This is the much vaunted and much expected appeal from the CAT’s decision of last year on o8X. The leading Judgment was given by Lord Justice Lloyd, whom in other telecommunications matters has proved to be of good sense and have some understanding of the industry. On this occasion it is possible to argue that he may not have fully grasped the importance of some of the things being discussed, in terms of who has the right to set prices on whom, and what he has done is probably to create an considerable regulatory millstone for Ofcom. Strangely, he may have shoved us back towards a much more French view of the Access Directive and away from a laissez-faire approach. He may well have driven Ofcom and indeed the industry into an era of highly-regulated prices. O2 and the other MNOs may rue the day that they took on this appeal.
In general terms, the Judgment affirming Jacobs LJ previously emphasises the CAT not acting as a second tier regulator but as an appeal mechanism in assisting Ofcom to set a price fair between the parties, and reasonable in the light of industry objectives in the CRF.
Clauses 12 and 13 of the BT SIA
In simple terms, the CAT decided that the number one consideration in respect of the charge notices issued by BT was that they had a right to force them through, pursuant to clause 12 of the SIA. The Court of Appeal saw very little difference between clauses 12 and 13 (this probably answers the subsequent dispute from T-Mobile on the subject), so the differences between them in essence are very little – certainly not enough to support a regulatory structure saying that you should continue here to give precedence to the right to impose the pricing structure.
Firstly, and as I suspected would be the case, history has forgotten why clauses 12 and 13 of the BT SIA are shaped as they are. It is not some perverse result of BT’s 1993 pre-eminence and bargaining position. It is the result of BT arguing quite forcibly and successfully that it needed to be able to control the prices that it charged because it was a regulated, and in those days a far more regulated, being. Moreover, when it was dealing with other people’s traffic in transit it would have had a chance to object to the prices that they put forward, pursuant to the inbound services to it as it were under the clause 13 procedure. It was essentially saying: firstly I have got to retain control of what I charge for regulatory reasons and secondly I have also got to make the books balance. Generally if BT have given a charge change notice in a situation where one has been served on it and BT has accepted it, it cannot afford to have an imbalance in prices in and out as it were. Where it is dealing with its own services and those provided by itself where there is no onward transit then the regulatory argument applies.
So an effect of all of this is that nobody can have a price that they charge other operators, other than one that is fair and reasonable in all of the circumstances. That means that those who are a million miles from having any form of significant market power effectively now have their prices regulated. In other words, people who provide services to consumers of Mobile Network Operators no longer have the power to control their own prices. BT will not be able to accept some of these charge control notice for services that could be supplied across the transit unless it has decided for itself that the costs are fair and reasonable, because it is going to have to pass those on with a transit cost to somebody else. Therefore, at one level the effect of Lloyd LJ’s Judgment is to impose on the entire UK regime fair and reasonable tests that remove from some operators the power to set their own prices. Who is going to set them for them? BT has always shown a marked and indeed proper reluctance to set prices for others. One can see, however, a number of disputes arising in the near future.
But of course under the present regime, as from May last year, Ofcom does not need to accept a dispute. In that case, the parties would be left relying upon their contractual rights. This is probably why T-Mobile have started a dispute with Ofcom over clause 13 of the SIA – they have realised that the absence of some drafting change despite what Lord Justice Lloyd says there will always be a dichotomy between the effects of clauses 12 and 13 of the SIA. The only way for an operator to make sure that it gets the pricing regime it wants, where it transits through BT, is to persuade BT that its charge control notice is fine and then see that imposed upon those up or down the line. So the effect of Ofcom not in that situation deciding to deal with the dispute is to enable the operator to impose the charge it wants. Whilst that may not be true, for example, with a Mobile Network Operator trying to impose a charge on BT that BT does not like. Moreover, in a situation where Ofcom deals with the dispute between BT and another operator in respect of an onward charge, then the possibility of there then becoming an imbalance between the inward charge and the onward charge occurs.
