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You are here: BAILII >> Databases >> United Kingdom Competition Appeals Tribunal >> Hutchison 3G (UK) Ltd v Office of Communications [2005] CAT 39 (29 November 2005) URL: http://www.bailii.org/uk/cases/CAT/2005/39.html Cite as: [2005] CAT 39 |
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Hutchison 3G (UK) Limited v Office of Communications [2005] CAT 39 (29 November 2005)
Case No: 1047/3/3/04
IN THE COMPETITION
APPEAL TRIBUNAL
Victoria House,
Bloomsbury Place,
London WC1A 2EB
29 November 2005
BETWEEN:
Appellant
Respondent
Intervener
Mr. Nicholas Green QC (instructed by Freshfields Bruckhaus Deringer) appeared for the Appellant
Mr. Peter Roth QC and Miss Kassie Smith (instructed by The Director of Legal Services (Competition), Office of Communications) appeared for the Respondent.
Mr. Gerald Barling QC and Miss Sarah Stevens (instructed by BT Legal) appeared for the Intervener.
I INTRODUCTION
II THE NEW REGULATORY FRAMEWORK
Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services ("the Framework Directive")[1];
Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities ("the Access Directive")[2];
Directive 2002/20/EC on the authorisation of electronic communications networks and services ("the Authorisation Directive")[3];
Directive 2002/22/EC on universal service and users' rights relating to electronic communications networks and services ("the Universal Service Directive") and[4];
Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector ("the Privacy Directive")[5].
III THE FACTUAL CONTEXT OF THE RELEVANT MARKET
IV THE PROCEDURAL HISTORY OF THIS MATTER AND THE MAIN FINDINGS IN THE DECISION
"2.23 Ofcom has concluded that, having taken due account of the Recommendation and the SMP Guidelines, as well as Oftel's guidelines on assessing effective competition in carrying out this review, there are six separate relevant markets as follows:
[determinations on the other networks]
…. wholesale voice call termination provided by '3' (such termination provided via '3''s mobile network); …"
"Criteria used in assessing SMP
3.2 In its assessment of SMP in the markets for voice call termination, Ofcom has focused on single firm dominance and has relied on four of the criteria listed in the SMP Guidelines and in Oftel's Guidelines on the assessment of SMP. These criteria are:
(a) market share;
(b) ease of market entry;
(c) excessive prices and profitability; and
(d) countervailing buyer power.
3.3 Ofcom has also considered the CPP arrangements – a key factor in shaping the competitive conditions prevailing in the wholesale mobile voice call termination markets."
The point made at paragraph 3.3 was elaborated on in the preceding reviews, which are cross-referenced in paragraph 3.1 as containing relevant material. This is not elaborated on in this part of the Decision, but it is referred to in the preceding chapter in paragraphs 2.5 and 2.6, where it is observed that MNO's have little incentive to keep termination charges low because those charges are passed on to the caller; and in Annex B (page 173) of the May review (incorporated expressly into the Decision in paragraph 3.1) OFCOM observed that because of the CPP arrangement, and because of the lack of awareness on the part of callers of the cost of calling mobiles from other networks or from fixed lines, and lack of customer awareness of the price they were paying, customer awareness was no constraint on termination charges and therefore did not affect its provisional determination of SMP. We consider that OFCOM took that factor into account in the Decision in addition to the other factors expressly relied on.
"Ofcom's conclusion on the new entrant: '3'
3.21 Ofcom maintains its view that '3' has SMP in the market in which it supplies wholesale mobile termination services. Ofcom considers that (i) '3''s 100 % market share in the market for wholesale voice call termination on its network; and (ii) the presence of absolute barriers to entry in that market, mean that '3' has SMP.
3.22 In addition, Ofcom believes that purchasers of termination from '3' have insufficient buyer power to off-set '3''s market power, and thus constrain its pricing behaviour."
The decision then goes on to deal with the question of countervailing buyer power, and finds in paragraphs 3.29 to 3.42 that neither BT nor any MNOs had such power.
"5.72 Ofcom remains of the view that a transparency obligation including a reporting requirement is a proportionate obligation to impose on '3' at this stage, as explained in paragraphs 5.134 – 5.137 of the December consultation."
Then, in the schedule to the Decision OFCOM imposes certain reporting obligations the details of which do not matter at this stage; the remedy itself is not challenged if the SMP determination stands.
V SUMMARY OF THE TRIBUNAL'S FINDINGS
a) market share;
b) ease of market entry;
c) excessive prices and profitability; and
d) countervailing buyer power ("CBP").
In that regard, H3G had 100 per cent market share and there were absolute barriers to entry in the market for wholesale voice call termination on the H3G mobile network. We note that it was against the background of those strong prima facie indicators of SMP that OFCOM reached its decision that there was no effective competition in that market and, accordingly, concluded that H3G has SMP. Nonetheless, it was for OFCOM to analyse whether there was sufficient CBP in the market to negate the finding of SMP. We take the view that on that one aspect of its Decision, OFCOM did not meet the standard required of it. Notwithstanding that, on a reconsideration, it would be open to OFCOM to reach the same conclusion; it is now for OFCOM to reconsider that part of the decision relating to CBP in the light of this judgment and the information currently available.
VI JURISDICTION OF THE TRIBUNAL
"Article 4
Right of appeal
1. Member States shall ensure that effective mechanisms exist at national level under which any user or undertaking providing electronic communications networks and/or services who is affected by a decision of a national regulatory authority has the right of appeal against the decision to an appeal body that is independent of the parties involved. This body, which may be a court, shall have the appropriate expertise available to it to enable it to carry out its functions. Member States shall ensure that the merits of the case are duly taken into account and that there is an effective appeal mechanism. Pending the outcome of any such appeal, the decision of the national regulatory authority shall stand, unless the appeal body decides otherwise.
2. Where the appeal body referred to in paragraph 1 is not judicial in character, written reasons for its decision shall always be given. Furthermore, in such a case, its decision shall be subject to review by a court or tribunal within the meaning of Article 234 of the Treaty."
"195 Decisions of the Tribunal
(1) The Tribunal shall dispose of an appeal under section 192(2) in accordance with this section.
(2) The Tribunal shall decide the appeal on the merits and by reference to the grounds of appeal set out in the notice of appeal.
(3) The Tribunal's decision must include a decision as to what (if any) is the appropriate action for the decision-maker to take in relation to the subject-matter of the decision under appeal.
(4) The Tribunal shall then remit the decision under appeal to the decision-maker with such directions (if any) as the Tribunal considers appropriate for giving effect to its decision.
(5) The Tribunal must not direct the decision-maker to take any action which he would not otherwise have power to take in relation to the decision under appeal.
(6) It shall be the duty of the decision-maker to comply with every direction given under subsection (4).
(7) In the case of an appeal against a decision given effect to by a restriction or condition set by regulations under section 109, the Tribunal must take only such steps for disposing of the appeal as it considers are not detrimental to good administration.
(8) In its application to a decision of the Tribunal under this section, paragraph 1(2)(b) of Schedule 4 to the Enterprise Act 2002 (c. 40) (exclusion of commercial information from documents recording Tribunal decisions) is to have effect as if for the reference to the undertaking to which commercial information relates there were substituted a reference to any person to whom it relates.
(9) In this section "the decision-maker" means-
(a) OFCOM or the Secretary of State, according to who took the decision appealed against; or
(b) in the case of an appeal against-
(i) a direction, approval or consent given by a person other than OFCOM or the Secretary of State, or
(ii) the modification or withdrawal by such a person of such a direction, approval or consent,
that other person."
VII THE TRIBUNAL'S ANALYSIS
a) What was the standard of proof necessary to be achieved in order for OFCOM to be satisfied of the existence of SMP.
b) Whether OFCOM considered all factors that it ought to have considered in reaching its conclusion.
c) Whether the factors that it did investigate (or purport to investigate) were properly considered.
d) Whether OFCOM was entitled to reach its decision in the light of the above matters.
A. THE STANDARD OF PROOF
"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."
OFCOM correctly pointed out that this passage on its face referred to the imposition of ex ante obligations, and not to a finding of SMP, but Mr Green's point was that since a finding of SMP led inevitably to some form of regulatory obligation, then one could read this passage as though it referred to a finding of SMP. This meant that a particularly serious or heavy burden was imposed in an ex ante case, requiring a "thorough economic analysis" and "mere theoretical ability" to control prices is not enough.
