UK: CAT Provides Guidance On Ofcom’s Dispute Resolution Powers

Last Updated: 11 July 2008
Article by Niamh Grogan and Neil Davies

On 20 May the Competition Appeal Tribunal (CAT) handed down its judgment in the termination rate dispute appeals. In that judgment the CAT overturned Ofcom's decisions in a number of disputes that had arisen between mobile network operators (MNOs) and BT, finding that Ofcom had made a number of errors in its approach and had misapplied its dispute resolution powers.

The CAT has expressly considered the nature of Ofcom's dispute resolution powers and provided guidance to Ofcom on how it should exercise those powers in the future. This article considers that new guidance.

OFCOM'S DISPUTE RESOLUTION POWERS

By virtue of the Communications Act (CA) 2003, Ofcom has powers to resolve disputes arising between operators regarding the provision of network access and/or other regulatory conditions imposed by Ofcom. Such disputes arise when there has been a failure of commercial negotiations between the parties.

This is distinct from and in addition to Ofcom's power to investigate complaints into alleged breaches of competition law and/or specific ex ante regulatory conditions. On accepting a dispute, Ofcom is obliged to consider and resolve it within four months, unless there are exceptional circumstances justifying a longer period.

Ofcom published guidance on its handling of disputes in July 2004. That guidance set out the process Ofcom uses when determining disputes, as well as the submission standards expected from referring parties. Ofcom's approach has now been called into question by the CAT's judgment.

TERMINATION RATE DISPUTES

The disputes in question arose in 2006 between BT and all of the MNOs, as well as between H3G, O2 and Orange, concerning the level of charges for wholesale mobile call termination. At the time of the disputes the MNOs' charges for terminating calls on their 2G mobile telephone networks were capped in accordance with price controls imposed by Ofcom in 2004. However, the MNOs' charges for terminating calls on their 3G networks were not, at that point, subject to a price cap (Ofcom imposed new charge controls on both 2G and 3G mobile call termination rates from 1 April 2007). Each of the MNOs had sought to charge a termination rate representing a blend of the regulated 2G rate and the unregulated 3G rate.

BT rejected those charges and Ofcom was requested to determine the appropriate rate. Ofcom resolved the disputes in favour of the MNOs, finding that the blended charges were reasonable. This determination was then appealed to the CAT by a number of parties, including BT and other fixed network operators.

GUIDANCE ON OFCOM'S DISPUTE RESOLUTION POWERS

Overturning Ofcom's determination of these disputes, the CAT found that Ofcom had made a number of legal errors in its approach and had misapplied its dispute resolution powers.

In particular, Ofcom's approach to resolving the disputes had been to ask whether, in light of the parties' existing regulatory obligations (eg, the charge controls in effect at the time), there was any reason why the charges proposed by the MNOs should not be accepted. This, the CAT found, was an inadequate approach, as it failed to have sufficient regard for Ofcom's other statutory duties, which are to be found in ss3-4 CA 2003. In the words of the CAT:

'Ofcom failed to recognise that dispute resolution is itself a third regulatory restraint that operates in addition to other ex ante obligations and ex post competition law'.

Thus, Ofcom's power to determine disputes is an autonomous regulatory process and should not be directed solely at bolstering pre-existing regulatory constraints.

Following requests from the appeal parties and from Ofcom itself, the CAT went on in its judgment to provide some general guidance to Ofcom on how it should resolve disputes under s185 CA 2003.

Consideration of why the dispute has arisen The CAT notes that in many cases a dispute will have arisen in the context of an existing commercial relationship in which one party is seeking to vary terms. As such, the onus to justify lies on the party proposing the variation. Ofcom's first task is to examine whether those reasons are justified, considering what is fair between the parties and what is reasonable from the point of view of Ofcom's regulatory objectives.

If it is clear that the reasons put forward do not justify the change in terms, Ofcom can resolve the dispute simply by upholding the rejection of the proposed change. Conversely, if it is clear that the reasons for rejecting the proposed change are unfounded, Ofcom can resolve the dispute by upholding the proposed change.

However, even if it decides that the arguments put forward by one party are misconceived, Ofcom is obliged to consider whether the outcome is consistent with its other regulatory obligations. The CAT explains that this does not mean that Ofcom must examine the entirety of the agreement in question afresh, but it is however required to consider the exercise of its other powers under CA 2003 that have not been put in issue by the parties. If there are such grounds, Ofcom is entitled to investigate them further. Ofcom cannot ignore those issues in the context of the dispute on the grounds that they could be dealt with by way of further market review or by the application of competition law.

Crucially however, Ofcom is not obliged to accept the position proposed by one or other of the parties. It can come to a different conclusion in order to meet its regulatory objectives. This reflects the fact that Ofcom carries out its dispute resolution powers as a regulator, not as a commercial arbitrator.

Information about costs

If there is merit on both sides of the dispute, Ofcom is required to consider and adjudicate on the reasons proposed for changing the contractual terms. In doing so, the parties are entitled to raise new arguments not previously relied on during commercial negotiations. Ofcom is entitled to request information from the parties on issues that it considers to be important. When Ofcom considers that the relationship between prices and costs is relevant and/or when the issue of costs is put in issue by the parties, it will be required to undertake an analysis of whether the change in price is fair and reasonable in light of that party's costs. In doing so, Ofcom is entitled to and should make use of relevant information in its possession by virtue of its other regulatory activities. The CAT stresses, however, that this costs analysis need not be as detailed as would be required for the purposes of a market review.

Benchmarking

Ofcom should contemplate the value of comparisons put forward by the parties and consider what they show about the reasonableness of the charges or other terms and conditions being proposed.

However, the CAT urges caution when benchmarking against existing or proposed price control caps. Any such benchmarking should be done while ensuring that parties are not deprived of the advantages of cost reductions or other efficiency savings that price controls are supposed to encourage.

Consideration of other regulatory objectives

The CAT stresses that in any dispute determination it would expect to see some discussion of which of Ofcom's statutory duties are engaged by the dispute and how the proposed resolution of the dispute meets those objectives. For instance, the requirement to promote competition, pursuant to s4(3) CA 2003, obliges Ofcom to take account of the interests of other market participants.

The main way in which relevant interests are taken into account is consultation on the draft determination. The CAT states that it is therefore important to invite and consider the view of operators other than the parties to the dispute. Ofcom is therefore required to ensure that the information published regarding the dispute is sufficiently detailed to enable third parties to appreciate its effects upon them.

Resolution Of The Disputes

CA 2003 requires the CAT to remit the disputes back to Ofcom with directions as it considers appropriate. Interestingly, given the guidance it has given to Ofcom on the nature of its dispute resolution powers, the CAT has decided to determine the appropriate rate for call termination itself during the relevant period before remitting the matter back to Ofcom and directing it to fix certain rates.

In order to do so, the CAT has invited the parties to submit further contemporaneous evidence on which they rely to justify a change in price. The CAT's own determination of the disputes, in accordance with its own guidance, should become the textbook example of how to resolve similar disputes.

Comment

Since the CAT's judgment, Ofcom has announced that it is preparing for consultation a revised set of draft guidelines dedicated to the determination of disputes. In the meantime, Ofcom has indicated that it will examine disputes referred to it on a case-by-case basis to determine the impact of the CAT's guidance.

In light of the commercial importance to operators of Ofcom's dispute resolution powers, the CAT's guidance should contribute welcome certainty for the future. It remains to be seen whether this will translate into a reduction in the number of Ofcom's dispute resolution decisions ending up before the CAT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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