Hutchinson 3G Uk Ltd v Customs & Excise [2004] UKVAT V18783 (16 September 2004) [2001] EWCA Civ.1448

EWCA-Civ
Hutchinson 3G Uk Ltd v Customs & Excise [2004] UKVAT V18783 (16 September 2004)
[2001] EWCA Civ.1448 · 2004-09-16
[1]18783 IN THE VAT AND DUTIES TRIBUNAL CENTRE: LONDON Between HUTCHISON 3G UK LIMITED (LON/2003/0861) mmO2 Plc (LON/2003/0878) ORANGE 3G LIMITED (LON/2003/0852) T-MOBILE (UK) LIMITED (LON/2003/0859) VODAFONE GROUP SERVICES LIMITED (LON/2003/0983) Appellants -and- THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents Tribunal: Dr. J. Avery Jones (Chairman) Sitting in Chambers in London on 16 August 2004 DIRECTION IT IS DIRECTED THAT:(1) the questions set out in the Request for a Preliminary Ruling of the Court of Justice of the European Communities attached hereto as Schedule A be referred to the Court of Justice of the European Communities for a preliminary ruling pursuant to Article 234 EC for the reasons set out therein and by reference to the Agreed Statement of Facts attached hereto as Schedule B;(2) all further proceedings in this appeal be stayed, with liberty to apply, until the said Court of Justice of the European Communities has given its preliminary ruling on the said questions or until further Order. Release Date: 24 August 2004 SCHEDULE A REQUEST FOR A PRELIMINARY RULING OF THE COURT OF JUSTICE OF THE EUROPEAN COMMUNITIES UNDER ARTICLE 234 OF THE EC TREATY Introduction 1 This request for a preliminary ruling arises in the context of appeals to the VAT and Duties Tribunal (the Tribunal ) brought by the Appellants against certain decisions of the Respondents. Each of the Appellants had submitted claims for the recovery of a total of some £3,347,698,000 (equivalent to some €5,009,274,000 as of 2 July 2004) value added tax ( VAT ) claimed by them to have been paid on the grant to them by way of an auction (the Auction ), by the Secretary of State for Trade and Industry (the Secretary of State ), of Third Generation Mobile Communications Licences (the Licences ) in 2000. The Respondents rejected the Appellants' claims to deduct these amounts from the VAT collected by the Appellants on their taxable supplies. In brief, the Respondents rejected the Appellants' claims on the basis that no VAT was deductible because the grant of the Licences was not subject to VAT. 2 After considering the arguments of the parties, the Tribunal has concluded that in order to enable it to decide those appeals it is necessary to resolve various questions concerning the interpretation of European Community law and therefore that it is appropriate to request the Court of Justice of the European Communities to make a preliminary ruling on those questions. The Parties 1 Each of the Appellants is registered for VAT either individually or as a member of a group registration. They, or the group of which they are a member, make or intend to make taxable supplies of telecommunications services. The first, third, fourth and fifth Appellants (Hutchison 3G UK Limited, Orange 3G Limited, T-Mobile (UK) Limited and Vodafone Group Services Limited) are represented in these proceedings by Linklaters, Solicitors and by Paul Lasok QC, and may be contacted at Linklaters, One Silk Street, London, EC2Y 8HQ, England, Tel: (44-20) 7456 2000, Fax: (44-20) 7456 2222. The second Appellant (mmO 2 Plc) is represented in these proceedings by Freshfields Bruckhaus Deringer, Solicitors, and by Roderick Cordara QC, and may be contacted at Freshfields Bruckhaus Deringer, 65 Fleet Street, London, EC4Y 1HS, England, Tel: (44-20) 7936 4000, Fax: (44-20) 7832 7001. 2 The Respondents are responsible for the care and management of VAT in the United Kingdom. They are represented in these proceedings by the Solicitor to the Commissioners of Customs and Excise and by Kenneth Parker QC and George Peretz, Barrister, and may be contacted at the Solicitor to the Commissioners of Customs and Excise, New King's Beam House, 22 Upper Ground, London SE1 9PJ, tel.: (44) 870 785 8053, fax.: (44) 870 785 8169. Factual Background 1 The factual background is set out in the Agreed Statement of Facts attached to this Direction as Schedule B, which should be considered an integral part of this request for a preliminary ruling. Summary of the Arguments of the Parties 1 A summary of the arguments of the parties is set out below. The arguments of the parties will be fully developed in their Observations to the Court of Justice of the European Communities. Articles 4(1) and 4(2) of the Sixth Directive 2 Article 4(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment (the Sixth Directive ) [1] defines "taxable person" to mean:
" any person who independently carries out … any economic activity specified in paragraph 2, whatever the purpose or results of that activity ". 3 Article 4(2) includes within the concept of " economic activities " the activities of " persons supplying services ". 4 The Appellants contend that the Auction and grant of the Licences by the Secretary of State was an economic activity within the meaning of Articles 4(1) and 4(2). 5 The Appellants' principal arguments in this regard are set out below. 5.1 The question as to whether an activity is an "economic activity" for the purposes of Articles 4(1) and 4(2) is determined by reference to its inherent nature. [2] The purpose and objectives of the Secretary of State are irrelevant (or, if they are held to be relevant, the Appellants' own purpose, as well as that of the Secretary of State, is relevant). [3] 5.2 The Auction and grant of the Licences was an economic activity in particular because of: the nature of the Licences (the Appellants contend that they amounted to the sale to businesses of the right to use part of a scarce resource for business purposes, the scarcity of the resource being enhanced by the way in which the Auction and the Licences were configured); the financial consideration obtained for them (the Appellants contend that the aim was to make a profit and the revenue generated by the Auction was available to be used by the Government for its general purposes unconnected with the 3G telecommunications market); the way in which the Licences were configured and granted and the financial consideration determined (the Appellants contend that the design and implementation of the Auction, which was the first held in the EU, were such as to realise the maximum, or close to the maximum, value available to the Government from the sale of the Licences, causing the United Kingdom to receive a disproportionately large share of the funds available to invest in 3G licences in the EU). The Appellants contend that the public statements and actions of the Government confirmed the foregoing. 5.3 Articles 4(1) and (2) do not exclude "regulatory" activities per se from the concept of "economic activity"
. The Appellants do not accept the Respondents' contention that Directive 97/13/EC (the Licensing Directive ) [4] (and in particular Article 11 thereof) and/or Decision 128/1999/EC (the UMTS Decision ) [5] (collectively referred to as the Community provisions ), are relevant to the characterisation for VAT purposes of the activities of the Secretary of State, either per se or insofar as the Secretary of State's activities in connection with the Auction complied therewith or insofar as United Kingdom legislation sought to comply therewith. If any of the Community provisions are held to be relevant, the Appellants do not accept, merely on the unsupported assertion of the Respondents, that: (i) the activities of the Secretary of State either did not need to comply or in fact complied with the Licensing Directive; (ii) the United Kingdom legislation in fact complied with the Community provisions; (iii) the authors of the Licensing Directive recognised that the Auction was an appropriate way to optimise the allocation of the spectrum; and (iv) the Auction operated to impose charges which reflect the need to ensure the optimal use of the spectrum or took into particular account the need to foster the development of innovative services and competition. 6 If the Secretary of State is held (whether by virtue of having a mixed purpose or on other grounds) to have been carrying out activities which were partly "economic activities" for the purposes of Articles 4(1) and (2) and partly not, the Appellants submit that the whole, or substantially the whole, amount of the consideration paid for the Licences falls to be treated as the taxable amount. 7 The Respondents contend, in essence, by reference inter alia to cases such as Case C-364/92, Eurocontrol [1994] ECR I-43 , that, in the circumstances set out in the Agreed Statement of Facts, the activity of the Secretary of State in awarding the Licences in the context of the relevant legislative framework (including the Licensing Directive and the UMTS Decision as well as UK legislation, that is to say, the Wireless Telegraphy Acts 1949 and 1998 and legislation made under them, which sought, inter alia, to implement those Community provisions) cannot be classified as an "economic activity" under Article 4(1) and (2) but rather constitutes an exercise of the sovereign authority of the State in regulating use of the spectrum. Doing so by way of auction could (putting the argument at its lowest) reasonably be regarded as a way of achieving the Government's objectives, as recorded in the Ministerial statement to Parliament of 18 May 1998, of achieving, for the long-term benefit of UK consumers and the national economy, the timely and economically advantageous development and sustained provision of UMTS services in the UK, and, subject to that overall aim, (i) utilising the available UMTS spectrum with optimum efficiency; (ii) promoting effective and sustainable competition for the provision of UMTS services; and (iii) subject to the above objectives, designing an auction which was best judged to realise the full economic value to consumers, industry and the taxpayer of the spectrum. Article 4(5) of the Sixth Directive 8 Article 4(5) provides that:
"States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions. However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition. In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out on such a small scale as to be negligible. Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities."
