"shall secure, and shall be able to demonstrate to the satisfaction of Ofcom, that each and every charge offered, payable or proposed for Network Access covered by condition HH1 [4] is reasonably derived from the costs of provision based on a forward looking long run incremental cost approach and allowing an appropriate mark up for the recovery of common costs including an appropriate return on capital employed."
"Article 13 Price control and cost accounting obligations 1. A national regulatory authority may, in accordance with the provisions of Article 8, impose obligations relating to cost recovery and price controls, including obligations for cost orientation of prices and obligations concerning cost accounting systems, for the provision of specific types of interconnection and/or access, in situations where a market analysis indicates that a lack of effective competition means that the operator concerned might sustain prices at an excessively high level, or apply a price squeeze, to the detriment of end-users. National regulatory authorities shall take into account the investment made by the operator and allow him a reasonable rate of return on adequate capital employed, taking into account the risks involved. [10] 2. National regulatory authorities shall ensure that any cost recovery mechanism or pricing methodology that is mandated serves to promote efficiency and sustainable competition and maximise consumer benefits. In this regard national regulatory authorities may also take account of prices available in comparable competitive markets. 3. Where an operator has an obligation regarding the cost orientation of its prices, the burden of proof that charges are derived from costs including a reasonable rate of return on investment shall lie with the operator concerned. For the purpose of calculating the cost of efficient provision of services, national regulatory authorities may use cost accounting methods independent of those used by the undertaking. National regulatory authorities may require an operator to provide full justification for its prices, and may, where appropriate, require prices to be adjusted."
"Price control may be necessary when market analysis in a particular market reveals inefficient competition. The regulatory intervention may be relatively light, such as an obligation that prices for carrier selection are reasonable as laid down in Directive 97/33/EC, or much heavier such as an obligation that prices are cost oriented to provide full justification for those prices where competition is not sufficiently strong to prevent excessive pricing. In particular, operators with significant market power should avoid a price squeeze whereby the difference between their retail prices and the interconnection prices charged to competitors who provide similar retail services is not adequate to ensure sustainable competition. When a national regulatory authority calculates costs incurred in establishing a service mandated under this Directive, it is appropriate to allow a reasonable return on the capital employed including appropriate labour and building costs, with the value of capital adjusted where necessary to reflect the current valuation of assets and efficiency of operations. The method of cost recovery should be appropriate to the circumstances taking account of the need to promote efficiency and sustainable competition and maximise consumer benefits."
"Article 20 Dispute resolution between undertakings 1. In the event of a dispute arising in connection with obligations arising under this Directive or the Specific Directives between undertakings providing electronic communications networks or services in a Member State, the national regulatory authority concerned shall, at the request of either party, issue a binding decision to resolve the dispute in the shortest possible time frame and in any case within four months except in exceptional circumstances. The Member State concerned shall require that all parties cooperate fully with the national regulatory authority. [12] ... 3. In resolving a dispute, the national regulatory authority shall take decisions aimed at achieving the objectives set out in Article 8. Any obligations imposed on an undertaking by the national regulatory authority in resolving a dispute shall respect the provisions of this Directive or the Specific Directives. ... 5. The procedure referred to in paragraphs 1, 3 and 4 shall not preclude either party from bringing an action before the courts."
"In the event of a dispute between undertakings in the same Member State in an area covered by this Directive or the Specific Directives, for example relating to obligations for access and interconnection or to the means of transferring subscriber lists, an aggrieved party that has negotiated in good faith but failed to reach agreement should be able to call on the national regulatory authority to resolve the dispute. National regulatory authorities should be able to impose a solution on the parties. The intervention of a national regulatory authority in the resolution of a dispute between undertakings providing electronic communications networks or services in a Member State should seek to ensure compliance with the obligations arising under this Directive or the Specific Directives."
"7.10 Regulation at the wholesale level is designed to address the problems which result from the existence of SMP in the relevant wholesale market. In particular it is designed to ensure that the SMP at the wholesale level does not restrict or distort competition in the relevant downstream markets or operate against the interests of consumers, for example through excessively high prices ... 7.11 The application of regulation at the wholesale level also fits with the requirements of the Framework Directive, that NRAs take measures which are proportionate to the objective of encouraging efficient investment in infrastructure and promoting innovation. The introduction of regulation in wholesale markets will encourage communications providers to purchase wholesale products and combine them with their own networks where possible to create retail products in competition with BT's retail leased lines products and other services. This is preferable to retail regulation alone, which would by contrast tend to favour the purchase of BT's retail products and thereby lessen other communications providers' investment in infrastructure and, through less competition, innovation."
"7.61 Ofcom considers that the cost orientation condition is justifiable and a proportionate response to the extent of competition in the markets analysed. It enables competitors to purchase services at a rate which will enable them to develop competitive services to the benefit of consumers, whilst at the same time allowing BT a fair rate of return which it would expect in a competitive market. The potential for a degree of flexibility envisaged in the approach to the recovery of cost of capital recognises that some investments will carry a higher degree of risk than others and does not remove incentives for the development of new services."
"10.10 Given the imposition of LRIC with an appropriate mark-up for the recovery of common costs on both BT and Kingston, and a charge control for BT, Ofcom is proposing that BT and Kingston should maintain appropriate cost accounting systems, that demonstrate that the obligations of cost orientation and (for BT) the charge control are being met. This will enable Ofcom to monitor compliance with those obligations."