Ofcom’s ability not to take on access disputes mitigates against what Lord Justice Lloyd has done, making a tremendous sea change in British telecommunication regulation. Ofcom can simply refuse to deal with cases. That, however, as a decision itself is one that people may try to see reviewed.
What sauce for the goose is sauce for the gander?
What that also means is that the MNOs’ prices are subject to the same contention. They now cannot charge anything that is not fair and reasonable on interconnect terms. What does that mean? Well probably it means that they cannot charge something which is other than socially acceptable, which in turn in Europe means something probably not adjacent to what you can charge for roaming in terms of access charges. The MNOs may have probably permanently “done” for ladder pricing. They have also introduced a new era of price control based on Article 5 of the Access Directive which has no reference to significant market power, but who could be the first beneficiaries of all of this? What if it might be, for example, that providers of services consider the Mobile Network Operators’ access charges to be excessive. They should, after all, be fair and reasonable and that brings us back to social acceptability and the level or European roaming charges. The average MNO might see this as being not possible, but it now theoretically is possible and it may not be possible for them to argue in a situation where a fair and reasonable charge is made that there is an unreasonable water-bedding effect. It might become quite apparent, however, the degree to which water-bedding goes on then there might be a proper examination of whether or not it is in and whose interest it is in to have general voice and text and data subsidised by making calls to particular services.
The importance of interconnection in a regulatory regime and end-to-end connectivity
Lord Justice Lloyd gives particular prominence to the statement that interconnection is at the heart of all regulation and that this is to give effect to a well known European principle of end to end connectivity. Now there is going to be some very useful quotes as one or two service operators have long running disputes over making their services accessible by, for example, services provided by the BT home hub. If those are truly two of the most important guiding principles that should apply from the European regime through Ofcom to the UK market, there might be a few problems for one or two people along the road.
Factors to be taken into account
Essentially Lord Justice Lloyd gave credence to the way in which Ofcom had approached the subject in the first place. It needed to look at the factors and the various competing forces and give them an appropriate weight because as the regulator that is its job to do. This is a hint that the CAT should not do it for it. So, if there is regulatory or policy concern to be given an effect, it should be taken into account. In the future, in the general area of 08X that is of course going to include the results of the Non-Geographic Number Simplification Review, if any of those should be lawful. It still does not prevent Ofcom having to make a value Judgment on what is a fair and reasonable charge in the circumstances. That is a question which it should really be examining very carefully now because one suspects that they are going to get asked it in the very near future. Where there is an existing SMP situation, then it is clear that the fair and reasonable costs in the circumstances are going to be that required by that regulatory stricture. Where, for consumer purposes, there is a price cap, a fair and reasonable price will be under that price cap. But are the MNOs right to argue that SMP is just one consideration in deciding what is fair and reasonable?
A word of warning for Ofcom, however. Because the Government has never quite implemented things properly, anybody who tries to pull an Access Directive Article 5 dispute at the moment on anything that relates to, for example, DQ services is in for a nasty shock. Due to mis-implementation of the Access Directive disputes procedure, if Ofcom were minded to accept such a dispute, arguably does not apply to access to its services. Arguable, however, it does apply to the cost of access of the customer by DQ services (i.e. the cost of access charge). This is because DQ services are not set out in a definition of what is covered by the Access Directive provisions in the United Kingdom.
Promotion of competition as an end in itself
This was attacked by Lord Justice Lloyd. Competition for competition’s sake is not enough he argues. There has to be some good in it and it should be only enforced when it is appropriate. Interesting that, as most telecoms regulators would probably believe that competition regulation is at the heart of telecoms regulation in Europe. A problem, however, is according to our Court of Appeal what some commentators believe is the half-baked idea of water-bedding getting credence because it was at the bottom of a half-baked idea by Ofcom that there was not any significant advantage to the consumer in permitting ladder pricing. At some stage the whole water-bedding question has got to be fully judicially aired in the United Kingdom. In the old days, the regulators called water-bedding cross-subsidisation and then looked as to whether that cross-subsidisation was helpful or unhelpful as regards the welfare of those who paid more or less for their services as a result of its existence. That same kind of analysis has to be undertaken again.
