores:British Telecommunications plc v Office Of Communications (OFCOM) & Ors
Resolution Date:May 04, 2017
 
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Neutral Citation Number: [2017] EWCA Civ 330

Case No: C3/2014/4203, C3/2015/0439, C3/2015/0440 & C3/2014/4185

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE COMPETITION APPEAL TRIBUNAL

1205/3/3/13, 1206/3/3/13 & 1207/3/3/13

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 04/05/2017

Before:

LADY JUSTICE ARDEN

LORD JUSTICE LLOYD JONES

and

LORD JUSTICE SALES

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Between:

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Rhodri Thompson QC, Graham Read QC & Georgina Hirsch (instructed by BT) for BT

Pushpinder Saini QC, Kate Gallafent QC, Hanif Mussa & Emily Neill (instructed by OFCOM) for OFCOM

Meredith Pickford QC (Instructed by Herbert Smith Freehills LLP) for TalkTalk and Sky

Dinah Rose QC & Tristan Jones (instructed by Towerhouse LLP) for The Altnets

Hearing dates: 6th - 9th March 2017

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Lady Justice Arden delivering the judgment of the court:

GLOSSARY

2003 ACT COMMUNICATIONS ACT 2003

AD ACCESS DIRECTIVE 2002/19/EC

AISBO ALTERNATIVE INTERFACE SYMMETRIC BROADBAND ORIGINATION

AuD AUTHORISATION DIRECTIVE 2002/20/EC

BES BACKHAUL EXTENSION SERVICES

BCMR BUSINESS CONNECTIVITY MARKET REVIEW 2008

CCA CURRENT COST ACCOUNTING

CP COMMUNICATION PROVIDER

CRF COMMON REGULATORY FRAMEWORK

EPMU EQUI-PROPORTIONATE MARK UP FOR COMMON COSTS

FD FRAMEWORK DIRECTIVE 2002/21/EC

HH3.1 THE COST ORIENTATION OBLIGATION

LRIC LONG RUN INCREMENTAL COST

LLMR LEASED LINES MARKET REVIEW 2004

MNO MOBILE NETWORK OPERATOR

MS MEMBER STATES OF EU

NRA NATIONAL REGULATORY AUTHORITY

OFCOM OFFICE OF COMMUNICATIONS

PPCs PARTIAL PRIVATE CIRCUITS

ROCE RETURN ON CAPITAL EMPLOYED

SIA STANDARD INTERCONNECTION AGREEMENT

SMP SIGNIFICANT MARKET POWER

WACC WEIGHTED AVERAGE COST OF CAPITAL

WES WHOLESALE EXTENSION SERVICES

SAC STAND ALONE COST

DLRIC DISTRIBUTED LONG RUN INCREMENTAL COST

DSAC DISTRIBUTED STAND ALONE COST

FAC FULLY ALLOCATED COST

Introduction

  1. There are before the court an appeal by British Telecommunications Plc (``BT'') and an appeal by TalkTalk Telecom Group Plc (``TalkTalk'') against different parts of orders made by the Competition Appeal Tribunal (``CAT'') as a result of a determination on 1 August 2014 of three appeals to the CAT. The appeals to the CAT were against a decision by the Office of Communications (``Ofcom'') dated 20 December 2012 entitled Disputes between each of Sky, TalkTalk, Virgin Media, Cable & Wireless and Verizon and BT regarding BT's charges for Ethernet services: Determinations and Explanatory Statement (``the Determination'').

  2. This is the judgment of the court, to which all its members have contributed. The section on grounds 1 and 2 of BT's appeal was primarily drafted by Sales LJ; the section on ground 3 of BT's appeal was primarily drafted by Lloyd Jones LJ; and the section on TalkTalk's appeal was primarily drafted by Arden LJ.

  3. Ofcom's Determination was made in respect of disputes referred to it under the competition regime governing the telecommunications market set out in the Communications Act 2003 and the EU Common Regulatory Framework (``CRF''), comprising the Framework Directive (2002/21/EC - ``the FD''), the Access Directive (2002/19/EC - ``the AD''), the Authorisation Directive (2002/20/EC - ``the AuD'') and certain other Directives. The FD establishes a regulatory framework; the AD governs access to electronic communication networks; and the AuD governs the authorisation of electronic networks and services. These Directives were amended by Directive 2009/140/EC, but it is common ground that for the purposes of these appeals it is appropriate and more convenient to focus on the 2003 Act and the CRF Directives in their unamended form.

  4. BT, as the successor to the national telecommunications monopoly provider, has a significant Ethernet (data transmission) infrastructure in place. BT offers various Ethernet facilities at set prices to other communications providers (``CPs''), such as Sky UK Ltd (``Sky''), TalkTalk and the CPs referred to as ``the Altnets'' (comprising Cable & Wireless Worldwide Plc, Virgin Media UK Ltd and Verizon UK Ltd). Also included among the CPs is Gamma Telecom Holdings Ltd (``Gamma''), which was given permission to file written submissions on the appeals.