First sub-paragraph of Article 4(5) - acting as a public authority 9 The Appellants contend that the first sub-paragraph of Article 4(5) sets out a limited exception to the basic rule in Article 4(1). The exception applies (subject to the two limitations set out in the second and third sub-paragraphs of Article 4(5)) to activities and transactions in which States, regional and local government authorities and other bodies governed by public law engage "as public authorities". 10 The Appellants contend that the Secretary of State cannot be said to have acted "as a public authority" within the meaning of the first sub-paragraph of Article 4(5). Bodies governed by public law engage in activities "as public authorities" within the meaning of that provision when they do so under the special legal regime applicable to them. On the other hand, when they act under the same legal conditions as those that apply to private traders, they cannot be regarded as acting "as public authorities". [6] 11 Even if the issuing of the Licences could be regarded as being in some respects a "non-economic" activity or in some respects as being carried out by the Secretary of State in his capacity as a public authority acting as such, it was in other respects an economic activity carried out by the Secretary of State in his capacity as a taxable person. Further, if the Secretary of State is held (on whatever basis) to have been acting partly "as a public authority" and partly not, the Appellants submit that none of the consideration for the grant of the Licences, or, in the alternative, only a proportion of the consideration equal to the administrative costs incurred in granting the Licences (appropriately apportioned among the Licences), should be treated as consideration for a supply by the Secretary of State acting as a public authority. 12 The Appellants do not consider that the Community provisions (see paragraph 4.5.3 above) are any more relevant to the question as to whether the Secretary of State was acting as a public authority for the purposes of the first sub-paragraph of Article 4(5) than to the "economic activity" issue considered at paragraph 4.5.3 above. Moreover, the Appellants contend that the Secretary of State acted under a national statutory framework which was entirely or substantially permissive and imposed no conditions or obligations upon the Secretary of State that would differentiate the legal conditions under which he acted from those applying to private traders [7] (so that any conditions and obligations governing the Auction and grant of the Licences were imposed by the Secretary of State upon himself). The effect of the national statutory regime was to allow the Secretary of State to replicate the private law regime of an open market auction. 13 The Respondents maintain in essence that, in the circumstances set out in the Agreed Statement of Facts, the Secretary of State plainly was acting as a public authority, since his activities were governed by public law and under a special legal regime that does not apply to private operators (Case 446/98, Fazenda Publica v Camara Municipal do Porto [2000] ECR I-11435 ). The Respondents contend that the legislative framework governing the Secretary of State's activities in regulating use of the spectrum plainly did not apply to private operators; no private operator has power to authorise or regulate the use of the spectrum pursuant to the Wireless Telegraphy Acts 1949 and 1998, which made it a criminal offence to use the electro-magnetic spectrum save where an exemption applied or by persons holding a licence granted by the Secretary of State, and which also, the Respondents contend, constituted the public law regime under which the Secretary of State acted at all material times. Second sub-paragraph of Article 4(5) - distortion of competition 14 The Appellants contend that the limitation in the second sub-paragraph of Article 4(5) based on "distortion of competition" (which reflects or ought to be construed and applied consistently with the principle of fiscal neutrality) applies where treating the Secretary of State as a non-taxable person (i) would, or (ii) could or (iii) might lead to significant distortions of competition either immediately or in the future. They contend that this is the correct "distortion of competition" test, following the approach of the Court of Justice of the European Communities in paragraph 64 of its judgment in Assurandør-Societetet, acting on behalf of Taksatorringen v Skatteministeriet (Case C-8/01) in relation to the construction of similar language in Article 13A(1)(f) of the Sixth Directive. In this connection, the Appellants contend that neither the scheme and context of the Sixth Directive nor the different language versions of Articles 4(5) and 13A justify the application of a different "distortion of competition" test in the Article 4(5) context from that held by the Court of Justice of the European Communities to apply in the Article 13A context. There is no European authority explaining how the "distortion of competition" test in the second sub-paragraph of Article 4(5) is to be applied. 