"42. A prospective analysis of the kind necessary in merger control must be carried out with great care since it does not entail the examination of past events – for which often many items of evidence are available which make it possible to understand the causes – or of current events, but rather a prediction of events which are more or less likely to occur in future if a decision prohibiting the planned concentration or laying down the conditions for it is not adopted.
43. Thus, the prospective analysis consists of an examination of how a concentration might alter the factors determining the state of competition on a given market in order to establish whether it would give rise to a serious impediment to effective competition. Such an analysis makes it necessary to envisage various chains of cause and effect with a view to ascertaining which of them are the most likely.
44. The analysis of a 'conglomerate-type' concentration is a prospective analysis in which, first, the consideration of a lengthy period of time in the future and, secondly, the leveraging necessary to give rise to a significant impediment to effective competition mean that the chains of cause and effect are dimly discernible, uncertain and difficult to establish. That being so, the quality of the evidence produced by the Commission in order to establish that it is necessary to adopt a decision declaring the concentration incompatible with the common market is particularly important, since that evidence must support the Commission's conclusion that, if such a decision were not adopted, the economic development envisaged by it would be plausible."
Reliance was also placed on paragraph 162 of the judgment of the CFI in Tetra Laval BV v. Commission of the European Communities (Case T-5/02) [2002] ECR II-4381, which states:
"162. It follows from the foregoing that it is necessary to examine whether the Commission based its analysis of the likelihood of leveraging from the aseptic carton markets, and of the consequences of such leveraging by the merged entity, on sufficiently convincing evidence. In the course of that examination it is necessary, in the present case, to take account only of conduct which would, at least probably, not be illegal. In addition, since the anticipated dominant position would only emerge after a certain lapse of time, by 2005 according to the Commission, its analysis of the future position must, whilst allowing for a certain margin of discretion, be particularly plausible. "
In addition, Mr Green relied on extracts from the Opinion of Advocate General Tizzano delivered on 25 May 2004 in the Tetra Laval case, which he said suggested a high standard of proof which was required in ex ante regulation cases, and he particularly relied on paragraph 76, where the Advocate General said:
"76. As a matter of fact, I consider that the symmetry of those requirements cannot be absolute, seeing that there is, between the cases in which the notified transactions would very probably create or strengthen a dominant position within the meaning of Article 2 and the cases in which those transactions very probably would not create or strengthen such a dominant position, a 'grey area': an area, that is to say, in which cases are to be found where it is especially difficult to foresee the effects of the notified transaction and where it is therefore impossible to arrive at a clear distinct conviction that the likelihood that a dominant position will be created or strengthened is significantly greater or less than the likelihood that such a position will not be created or strengthened. The system laid down by Regulation 4064/89 must therefore necessarily provide a yardstick for the solution of those cases which are of doubtful or difficult classification."
This, Mr Green said, was a strong pronouncement.
"42. A prospective analysis of the kind necessary in merger control must be carried out with great care since it does not entail the examination of past events – for which often many items of evidence are available which makes it possible to understand the causes – or of current events, but rather a prediction of events which are more or less likely to occur in the future…".
However, ECAP went on to conclude:
"4.23 This does not mean that because there is ex ante analysis that the Respondent [i.e. the regulator] has to meet a higher standard of proof. The standard is whether, on the balance of probabilities an undertaking has significant market power. Rather the Panel is merely asserting the common sense proposition that when one is making a finding of significant market power on the basis of a prospective analysis (as opposed to an ex post analysis) then it is necessary that this analysis be sufficiently rigorous and thorough so that a clear link can be drawn between existing circumstances and likely future behaviour. To put it another way, because the likelihood of error is greater in a prospective analysis, the prospective analysis must be proportionately more rigorous to account for this possibility."
We respectfully agree with that approach.
B. H3G'S ATTACK ON THE DECISION
i. OFCOM did not carry out a sufficient analysis of prices to entitle it to come to a decision that H3G had SMP.
ii. OFCOM failed to take account, or sufficient account, of restraints on H3G's ability to increase prices arising from regulation.
iii. OFCOM failed to take account, or sufficient account, of the ability of customers (principally BT) to restrain pricing.
iv. H3G's case is that as a result of these failures, and looking at the matter overall, OFCOM did not carry out the exercise required of it if it were to find SMP, and that its decision is therefore flawed.
We will consider each of these various lines of attack in turn, but before doing so we need to set out some material which is relevant to the basis on which SMP can be determined.
THE DETERMINATION OF SMP
"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 the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers."
This definition is equivalent to the concept of dominance as defined by the case law of the Court of Justice and the Court of First Instance of the European Communities, see recital 25 of the same Directive. The words, or very similar words, appear elsewhere in the jurisprudence in that context – see e.g. Case 311/84 Michelin v The Commission [1983] ECR 3461 at paragraph 30.
"73. In an ex-post analysis, a competition authority may be faced with a number of different examples of market behaviour each indicative of market power within the meaning of Article 82. However, in an ex-ante environment, market power is essentially measured by reference of the power of the undertaking concerned to raise prices by restricting output without incurring a significant loss of sales or revenues.
…
75. As explained in the paragraphs below, a dominant position is found by reference to a number of criteria and its assessment is based, as stated above, on a forward-looking market analysis based on existing market conditions. Market shares are often used as a proxy for market power. Although a high market share alone is not sufficient to establish the possession of significant market power (dominance), it is unlikely that a firm without a significant share of the relevant market would be in a dominant position. Thus, undertakings with market shares of no more than 25 % are not likely to enjoy a (single) dominant position on the market concerned. In the Commission's decision-making practice, single dominance concerns normally arise in the case of undertakings with market shares of over 40 %, although the Commission may in some cases have concerns about dominance even with lower market shares, as dominance may occur without the existence of a large market share. According to estab lished case-law, very large market shares — in excess of 50 % — are in themselves, save in exceptional circum stances, evidence of the existence of a dominant position. An undertaking with a large market share may be presumed to have SMP, that is, to be in a dominant position, if its market share has remained stable over time. The fact that an undertaking with a significant position on the market is gradually losing market share may well indicate that the market is becoming more competitive, but it does not preclude a finding of significant market power. On the other hand, fluctuating market shares over time may be indicative of a lack of market power in the relevant market.
…
78. It is important to stress that the existence of a dominant position cannot be established on the sole basis of large market shares. As mentioned above, the existence of high market shares simply means that the operator concerned might be in a dominant position. Therefore, NRAs should undertake a thorough and overall analysis of the economic characteristics of the relevant market before coming to a conclusion as to the existence of significant market power. In that regard, the following criteria can also be used to measure the power of an undertaking to behave to an appreciable extent independently of its competitors, customers and consumers. These criteria include amongst others:
— overall size of the undertaking,
— control of infrastructure not easily duplicated,
— technological advantages or superiority,
— absence of or low countervailing buyer power,
— easy or privileged access to capital markets/financial resources,
— product/services diversification (e.g. bundled products or services),
— economies of scale,
— economies of scope,
— vertical integration,
— a highly developed distribution and sales network,
— absence of potential competition,
— barriers to expansion.
79. A dominant position can derive from a combination of the above criteria, which taken separately may not neces sarily be determinative.
80. A finding of dominance depends on an assessment of ease of market entry…"
"74. Since the view is taken in the contested decision that adoption of the conduct referred to in recital 364 in that decision is an essential step in leveraging, the Court of First Instance was right to hold that the likelihood of its adoption must be examined comprehensively, that is to say, taking account … both of the incentives to adopt such conduct and the factors liable to reduce, or even eliminate, those incentives, including the possibility that the conduct is unlawful.
In other words, the dominance in that case did not arise from facts that could plainly be seen to exist as a result of the merger. In order for the dominance to arise one of the parties would have to take positive steps to exploit existing dominance in a different market so as to achieve a given market effect. The ECJ held that that has to be proved as a likely fact to some relevant degree (the degree does not matter for present purposes).
a) A large market share gives rise to a presumption of dominance.
b) However, the nature of that "presumption" must be properly understood. Normally, in English law, a presumption can be relied on by itself if there is no other evidence which goes to the point; no-one suggested that the position would be different so far as any European principles might be in play. The first sentence of paragraph 78 of the guidelines seems at first sight to detract from that principle. However, we are not satisfied that it does. What paragraph 78 provides is that a regulator is not entitled to find a large market share, rely on that as giving rise to a presumption of dominance and stop there. The regulator is obliged to go on and consider all other such factors as are relevant to a consideration of the point in the market in question. The paragraph then goes on to identify some of them. What is required by the Guidelines is a "thorough and overall analysis of the economic characteristics of the relevant market before coming to a conclusion as to the existence of significant market power." This approach is demonstrated by various authorities, including Hoffman-La-Roche [1979] ECR 461, and we do not consider that anything appearing in Tetra Laval contradicts or modifies it.