  5. The present appeals are concerned with those parts of the market for Ethernet services known as the AISBO market. AISBO is the acronym for `alternative interface symmetric broadband origination.' The AISBO market is a wholesale market within which CPs purchase access to BT's Ethernet infrastructure and services in order to sell their own telephone and broadband services delivered over that infrastructure to retail customers, in competition in that retail market with BT and other CPs. The AISBO facilities provided by BT include Wholesale Extension Services (``WES''), which connect large end-users, such as banks, to a CP's network via BT's infrastructure, and Backhaul Extension Services (``BES''), which provide much of the infrastructure between a CP's core network and the retail customer's local exchange. The AISBO market is distinct from the TISBO (`traditional interface symmetric broadband origination') market.

  6. BT offers AISBO facilities at a number of different bandwidths (i.e. data transfer speeds). CPs which require an AISBO line request one from BT, which sends an engineer to the site to install the equipment to establish the necessary connection. CPs may be billed by BT for, among other things, a one-off connection charge, line rental and a ``main link'' charge for establishing a link between two exchanges. More detail about this can be found in the CAT's judgment and does not need to be set out here.

  7. Under the 2003 Act and the CRF, an undertaking which is found to have significant market power (``SMP'') in a market within the telecommunications field may be subjected to regulatory controls, known as SMP conditions, in relation to its pricing and the terms on which it offers its services to others. In 2003, the then regulator of the telecommunications market, the Office of Telecommunications (``Oftel''), commenced a review of the retail leased lines, symmetric broadband origination and wholesale trunk segments markets, to identify and analyse relevant markets, determine whether undertakings had SMP in any markets and if so to set SMP conditions. Oftel's review was taken over by Ofcom, which succeeded it as regulator, in the course of 2004.

  8. On 24 June 2004, Ofcom issued its final form Leased Lines Market Review (``the 2004 LLMR''). This was a substantial document which included analyses of various markets and the extent of market power within them. Ofcom identified BT as having SMP in the AISBO market. It imposed Condition HH3, entitled ``Basis of Charges'', as an SMP condition on BT as the Dominant Provider in that market, as follows:

    ``HH3.1 Unless Ofcom directs otherwise from time to time, the Dominant Provider shall secure, and shall be able to demonstrate to the satisfaction of Ofcom, that each and every charge offered, payable or proposed for Network Access covered by Condition HH1 [i.e. including AISBO services] is reasonably derived from the costs of provision based on a forward looking long run incremental cost approach and allowing an appropriate mark up for the recovery of common costs including an appropriate return on capital employed.

    HH3.2 The Dominant Provider shall comply with any direction Ofcom may from time to time direct under this Condition.''

  9. HH3.1 is a form of regulatory control known as cost orientation, which requires a reasonable relationship to be maintained going forward between the costs of a service provider with SMP and the prices it charges for its services. It is a less intrusive form of regulation than a price control condition, whereby the regulator uses information about the historic costs of a service provider with SMP to impose maximum prices which it may charge for its services in the future.

  10. In 2008 Ofcom carried out a further market review, resulting in it issuing the BCMR. In that market review Ofcom concluded that in the part of the AISBO market for high bandwidths, competition had developed and BT no longer had SMP. Accordingly, Condition HH3 was discontinued in relation to that part of the AISBO market. It continued in place for other parts of the AISBO market, which constituted a distinct market.

  11. Between 2010 and 2012 various CPs complained to Ofcom that BT's charges for its AISBO services in 2004 to 2011 were excessive and in breach of Condition HH3.1. Ofcom accepted this dispute under the relevant provisions of the 2003 Act and the CRF. It carried out an investigation with representations from all affected parties, leading to the Determination of December 2012.

  12. In the Determination, Ofcom found that BT had indeed failed to comply with its obligations under Condition HH3.1. It had used a method of attempting to justify its prices in relation to its costs which Ofcom did not regard as appropriate and which was excessively generous to BT. Ofcom considered that a different methodology of cost orientation should be used, a version of what is known as Distributed Stand Alone Cost (``DSAC''). Ofcom therefore ordered BT to make substantial payments back to the CPs which had been overcharged in this way in the period covered by their complaints. Ofcom did not, however, order payment of interest in relation to the payments to be made by BT to the CPs.

  13. On the issue of payment of interest, Ofcom considered that clause 12.3 of the relevant contracts between the CPs and BT led to the conclusion that no interest should be paid, because Ofcom considered that they had made deliberate provision in that clause to rule out payment of interest in a situation where the regulator required a repayment to be made. Clause 12.3 states as follows:

    ``If a refund is due to the Communications Provider by BT (unless that overpayment results from information provided by the Communications Provider which is not attributable to information provided by BT),...

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