"10.13 In order to demonstrate cost orientation of a service or product, it is necessary for the dominant provider to establish cost accounting systems that capture, identify, value and attribute relevant costs to its services and products in accordance with agreed regulatory accounting principles, such as cost causality. A key part of this process is the stage which identifies those parts of the underlying activities or elements that directly support or are consumed by those services or products. These elements are referred to as network components. As these components are frequently used to provide more than one product or service, it is also necessary to determine how much of each component is used for each service or product that should be cost-oriented. The service/product costing methodology applies the utilisation of these components (which are characterised by common usage measures) to the appropriate service product."
"OA2 Ofcom may from time to time make such directions as they consider appropriate in relation to BT's Cost Accounting System, Accounting Separation System and its obligations under these conditions. OA3 BT shall comply with any direction Ofcom may make from time to time under these conditions. ... OA5 BT shall in respect of the Market, Technical Areas and the Disaggregated Activities (as applicable) for each Financial Year: a. prepare such Regulatory Financial Statements as directed by Ofcom from time to time in accordance with the Accounting Documents (the relevant Accounting Documents to be identified in the Regulatory Financial Statements by reference to their date); … d. publish the Regulatory Financial Statements and corresponding audit opinion as directed by Ofcom from time to time and in accordance with condition OA6(b) and (c) ..."
"1.28 ... This conclusion is based primarily on BT's persistently high market share (73% by volume in 2006); the high profitability of the relevant services (around 30% Return on Capital Employed in 2007/08); the advantages enjoyed by BT due to its much more extensive network infrastructure; and the barriers to entry and expansion in this market, which are associated with high sunk costs and the availability of economies of scale and scope."
"1.29 ... While still relatively high at around 38% to 40%, BT's market share has been falling and there is no evidence to indicate that this trend will reverse in the near future. In addition, there has been significant entry in the market in the recent past, and we are aware of likely future entry. The evidence suggests that the very high revenues that can be earned from these circuits mean that CPs are generally willing to sink the high fixed costs required to provide them."
"1.39 We have decided to impose a range of obligations on BT and [Kingston] in the markets in which they have been found to have SMP. While the obligations are in many respects similar to those imposed following the 2003/04 Review, there are a number of significant changes, including: The proposed extension of charge controls to cover low bandwidth AISBO and TI trunk services, in addition to low and high bandwidth TISBOs. In proposing a charge control for low bandwidth AISBO services, we have taken account of the fact that this is now a mature market, in which BT has a position of persistent dominance and is earnings [sic] high returns. BT's returns in the trunk market have also been high and, contrary to our expectations at the time of the 2003/04 review, this market has not become increasingly competitive over time ..."
"4.14 ... Charge controls and cost orientation obligations are complementary in that the former restricts BT's pricing flexibility at a basket level whilst the latter ensures that BT sets its individual prices within some reasonable bounds."
"The grounds of appeal must be set out in sufficient detail to indicate— (a) to what extent (if any) the appellant contends that the decision appealed against was based on an error of fact or was wrong in law or both; and (b) to what extent (if any) the appellant is appealing against the exercise of a discretion by OFCOM, by the Secretary of State or by another person."
"(1) The Tribunal shall dispose of an appeal under section 192(2) in accordance with this section. (2) The Tribunal shall decide the appeal on the merits and by reference to the grounds of appeal set out in the notice of appeal."
"1. Member States shall ensure that effective mechanisms exist at national level under which any user or undertaking providing electronic communications networks and/or services who is affected by a decision of a national regulatory authority has the right of appeal against the decision to an appeal body that is independent of the parties involved. This body, which may be a court, shall have the appropriate expertise to enable it to carry out its functions effectively. Member States shall ensure that the merits of the case are duly taken into account and that there is an effective appeal mechanism."
"We draw attention to two points in particular which emerge from this passage in the judgment of Lloyd LJ. First, the function of the Tribunal is not to act as 'a fully equipped duplicate regulatory body waiting in the wings just for appeals', to quote the graphic phrase used by Jacob LJ in the T-Mobile case [ T-Mobile (UK) Ltd v Ofcom[2008] EWCA Civ 1373 ], and it may be very difficult for the Tribunal to interfere "if all that is impugned is an overall value judgment based upon competing commercial considerations in the context of a public policy decision" (ibid.). Secondly, and to similar effect, if Ofcom 'has addressed the right question by reference to relevant material, any value judgment on its part, as between different relevant considerations, must carry great weight': see the concluding words of paragraph [67]. Another way of making the same point is to say that the weight to be attached to different considerations in forming a value judgment is a matter for Ofcom, as the NRA charged with the duty of resolving disputes, and in the absence of any misdirection by Ofcom the court will normally respect its determination, whether or not the court would itself have balanced the considerations in the same way and reached the same conclusion."