PRICING AND COSTS
a) OFCOM in substance regarded price or the power over price as the sole touchstone of its decision.
b) In relation to the 4 2G MNOs it found an ability to charge excessive prices, and an incentive to do so. However, in the case of Hutchison it found ability, but no incentive, and did not even examine incentive. It ought to have examined the incentive question, and had it done so it would have found that there was no incentive. Absent an incentive there was no dominance.
c) OFCOM failed to conduct an analysis of Hutchison's costs or prices and relied purely on a theoretical ability to raise prices, and therefore failed to carry out an important and necessary part of the exercise. There was therefore no proper evidence that prices were, or would become, excessive. Without this the decision is flawed.
d) On analysis the Decision is forward-looking in terms of prices becoming excessive, and OFCOM has failed to carry out properly (or at all) the exercise of assessing when, how and to what extent they will or may become excessive. We think that on analysis this is probably a refinement or an aspect of the point at (c) or perhaps (b).
We will take these points in turn.
Point (a) – power over price as the sole touchstone
"Further details of Ofcom's reasoning for its decision on SMP, and of the analysis performed by Ofcom to arrive at the conclusions presented below, are available in Chapter 3 (paragraphs 3.9-3.45) of the December consultation and Chapter 4 and Annex B of the May consultation."
"The ability to keep prices persistently and profitably above the competitive level is an important indicator of market power. In a competitive market, individual firms should not be able to raise prices above costs and sustain excess profits for prolonged periods of time" (paragraph 3.17).
It then goes on to consider prices and costs for the 4 2G companies. It is true that the debate at this point involves a consideration of excessive pricing (when compared to costs) but it is only one of the factors that the Director put forward. The countervailing buyer power point was also related to pricing, because it was a consideration of the extent to which such power is capable of being exerted to prevent a price rise, but again price is part of this aspect of the consideration, not the pre-eminent point. An Annex sets out other criteria listed in the various guidelines and explains why they are said to be less relevant in this specific market.
"3.21 Ofcom maintains its view that '3' has SMP in the market in which it supplies wholesale mobile termination services. Ofcom considers that (i) '3''s 100% market share in the market for wholesale voice call termination on its network; and (ii) the presence of absolute barriers to entry in that market, mean that '3' has SMP.
3.22 In addition, Ofcom believes that purchasers of termination from '3' have insufficient buyer power to off-set '3''s market power, and thus constrain its pricing behaviour."
"The constraints facing "3" are … not sufficient to hold charges at the competitive level on a forward-looking basis." (Paragraph 3.46)
At this point OFCOM is considering a submission by H3G, not putting forward its own primary reasoning. Last, in paragraph 3.50 OFCOM considers a submission by H3G that it had failed to take into account the fact that regulation would constrain pricing, pointing out that it did not consider it would.
Point (b) – the absence of a finding of incentive to raise prices
"The Director therefore needs to consider potential ex ante regulatory remedies to address SMP in each case [i.e. in the case of each of the MNOs, including H3G]."
From paragraph 5.118 onwards it deals with H3G, and at paragraph 5.128 the Director
"recognises that, whilst it has the ability, whether '3' has the incentive to set excessive charges for 2G voice call termination service is less certain. The Director accepts that so far, '3' has set charges for 2G voice call termination services in line with those of the other MNO's. This does not mean however that charges will remain so indefinitely, or that '3' lacks the ability to significantly raise the level of charges for 2G termination services."
and in paragraph 5.130 the Director again refers to
"uncertainty regarding '3's incentive to set excessive charges …"
"A full explanation of Ofcom's position as regards the regulation of '3''s call termination is provided in paragraphs 5.129-5.132 of the December consultation."
It is therefore apparent that OFCOM is still relying on the "uncertainty".
"71 It should be observed, first of all, that paragraphs 148 to 162 of the judgment under appeal, which the Commission challenges under both its first and its second ground of appeal, form a section in which the Court of First Instance described certain specific aspects of conglomerate effects, in particular temporal aspects, and inferred from them certain general rules as to the evidence which the Commission must produce when it considers that a proposed concentration must be declared incompatible with the common market.
"72 It was in the context of this reminder of the need for 'convincing evidence' that the Court of First Instance made reference to the obligation to examine all the relevant information.
"73 Such an examination must be carried out in the light of the purpose of the Regulation, which is to prevent the creation or strengthening of dominant positions capable of significantly impeding effective competition in the common market or a substantial part thereof.
"74 Since the view is taken in the contested decision that adoption of the conduct referred to in recital 364 in that decision is an essential step in leveraging, the Court of First Instance was right to hold that the likelihood of its adoption must be examined comprehensively, that is to say, taking account, as stated in paragraph 159 of the judgment under appeal, both of the incentives to adopt such conduct and the factors liable to reduce, or even eliminate, those incentives, including the possibility that the conduct is unlawful."
What is important for Mr Green's purposes is the reference to incentives in paragraph 74. The point is taken up again in the next paragraph:
"75 However, it would run counter to the Regulation's purpose of prevention to require the Commission, as was held in the last sentence of 159 of the judgment under appeal to examine for each proposed merger the extent to which the incentives to adopt anti-competitive conduct would be reduced or even eliminated as a result of the unlawfulness of the conduct in question, the likelihood of its detection, the action taken by the competent authorities, both at community and national level, and the financial penalties which could ensue."
He says that it is plain from this, and from other reasoning in that decision, that incentives must be taken into account.
Point (c) - the alleged failure to assess costs or to ascertain when prices would become excessive
"supported by Ofcom's analysis of 2G voice call termination charges, which appear to have been substantially above a reasonable estimate of each MNO's costs for a number of years, despite both formal and informal regulation."
In this respect Mr Green reverted to his reliance on Tetra Laval and said that that case demonstrated that it was the regulator's duty to carry out such an analysis, and it had to take place over the relevant time frame (here, the 18-24 months covered by this period of review). Without it the conclusion was speculation only, and speculation was not a proper basis for finding SMP.
"[Ofcom] has manifestly failed to give proper individual consideration to the question of whether Hutchison 3G can set excessive call termination prices …"
By way of elaboration the Decision records (in paragraph 3.44):
"'3' also questions whether Ofcom's analysis of the MNOs' behaviour in setting 2G voice termination charges and its conclusion that these charges have been set above a reasonable estimate of each MNO's costs for a number of years applies also to '3'. '3' argues that the December Consultation contains no analysis of its costs that could have led Ofcom to conclude that '3''s charges are excessive. In addition, '3' claims that it has provided Ofcom with evidence that demonstrates that its pricing is not excessive."
"3.46 The analysis of 2G termination charges Ofcom presented in Chapter 4 of the December Consultation was limited to the charges levied by Vodafone, O2, Orange and T-Mobile. Ofcom is aware that '3''s termination charges in practice reflect a combination of its 2G and 3G termination costs, and Ofcom has not performed a detailed analysis of '3''s charges. As Ofcom has noted, 3G networks are new and capable of providing a range of innovative services, and therefore it would be difficult to assess with confidence the relevant voice call termination costs and the appropriate rate of return on capital invested. However, this does not imply that '3' is unable to set excessive termination charges, given the lack of constraints that it faces. The constraints facing '3' are similar in nature to those facing the other MNO's, and these are not sufficient to hold charges at the competitive level on a forward-looking basis.
With regard to the evidence submitted by '3', this did not include information on '3''s termination costs and, more importantly, it only refers to ported numbers for which '3', like all the other MNOs, receives a different termination charge from its own …"
Point (d) – OFCOM's alleged failure to assess whether prices would become excessive over time
REGULATION, DISPUTE RESOLUTION AND COUNTERVAILING BUYER POWER
a) The effect of the possibility of regulation.
b) The countervailing buyer power ("CBP") of BT, which was the largest purchaser of termination on H3G's network.
c) The dispute resolution mechanism which exists under the agreement between BT and H3G in relation to the access agreement between them. That agreement has a price alteration mechanism, with the Director-General (and probably now Ofcom) having some apparent role in resolving disputes. H3G says that this means that it does not have power over price.
