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.

Ofcom issue revised penalty guidelines

Ofcom today issued revised guidelines on the penalties they may impose on those breaching rules policed by Ofcom. The new guidelines replace prior guidelines dating from 2003 and apply to a rag-bag of over 40 potential contraventions, although significantly not competition law.

In a departure from Ofcom’s default ‘if in doubt write a long document’ approach, the guidelines are refreshingly short:

Ofcom will consider all the circumstances of the case in the round in order to determine the appropriate and proportionate amount of any penalty. The central objective of imposing a penalty is deterrence. The amount of any penalty must be sufficient to ensure that it will act as an effective incentive to compliance, having regard to the seriousness of the infringement.

The factors taken into account in each case will vary, depending on what is relevant. Some examples of potentially relevant factors are:

  • The degree of harm, whether actual or potential, caused by the contravention, including any increased cost incurred by consumers or other market participants;
  • The duration of the contravention;
  • Any gain (financial or otherwise) made by the regulated body in breach (or any connected body) as a result of the contravention;
  • Any steps taken for remedying the consequences of the contravention;
  • Whether the regulated body in breach has a history of contraventions (repeated contraventions may lead to significantly increased penalties);
  • Whether in all the circumstances appropriate steps had been taken by the regulated body to prevent the contravention;
  • The extent to which the contravention occurred intentionally or recklessly, including the extent to which senior management knew, or ought to have known, that a contravention was occurring or would occur;
  • Whether the contravention in question continued, or timely and effective steps were taken to end it, once the regulated body became aware of it; and
  • The extent to which the level of penalty is proportionate, taking into account the size and turnover of the regulated body.

 

Ofcom revise dispute resolution guidelines

Ofcom yesterday published revised guidelines for the handling of regulatory disputes. Whilst these revised guidelines are ostensibly a response to the revised European Regulatory Framework, as implemented by the Electronic Communications and Wireless Telegraphy Regulations 2011 (SI 2011/1210), in reality they also address significant judicial criticism of Ofcom’s approach to dispute handling. The apogee of this criticism was perhaps the CAT judgment on the core issues in the mobile termination rates case, where the CAT found that Ofcom had not approached dispute resolution in the right way. As well as ruling on the issues before it, in its judgment the CAT laid out detailed guidance as to how Ofcom should approach dispute resolution on a forward-looking basis – see paragraphs 175 onwards of that judgment for details. The new guidelines replace Ofcom’s (now largely ignored in practice) 2004 Guidelines, and 2006 draft (but never adopted) guidelines.

Summary of changes

Required by legislation

Ofcom summarise the key changes required by legislative change as being:

“the replacement of the duty on Ofcom to resolve network access disputes with a discretionary power for Ofcom to intervene in such disputes, [which means that] Ofcom’s mandatory duty to resolve disputes now relates only to existing obligations imposed on communications providers;

the expansion of the category of persons able to refer certain disputes to Ofcom for resolution;

a new requirement for National Regulatory Authorities (NRAs) involved in cross-border disputes to co-ordinate their activities and a power for Ofcom to seek an opinion from the Body of European Regulators for Electronic Communications (BEREC); and

the introduction of a discretionary power allowing Ofcom to recover its costs in resolving disputes from disputing parties.”

Other changes 

Ofcom has also introduced other changes to its procedure and processes, although as its  practice already diverges de facto from the 2004 guidelines (in the light of CAT criticism), it is perhaps more useful to review the new process as a whole,than to just focus on the changes.

Overview of dispute resolution process

Informal discussion

Ofcom encourage parties to speak to them informally before submitting a dispute. This is current best practice as it is often helpful in putting pressure on the other party to meaningfully negotiate and to gauge Ofcom’s likely reception of a dispute.

Formal dispute submission

The formal process starts with an ‘adequate, well-reasoned submission supported by evidence’,  following the format set out in schedule 6 to the new guidelines. The revised format largely builds on the existing requirements, but with more detail. By way of example. there is now a requirement to provide the following supporting information (or a justification as to why it is not relevant or available):

  • copies of the relevant contract or terms which are the subject of the dispute (see Section B);
  • business plans relating to the relevant product or service (see Section B);
  • all relevant documentary evidence of commercial negotiations between the Parties relating to the disputed matter or matters (see Section C);
  • relevant details about the provision of the product or service in question;
  • a full chronology of all the relevant facts;
  • detailed and specific cost/price information for the provision of the relevant product or service, as well as cost/price trends (where available). In all cases, costs/price information and data must, in view of the strict statutory timetable for resolving disputes, be presented in a usable format, including, where relevant, a fully executable model;
  • full and complete benchmarking data. This could be on an international, industry or other basis. In the alternative, explain why no such data is available or relevant; and
  • all relevant previous decisions, determinations, rulings by courts/tribunals, guidance, opinions/recommendations and policy statements at the UK or EC level.

The final requirement is new and is likely to result in Communications Providers needing more legal support (internally or externally) than has previously been the case and is the final nail in the coffin for the submission of disputes on a ‘quick and dirty’ basis.