"… we consider that the following principles should inform our approach to disputed questions upon which Ofcom has exercised a judgment of the kind under discussion: (a) Since the Tribunal is exercising a jurisdiction "on the merits", its assessment is not limited to the classic heads of judicial review, and in particular it is not restricted to an investigation of whether Ofcom's determination of the particular issue was what is known as Wednesbury unreasonable or irrational or outside the range of reasonable responses. (b) Rather the Tribunal is called upon to consider whether, in the light of the grounds of appeal and the evidence before it, the determination was wrong. For this purpose it is not sufficient for the Tribunal simply to conclude that it would have reached a different decision had it been the designated decision-maker. (c) In considering whether the regulator's decision on the specific issue is wrong, the Tribunal should consider the decision carefully, and attach due weight to it, and to the reasons underlying it. This follows not least from the fact that this is an appeal from an administrative decision not a de novo rehearing of the matter, and from the fact that Parliament has chosen to place responsibility for making the decision on Ofcom. (d) When considering how much weight to place upon those matters, the specific language of section 316 to which we have referred, and the duration and intensity of the investigation carried out by Ofcom as a specialist regulator, are clearly important factors, along with the nature of the particular issue and decision, the fullness and clarity of the reasoning and the evidence given on appeal. Whether or not it is helpful to encapsulate the appropriate approach in the proposition that Ofcom enjoys a margin of appreciation on issues which entail the exercise of its judgment, the fact is that the Tribunal should apply appropriate restraint and should not interfere with Ofcom's exercise of a judgment unless satisfied that it was wrong."
"60. The task of the appeal body referred to in Article 4 of the Framework Directive is to consider whether the decision of the national regulatory authority is right on "the merits of the case"
"70. Under Article 4 of the Framework Directive, the appeal body is concerned not merely with Ofcom's process of determination but with the merits. Ofcom is not only an adjudicative but an investigative body, and the appellant may wish to produce material, or further material, to rebut Ofcom's conclusions from its investigation. It is unsurprising that the CAT should adopt a more permissive approach towards the reception of fresh evidence than a court hearing an appeal from a judgment following the trial of a civil action. Indeed, as Sullivan LJ observed, the appeal body might in some cases expect an appellant to produce further material to address criticisms or weaknesses identified by Ofcom. 71. Ofcom submitted in its skeleton argument that an unfettered right to adduce fresh evidence on appeal might cause parties to avoid proper engagement with Ofcom during the dispute resolution process. No party has an unfettered right to adduce fresh evidence on an appeal to the CAT, and there is force in Ms Rose's argument that parties ought to be encouraged to present their case to Ofcom as fully as the circumstances permit. That is a factor, among others, to be borne in mind by the CAT when considering the discretionary question whether to admit fresh evidence. Other relevant factors would include the potential prejudice (in costs, delay or otherwise) which other parties may suffer if an appellant is permitted to introduce material that it could reasonably have been expected to place before Ofcom. These are not necessarily the only relevant factors. 72. The court was asked by Ofcom to give clear guidance to the CAT about the exercise of its power to admit fresh evidence. Before the CAT there was argument whether it was for the party seeking to adduce fresh evidence to show why it should be given permission to do so, or was for the opposing party to show why permission should not be granted. Since the introduction of fresh evidence is not a matter of right, in the event of a dispute about its admission I would regard it as the responsibility of the party who wants to introduce it to show a good reason why the CAT should admit it. The question for the CAT would be whether in all the circumstances it considers that it is in the interests of justice for the evidence to be admitted. I would not attempt to lay down any more precise test, nor would I attempt to lay down a comprehensive list of relevant factors or suggest how they should be balanced in a particular case. There are several reasons why I consider that it would be inappropriate, and is unnecessary, for this court to do so."
" Incremental cost is the cost of producing a specified additional product, service or increment of output over a specified time period…. Another way of expressing this is that the incremental costs of a service are the difference between the total costs in a situation where the service is provided and the costs in another situation where the service is not provided. Long Run Incremental Cost ("
"3.2 There are three main elements of economic efficiency that should be considered in assessing the two approaches ... : (i) Allocative efficiency (ii) Dynamic efficiency, and (iii) Productive efficiency 3.3 In the current context ..., short-run allocative efficiency requires that prices are set in a way that maximises the total level of demand (subject to the recovery of the costs of provision) in order to produce the greatest possible benefits to end users which in turn requires that: (i) the level of prices for a set of relevant services that share common costs is set no higher than necessary to generate revenues consistent with BT recovering its (efficient) costs of provision (including the appropriate level of cost of capital); ... ; and (ii) where prices are set for a multitude of products which share fixed and common costs, the structure of prices is set such that it maximises overall end user demand. This in general will require that relatively more fixed and common (f/c) costs are recovered from services that face demand from consumers that is relatively price insensitive (or price 'inelastic'). 3.4 Dynamic efficiency in the current context requires that prices are set in a way that provides the appropriate incentives for: (i) BT to undertake efficient investments in the provision of the cost oriented services in question; and to introduce new/innovative services; (ii) downstream competition and efficient downstream investment by rivals who purchase the cost oriented services; and (iii) efficient new entry in the provision of cost oriented services (taking into account that efficient entry in this context includes entry that may be statically inefficient in the short term but provides sufficient offsetting benefits in the longer term ... ); 3.5 Productive efficiency in relation to the provision of services that are subject to cost orientation by BT requires that BT produces the cost oriented services at as low a cost as possible."
"Unless Ofcom directs otherwise from time to time, the Dominant Provider [BT] shall secure, and shall be able to demonstrate to the satisfaction of Ofcom, that each and every charge offered, payable or proposed for Network Access covered by Condition HH1 is reasonably derived from the costs of provision based on a forward looking long run incremental cost approach and allowing an appropriate mark up for the recovery of common costs including an appropriate return on capital employed."