"3.39 The December consultation (paragraph 3.44) noted that there were commercial considerations which limited the countervailing buyer power of MNOs. Aside from these commercial considerations, Ofcom also considers that, in relation to whether an operator has countervailing buyer power, the threat of regulatory intervention is relevant."
Paragraph 3.44 of the December consultation was in the following terms:
"Against this, there are incentives on MNOs to complete their subscribers' calls to '3' customers, particularly as '3' attracts further subscribers. For example, the subscribers of an MNO might be annoyed if they could not complete calls to all mobile subscribers (including those of '3') and, if other MNOs did reach agreement with '3' it would expose that MNO to commercial disadvantage. Further, any attempt to block calls to '3's subscribers could be the subject of an investigation or dispute by the Director or Ofcom.The Director therefore maintains that, despite a level of countervailing buyer, '3' holds a position of SMP in the relevant market. The mitigating factors outlined by '3' - such as its size, its roaming agreements and the mobile number portability ('MNP') arrangements - are considered further in the chapters on the detrimental effects of SMP and in the regulatory option appraisal."
"3.30 … While, as '3' has pointed out, there are no formal conditions in place – because they have not previously been required – the May guidance explains that BT is expected to offer end-to-end connectivity in order to meet USO requirements to provide publicly available telephone services. This weakens BT's bargaining position as it removes the threat of BT not providing connectivity if agreement over charges cannot be reached.
3.31 It is possible that during the initial interconnection negotiations between BT and '3', '3''s urgency to launch services was a relevant factor in the relative bargaining positions of each party. However, Ofcom's analysis in this market review must be forward-looking and consider '3''s likely position in the next 18-24 months. Therefore Ofcom must also consider future negotiations between '3' and BT.
3.32 With such a forward-looking perspective, and with delay not such a critical issue for '3', it would be difficult to argue that '3' could not set excessive charges for the termination services provided to BT … It may be that existing contractual arrangements between '3' and BT make it difficult for '3 to raise charges from their current level. However, there is no arrangement in this contract for BT to ensure that charges fall over time from their current level (in line with costs). Some evidence of this is BT's inability to enforce reduced termination payments to '3 at the time of the 15 per cent charge reduction applied to the other MNOs in July 2003."
For those reasons the Decision found that OFCOM considered that BT was under an obligation which led to the position that it did not have CBP that offset H3G's market power in call termination.
"4.14 In this context, Ofcom notes it has the power to resolve the price increase dispute in question by determining that it will not prevent the increase until it has exercised its powers to set, inter alia, an SMP condition (see section 190(4) of the Act). Accordingly, Ofcom does not accept that it has made a material error of fact in rejecting dispute resolution as a constraint on the MNOs' ability to price excessively."
BT'S POSITION, THE INTERCONNECT AGREEMENT AND THE NEGOTIATION OF THAT AGREEMENT
a) H3G was under some time pressure because it wished to launch its product in the first half of 2002. There was an increasingly urgent need to finalise the termination rates towards the end of 2002, part of which was due to the fact that BT's Wholesale Board (which had to approve such matters) only met once a month and deadlines for presenting to the December meeting were missed. However, the problems did not arise from delays created by BT. So far as things got urgent, they arose from a failure by H3G over a couple of months to propose rates and then back up its proposals.
b) It is said by H3G that it was vulnerable to delays created by BT, and at least to that extent BT had CBP. That may be true, but there is no evidence that BT at any time did anything which might be regarded as introducing unnecessary or tactical delays. On the evidence we have seen it dealt with appropriate expedition throughout.
c) When H3G proposed to adopt the fm2 band, BT did not reject it out of hand, or indeed reject it in any meaningful sense. What it said was that it would require the adoption of that band to be justified by H3G. H3G chose not to justify it, and chose to suggest another band to BT.
"2.3 A Party may terminate this Agreement by giving at any time to
the other not less than 24 months' written notice to terminate.
…
13. OPERATOR SERVICES
13.1 For an Operator service or facility BT shall pay to the Operator
the charges specified from time to time in the Carrier Price List.
13.2 The Operator may from time to time by sending to such person, as BT may notify to the Operator from time to time, a notice in writing in duplicate request a variation to a charge for an Operator service or facility ("Charge Change Notice"). Such notice shall specify the proposed new charge and the date on which it is proposed that the variation is to become effective ("Charge Change Proposal"). BT shall within 4 Working Days of receipt of such notice acknowledge receipt and within a reasonable time notify the Operator in writing of acceptance or rejection of the proposed variation.
13.3 BT may from time to time by sending such person, as the Operator may notify to BT from time to time, a notice in writing in duplicate request a variation to a charge for an Operator service or facility ("Charge Change Notice"). Such notice shall specify the proposed new charge and the date on which it is proposed that the variation is to become effective ("Charge Change Proposal"). The Operator shall within 4 Working Days of receipt of such notice acknowledge receipt and within 14 days of receipt of such notice notify BT in writing of acceptance or rejection of the proposed variation. If the Operator has not accepted the Charge Change Proposal within 14 days of receipt of such notice (or such longer period as may be agreed in writing) the proposed variation shall be deemed to have been rejected.
13.4 If the Party receiving a Charge Change Notice accepts the Change Proposal the parties shall forthwith enter into an agreement to modify the Agreement in accordance with the Charge Change Proposal.
13.5 If the Party receiving a Charge Change Notice rejects the Charge Change Proposal the Parties shall forthwith negotiate in good faith.
13.6 If following rejection of a Charge Change Proposal and negotiation, the Parties agree that the Charge Change Notice requires modification, the Party who sent the Charge Change Notice may send a further Charge Change Notice.
13.7 If following rejection of a Charge Change Proposal and negotiation the Parties fail to reach agreement within 14 days of the rejection of the Charge Change Proposal, either party may, not later than 1 month after the expiration of such 14 days period, refer the matters in dispute to the Director General.
13.8 If the Director General upholds the Charge Change Proposal in the Charge Change Notice without modification the Charge Change Proposal shall take effect on the date specified in the Charge Change Notice and the Parties shall forthwith enter into an agreement to modify the Agreement in the accordance with this paragraph 13.8.
13.9 If the Director General does not uphold the Charge Change Proposal in the Charge Change Notice without modification then that Charge Change Notice shall cease to be of any effect. In the event that the Director General proceeds to make an order, direction, determination or requirement following a referral pursuant to paragraph 13.7 then the Party who sent the Charge Change Notice shall send a further Charge Change Notice in accordance with the order, direction, determination or requirement of the Director General and the parties shall forthwith enter into an agreement to modify the Agreement in accordance with this paragraph 13.9."
REGULATION
"56 The Commission's argument challenges paragraphs 156 to 162 of the judgment under appeal, which immediately follow paragraphs 148 to 155, which were likewise challenged by the Commission and were examined by the Court in connection with the first ground of appeal. In those paragraphs, the Court of First Instance held as follows:
'156. In the present case, the leveraging from the aseptic carton market, as described in the contested decision, would manifest itself - in addition to the possibility of the merged entity engaging in practices such as tying sales of carton packaging equipment and consumables to sales of PET packaging equipment and forced sales (recitals 345 and 365) - firstly, by the probability of predatory pricing by the merged entity (recital 364, cited in paragraph 49 above); secondly, by price wars; and, thirdly, by the granting of loyalty rebates. Engaging in these practices would enable the merged entity to ensure, as far as possible, that its customers on the carton markets obtain from Sidel any PET equipment they may require. The contested decision finds that Tetra holds a dominant position on the aseptic carton markets, that is to say, the markets for aseptic carton packaging systems and aseptic cartons (recital 231, see paragraph 40 above), a finding which is not disputed by the applicant.
157. It should be recalled that, according to settled case-law, where an undertaking is in a dominant position it is in consequence obliged, where appropriate, to modify its conduct so as not to impair effective competition on the market regardless of whether the Commission has adopted a decision to that effect (Case 322/81 Michelin v Commission [1983] ECR 3461, paragraph 57; Case T-51/89 Tetra Pak v Commission [1990] ECR II-309, paragraph 23; and Joined Cases T-125/97 and T-127/97 Coca-Cola v Commission [2000] ECR II-1733, paragraph 80).
