Ofcom consults on exercising discretion to not order repayment in LLU dispute


Last week Ofcom started a consultation in relation to LLU charges in which is intending to not exercise its discretion to order repayment of overcharges. The circumstances in which repayment is ordered is currently a very live issue with BT, the regulator Ofcom and the alternative fixed operators taking different positions on the issue in various cases.

The positions are of course more nuanced than those summarised below, but can be crudely characterised (I am sure readers will correct any mischaracterisation!) as:

  • BT: whilst repayment is possible, there should be both evidence of actual economic harm and (perhaps) other aggravating features before repayment should be ordered. Repayment is similar to a fine or penalty and is a windfall in the hands of the recipient, so should only be ordered in exceptional circumstances.
  • Ofcom: repayment is a a discretionary power and should be assessed on the basis of what is fair between the parties and reasonable in the light of Ofcom’s statutory duties. Ofcom should also consider the effect of any repayment on consumers and competition (including incentive effects).
  • Alternative fixed network operators. Whilst individual operators take somewhat different views, there is a broad consensus view that where there has been breach of a regulatory obligation repayment should ordinarily follow. Repayment is by way of restitution and so to not order repayment would require exceptional circumstances.  

I’ll take a quick whistle-stop tour of the statute and recent cases before coming to the consultation. Starting with the statute, Section 190 of the Communications Act 2003 provides:

“190(2)  [Ofcom’s] main power … is to do one or more of the following:

(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.”

The Competition Appeal Tribunal (or CAT) is the UK appellant court for appealing certain Ofcom decisions (including those concerning the repayment of disputed amounts). Many telecoms disputes have rather complex factual backgrounds, so I’ll again summarise the background to focus on what the courts have said about the repayment issue.

As in many jurisdictions, the UK telecoms industry has fought long and hard over mobile termination rates. The relevant decision in the last cycle of cases to repayment was the core issues  ‘Termination Rates Dispute” or TRD judgment, where the CAT held:

“Section 190(2)(d) of the 2003 Act is a straightforward provision designed to ensure that OFCOM’s determination of what is a reasonable rate is backdated to the time at which that rate would have come into effect had the OCCN been accepted. It should ordinarily follow on from a determination that this kind of readjustment takes place. Otherwise the party which has wrongly resisted the proposed OCCN is in a better position than they would have been in had they accepted it without challenge.”

The CAT in the TRD case went on to reject as irrelevant arguments relating to whether the dispute rate had been passed onto (in this case wholesale) customers or not.

In the recent PPC decision (discussed here), the CAT held:

“338. We consider that OFCOM exercised its discretion properly under section 190(2)(d) for the following reasons:
(1) As we have noted, such discretion as OFCOM has under section 190(2)(d) is a “hard” discretion confined to requiring OFCOM to follow through on the conclusions it has drawn pursuant to the Dispute Resolution Process. Here, OFCOM concluded that there had been overcharging by BT in that its prices for 2 Mbit/s trunk were not cost orientated.
(2) Given this conclusion, it is plain that the Altnets have overpaid in respect of 2 Mbit/s trunk, and that BT has had the benefit of such overpayments. Repayment is simply putting the parties in the position they would have been in had Condition H3.1 been complied with. Failure to do so would undoubtedly signal that compliance with SMP conditions is not rigorously policed and that – we consider – is an inappropriate signal to send. Had BT carefully sought to apply Condition H3.1, but failed, then we consider that that should have been taken into account, and the amount BT would have to pay reduced. But that is not so in this case. This is a case where BT has comprehensively misconstrued the obligation on it, and
overcharged as a result. Any shift away from the restitutionary approach that we have described would, so we conclude, be unjustifiable.
(3) BT, on a number of occasions sought to characterise OFCOM’s direction as the imposition of a penalty (Notice of Appeal, paragraphs 34, 63(d), 218; Mr Read also referred to it as a “punitive measure” (Transcript, Day one, page 3)). We reject this characterisation. OFCOM’s direction, as we have noted, was not intended (and did not) penalise BT, but sought to rectify some (but probably not all) of the adverse effects of BT’s failure to comply with Condition H3.1. In so acting, OFCOM was acting consistently with a number of cases stating that where a person is given the power to levy charges, if that person charges excessively, then the excess is recoverable at the instance of the person who has overpaid: see, for instance, Corporation of Stamford v Pawlett (1830) 1 C & J 57 at 80- 81, 148 ER 1334.
(4) In these circumstances, we fail to understand BT’s contention that economic harm needs to be taken into account. This contention was summarised in paragraph 313(1) above. As we have concluded, we consider that establishing economic harm is not a pre-requisite for showing a breach of Condition H3.1, simply because Condition H3.1 is itself based on a strong assumption that SMP would be very likely to cause economic harm if the condition is not complied with…”

Last week, the CAT refused BT permission to appeal the PPC decision. One of BT’s grounds related to section 190(2)(d), in relation to which the CAT found:

“…we are not persuaded by BT’s Request for Permission to Appeal that there was any incorrect exercise of discretion by OFCOM pursuant to its powers under section 190(2)(d), nor that [the para quoted above] of the Judgment is wrong on a point of law.”

Ofcom was of course mindful of these prior judgments when considering the LLU dispute.

Ofcom therefore carefully analyse the factual background in their consultation and they distinguish the LLU dispute from both TRD and PPC on a factual basis. The key distinctions they draw is that at the relevant time, BT was:

  1. not in breach of a relevant regulatory obligation (although as this was a result of Ofcom’s error, it is interesting to speculate as to where the disputants might go next if Ofcom succeed with this line); and
  2. that as a result of ‘passing on’ there was no ‘economic harm’ to consumers or competition.

The watcher looks forward with interest to the responses to the consultation.  Whilst the first contention is true as a factual matter, it is by no means obvious that it leads to the conclusion Ofcom draws. On the second issue, given the unsettled position of the ‘passing on’ defence within European Competition jurisprudence (and the clearer US position), I wonder if Ofcom are ready to deal with the can of worms they have stumbled against, kicked over and will now have to deal with?

The Watcher needs to declare an interest: he has represented the altnets in many of these proceedings, so readers should ‘filter’ this post accordingly.

About Rob Bratby

Telecommunications, media and technology lawyer advising companies across Europe and Asia
This entry was posted in Broadband, Court decision, EU, Fixed, Mobile, Regulatory action, Telecoms, UK and tagged , , , , , . Bookmark the permalink.

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