"202. Whereas in the case of a contract, the relevant factual matrix will extend to what was reasonably available to the contracting parties, in the case of a public law instrument, which (as in the case of an SMP condition) is promulgated to the world at large, the relevant factual material will only extend to the material reasonably available to the public at large (and so will typically be narrower than the relevant factual matrix in a contractual context). 203. In the present case, we consider the relevant factual matrix to be quite limited, and to be confined to the relevant statutory framework for the imposition of SMP conditions (specifically, the 2003 Act and the EU directives comprising the common regulatory framework) and to the published documents that led up to the SMP conditions imposed in this case (including, in particular, the 2004 LLMR Statement). 204. Clearly, documents post-dating the imposition of the SMP conditions in this case cannot form part of the factual matrix, being after the event. As regards documents in the more distant past – like for instance – Oftel's "
"… except insofar as the context otherwise requires, words or expressions shall have the meaning assigned to them and otherwise any word or expression shall have the same meaning as it has in the [2003] Act."
"(3) In this Chapter references to network access are references to— ... (b) any services, facilities or arrangements which— (i) are not comprised in interconnection; but (ii) are services, facilities or arrangements by means of which a [communications provider or] [27] person making available associated facilities is able, for the purposes of the provision of an electronic communications service (whether by him or by another), to make use of anything mentioned in subsection (4); and references to providing network access include references to providing any such services, making available any such facilities or entering into any such arrangements. (4) The things referred to in subsection 3(b) are— (a) any electronic communications network or electronic communications service provided by another communications provider; (b) any apparatus comprised in such a network or used for the purposes of such a network or service; …"
"Having concluded that the meaning of [the SMP] conditions is clear, we fail to see how either OFCOM or this Tribunal could sanction an approach that disregarded the clear meaning of Condition H3.1"
"…we actually take great care in actually selecting the appropriate attribution methodology. So by definition in the end the one that we choose at that particular time was the one that we feel is the most fair and agrees with the principles of, as I have said, cost causality and objectiveness."
"I guess my question is, on balance, what do CPs see, and what do they react to; and I believe on a general approach they look at the whole life cost [of a circuit] first because [connections and rentals] are consumed together and they are in the same market."
"Generally speaking, I describe an NPV calculation that we make in respect of a decision, for example, between self-provision and purchasing services from BT. If we self-provide the great majority of our outlay would be upfront. We will need to dig the streets, we have to buy equipment, we need [to] do a quite a lot of work on the customer side [site?] and the great majority of those costs will be upfront. The ongoing costs will be relatively small. So it will be a very front-loaded cost of delivery on a self-provision basis. The relative level of connection and rental influences that decision because if the BT connection charge is very high, from a cash flow perspective, we will be in an equivalent position to self-provision more rapidly, and therefore we may decide to self-provide even for [a] contract for a relatively short term. However, if the connection was low, if the rental was fairly balanced we probably would be in that position [i.e. to self-provide] only when we are assured of a relatively long tenure of the customer."
"…We know that our cost to continue to provide the service is only the rental, and we know that the cost for potential competitors to provide the service instead of Virgin Media will be rental and connection. That gives us information of what the competitive market price should be that would enable us to retain their custom in a situation in which that service is put out to tender again. So again, we look at the rental as our ongoing cost of providing the service, but we look also at the connection because that gives us an indication of what do we need to do at the pricing level in order to retain that service."
"…not all circuits relevant to the Disputes attracted a connection charge (as some were migrated from retail circuits to WES/BES products), and circuit bandwidth downgrades and upgrades give rise to a mismatch of connection and rental charges between bandwidths."
"accepts that Condition HH3.1 applies to charges offered, payable and proposed in respect of reasonable requests for "
"14.65 In our view, BT has failed to provide in its response the evidence we explained in the Provisional Conclusions would be required to support its arguments in relation to 2006/07. For example, BT has not: 14.65.1 demonstrated that its unit DSACs were lower than it reasonably expected when setting charges for 2006/07; 14.65.2 provided us with details of the volume forecasts it used in setting charges for 2006/07, together with an explanation of why it considered these to be reasonable forecasts and why the deviation from forecast led to the failure of the DSAC test; and/or 14.65.3 explained (where relevant) why any cost movements that contributed to the failure of the DSAC test could not have been reasonably forecast and provided evidence of its original cost forecast, together with the supporting reasoning for that forecast at the time."
"In reaching this decision, Ofcom has not considered the merits of THUS's allegation that BT's WES/WEES Ethernet product portfolio is discriminatory and not cost oriented, in contravention of SMP conditions HH1, HH2 and HH3. Ofcom considers the merits of a complaint only once an investigation begins."
"9.221 …For the purposes of resolving these Disputes we do not consider average charges compared to average DSAC across the whole period, as we suggested might be relevant in the 2009 PPC Determinations. We believe our approach is appropriate given the importance placed by the CAT on the DSAC test and its findings in relation to treating charges above DSAC as "intrinsically excessive"
"Mr Read: My question is a simple one: why is it that Ofcom does not look at the average over the period? If it did, BT would be compliant for those four years? Mr Myers: As you pointed out, there were things changing over the period. Prices certainly changed in 2009/10, there were not such large changes in other years, but as you pointed out there were significant changes in the year by year costs, very significant changes on these numbers between each of the years. I think that would create circumstances - costs circumstances in this case or cost and revenue circumstances in 2009/10, that were very significantly different between each of these years. In that context, averaging runs a significant risk of averaging together two rather dissimilar things and reaching a false conclusion, that conclusion about a false negative conclusion I was being asked to comment on earlier by Mr. Thompson, as a consequence of averaging different things together. Ofcom's approach was a different approach which addressed the same underlying concerns that lead one, or might lead one to - or the argument is made that one should average, which is to look at the year by year costs and invite an explanation of why, in this case, the costs are so different between, for example, 2006/07 and 2007/08 - in other words, look at the specific circumstances. So I would say, therefore, to summarise that, two points: Ofcom's approach by looking at the evidence on a year by year basis addresses effectively the same underlying concern which is the proponents of averaging across years are leading them to that view, but it avoids one of the disadvantages of averaging, which is that it may hide overcharging in one year by combining it with something that's comfortably below DSAC in a different year."