158. Moreover, in response to the questions put by the Court at the hearing, the Commission did not deny that leveraging by Tetra through the conduct described above could constitute abuse of Tetra's pre-existing dominant position in the aseptic carton markets. This could also be the case, according to the concerns expressed by the Commission in its defence, in circumstances where the merged entity refused to participate in the installation and any necessary conversion of Sidel SBM machines, to provide after-sales service or to honour the guarantees for such machines when sold by converters. However, the Commission went on to state that the fact that a type of conduct may constitute an independent infringement of Article 82 EC does not preclude that conduct from being taken into account in the Commission's assessment of all forms of leveraging made possible by a merger transaction.
159. In this regard, it must be stated that, although the Regulation provides for the prohibition of a merger creating or strengthening a dominant position which has significant anti-competitive effects, these conditions do not require it to be demonstrated that the merged entity will, as a result of the merger, engage in abusive, and consequently unlawful, conduct. Although it cannot therefore be presumed that Community law will not be complied with by the parties to a conglomerate-type merger transaction, such a possibility cannot be excluded by the Commission when it carries out its control of mergers. Accordingly, when the Commission, in assessing the effects of such a merger, relies on foreseeable conduct which in itself is likely to constitute abuse of an existing dominant position, it is required to assess whether, despite the prohibition of such conduct, it is none the less likely that the entity resulting from the merger will act in such a manner or whether, on the contrary, the illegal nature of the conduct and/or the risk of detection will make such a strategy unlikely. While it is appropriate to take account, in its assessment, of incentives to engage in anti-competitive practices, such as those resulting in the present case for Tetra from the commercial advantages which may be foreseen on the PET equipment markets (recital 359), the Commission must also consider the extent to which those incentives would be reduced, or even eliminated, owing to the illegality of the conduct in question, the likelihood of its detection, action taken by the competent authorities, both at Community and national level, and the financial penalties which could ensue.
160. Since the Commission did not carry out such an assessment in the contested decision, it follows that, in so far as the Commission's assessment is based on the possibility, or even the probability, that Tetra will engage in such conduct in the aseptic carton markets, its findings in this respect cannot be upheld.
161. Moreover, the fact that the applicant offered commitments regarding its future conduct is also a factor which the Commission should have taken into account in assessing whether it was likely that the merged entity would act in a manner which could result in the creation of a dominant position on one or more of the relevant PET equipment markets. There is no indication in the contested decision that the Commission took account of the implications of those commitments when it assessed the creation of such a position in future through leveraging.
162. It follows from the foregoing that it is necessary to examine whether the Commission based its analysis of the likelihood of leveraging from the aseptic carton markets, and of the consequences of such leveraging by the merged entity, on sufficiently convincing evidence. In the course of that examination it is necessary, in the present case, to take account only of conduct which would, at least probably, not be illegal. In addition, since the anticipated dominant position would only emerge after a certain lapse of time, by 2005 according to the Commission, its analysis of the future position must, whilst allowing for a certain margin of discretion, be particularly plausible.'"
"74. Since the view is taken in the contested decision that adoption of the conduct referred to recital 364 in that decision is an essential step in leveraging, the Court of First Instance was right to hold that the likelihood of its adoption must be examined comprehensively, that is to say, taking account, as stated in paragraph 159 of the judgment under appeal, both of the incentives to adopt such conduct and the factors liable to reduce, or even eliminate, those incentives, including the possibility that the conduct is unlawful.
75. However, it would run counter to the Regulation's purpose of prevention to require the Commission, as was held in the last sentence in paragraph 159 of the judgment under appeal, to examine, for each proposed merger, the extent to which the incentives to adopt anti-competitive conduct would be reduced, or even eliminated, as a result of the unlawfulness of the conduct in question, the likelihood of its detection, the action taken by the competent authorities, both at Community and national level, and the financial penalties which could ensue.
76. An assessment such as that required by the Court of First Instance would make it necessary to carry out an exhaustive and detailed examination of the rules of the various legal orders which might be applicable and of the enforcement policy practised in them. Moreover, if it is to be relevant, such an assessment calls for a high probability of the occurrence of the acts envisaged as capable of giving rise to objections on the ground that they are part of anti-competitive conduct.
77. It follows that, at the stage of assessing a proposed merger, an assessment intended to establish whether an infringement of Article 82 EC is likely and to ascertain that it will be penalised in several legal orders would be too speculative and would not allow the Commission to base its assessment on all of the relevant facts with a view to establishing whether they support an economic scenario in which a development such as leveraging will occur.
78. Consequently, the Court of First Instance erred in law in rejecting the Commission's conclusions as to the adoption by the merged entity of anti-competitive conduct capable of resulting in leveraging on the sole ground that the Commission had, when assessing the likelihood that such conduct might be adopted, failed to take account of the unlawfulness of that conduct and, consequently, of the likelihood of its detection, of action by the competent authorities, both at Community and national level, and of the financial penalties which might ensue. Nevertheless, since the judgment under appeal is also based on the failure to take account of the commitments offered by Tetra, it is necessary to continue the examination of the second ground of appeal."
"In economic terms, it is not appropriate to exclude regulatory obligations that exist independently of a SMP finding on the market under consideration but that can have an impact on the SMP finding on the markets under consideration. From a methodological viewpoint obligations flowing from existing regulation, other than the specific regulation imposed on the basis of SMP status in the analysed market, must be taken into consideration when assessing the ability of an undertaking to behave independently of its competitors and customers on that market." (emphasis supplied).
The emphasised words bring out a distinction. It was appropriate to take into account the existence of the regulatory interconnection obligation on DTAG, but not the effect of regulation on the very parties whose market power was under consideration.
"The purpose of a Greenfield approach is indeed to avoid circularity in the market analysis by avoiding that, when as a result of existing regulation a market is found to be effectively competitive, which could result in withdrawing that regulation, the market may return to a situation when there is no longer effective competition. In other words any Greenfield approach must ensure that absence of SMP is only found and regulation only rolled back where markets have become sustainably competitive, and not where the absence of SMP is precisely the result of the regulation in place."
In other words, a potentially regulated person cannot claim that it does not have SMP because regulation has procured a situation in which it no longer has it. So long as it is regulation which is bringing about competitive outcomes, the markets are not competitive independently of that regulation. It follows that the potentially regulated person cannot say that it does not have SMP because the threat of regulation means that it does not have the necessary power. That would be circular and illogical. OFCOM relied on this reasoning.
COUNTERVAILING BUYER POWER
"absence of or low countervailing buyer power"
"4.21 Countervailing buyer power exists when a particular purchaser (or group of purchasers) of a good or service is sufficiently important to its supplier to influence the price charged for that good or service. In order to constrain the price effectively, the purchaser must be able to bring some pressure to bear on the supplier to prevent a price rise by exerting a credible threat, for example not to purchase or to self-provide.
4.22 In this case, the question of whether each MNO providing voice call termination has SMP depends on the extent to which its monopolistic position may be off-set by the buyer power of purchasers.
4.23 BT is the major buyer of voice call termination on mobile networks (see table 4.2 below). In theory BT might credibly threaten not to purchase termination from an MNO and this would deprive that MNO of the pricing freedom that it derives from its monopoly over termination. In practice, this issue is irrelevant since BT, even if it did have buyer power, has not been able to exert it because of its obligation to complete all calls whatever the terminating network. The reasons for this obligation will be set out in the document End to End Connectivity (to be published in May 2003). This regulatory requirement curbs any buyer power that BT may have and leaves the MNOs free to set terminating charges above the competitive level."
"3.32 Countervailing buyer power exists when a particular purchaser (or group of purchasers) of a good or service is sufficiently important to its supplier to influence the price charged for that good or service. In order to constrain the price effectively, the purchaser must be able to bring some pressure to bear on the supplier to prevent a price rise by exerting a credible threat, for example not to purchase or to self-provide.
3.33 In this case, the question of whether each MNO providing voice call termination has SMP depends on the extent to which its monopolistic position may be off-set by the buyer power of purchasers.