15 The Appellants contend that a qualifying risk of distortion arises from, inter alia , the proposed introduction of secondary trading in spectrum in the future alongside continuing primary assignments by the Secretary of State. A person wishing to acquire rights in relation to the use of 3G equipment or spectrum would be charged VAT on the acquisition of such rights in the secondary market but would not (if the Respondents are correct) be charged VAT on the acquisition of such rights from the Secretary of State. The tax treatment of similar supplies would therefore (if the Respondents are right) be different. The Appellants contend that, putting it at its lowest, the cash flow implications of acquiring high value rights on a taxable basis can be substantial. In addition, it cannot be assumed that all participants in a liberalised spectrum market would be able fully to recover their input tax. The Appellants contend that spectrum trading was not prohibited in principle by EC legislation at the time of the Auction and assert that it was permitted as a matter of fact by a number of Member States (subject to regulatory approval). Accordingly, the Appellants assert that the second sub-paragraph of Article 4(5) prevents the Secretary of State from being treated as a non-taxable person. 16 The Respondents maintain that the Appellants have not raised any plausible argument to the effect that any significant distortion of competition would arise as a result of treatment of the Secretary of State's activities as non-taxable. They contend, inter alia , that: - 16.1 even if at some future time there were to be some form of "competition" between secondary trading in rights and (unspecified) " continuing assignments " of rights by the Secretary of State, that hypothetical possibility of future competition cannot affect the analysis of whether treatment of the Secretary of State's activities as non-taxable at the material time (when there was on any view no such "competition") would cause any significant distortion of competition; and 16.2 The Appellants have not identified, let alone provided economic evidence to support their contentions as to, the market in which competition is said to be significantly distorted by treating the Secretary of State's activity of granting the Licences as non-taxable, nor produced any evidence that competition would thereby be significantly distorted in any such market (bearing in mind, for example, the obvious point (as the Respondents contend) that purchasers on any such market would be able to reclaim as input tax any VAT chargeable on supplies by private operators). Third sub-paragraph of Article 4(5) and Annex D - telecommunications 17 The Appellants assert that the activities of the Secretary of State in auctioning off and granting the Licences fall within the third sub-paragraph of Article 4(5) because they fall to be treated as "telecommunications" within the meaning of Annex D to the Sixth Directive. 18 The Appellants contend that the term "telecommunications" in Annex D has a broad and general meaning and there is no reason to limit the scope of the term. The Appellants submit that their contention for this wide interpretation of "telecommunications" in Annex D is supported by the broad definition of "telecommunications" that is included in Article 9(2)(e) of the Sixth Directive. 19 The Appellants also assert that the term "telecommunications" in Annex D includes the sale by a government organ of a Member State of licences permitting the use of telecommunications equipment in defined parts of the electro-magnetic spectrum for commercial purposes in the context of the liberalisation by that government of the market in electro-magnetic spectrum from state control or monopoly. 20 The Respondents maintain, in essence, that the term "telecommunications" in Annex D does not include the activity of regulating the use of the electro-magnetic spectrum for (in particular) telecommunications purposes; or the award of the right to use part of the electro-magnetic spectrum for telecommunications purposes. The definition in Article 9(2)(e) is intended to cover, in essence, supplies of rights to use telecommunications infrastructure and equipment, and does not cover the grant of rights to use part of the spectrum for telecommunications purposes. Value Added Tax Act 1994 21 There is also an issue of domestic UK VAT law and its relationship with Article 4(5) of the Sixth Directive. The precise application of this issue depends on the preliminary ruling of the Court of Justice of the European Communities in response to the questions now referred. 22 On 5 July 1994 the Value Added Tax Act 1994 (the VAT Act 1994 ) received Royal Assent. Section 4(1) of the VAT Act 1994 provides:
" VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him ."