"82. Some method of ensuring that common costs are recovered – but not over-recovered – is clearly essential. … 83. In short, whilst it is obvious that if a multi-product firm prices at LRIC it will make a loss (because there will be no recovery of common costs), and if it prices at SAC it will make an unreasonable profit (because there will be multiple recovery of common costs), it is much less obvious how common costs are to be treated."
"285. No-one suggested that DSAC was a conclusive indicator that common costs have been appropriately allocated. It was common ground that a charge for a service could be cost orientated even though it was in excess of the DSAC ceiling, and equally a charge below DSAC might not be cost orientated… 286. By the conclusion of the hearing, it appeared that BT did not dispute that DSAC could be an appropriate test for cost orientation. To the extent that BT maintained its contention (made in paragraph 135 of its Notice of Appeal) that DSAC "is fundamentally flawed from an economic and regulatory viewpoint", we reject it. In actual fact, as a method for dealing with the allocation of common costs, DSAC was, in the case of PPCs, the most practicable option: (1) Combinatorial testing … was simply not practicable. (2) FAC could have been used as a means of fully allocating common costs, but would have effectively imposed a single price on BT for its PPC services. Had BT decided to meet its cost orientation obligations under Condition H3.1 by using FAC, then we consider that this would have been an appropriate approach for BT to adopt, and one that OFCOM would not have been able to challenge had it been adopted. But, of course, its very inflexibility is the reason why BT would not have adopted it. Had OFCOM sought to use FAC as the test for BT's compliance with Condition H3.1, then we consider that this would not have been an appropriate course, for precisely the same reason. (We stress that there was never any suggestion that OFCOM would take this course.) 287. In short, we find that the use of DSAC as a test for cost orientation was not only entirely appropriate, but actually the only satisfactory available course open both to BT (in seeking to comply and show compliance with Condition H3.1) and to OFCOM (in seeking to monitor that compliance). Of course, OFCOM would, no doubt, be open to considering fresh alternatives to DSAC, were such to emerge. …"
"BT's third contention was that OFCOM treated prices above DSAC as intrinsically excessive and in breach of Condition H3. Our conclusion is that this is precisely what Condition H3.1 requires. …Condition H3.1 entitles the regulated firm to mark up prices that have reasonably been derived from LRIC by an appropriate amount to reflect the recovery of common costs and a reasonable return on capital. In this case, DSAC represented the best single measure for assessing whether the condition had been satisfied and so marked the upper limit or ceiling on the permissible mark up of prices."
"it is common ground that the DSAC cost standard permits substantial multiple recovery of common costs. In the present case it would have permitted BT to earn a return on capital employed ("
"The issue is what, for the purpose of Condition H3.1, was "appropriate" on the facts and in the overall context of the regulatory purposes of the Condition and the overall scheme of the [2003] Act and the CRF to which the Act was intended to give effect."
"Regulation at the wholesale level is designed to address the problems which result from the existence of SMP in the relevant wholesale market. In particular it is designed to ensure that the SMP at the wholesale level does not restrict or distort competition in the relevant downstream markets or operate against the interests of consumers, for example through excessively high prices…."
"As BT has been identified as having SMP in this market, the availability of wholesale AISBO services at cost oriented prices would help to ensure that the resulting competition in the retail leased lines markets and other downstream markets should lead to lower prices."
"It enables competitors to purchase services at a rate which will enable them to develop competitive services to the benefit of consumers, whilst at the same time allowing BT a fair rate of return which it would expect in a competitive market. The potential for a degree of flexibility envisaged in the approach to the recovery of cost of capital recognises that some investments will carry a higher degree of risk than others and does not remove incentives for the development of new services."
"Ofcom is of the view that it is not currently necessary to impose a price control on AISBO products. The AISBO market is in a relatively early stage of development and it is necessary to give time for the effects of the cost orientation obligation to impact on the competitiveness of the market before considering whether a price control is necessary. The need for a price control will be considered when the market is next reviewed."
"by self-supplying SBO [i.e., symmetric broadband origination], communications providers are unlikely to be able to compete with BT's retail charges for LES circuits in many instances" (para B.434). Ofcom found that: "
"… that the setting of the condition is appropriate for the purposes of— (i) promoting efficiency; (ii) promoting sustainable competition; and (iii) conferring the greatest possible benefits on the end-users of public electronic communications services."
"determine what they consider to represent efficiency by using such cost accounting methods as they think fit."