Winners and losers
Well one can only applaud O2 for public spiritedness in its undertaking the appeal and of the other MNOs in backing it up. This is on the basis that it and the other MNOs are likely to be the biggest losers in all of this. They might have won a battle against ladder pricing, but there are a lot more battles to come relating to access charging and other matters.
The next loser is Ofcom. Firstly, it is probably not presently equipped to deal with a lot more disputes, which is possibly the result of what has occurred. In short, if you were affected by the Non-Geographic Review and you thought you were paying too much for access to mobile handsets, or mobile customers were paying too much for it in respect of your service, then you might well be tempted to go for an Access Directive disputes approach (thereby obtaining fair and reasonable charges) than waiting for your problems to be solved by unbundling. You might just think you could head off to a surer, better solution than anything proposed so far in the consultation.
Ofcom is also probably a loser because it is going to need to rewrite the Non-Geographic Review results, taking into account this decision and therefore looking strongly at the principle of fair and reasonable charges as being the overall guiding factor into which everything else must be slotted as a consideration – even more tree trunks to be destroyed.
Did Lord Justice Lloyd understand how the industry works?
Possibly not. It is probably unfortunate that most of the counsel involved in this case will not have been around professionally speaking at the time that the BT SIA was first developed. They might have had a better understanding of the difference between paragraphs 12 and 13 and have been able to explain those to the Court of Appeal. What essentially the decision does is to take away from operators the ability to fix their own prices, whether those be mad, bad or simply outrageous, if there is no good regulatory reason to change in what they want. In other words, when it comes down to Access Directive disputes, all prices have to be fair and reasonable. This is probably the most significant change in regulatory control for loss of power of operators over their own destiny that there has been in the history of UK telecoms regulation. There will be lots of people who would argue that that is not the case of course and that taking an extreme view does not help, but I am not sure that the view left by the Court of Appeal is one which is necessarily helpful, particularly to new operators or, rather, operators of new services. It would have the effect is stifling competition.
Off to the Supreme Court?
One should always preface these remarks by saying that you do not have to have, as I understand it, been involved in the appeal process previously to appeal this to the Supreme Court. Of course you have not got very long to make a choice about what you do about it, but it strikes me that this is just the sort of issue that should be going to the Supreme Court, given that it is going to significantly affect other people’s lives (through their phone bills) in the UK for a long time to come. In particular, however, it is going to affect the choices made by operators of all descriptions and far from being a means of freeing Mobile Network Operators from constraints that might be imposed by others, is likely to be as much of a constraint on them. See there is a difference about clauses 12 and 13 of the SIA. If you have got through 13 you get to 12 and the other operators cannot start mucking about with your prices.
The test of reasonableness in a sense is filtered through whether you have persuaded BT that it could and should charge it. This is something Lord Justice Lloyd simply does not appreciate. Neither does it seem to have been taken to his attention. What the Supreme Court needs to do is to review the TRD case and this case and formulate a principle based on the fact that charges should only be disputed successfully if they are unfair and unreasonable in all the circumstances and where there is no regulatory reason to change them, because there is no overwhelming argument that setting them in the way required by the operator concerned is going to cause harm of a significant and material degree in the market place or to the consumer then people should be allowed to charge what they want. The test under Article 5 would be essentially to create a price regime for interconnection that does not stop people using those interconnected access services.
There is still the chance for the Supreme Court to back a regime where people can charge what they want to and preserve that as the fundamental right. Only when it becomes unfair and unreasonable is it that you need to do something about it. The onus needs to move back not to showing that your new price is fair and reasonable, but on it being shown that it is unfair and unreasonable.