Section 41(1) of the VAT Act 1994 provides:
" This Act shall apply in relation to taxable supplies by the Crown as it applies in relation to taxable supplies by taxable persons ."
Section 41(2) of the VAT Act 1994 provides:
" Where the supply by a Government department of any goods or services does not amount to the carrying on of a business but it appears to the Treasury that similar goods or services are or might be supplied by taxable persons in the course or furtherance of any business, then, if and to the extent that the Treasury so direct, the supply of those goods or services by that department shall be treated for the purposes of this Act as a supply in the course or furtherance of any business carried on by it ." 23 On 14 April 2000 the UK Treasury issued Treasury (Taxing) Directions (the Treasury Directions ). The Treasury Directions provided that "
A supply by a Government department which is mentioned in List 1 of any goods or services of a description in List 2 shall be treated for the purpose of the Act [the VAT Act 1994] as a supply in the course or furtherance of a business carried out by that department. " List 1 referred to the Department of Trade and Industry. List 2 referred inter alia both to " Licensing, certification, authorisation or the granting of any rights other than rights over land " and also to " telecommunications ". 24 The Appellants assert that it follows from those Directions that even if the Secretary of State would not otherwise be treated as engaged in economic activity under the Sixth Directive, the activity of the Secretary of State was deemed by operation of law pursuant to section 41(2) of the VAT Act 1994 and the Treasury Directions to be in the course of business, and was therefore chargeable to VAT under the domestic VAT legislation. 25 The Appellants contend that section 41(2) of the VAT Act 1994 and the Treasury Directions appear to implement Article 4(5) of the Sixth Directive and, therefore, the Respondents cannot rely on Article 4(5) (which the Appellants in any event contend does not support the Respondents' arguments) to override the clear, express, unambiguous and deliberately broad language of section 41(2) and of the Treasury Directions. Insofar as the national legislation goes further than Article 4(5) and broadens the scope of governmental activities within the charge to VAT, the Respondents cannot rely on Article 4(5) against the Appellants. In the alternative, if section 41(2) of the VAT Act 1994 does not implement Article 4(5) of the Sixth Directive, the Respondents cannot rely on Article 4(5) against the Appellants. In any event, the Appellants do not consider that the UK Government can rely on the terms of Article 4(5) for any purpose (including construction) in relation to an administrative act of a judgmental nature, as opposed to domestic legislation purporting to implement a provision of the Directive. 26 The Respondents maintain that the relevant national provisions have to be interpreted, so far as is possible, so as to ensure the effective implementation of the Sixth Directive, and in particular Article 4(5) (which the Respondents contend provides for the activities in question to be non-taxable) (Case C-106/89 Marleasing [1990] ECR I-4135 ). The Respondents contend that the relevant national provisions, particularly when interpreted in accordance with the Marleasing principle, produce the result that the activities of the Secretary of State are non-taxable. They observe that the question of whether the relevant national provisions are capable of being interpreted so as to implement the requirements of the Sixth Directive is of course for the national court to determine. Issues Arising – Context for the questions 1 Although the Tribunal has not yet heard detailed argument from the parties on these issues, the Tribunal considers that there are [considerable] uncertainties in the application of EC law to this case which the Tribunal will be unable to resolve without the guidance of the Court of Justice of the European Communities. The uncertainties include the following: (a) Whether (and if so, how) the answer to the question of whether the Activity (as defined in the Questions below) was an "economic activity" is determined by what the Respondents claim is its objectively regulatory nature. (b) Whether (and if so, how) the answer to the question of whether the Activity was an "economic activity" is affected by the aim or purpose of (i) the Secretary of State or (ii) the Appellants in their capacity as successful bidders for the Licences. (c) Whether (and if so, how) the answer to the question of whether the Activity was an "economic