"So what happens, let's take a hypothetical, that the test is in place, then what I would expect BT to do is to look at the range of cost orientated services. It will have a view as to what the FAC of those services is and it will try and set a set of prices based on its best forecast of volumes, etc., for that. Okay? That is the ex-ante. Then demand happens, volumes happen, costs clarify, and then BT will see how the revenue is compared to FAC. Now, let's say that … what happens is one group of cost orientated services shows that the revenues in relation to FAC are 10% higher, because of the kind of uncertainty you mention. Now, in principle communication providers could come and say, "
"It might be said that the errors in the published numbers should have been discovered earlier. Clearly it would have been better had they been, but they were not. In truth the calculation of the DSACs received too little attention by BT and others until the rash of disputes made their significance clear."
"11.27 Our starting point for making regulatory decisions assessing compliance with cost orientation obligations which require consideration of BT's costs and revenues, is BT's view of its costs, as published in its RFS. As we set out above, we would expect the RFS to contain the best available information for those decisions. However we have adjusted BT's accounting data on occasion in the past where we considered that this was necessary and appropriate. We have made such adjustments where the published data is in error or based on an obviously inappropriate methodology, to ensure that, as far as possible, we accurately reflect BT's costs and revenues when resolving disputes and undertaking other regulatory duties. ... 11.29 We can only make adjustments where it is reasonably practical to do so with the evidence available to us. Where we are concerned that data may contain an error or have been produced using an obviously inappropriate methodology, we can only change the data if we have sufficient information to properly address the concern with the published data. If sufficient data is not available to us, the original data in the RFS may still represent the best available information."
"[1] Does the adjustment correct an error in BT's published RFS? ... [2] Does the adjustment correct a methodology used in the published RFS that is obviously inappropriate for the purpose of resolving the dispute? ... [3] With the available evidence, is it reasonably practical to implement the proposed adjustment to the published data in a way that properly addresses the error or inappropriate methodology? ... [4] Does the proposed adjustment retrospectively alter the financial data on which we relied in previous regulatory decisions including for services outside the scope of the dispute? ... [5] Does accepting revised data create inappropriate incentives for BT to produce appropriate and accurate regulatory financial statements in the future? ..."
"it is for BT to put forward a good reason why its evidence should be admitted" (para 196). That Defence was served three months after BT's Notice of Appeal, and two months after the first CMC in this case. When BT expressly sought clarification from Ofcom of its position, Ofcom stated, by letter of5 June 2013 , that it would not be applying to exclude any of BT's evidence. However, in its skeleton argument for the hearing of the appeals, Ofcom observed that there are practical difficulties when BT raises new evidence in support of adjustments to the RFS in an appeal, and stated: "
"Between 2006/07 and 2009/10, transmission equipment costs were recovered through upfront circuit connection charges but, for accounting purposes, the assets were capitalised and depreciated over the life of the underlying equipment. This meant there was a timing mismatch between the revenues associated with transmission equipment (which were recognised in upfront connection charges) and the costs of transmission equipment (which were spread over the life of the equipment)."
"12.63 Figures relating to depreciation and MCE are available from BT's accounting systems. In addition BT provided an estimate of the cost of expensing the transmission equipment in the P&L each year. It did this by taking the annual additions from the asset register and apportioning them between services based on the volume of connections in each year. This method appears to assume that the purchase price of equipment for each service is the same, which may not be the case in practice. 12.64 This apportionment methodology differs from how transmission equipment depreciation and MCE is apportioned to services in the RFS, which uses a weighted approach. Adopting BT's methodology would mean certain services attracting a level of P&L expenses relating to the write off of transmission equipment that bore little relationship to the level of depreciation and MCE they were attracting in the RFS (and ultimately the capital cost of purchasing the equipment). 12.65 Consequently we have estimated the cost of expensing the equipment in the P&L each year by apportioning BT's annual additions from the asset register on the same basis as depreciation and MCE in the RFS. We consider that this approach is a more appropriate basis on which to estimate the annual P&L expense."
"13.357 … we consider it is possible that the provisioning cost component in 2006/07 and 2007/08 did not capture provisioning costs associated with Ethernet services. But the evidence available to us does not allow us to reach a clear conclusion on this point. 13.358 Therefore we do not consider that BT provided us with sufficient evidence explaining how provisioning costs associated with Ethernet services were captured in 2006/07 and 2007/08 to enable us to determine whether the RFS treatment was obviously inappropriate for the purpose of resolving the Disputes…"
"A (Mr Coulson): Well, I don't know for sure, but I would imagine...that [it] is part of the wholesale analogue services, which is a regulated market for provision of local access lines - copper access lines. Q (Mr Saini): So there may well be a price control covering that particular product, would that be fair to say? A (Mr Coulson): Yes, absolutely. Q (Mr Saini): So would it not be rather dangerous, Mr Coulson, to allow BT to shift these costs over from this price controlled service into Ethernet, because when the price control for that particular service was being set, costs of that service would have been taken into account, would they? A (Mr. Coulson): Well, what I have done here is identified an error. I think when errors are found, it is important to identify them and understand them. There is then a question about how you deal with that in the context of historic charge controls, which I have not considered, to be honest. But what I would say is that whilst the absolute amount of cost that belongs to another market doesn't change, clearly if you move£2 million from Ethernet and put£2 million into copper access lines it is£2 million . But from a unit cost perspective I suppose it's important to remember that there are thousands of Ethernet services, and probably something like 25 million copper lines in the UK. So the absolute amount would be the same, but the unit cost would be much less significant in any of the copper access services than it would have appeared in the Ethernet."