3.34 BT is the major buyer of voice call termination on mobile networks … [figures provided]. In theory, BT might credibly threaten not to purchase termination from an MNO and this would deprive that MNO of the pricing freedom that it derives from its monopoly over termination. In practice, this issue is irrelevant since BT, even if it did have buyer power, has not been able to exert it because of its obligation to complete all calls whatever the terminating network. The reasons for this obligation were set out in Oftel's guidance document End to End Connectivity (published in May 2003). That requirement curbs any buyer power that BT may have and leaves the MNOs free to set terminating charges above the competitive level.
3.35 In its response to the first consultation, '3' claimed that even with the existence of the end-to-end connectivity obligation conferred on BT, '3' does not have the ability to raise termination rates. Orange raised a similar concern in its response. The Director does not accept this claim. BT must ensure that its customers can call customers and services, irrespective of terminating network, i.e. it must provide end-to-end connectivity. It is therefore incorrect to assert that BT could properly exert countervailing buyer power to force an MNO to set to set lower termination rates with the threat of refusal to interconnect."
"3.30 In relation to the point about BT's countervailing buyer power, Ofcom does not believe that the existing regulatory framework would, in practice, allow BT (as an originating operator) to reject price increases by '3'. While, as '3' has pointed out, there are no formal conditions in place - because they have not previously been required - the May guidance explains that BT is expected to offer end-to-end connectivity in order to meet US0 requirements to provide publicly available telephone services. This weakens BT's bargaining position as it removes the threat of BT not providing connectivity if agreement over charges cannot be reached.
3.31 It is possible that during the initial interconnection negotiations between BT and '3', '3''s urgency to launch services was a relevant factor in the relative bargaining positions of each party. However, Ofcom's analysis in this market review must be forward-looking and consider '3"s likely position in the next 18-24 months. Therefore, Ofcom must also consider future negotiations between '3' and BT.
3.32 With such a forward-looking perspective, and with delay not such a critical issue for '3', it would be difficult to argue that '3' could not set excessive charges for the termination services provided to BT. With specific regard to '3''s evidence, Ofcom believes that it refers to the specific circumstances which '3' was in prior to offering services to the public. However, it does not provide a sufficient indication of how future negotiations with BT would run, given the change in '3''s circumstances (i.e. previously it required an interconnection agreement with BT to start operating, but that is no longer the case). It may be that existing contractual arrangements between '3' and BT make it difficult for '3' to raise charges from their current level. However, there is no arrangement in this contract for BT to ensure that charges fall over time from their current level (in line with costs). Some evidence of this is BTs inability to enforce reduced termination payments to '3' at the time of the 15 per cent charge reduction applied to the other MNOs in July 2003.
3.33 Hence, for the reasons set out above Ofcom considers that BT is under an obligation which leads to a position where it does not have countervailing buyer power that off-sets '3''s market power in call termination."
i) OFCOM's reasoning does not depend on any assessment of the actual relationship between H3G and BT; rather, it depends on its overall structure as defined by the connectivity obligation and the Interconnect Agreement with no assessment of how matters would be likely to work in practice.
ii) The connectivity obligation is probably the key factor. It is this that is said to negate (to an appropriate but otherwise undefined extent) the bargaining power that BT would otherwise have.
iii) As an aspect of (ii), no reasoning is provided as to why it was considered difficult to resist the notion that H3G could set excessive prices in the future, save for the existence of the Interconnect Agreement (by inference).
"64. The competitive pressure on a supplier is not only exercised by competitors but can also come from its customers. Even firms with very high market shares may not be in a position, post-merger, to significantly impede effective competition, in particular by acting to an appreciable extent independently of their customers, if the latter possess countervailing buyer power. Countervailing buyer power in this context should be understood as the bargaining strength that the buyer has vis-à-vis the seller in commercial negotiations due to its size, its commercial significance to the seller and its ability to switch to alternative suppliers.
65. The Commission considers, when relevant, to what extent customers will be in a position to counter the increase in market power that a merger would otherwise be likely to create. One source of countervailing buyer power would be if a customer could credibly threaten to resort, within a reasonable timeframe, to alternative sources of supply should the supplier decide to increase prices or to otherwise deteriorate quality or the conditions of delivery. This would be the case if the buyer could immediately switch to other suppliers, credibly threaten to vertically integrate into the upstream market or to sponsor upstream expansion or entry for instance by persuading a potential entrant to enter by committing to placing large orders with this company. It is more likely that large and sophisticated customers will possess this kind of countervailing buyer power than smaller firms in a fragmented industry. A buyer may also exercise countervailing buying power by refusing to buy other products produced by the supplier or, particularly, in the case of durable goods, delaying purchases.
66. In some cases it may be important to pay particular attention to the incentives of buyers to utilise their buyer power. For example, a downstream firm may not wish to make an investment in sponsoring new entry if the benefits of such entry in terms for lower input costs could also be reaped by its competitors."
These passages place considerable reliance on the ability of the purchaser to find an alternative supplier, and at the hearing before us so did OFCOM. Mr Roth drew our attention to two Commission decisions, in each of which he said the ability (or lack of ability) of the buyer to find an alternative source of supply was determinative. In Alcatel/Telettra (Case No IV/MO42 [1991] OJ L122/48), the sellers (Alcatel and Telettra) were suppliers of telecommunications equipment with very large market shares. They were the main suppliers to Telefonica, a substantial Spanish telecommunications operator. The high market share of the suppliers was capable of indicating dominance, but the Commission found that Telefonica was capable of increasing supplies from their competitors, and that prevented a conclusion that the suppliers had dominance. The decision in CVC/Lenzing (Case COMP/M.2187 [2004] OJ L143/1) was said by Mr Roth to demonstrate a decision the other way – the absence of an ability to substitute sources of supply meant that there was no CBP, and he relied on paragraph 193 of the Decision. These decisions demonstrated that the ability to find alternative sources of supply was key. In the present case BT had no alternative source of supply – no-one else could provide termination on H3G's network – and since it could not walk away (because of the end to end connectivity obligation) there was no countervailing buyer power to counteract the power of H3G in relation to its termination charges. That left H3G with SMP arising out of the factors appearing above.
a) The underlying principle in a case like this is whether there is effective competition. SMP is a tool in determining this question – indeed, it is the central tool.
b) Various factors are relevant in determining whether there is SMP, and one of those is CBP.
c) For these purposes the right question is not the binary one of whether CBP exists or not. In other words, it is not enough to ask whether there is CBP, and if so to hold that there cannot be SMP. CBP is the power of counterparties to offset the powers of the party whose allegedly superior powers are under consideration, and the important question is what degree of CBP is there, and (bearing in mind all the circumstances) does it operate to a sufficient extent so as to mean that there is no SMP? CBP is not an absolute concept in terms of its strength. It is a concept which embodies a possible range of strengths. In any case where it is relevant, the relevant question is likely to be not whether there is CBP or not, but whether there is any CBP, and if so how much and what effect does it have.
"Small networks will normally face some degree of buyer power that will limit greatly the associated market power … The existence of a regulatory requirement to negotiate interconnection in order to ensure end-to-end connectivity redresses this imbalance of market power. However, such a regulatory requirement would not endorse any attempt by a small network to set excessive termination charges. Consequently, there is still likely to be an imbalance of market power between large and small networks because it would be easier for a large network to initiate the step of raising call termination charges and it would be more difficult for a small network to resist a move by a large network to lower termination charges."
"…once it is clear that BT has an obligation to provide end-to-end connectivity and therefore must do a deal with H3G, which is the only source of access to subscribers on its network, BT has no effective negotiating ploys to counter H3G's market power derived from its 100% of the market and the absolute barriers to entry to that market. BT cannot walk away if it does not like the terms on offer. If it delayed unreasonably in reaching agreement it would face regulatory intervention. The inevitable conclusion therefore is that BT does not have sufficient buyer power to off-set H3G's position on H3G's own network.
Mr Roth emphasised this further when he said, in oral submissions:
"BT alone, it is found, did not have any buyer power because of end-to-end connectivity"
Thus OFCOM has maintained its position as to the effect of the end-to-end connectivity obligation.
"(1) In exercising their functions conferred by or under the Act, and these Regulations, the Secretary of State and the Director 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, and in doing so shall have regard to the following -
[a] the need to ensure satisfactory end-to-end communication for end-users; […]
[f] the principles of non-discrimination (including equal access) and proportionality;
[g] the need to maintain and develop a universal service.