Enquiry Stage

After submission of the dispute, the next phase is the enquiry stage, during which Ofcom will send a non-confidential version of the submission to other party to the dispute, invite comments and (in a change to current practice) share those comments with the submitting party. In another change to current procedure, Ofcom will then generally hold an all parties “Enquiry Phase Meeting”, which seems to have some similarities with a case management conference, although it doesn’t appear to be limited to solely procedural discussions. Prior to the Enquiry Phase Meeting the parties will be required to fill in a new pre-EPM questionnaire.

Following the EPM, Ofcom will decided whether it is appropriate for it to resolve the dispute – if it does so, a summary of the dispute will be published on the Ofcom web-site and the dispute will become public.

Resolution process

Ofcom may (but is not obliged) to consider similar disputes together.

There is some discussion of how it will approach cross-border disputes, but we will need to see how that works in practice.

Ofcom will generally use its statutory information gathering powers to request information from parties to the dispute, and in a change from current practice will not consult on these requests. It will generally set a 5-10 day deadline for a response.

The new guidelines summarise the potential remedies and approach that Ofcom will take to resolving disputes, but in practice the parties will look to the statute and CAT decisions for detail – not the new guidelines which very deliberately do not seek fetter Ofcom’s discretion in those respects.

Dispute Consultation – consultation on skeleton reasoning and conclusion at week 8, rather than full draft resolution

In another change to current practice, rather than consulting on a full draft resolution late in the process, Ofcom will now seek to consult on a skeleton of their provisional conclusions by around week 8 of the process. They will try to give parties a 15 day response window.   

New provisions on costs

The guidelines do not set out in detail how the new powers to recover costs will be applied in practice – that will be the subject of a further consultation. However, Ofcom do flag that costs orders will be used to incentivise the parties to explore other avenues of resolution, rather than using Ofcom as a first port of call.

Ofcom has wide jurisdiction and discretion to accept and resolve disputes

The CAT today rejected BT’s arguments that Ofcom has a narrow jurisdiction to accept and resolve disputes referred to it by Communications Providers pursuant to Section 185 of the Communications Act 2003.

The CAT joined two cases (one relating to ‘ladder pricing’  and one to charges for ethernet services above DSAC) in both of which BT alleged that Ofcom had no jurisdiction to determine the alleged disputes because:

  1. No dispute existed. BT contended that whilst there remained any scope for resolution of issues through, inter alia, future negotiation, no dispute existed. It relied on (i) the 32nd recital of the Framework Directive as modifying the meaning of ‘dispute’ in article 20 of the Framework Directive and article 5 of the Access Directive so as to require that all negotiations have been exhausted; (ii) Ofcom’s 2004 Disputes and Complaints Guidance; and/or; (iii) a ‘floodgates’ policy argument.  The CAT rejected all BT’s arguments.
  2. Alternative dispute resolution means were available. BT argued that (i) future negotiation constituted alternative means; and/or (ii) Ofcom should have used its Condition enforcement powers. The CAT again rejected both arguments.

The Watcher needs to declare an interest: he represented an intervener in this appeal, so readers should ‘filter’ this post accordingly.

UK implementation of revised EU telecoms (electronic communications) framework published

The UK’s Department for Culture, Media and Sport (and although not in the title, telecoms) today published its response to the consultation on implementation of the revised EU electronic communications framework in the UK.

In contrast to the original introduction of the current EU Framework in 2003 which necessitated tearing up the Telecommunications Act 1984 and replacing it with the Communications Act 2003, the changes are evolutionary, rather than revolutionary. The statutory changes will be implemented by statutory instruments that will be laid in early May, with other changes being effected by Ofcom and/or the Information Commissioner by 25 May. Nevertheless, some of the changes are more material, and they are summarised below.

The current changes are not the final word with the Government confirming that it will be undertaking a wholesale review of the Communications Act. This will kick off with an open letter in May.

  1. Appeals. Despite (or perhaps because of) the level of interest in reforming the current ‘on the merits’ appeal regime, this issue has been deferred to further consultation. The response does say that they consider that the current rules ‘gold-plate’ the European requirements and that moving to a Judicial Review standard (which would  make it more difficult to challenge decisions than currently is the case) would be appropriate.
  2. Network and service security and integrity. The new requirements will be ‘copied out’ which leaves a degree of ambiguity as to their meaning. It is proposed that clarity will come from Ofcom guidance, which will refer out to the existing security concepts in ND1643.
  3. Dispute resolution.  A wider group (‘one-step beneficiaries’) will be entitled to refer disputes whilst Ofcom will no longer be compelled to resolve ‘free-standing disputes’ not related to existing obligations or be required to resolve network access disputes (although it will obtain a new discretion to resolve network access disputes). Ofcom will gain new powers to recover its costs from complainants dependent on their conduct and the outcome of the dispute.
  4. Ofcom’s information gathering powers. These have been significantly widened, and Ofcom may levy fines of up to £2 million for non-compliance.
  5. Ofcom enforcement. The one month remedy window in relation to contravention notices has been replaced by a flexible ‘reasonable time for response’, and penalties for non-compliance may be periodic and/or have retroactive effect.  
  6. Power to impose Maximum Retail Tariff. Ofcom will gain new powers to impose maximum retail tariffs. It is likely to be used almost immediately in relation to non-geographic call pricing.
  7. Net Neutrality. The response takes a light touch approach to the issue of minimum quality of service (one aspect of net neutrality) with no significant additional obligations.
  8. Personal data breach notifications. The response reaffirms a ‘copy-out approach’, subject to three additions: new powers will permit the imposition of civil monetary penalties, provide for audit rights and make provisions for obtaining information from third parties. The Information Commissioner will be consulting on detailed enforcement guidance.
  9. Cookies.  See the post on the excellent Datonomy blog.