"If we think of this in £million terms, what that's saying is, whatever the figure was, [say]£18 million , [it] was taken into account in setting the price control for whichever [service] it was, WLR, say. The argument is, despite the fact that it was taken into account in that case, it should nevertheless still be shifted across into Ethernet. That seems to me to be a clear case of BT getting the£18 million twice. If the principle is established that as long as it doesn't have a material impact … however "material" is defined, … on the unit price, one could imagine that there are lots of price control services. We could move small amounts of £million amounts from a series of price controlled services and then, when one adds up that £million amount it could turn out to be quite a significant amount of money. So I find … the principle troubling. I think it seems more appropriate to me to think of this issue in terms of the £million amounts and being shifted around ...[effectively] being double-counted, being recovered twice."
"(1) Where OFCOM make a determination for resolving a dispute referred to them under this Chapter, their only powers are those conferred by this section. (2) Their main power … is to do one or more of the following— (a) to make a declaration setting out the rights and obligations of the parties to the dispute; (b) to give a direction fixing the terms or conditions of transactions between the parties to the dispute; (c) to give a direction imposing an obligation, enforceable by the parties to the dispute, to enter into a transaction between themselves on the terms and conditions fixed by OFCOM; and (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."
"1. Member States shall ensure the freedom to provide electronic communications networks and services, subject to the conditions set out in this Directive. To this end, Member States shall not prevent an undertaking from providing electronic communications networks or services, except where this is necessary for the reasons set out in Article 46(1) of the Treaty. 2. The provision of electronic communications networks or the provision of electronic communications services may, without prejudice to the specific obligations referred to in Article 6(2) or rights of use referred to in Article 5, only be subject to a general authorisation. The undertaking concerned may be required to submit a notification but may not be required to obtain an explicit decision or any other administrative act by the national regulatory authority before exercising the rights stemming from the authorisation. …"
"National regulatory authorities may require an operator to provide full justification for its prices, and may, where appropriate, require prices to be adjusted."
"In resolving a dispute, the national regulatory authority shall take decisions aimed at achieving the objectives set out in Article 8. Any obligations imposed on an undertaking by the national regulatory authority in resolving a dispute shall respect the provisions of this Directive or the Specific Directives."
"(7) The least onerous authorisation system possible should be used to allow the provision of electronic communications networks and services in order to stimulate the development of new electronic communications services and pan-European communications networks and services and to allow service providers and consumers to benefit from the economies of scale of the single market. (8) Those aims can be best achieved by general authorisation of all electronic communications networks and services without requiring any explicit decision or administrative act by the national regulatory authority and by limiting any procedural requirements to notification only. Where Member States require notification by providers of electronic communication networks or services when they start their activities, they may also require proof of such notification having been made by means of any legally recognised postal or electronic acknowledgement of receipt of the notification. Such acknowledgement should in any case not consist of or require an administrative act by the national regulatory authority to which the notification must be made. (9) It is necessary to include the rights and obligations of undertakings under general authorisations explicitly in such authorisations in order to ensure a level playing field throughout the Community and to facilitate cross-border negotiation of interconnection between public communications networks."
"Yet the Directives and the 2003 Act contain no such clear distinction. Such a distinction would be all the more necessary given that the historical/non-historical distinction put forward by BT is by no means the only distinction that could be made regarding past, present and future disputes between communications providers."
"…there is a basic injustice in restricting OFCOM's jurisdiction to that point in time when a party's conduct is overtly challenged. To revert, once again, to our hypothetical example…, why should [the disputing CP] be confined to adjustments of underpayments or overpayments relating back only so far as date [on which it first made its challenge, 30 days after the conduct began]? If OFCOM has determined that an adjustment should be made under section 190(2)(d), then OFCOM should have jurisdiction to order that such adjustment relates back to the date when the breach of the SMP condition began…. Any other approach would encourage pre-emptive and legally dictated challenges designed to extend OFCOM's jurisdiction, rather than the commercial approach that informs parties subject to the 2003 Act at present."
"82. … The object of the section generally is to confer power on Ofcom to enforce its determination of disputes referred to Ofcom pursuant to section 185 of the Act. The express purpose of section 190(2)(d) is to give effect to the determination by Ofcom of "the proper amount" of a charge and to do so by way of adjustment of any underpayment or overpayment. 83. It is common ground that Ofcom has a discretion in the exercise its powers under section 190. I do not accept Mr Saini's submission [for Ofcom] that the discretion is an "all or nothing" discretion: that is to say, in the case of excessive charging, either Ofcom must order repayment of the entire overpayment or it must decline to make any order for repayment. The statutory language does not expressly or impliedly require so extreme and inflexible a position. Nor is it logical for Parliament to have so intended. In exercising its remedial powers Ofcom will, as Mr Vajda said, be acting as a regulator giving effect to the statutory regime and, therefore, to the objectives of the CRF. That is not consistent with conferring an "all or nothing" power on Ofcom. It is, however, consistent with a discretion to make such order for repayment as will best achieve the objectives of the Act and the CRF on the particular facts of the case. Support for that is to be found in the word "adjustment" in section 190(2)(d), which is likely to have been intended to reflect the power of a NRA under Article 13(3) of the [Access Directive] to require prices to be adjusted "where appropriate". 84. The discretion under section 190 plainly must be exercised in a principled way with a view to achieving those objectives. The starting point must be, in a case of overcharging in breach of an SMP condition, to order repayment of the amount of the excess charge. If, however, the payee can show some good reason why a lesser repayment or no repayment at all would better achieve the objectives of the Act and the CRF then that would provide a principled basis for Ofcom to give a direction for only a partial repayment or to make no direction for repayment at all. If the Tribunal, in describing Ofcom's discretion under section 190(2) as a "hard discretion" (in paragraph 182), intended to exclude such an approach by Ofcom, then I cannot agree. In any event, in the light of the arguments raised on behalf of BT on this appeal which I have rejected, and on the facts as found by the Tribunal, I can see no proper basis for reaching a different conclusion from both Ofcom and the Tribunal on the remedy they considered appropriate."
