Judgment of the Court of Appeal on mobile call termination price controls

03 August 2009

Richard Eccles

The Court of Appeal has handed down its judgment in the mobile call termination price controls case.  The Court upheld the decisions of Ofcom and the Competition Appeal Tribunal (CAT) to the effect that H3G should be subject to price regulation in respect of call termination on its mobile network, despite the content of the end to end obligations in BT’s regulatory conditions that require it to purchase call termination services on reasonable terms and conditions (and on terms and conditions as shall be directed by Ofcom).  The Court concluded that this regulatory requirement that H3G set terms and conditions for BT that are reasonable and in accordance where necessary with Ofcom’s dispute resolution powers, did not prevent H3G from having significant market power in respect of mobile call termination on its network and that H3G was therefore in principle subject to price controls for such mobile call termination services.

The Office of Communications (Ofcom) originally published its conclusions following its market review of wholesale mobile voice call termination (MCT) markets in June 2004.  This is the market on which each mobile network operator (MNO) sells to other MNOs and fixed network operators, the service of connecting phone calls to its network.  Ofcom found that six providers (O2, Orange, T-Mobile, Vodafone, H3G and Inquam) had significant market power (SMP) and imposed conditions on each provider but refrained from placing price controls on H3G as it was a relatively new entrant to the market at the time.

The case had a complex procedural history.  H3G appealed Ofcom’s findings to the CAT and in November 2005, the CAT referred this back to Ofcom for further consideration.  Ofcom considered H3G’s market position as at 2004 and came to the same conclusion: that H3G had SMP, this decision was again appealed by H3G.  This time, Ofcom had also considered that all of the six operators, including H3G had SMP on the market as at 2007 and this time they did impose price controls on H3G.  BT and H3G then appealed against the level of pricing allowed for MCT.  Pursuant to section 193 of the Communications Act 2003, the price controls aspect of the appeal was sent to the Competition Commission.

The remainder of the issues raised in the appeals were dealt with by the CAT and were dismissed.  The CAT considered that Ofcom were correct in their finding that H3G had SMP based on their 100% market share, Ofcom’s dispute resolution powers in relation to price controls did not impact on this finding of H3G’s SMP, there was an absence of countervailing buyer power on the part of BT to negate H3G’s SMP and Ofcom had been correct to impose a price control over H3G.

H3G further appealed this decision and the CAT granted H3G leave to appeal to the Court of Appeal on issues relating to the finding of SMP and Ofcom’s power to impose a price control.

The first ground of appeal related to BT’s end-to-end connectivity (E2E) obligation.  H3G contended that BT could not lawfully be required to pay a price appreciably above the competitive level, therefore H3G could not act independently of BT and as a result did not have SMP.  One of the central issues to this ground of appeal was the relevance of regulatory constraints on the relevant undertakings to the assessment of SMP.  In considering this point, Lord Justice Lloyd referred to a European Commission decision in relation to a finding by the German telecoms regulator that several small telecoms operators did not hold SMP because of the countervailing buyer power exerted by Deutsche Telekom.  The conclusion of the court was that SMP is not to be found to be absent from a market if its absence is the result of regulation.  In addition, an undertaking that would otherwise have SMP cannot argue that it does not have SMP because it is, or would be, limited by regulatory provisions that are designed to constrain SMP.  Therefore the regulatory constraints that might be imposed if the regulator determines that a market is not effectively competitive should not be considered when determining whether a market is in fact effectively competitive.

Although the Court recognised that the existence of countervailing buyer power could deprive an operator of significant market power, it concluded that BT was itself under strong commercial pressure (even in 2004) to buy mobile call termination from H3G.  On this basis, BT did not have so much countervailing buyer power as to counteract the significant market power which H3G as a monopolist would prima facie hold on its own market.

The second ground of appeal was that the CAT was wrong to hold that Ofcom’s dispute resolution powers should be disregarded when considering whether H3G has SMP.  The court considered the first ground of appeal to be connected to this issue and concluded that constraints on H3G’s behaviour as a result of Ofcom’s dispute resolution powers were not relevant to the assessment of whether H3G has SMP.  The process of resolving a dispute is part of Ofcom’s regulatory functions.  As a result, the court did not feel the need to consider the arguments put forward by both parties although the court did recognise that the question in relation to deciding whether the use of Ofcom’s dispute resolution powers would necessarily result in an MCT charge being fixed at a competitive level was an important one, just not in the context of the appeal before them.

The third ground of appeal was that the CAT was wrong to hold that Ofcom could impose a price condition, because there was no risk that H3G might set an excessively high price for MCT and require BT to pay it under the E2E obligation.  The court considered that a finding of SMP does not necessarily mean that price controls can be imposed.

The Court considered arguments that H3G might charge, or be required by Ofcom to charge, call termination rates that were above the competitive level though not necessarily excessive or abusive.  However, the Court concluded that this issue would only be relevant if Ofcom’s dispute resolution powers were themselves relevant, whereas it had concluded that the dispute resolution powers should be disregarded.

The Court therefore dismissed the appeal and upheld the decisions of Ofcom and the CAT.  It also concluded that there was no reason to refer the case to the European Court of Justice as it had been guided in its judgment by the European Commission decision concerning Deutsche Telekom.

Source:

Hutchison 3G UK Ltd v Ofcom [2009] EWCA Civ 683, judgment of 16 July 2009

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