[…]
(3) In pursuit of the aims stated in paragraph (1) above the Director may intervene at any time, and shall do so on the request of either party, in order to make a direction specifying issues which must be covered in an interconnection agreement, or to make a direction that specific conditions be observed by one or more parties to such an agreement. The Director may in exceptional circumstances make a direction that changes be made to interconnection agreements already concluded where it is justified to ensure effective competition or interoperability of services for users or both.
[…]
(6) Where there is a dispute concerning interconnection between organisations the Director shall, at the request of either party, take steps to resolve the dispute within six months of the date of the request. The direction which the Director makes to resolve the dispute shall represent a fair balance between the legitimate interests of both parties. The direction shall be notified to the parties and published in accordance with regulation 8(3). The parties concerned shall be given a full statement of the reasons on which it is based.
[…]
(8) In exercising his duties under paragraphs (6) and (7) above, the Director shall take into account inter alia -
[a] the interests of users; […]
[e] the desirability of ensuring equal access arrangements; […]
[k] the need to maintain a universal service.
[…]
(10) Where Public Operators described in Schedule 2 have not interconnected their facilities the Director may, in accordance with the principle of proportionality and in the interests of end-users, make a direction that the Public Operators concerned shall interconnect their facilities. Any such direction shall be made only as a last resort in order to promote essential public interests. The direction may, where appropriate, set the terms of interconnection."
"45.2 The Licensee or the Schedule 2 Public Operator may at any time request the Director to make a direction in order:
(a) to specify issues which must be covered in an Interconnection agreement;
(b) to lay down specific conditions to be observed by one or more parties to the agreement; or
(c) if he thinks fit, to set time limits within which negotiations are to be completed,
and a direction under this paragraph operates as an exercise by the Director of the power of direction conferred by regulation 6(3) or 6(4) of the Interconnection Regulations, as the case may be.
45.3 The Licensee shall secure that the agreement or amendment referred to in paragraph 45.1 above is offered on terms and conditions which are reasonable.
45.4 To the extent that the terms and conditions of any agreement or amendment made under paragraph 45.1 cease to be reasonable, the Licensee shall, within a reasonable period, offer to the Schedule 2 Public Operator, or agree with such Operator, as the case may be, to amend the agreement so that its terms and conditions are reasonable.
45.5 The Licensee shall:
(a) comply with the requirements of any directions given to the Licensee under paragraph 45.2 above or under regulation 6(3) or 6(4) of the Interconnection Regulations in relation to any negotiations or agreement to which it is or is intended to be a party;
(b) comply with the requirements of any direction given to the Licensee under regulation 6(6) or 6(7) of the Interconnection Regulations in relation to any dispute over the terms of an agreement or amendment made under paragraph 45.1 above;
(c) where the Director specifies conditions based on essential requirements pursuant to regulation 7(1) of the Interconnection Regulations for inclusion in an Interconnection agreement to which the Licensee is a party, forthwith secure the incorporation of those terms and conditions in such an agreement;
(d) comply with any requirement made by the Director as a last resort under regulation 6(10) of the Interconnection Regulations to interconnect in order to protect essential public interests, and comply with any terms set by the Director for such purpose;
(e) comply with any decision by the Director under regulation 10(2) of the Interconnection Regulations; and
(f) comply with any facility or property sharing arrangements, or both, specified by the Director in accordance with regulation 10(3) of the Interconnection Regulations.
45.6 So long as section 11 of the Restrictive Trade Practices Act 1976 is still in force an agreement made pursuant to this Condition shall not contain any restrictive provision, unless, before the agreement is made, the Director has consented to the inclusion of such a provision. For the purposes of this paragraph, a provision in an agreement is a restrictive provision if by virtue of the existence of such a provision (taken alone or with other provisions) the agreement is one to which the Restrictive Trade Practices Act 1976 would apply but for paragraph 1(1) of Schedule 3 to that Act.
45.7 Paragraph 45.1 above does not apply to the extent that the Director has consented to limiting such obligation on a temporary basis and on the grounds that there are technically and commercially viable alternatives to the Interconnection requested, and that the requested Interconnection is inappropriate in relation to the resources available to meet the request.
45.8 For the avoidance of doubt:
(a) any question as to whether any term or condition (including a charge) is reasonable shall be decided by the Director having regard to any guidelines on the application of this Condition issued from time to time by the Director; and
(b) in considering whether a term or condition (including a charge) is reasonable, the Director may take into account, inter alia, the effective date of the term or condition and the period during which such term or condition may already have been in effect; the Director may conclude that a reasonable charge is one which is offered or agreed, as the case may be, on terms that it take effect in agreements or amendments made under paragraph 45.1 above from the date of a complaint or the date on which the term was first offered by the Licensee or accepted by a Schedule 2 Public Operator or from any other date which is considered by the Director to be appropriate in the circumstances."
"3 General duties of OFCOM
(1) It shall be the principal duty of OFCOM, in carrying out their functions—
(a) to further the interests of citizens in relation to communications matters; and
(b) to further the interests of consumers in relevant markets, where
appropriate by promoting competition."
There then follow other qualifications and elaborations on the duties of OFCOM. Sections 45 and following empower OFCOM to impose various conditions on network suppliers and operators. It is not necessary to set them out in detail but they include the power to impose conditions as to access to networks.
"185. Reference of disputes to OFCOM
(1) This section applies in the case of a dispute relating to the provision of network access if it is-
(a) a dispute between different communications providers;
(b) a dispute between a communications provider and a person who makes associated facilities available;
(c) a dispute between different persons making such facilities available;
(d) a dispute relating to the subject-matter of a condition set under section 74(1) between a communications provider or person who makes associated facilities available and a person who (without being such a person) is a person to whom such a condition applies; or
(e) a dispute relating to the subject-matter of such a condition between different persons each of whom (without being a communications provider or a person who makes associated facilities available) is a person to whom such a condition applies.
(2) This section also applies in the case of any other dispute if-
(a) it relates to rights or obligations conferred or imposed by or under this Part or any of the enactments relating to the management of the radio spectrum that are not contained in this Part;
(b) it is a dispute between different communications providers; and
(c) it is not an excluded dispute.
(3) Any one or more of the parties to the dispute may refer it to OFCOM.
[…]
(8) For the purposes of this section—
(a) the disputes that relate to the provision of network access include disputes as to the terms or conditions on which it is or may be provided in a particular case; and
(b) the disputes that relate to an obligation include disputes as to the terms or conditions on which any transaction is to be entered into for the purpose of complying with that obligation.
[…]
186. Action by OFCOM on dispute reference
(1) This section applies where a dispute is referred to OFCOM under and in accordance with section 185.
(2) OFCOM must decide whether or not it is appropriate for them to handle the dispute
(3) Unless they consider-
(a) that there are alternative means available for resolving the dispute,
(b) that a resolution of the dispute by those means would be consistent with the Community requirements set out in section 4, and
(c) that a prompt and satisfactory resolution of the dispute is likely if those alternative means are used for resolving it,
their decision must be a decision that it is appropriate for them to handle the dispute.
[…]
188. Procedure for resolving disputes
(1) This section applies where—
(a) OFCOM have decided under section 186(2) that it is appropriate for them to handle a dispute; or
(b) a dispute is referred back to OFCOM under section 186(6).
(2) OFCOM must—
(a) consider the dispute; and
(b) make a determination for resolving it.
[…]
190. Resolution of referred disputes
(1) Where OFCOM make a determination for resolving a dispute referred to them under this Chapter, their only powers are those conferred by this section.
(2) Their main power (except in the case of a dispute relating to rights and obligations conferred or imposed by or under the enactments relating to the management of the radio spectrum) 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."
"2.10 Oftel proposes to continue the existing policy that USO providers, in meeting reasonable requests to provide access to PATS [Publicly Available Telephone Services] must ensure that their customers can call other customers and services irrespective of terminating network, that is they must provide end-to-end connectivity.
2.11 In the USO consultation document, Oftel is proposing to designate BT and Kingston as Universal Service providers, although Kingston's designation will only apply in respect of activities in the Hull area."
…
2.15 … Oftel recognises that the obligation on BT and Kingston to purchase call termination from other network providers could, in the absence of regulation, result in those other network providers exploiting their SMP and charging unreasonable prices when they sell termination services to BT and Kingston.