activity" is affected, as the Appellants claim, by the extent to which a result of the Activity was to generate proceeds in excess of costs and/or to use or distribute any such excess of proceeds over costs for general purposes and not for the further regulation or promotion of the use of the electro-magnetic spectrum. (d) Whether, having regard to the case law of the Court of Justice of the European Communities, [8] the question whether or not the Secretary of State acted as a "public authority" in engaging in the Activity is determined by the extent, if any, to which the legal regime applicable to the Secretary of State involves substantially different legal conditions from those applicable to private traders, bearing in mind that the laws of the different Member States of the European Union may draw the distinction between public or administrative law, on the one hand, and private law on the other hand, in different ways. (e) Whether (and if so, how) the answers to the questions of: (i) whether the Activity was an "economic activity"; and (ii) whether the Secretary of State was acting as a "public authority", are affected by the existence and terms of the Licensing Directive, the UMTS Decision, the Wireless Telegraphy Acts 1949 and 1998 and any UK secondary legislation made under the Wireless Telegraphy Act 1998. (f) [ To be agreed ] (g) If the Court of Justice of the European Communities were to determine in response to Question 6.3 that the Activity is partly chargeable to VAT under the Sixth Directive and partly not, it would be unclear how the respective parts should be assessed. (h) The answer to Question 6.4 may be that a future or conditional risk of distortion of competition created by the treatment of the Secretary of State as a non-taxable person in respect of the Activity is capable of being a qualifying distortion of competition for the purposes of the second sub-paragraph of Article 4(5). Equally, the answer to Question 6.5 may be that such a risk of distortion of competition is a relevant factor in construing the third sub-paragraph of Article 4(5) and the word "telecommunications" in Annex D. In either of these cases, it will be argued by the Appellants before this Tribunal that there was a prospect at the time of the Auction (as disclosed in the Agreed Statement of Facts) that a secondary market in the right to use spectrum would come into existence during the term of the Licences alongside continuing primary assignments by the Government, and that such a prospect represents such a qualifying distortion of competition created by the treatment of the Secretary of State as a non-taxable person in respect of the Activity. The law on this issue seems to the Tribunal to be uncertain. 2 These issues are identified to give the Court of Justice of the European Communities the best indication that this Tribunal can currently give as to the environment in which its ruling will be deployed so as to assist it in giving a ruling that will be of the greatest utility to the Tribunal in resolving the matters before the Tribunal. Questions Referred 1 In the circumstances set out in the Agreed Statement of Facts (attached to this Direction as Schedule B), is the term "economic activity" for the purposes of Articles 4(1) and 4(2) of the Sixth Directive to be interpreted as including the issuing of the Licences by the Secretary of State by way of an auction of rights to use telecommunications equipment in defined parts of the electro-magnetic spectrum (the Activity ), and what considerations are relevant to that question? 2 In the circumstances set out in the Agreed Statement of Facts what considerations are relevant to the question whether or not the Secretary of State, in conducting the Activity, was acting as a "public authority" within the meaning of Article 4(5) of the Sixth Directive? 3 In the circumstances set out in the Agreed Statement of Facts, can the Activity be (i) in part an economic activity and in part not, and/or (ii) partly carried out by a body governed by public law acting as a public authority and partly not, with the result that the activity would be partly chargeable to VAT under the Sixth Directive and partly not? 4 How likely and how close in time to the carrying out of an activity such as the Activity does a "significant distortion of competition" within the meaning of the second sub-paragraph of Article 4(5) of the Sixth Directive have to be in order for the person carrying out that activity to be required by that sub-paragraph to be considered a taxable person in respect of that activity? To what extent, if any, does the principle of fiscal neutrality bear on that question? 