In summary, it would seem that the response ducks or defers many of the more complex issues, so those debates will continue in the context of the Communications Act review.

Fresh evidence may be introduced in telecoms appeals

Yesterday the Court of Appeal confirmed (in British Telecommunications Plc v Office of Communications [2011] EWCA Civ 245 , judgment of 10 March 2011) that there was no basis for restricting the introduction of fresh evidence into an appeal against a decision of Ofcom made pursuant to the Communications Act 2003.

The procedural point arose in one of the ‘Ladder Pricing’ appeals relating to non-geographic number termination rates (080) – see prior blog post for more detail on the substantive issue – when Ofcom objected to BT’s introduction of fresh expert economic evidence into the appeal. BT’s evidence in question had not been submitted to Ofcom by BT in the course of Ofcom’s first instance dispute resolution process, and Ofcom argued that either: (i) as a matter of statutory construction of the Communications Act; or (ii) as a general principle of common law, the fresh evidence should be excluded.

The CAT decided that BT could introduce fresh evidence at the CAT and Ofcom appealed that decision to the Court of Appeal. The Court of Appeal rejected Ofcom’s submissions, although it noted that there was not an unfettered right to introduce evidence, and that admissibility was at the CAT’s discretion. The question for the CAT was whether in all the circumstances that it considered that it would be in the interest of justice for new evidence to be admitted.

Against the increasing trend for Ofcom decisions to be appealed, this ruling may help to streamline Ofcom’s dispute resolution process as the parties will no longer feel compelled to argue every conceivable point before Ofcom to preserve their position on appeal, but instead will focus on the core issues for Ofcom to consider in what is (at least in theory) meant to be a swift process.

Rules applicable to all UK telecoms operators to change

Last week Ofcom started a consultation on revising the UK’s General Conditions of Entitlement and Universal Service Conditions. The consultation closes on 7 April, and will be followed by a statement, with implementation on or before 25 May 2011.

The changes are part of the UK’s implementation of the revised European Framework for electronic communications. In addition, (although not expressly part of this consultation) the UK will need to take account of the recent European judgment on the UK’s Court of Appeal’s reference as to what obligations may lawfully be imposed on designated universal service providers. This Ofcom consultation follows the broader, now closed (with responsibility transferred to DCMS), BIS consultation which covers wider changes to the Communications Act 2003, the Wireless Telegraphy Act 2006 and the Privacy and Electronic Communications Regulations 2003.

Within Europe and the UK, the scope of telecoms (or as it is more accurately now described, electronic communications) regulation is very broad, and as (some of) the General Conditions do, and will continue to, apply to any Communications Provider, the consultation will be of broad interest.

The main changes proposed are:

  • a requirement that number portability takes place within one working day of an activation request being received by a donor Communications Provider. This will apply to fixed, mobile and bulk mobile porting requests and is to be backed up by accessible compensation schemes where this deadline is not met (GC18);
  • access to emergency services (112/999) is to be provided via  SMS (GC15) as well as clarifying the scope of the access and the provision of location information obligation on network providers, resellers, VoIP providers (GC4);
  • changes to mandatory contract terms (GC9):
  1. ‘the maximum duration of initial consumer contracts will be 2 years; and users generally must be offered an option to contract for the provision of public electronic communication services and also make this information available to other end-users on request;
  2. subscribers must be able to withdraw from contracts penalty-free following a notice of contract modifications; and for a maximum duration of 12 months; and
  3. contract termination conditions and procedures for termination must not act as a disincentive to end-users from switching their providers.’;
  • an extension of the requirement to maintain proper and effective functioning of the network to mobile and nomadic networks (GC3);
  • the introduction of a process for transferring number allocations and permitting time-limited number allocations (GC17); and
  • the introduction of an obligation on Communications Providers to provide end-users with access and the ability to use services behind any numbers in the European numbering plan, including non-geographic numbers. Although the wording change appears small, this could have significant impact on access to VoIP and other services (GC20).

Whenever changes are made to rules with general application it is inevitable that in addition to the intended consequences there will be unexpected or unintended consequences. Whilst contemporary press coverage focused on the changes to contract terms affecting retail contracts for smart phone contracts (views were mixed), and access to emergency services via SMSs (positively received) my suspicion is that the more ‘technical’ changes to the definitions, requirements to maintain network functionality, provision of location data, ‘number trading’ and most importantly the end-user right to access and use services will have much more significant long-term impact, even though not highlighted in Ofcom’s executive summary.