2.16 For this reason, Oftel has proposed that all fixed PECNs [Public Electronic Communications Networks] should be required to provide call termination to all other PECNs on fair and reasonable terms if in receipt of a reasonable request to do so. In the event of a dispute, the Director would decide what constitutes fair and reasonable terms."
"… DTAG [i.e. the operator] is generally obliged to interconnect with ANOs, but that such an obligation would not require DTAG to accept unreasonable conditions for interconnection. Hence, while DTAG would have an interconnection obligation, it could still refuse unacceptably high termination rates charged by an ANO, and thereby also exercise countervailing buyer power.
Following the Commission's criticism that the strict Greenfield approach seemed to be inappropriate in the circumstances of the German market, and that the modified Greenfield approach had been wrongly applied by [the regulator], [the regulator] undertook a new SMP assessment."
It should be noted that what is described as the modified Greenfield approach coincides with what we think the correct approach is in relation to this particular area, and that the Commission did not think that it was wrong in principle to take that approach.
"… where an operator is designated as having significant market power on a specific market … national regulatory authorities shall impose the obligations set out in Articles 9 to 13 of this Directive as appropriate".
Article 8(3) provides that:
"Without prejudice to:
the provisions of Articles 5(1), 5(2) and 6
…
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 is headed "Price control and cost accounting obligations" and provides that an NRA:
"… may, in accordance with the provisions of Article 8, impose obligations relating to cost recovery and price controls … where a market analysis indicates that a lack of effective competition means that the operator concerned might sustain prices at an excessively high level …"
Mr Roth submitted that a ruling by OFCOM as to the price which should be charged for interconnection (in order to resolve a dispute) was price control which Article 8(3) forbad in the absence of an SMP determination.
"Article 5
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;
…"
A power to resolve interconnection disputes is well within this wording, and there is no basis, as a matter of construction of Article 5, for separating out disputes as to price. Indeed, it would be illogical to do so. Pricing may be at the heart of a dispute; and some disputes about connection may have aspects which are not, by themselves, directly disputes about price, but may have pricing consequences so that one cannot decide one without the other. Determinations under this jurisdiction are not price control in the sense of Article 13. The two jurisdictions exist in parallel; the fact that Article 8(3) is without prejudice to the relevant parts of Article 5 demonstrates that they each have their separate existence.
"4.11 … Ofcom needs to form a view as to what is the appropriate way of exercising all of its powers under the Act in the circumstances of each case.
…
4.14 In this context, Ofcom notes it has the power to resolve the price increase dispute in question by determining that it will not prevent the increase until it has exercised its powers to set, inter alia, an SMP condition (see section 190(4) of the Act). Accordingly, Ofcom does not accept that it has made a material error of fact in rejecting dispute resolution as a constraint on the MNOs' ability to price excessively."
THE INTERCONNECT AGREEMENT AND DISPUTE RESOLUTION
"It is the creation in itself of [a dominant position] that the Merger Regulation is intended to prevent. The application of the Regulation is not affected by the argument developed by the notifying party that the clauses concerned may limit the capacity of the new entity to abuse its dominant position."
Analytically the reason for that is probably twofold.
a) First, the contractual position goes to the question of abuse, not whether there is SMP in the first place. This is the distinction drawn by this Tribunal in Napp Pharmaceutical Holdings Ltd and Subsidiaries v The Director General of Fair Trading [2002] CompAR 13, where a price control mechanism imposed by the NHS was held not to go to dominance for that reason – see paragraph 165. We consider the restraint in that case was analogous to the clause 13 mechanism for these purposes.
b) The second answer lies in identifying just what the clause 13 mechanism is. It is not actually a full third party arbitral mechanism of the kind one sees in, for example, a rent review clause. The arbiter in clause 13 is the regulator. The regulator's powers are conferred and constrained by statute, and while Ofcom's are extensive they do not include the power to be a third party arbitrator. In truth clause 13 does not invoke that latter sort of status. The sort of dispute that clause 13 contemplates is a form of interconnection dispute, which OFCOM would resolve as regulator, not as a third party dispute resolver. Its intervention would therefore be as regulator, and would be a form of regulation. It therefore falls to be disregarded, as a matter of principle, just as OFCOM's general presence as a regulator with a potential effect on the conduct of the putatively regulated person falls to be disregarded, for the reasons given above. This is the same point that we have considered and dealt with above. Accordingly we do not consider that the Clause 13 mechanism for dispute resolution has any material effect on the question of whether H3G had or has SMP.
CONCLUSIONS ON CBP
i) It will be remembered that BT did not accept the first price band proposed by H3G. It invited costs justification, and pointed out that matters had to be considered by the relevant Board. That might be said to say something about its negotiating power.
ii) H3G put in evidence before us a document which we do not think was before OFCOM, namely an internal H3G memorandum from about November 2001 in which two employees debate a strategy for determining the termination charges that should be sought form BT. It recognises:
"H3G's interconnect charge must be set at a level to maximise this revenue opportunity without being unacceptable to Oftel, or to our interconnect partners. A high interconnect charge will be reflected by other networks charging their customers a high retail price for calling to H3G."
Later it says:
"If BT reject H3G's proposed interconnect charges, and no agreement can be reached commercially, this will result in BT requesting Oftel to intervene and determine what charges should apply …"
Those two extracts do not support any assertion that H3G had a strong hand in determining the price, and there is nothing else in the memorandum which obviously does either. While it is true that this memorandum refers to delay it might be said to provide material (albeit from H3G's side and not BT's) which would support the idea that the negotiation with BT would be a genuine one and not one in which BT held few, if any, cards. If that was true, then it may be that the same sort of factors operate now (or would have operated at the future period to which the Decision looked).
THE ECAP DECISION
VIII CONCLUSION
"(3) The Tribunal's decision must include a decision as to what (if any) is the appropriate action for the decision-maker to take in relation to the subject-matter of the decision under appeal."
At present we consider that the appropriate direction would be to require OFCOM to reconsider its determination of SMP taking into account the extent to which countervailing buyer power exists in BT, and considering such other matters as are relevant as at the time of its reconsideration. However, we would wish to give the parties an opportunity to address us on the form of relief to be granted should they wish to do so.
The Hon Mr Justice Mann Adam Scott Paul Stoneman
Charles Dhanowa 29 November 2005
Registrar
Note 1 OJ [2002] L108/33. [Back] Note 2 OJ [2002] L108/7. [Back] Note 3 OJ [2002] L108/21. [Back] Note 4 OJ [2002] L108/51. [Back] Note 5 OJ [2002] L201/37. [Back] Note 6 The Privacy Directive, which establishes users’ rights with regard to the privacy of their communications, was adopted slightly later than the other Directives and was implemented by The Privacy and Electronic Communications (EC Directive) Regulations 2003, SI 2003/2426, which came into force on 11 December 2003.The Privacy Directive does not need to be considered for the purposes of the current appeal. [Back] Note 7 R (on the application of T-Mobile (UK) Ltd and others) v Competition Commission and others [2003] EWHC 1555 (Admin). [Back] Note 8 OJ [2003] L114/45. [Back] Note 9 As required by section 79 of the 2003 Act. [Back] Note 10 Oftel’s market review guidelines: criteria for the assessment of significant market power. [Back] Note 11 These four criteria are taken from those listed in the Commission Guidelines and the Oftel Guidelines. [Back] Note 12 Though we note that H3Gs’ submission in this respect was contrary to the stance that it adopted in its response to the May Consultation, in which it suggested that “no regulation” might be an appropriate end point even if SMP were found:
“1.6 Hutchison 3G therefore urges the director to reconsider his designation of SMP or to consider lesser remedies for Hutchison 3G (e.g. no regulation at all or imposition of a transparency obligation). To impose ex-ante regulation upon Hutchison 3G, as the Director proposes, would place the Director in breach of his duties and obligations to provide for appropriate regulation of telecommunications networks.”
[Back] Note 13 During the hearing Mr Green referred to excessive prices as prices that were above the Long Run Incremental Costs (LRIC) of 3G technology, such costs including the expenditure on the acquisition of the 3G licence. An alternative definition is prices that exceed the prices that would exist in the market in the absence of SMP (in the hands of any party). [Back] Note 14 Crehan v Inntrepreneur Pub Co [2004] EWCA Civ 637, 148 Sol Jo LB 662. [Back] Note 15 Case DE/2005/0239, Decision dated 28th September 2005 [Back]