A rare foray by the UK Supreme Court into telecoms regulation provides a fascinating insight into the standard of review applicable by the Competition Appeal Tribunal (CAT) of regulatory decisions. The judgment also provides a useful statement of principle as to the relevant evidence a regulator can take into account in reaching a decision.
In BT v Telefónica O2 and Ors the Supreme Court considered regulatory principles applied by Ofcom, in using its statutory adjudication powers under the Framework Directive (2002/19/EC) to resolve a dispute between BT and four mobile network operators on the pricing applied to termination charges for non-geographic numbers. Such numbers allow premium rates to be charged to consumers.
In summary, a dispute came for adjudication before Ofcom when BT exercised a contractual variation right to implement a new interconnection pricing scheme. Under this scheme, prices would change according to the price the originating mobile network charged the customer. The networks complained to Ofcom that the proposed change was anticompetitive.
Following the completion of its statutory adjudication procedure, Ofcom agreed – it found BT had failed to demonstrate the change would benefit consumers. BT appealed Ofcom’s decision to the CAT, which conducted an appeal ‘on the merits’ and rejected Ofcom’s evaluation of the pricing structure as anticompetitive. The mobile operators appealed the CAT’s judgment to the Court of Appeal, which reversed the CAT decision. Finally, BT appealed this judgment to the Supreme Court.
The Supreme Court’s unanimous judgment (given by Lord Sumption) considers the EU Common Regulatory Framework for telecoms, of which the Framework Directive forms part, in depth. It provides useful comment on the nature of the regulator’s assessment and the role of the Courts in evaluating such assessments on appeal. The judgment also contained several broad statements of principle worth highlighting:
• Lord Sumption emphasised that freedom of contract is the primary subject of regulation. At paragraph 34 he stated: “The terms of the interconnection agreement are the necessary starting point for this process. If there is no contractual right to vary the charges, it is difficult to see how Ofcom can approve a variation unless it is necessary to achieve end-to-end connectivity (for example to enable operators to recover their efficient costs) or to achieve the Article 8 objectives. If there is a contractual right to a variation, but the proposed variation is not consistent with the Article 8 objectives, Ofcom may reject the variation.”
• At paragraph 42 Lord Sumption ruled that the burden of proof was on Ofcom to show consumer harm arose if it wished to reject a contractual variation proposed by BT: “the sole basis on which Ofcom rejected the new charges was that the welfare test having been inconclusive, it had not been demonstrated that BT’s new schedule of charges would produce consumer benefits. In my opinion, this was wrong in principle, […]. BT were contractually entitled to vary their charges unless the proposed variations were inconsistent with the Article 8 objectives, including the objective of ensuring consumer benefit in accordance with Article 8.2(a).” At paragraph 46 he also endorsed the CAT’s finding of fact that: “the effect of not allowing BT to introduce innovative charging structures was itself anticompetitive because innovative pricing structures are an effective mode of competing.”
The Supreme Court’s approach is refreshing. As a matter of principle it is surely correct that courts and regulators should intervene in markets only where good evidence supports such intervention. The burden of proof is correctly placed on the regulator (or complainant). It cannot be right that a regulated firm (or, for that matter, a dominant firm) should be required positively to demonstrate consumer benefit in order to be permitted to make an innovative change.