"Both Ofcom and the Tribunal were perfectly entitled to conclude that it is not consistent with the regulatory regime and the objectives of the CRF to leave BT with the benefit of its excessive charging for trunk segments in breach of Condition H3.1 in the light of those economic consequences as well as the economic harm suffered by the ultimate retail customers."
"… If any charge is recalculated or adjusted with retrospective effect under an order, direction, determination or requirement of Ofcom, or any other regulatory authority or body of competent jurisdiction, the Purchaser Parties agree that interest will not be payable on any amount due to either party as a result of that recalculation or adjustment."
"In resolving a dispute, national regulatory authorities shall take decisions aimed at achieving the objectives set out in Article 8."
"The intervention of a national regulatory authority in the resolution of a dispute between undertakings providing electronic communications networks or services in a Member State should seek to ensure compliance with the obligations arising under this Directive or the Specific Directives."
"With regard to access and interconnection, Member States shall ensure that the national regulatory authority is empowered to intervene at its own initiative where justified [or, in the absence of agreement between undertakings, at the request of either of the parties involved,] [39] in order to secure the policy objectives of Article 8 of Directive 2002/21/EC (Framework Directive), in accordance with the provisions of this Directive and the procedures referred to in Articles 6 and 7, 20 and 21 of Directive 2002/21/EC (Framework Directive)."
"In this case, therefore, Ofcom's function was to determine whether BT's proposed charges exceeded the limits of its contractual discretion. That depends on whether they were in fact consistent with the Article 8 objectives."
"31. The dispute resolution functions of Ofcom have often been described as regulatory, notably by the CAT in T-Mobile (UK) Ltd v Office of Communications[2008] CAT 12 . It is unquestionably true that the dispute resolution functions of national regulatory authorities are part of the regulatory scheme, and that in exercising those functions the regulator is required by Article 20.3 of the Framework Directive to promote the overarching objectives set out in Article 8, just as it is required to do in exercising its other functions. But the description of dispute resolution as "a form of regulation in its own right" is apt to mislead without some analysis of what is meant by it. 32. As a national regulatory authority charged with the resolution of disputes, Ofcom has both regulatory and adjudicatory powers. Article 20.1 of the Framework Directive requires national regulatory authorities to have power to resolve disputes between CPs "in connection with obligations arising under this Directive or the Specific Directives between undertakings."
"that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers"
"(a) Objective 1 : avoid CPs having an incentive to set charges that are unduly high; (b) Objective 2 : avoid CPs having an incentive to delay submitting disputes; and (c) Objective 3 : avoid distorting CPs' incentives to invest"
"… it does not appear that BT had at any stage developed a robust or well-justified means of demonstrating compliance with its cost orientation obligations."
"3.47 As explained above, when setting the principal our starting point is generally that it should reflect the amount of the overcharge. However, where a lesser repayment may better achieve the objectives of the 2003 Act or the CRF, we may where appropriate reduce the principal (or indeed conclude that no repayment is necessary). This suggests that, even if the size of the overcharge were larger than the loss suffered by an overcharged CP, it is not guaranteed that the repayment will be larger. Put another way, a CP may not be confident that it is profitable to delay bringing a dispute if it is concerned that the principle repayment sum might not reflect the full amount of the overcharge."
"13.3 [C]orrect pricing is required to inform C&W's cost and business strategies. This is of particular importance when pitching for new customer business. In instances where prices are expected to fall – for example, where there is an investigation into pricing of a particular service – C&W will come under pressure to factor that price fall into the bids which are being submitted at that time. However, C&W would only be in a position to factor the price decrease into a bid if the decrease was certain. Therefore, sitting on a dispute does not help C&W conduct daily business, where pricing certainty is essential; and 13.4 [U]ntil the point when Ofcom determines that an overcharge has occurred following a breach of cost orientation conditions, such as in this case, BT will be trading at a competitive advantage to the other CPs in the market. The higher wholesale prices will negatively affect CPs' profitability and ability to compete with BT's downstream arm."
"In our view, it is likely to be appropriate to award interest in the majority of cases in which a direction for repayment is considered appropriate in order to avoid creating an incentive for CPs to set charges that are unduly high (in the absence of evidence to the contrary). Doing so is likely to meet our statutory duties in most cases. In particular, our main objective of avoiding CPs having an incentive to set unduly high charges is likely to benefit customers."
"Mr Saini: What was the dialogue between the regulatory finance team, of which you were, at one point, head, and those people who were costing the products? In other words, was there ever a dialogue where the regulatory finance team would say: "
“To encourage investments by the operator, including in next generation networks, national regulatory authorities shall take into account the investment made by the operator, and allow him a reasonable rate of return on adequate capital employed, taking into account any risks specific to a particular new investment network project.”
“In the event of a dispute arising in connection with existing obligations under this Directive or the Specific Directives between undertakings providing electronic communications networks or services in a Member State ...”