Judgment (Non-specified price control matters)

Judgment of the Tribunal on the non-specified price control matters raised in an appeal by British Telecommunications PLC (“BT”) against the decision of the Office of Communications (“Ofcom”) contained in its Statement entitled “Fixed Access Market Reviews: Approach to the VULA margin” dated 19 March 2015 (the “Statement”).

VULA stands for “Virtual Unbundled Local Access”; it is the wholesale product through which communications providers have access to BT’s next generation network, which supports the provision of superfast broadband services to consumers. The Statement imposes a price control on BT that regulates the VULA margin (the difference between the wholesale price of VULA and the price of BT’s retail packages that use VULA as an input). The price control is intended to ensure that communications providers have sufficient margin to be able to compete with BT in the provision of superfast broadband packages to consumers.

Pursuant to the Communications Act 2003 (the “2003 Act”), Ofcom’s power to impose a price control on an operator with significant market power (in this case BT) is subject to section 88. This provides that Ofcom shall not set a price control unless it appears to them from the market analysis carried out for that purpose that “there is a relevant risk of adverse effects arising from price distortion”. There is such a risk if the operator with significant market power “might so impose a price squeeze as to have adverse consequences for end-users”.

BT’s grounds, and the Tribunal’s conclusions in relation to each of them, are summarised briefly below.

1. BT submitted that Ofcom had adopted the wrong approach to the assessment of relevant risk of adverse effects arising from a price squeeze. More specifically: (i) Ofcom’s power to impose a price control should be interpreted restrictively; and (ii) section 88 should be interpreted in light of the European jurisprudence on Article 102 of the Treaty on the Functioning of the European Union. On that view, a section 88 price squeeze should be equated with an Article 102 margin squeeze and Ofcom would only be able to impose a price control where adverse effects on end users were probable or likely.

The Tribunal held that BT had not shown that Ofcom had erred in this regard. The reasons BT put forward in support of its view that Ofcom’s powers to impose a price control were to be interpreted restrictively were not convincing. Neither the purpose nor the specific drafting of the legislation supported such a view; the other materials to which BT referred (namely case law and policy documents) were also not found to limit the scope of Ofcom’s powers in the way that BT alleged. Second, the Tribunal was not persuaded that the case law of the European Courts on margin squeeze under Article 102 is applicable in the context under consideration and it therefore does not limit Ofcom’s powers in the manner suggested by BT.

2. BT submitted that Ofcom erred in failing to take account in its market analysis of the legal and regulatory constraints affecting BT, namely (i) the deterrent effect of ex post competition law; (ii) the effect of undertakings in lieu of reference that BT had given in 2005 under the Enterprise Act 2002; and (iii) the FRAND obligation in respect of VULA to which BT was already subject.

The Tribunal disagreed with BT that Ofcom had erred in considering these legal and regulatory constraints in Section 4 of its Statement (which dealt with the manner in which Ofcom’s concerns regarding the VULA margin should be addressed) rather than in Section 3 (which set out Ofcom’s market analysis). The Tribunal concluded that the approach that Ofcom had taken was reasonable. Moreover, even if Ofcom had taken the approach which BT argued it should have taken, the conclusions reached were unlikely to have been any different. The Tribunal also found that Ofcom had given sufficient weight to these legal and regulatory constraints.

3. BT submitted that Ofcom had erred in analysing the incentives for BT to implement a price squeeze. In particular Ofcom had failed to investigate sufficiently a number of competitive constraints acting on BT in the retail broadband market. Ofcom also had not taken proper account of BT’s past conduct or the risks associated with regulating the VULA margin; finally Ofcom had failed to carry out a quantitative analysis of BT’s incentives.

The Tribunal rejected all of these arguments and concluded that BT had not shown that Ofcom had erred in its market analysis.

Accordingly, and for the reasons set out in the judgment, the Tribunal unanimously dismissed the non-specified price control matters in BT’s appeal.