5 Does the word "telecommunications" in Annex D to the Sixth Directive (which is referred to in the third sub-paragraph of Article 4(5) of the Sixth Directive) include the issuing of the Licenses by the Secretary of State by way of an auction of rights to use telecommunications equipment in defined parts of the electro-magnetic spectrum, in the circumstances set out in the Agreed Statement of Facts? 6 Where (i) a Member State chooses to implement Articles 4(1) and 4(5) of the Sixth Directive by legislation conferring on a Government department (such as, in this case, the UK Treasury) a statutory power to make directions specifying which goods or services supplied by Government departments are to be treated as taxable supplies and (ii) that Government department makes, or purports to make, pursuant to that statutory power, directions specifying that certain supplies are taxable: is the principle set out in Case C-106/89 Marleasing [1990] ECR I-4135, paragraph 8 relevant to the interpretation of the domestic legislation and of those Directions (and if so, how)? SCHEDULE B AGREED STATEMENT OF FACTS HUTCHISON 3G UK LIMITED (LON/2003/0861) mmO 2 Plc (LON/2003/0878) ORANGE 3G LIMITED (LON/2003/0852) T-MOBILE (UK) LIMITED (LON/2003/0859) VODAFONE GROUP SERVICES LIMITED (LON/2003/0983) Appellants - and - HM COMMISSIONERS OF CUSTOMS & EXCISE Respondents AGREED STATEMENT OF FACTS Introduction This statement of facts covers the following areas: Background to 3G (paragraphs 0 to 0) Legal and Factual Background to the Grant of 3G Licences in the UK (paragraphs 0 to 0) Those involved in the Auction process (paragraphs 0 to 0) Licence and Auction Design (paragraphs 0 to 0) Licensee Obligations (paragraphs 0 to 0) Participants in the Auction Process (paragraphs 0 to 0) The Auction (paragraphs 0 to 50) Factors Affecting the Revenues Generated by the Auction (paragraphs 51 to 53) Spectrum Trading (paragraphs 54 to 58) Background to 3G The third generation of mobile devices ("3G") represents an important technological development in the mobile telecommunications market. 3G mobile devices offer a greater capacity for the fast transfer of data than previous generations of mobile telephones, enabling the provision (or greatly enhanced provision) of multimedia services, such as video-conferencing, mobile office services, virtual banking, home shopping, internet access and on-line entertainment. [9] The radio spectrum is a range of radio frequencies, used by the public and private sector to deliver services such as broadcasting, radar, and mobile communications. It is a finite resource of great and growing economic importance. [10] Global demand for spectrum is increasing, especially in ranges suitable for mobile communications. [11] To avoid interference, the spectrum must be allocated in some way among the various potential uses to which it can be put. Historically, this has been done by allocating spectrum to specific uses. Where the spectrum is allocated to uses such as broadcasting or mobile communications (as opposed to, for example, military use), the spectrum is then typically assigned to individual users through a licensing process. Though national governments retain the right to regulate the use of spectrum within their territories, decisions about which parts of the spectrum to allocate for which services are often made in the context of international agreements. [12] The standards [13] developed to enable the provision of 3G services are based upon work undertaken by the International Telecommunications Union ("ITU"), a United Nations agency [14] whose responsibilities include the oversight and facilitation of inter-governmental negotiations needed to develop legally binding agreements between sovereign states governing the use of the spectrum. [15] In 1992, the ITU World Administrative Radio Conference ("WARC 92") identified the frequency bands for the development of both the satellite and terrestrial parts of the Future Public Land Mobile Telecommunications System (FPLMTS), later renamed International Mobile Telecommunications-2000 ("IMT-2000"). The IMT-2000 3G mobile system concept was developed at a world level on the basis of ITU Resolution 212. [16] Within Europe, a specific system called the Universal Mobile Telecommunications System ("UMTS") has been developed which satisfies the IMT-2000 standard. [17] By Directive 97/13/EC of the European Parliament and Council of 10 April 1997 "on a common framework for general authorizations and individual licences in the field of telecommunications services" (the "Licensing Directive") a framework had been established for telecommunications licensing which was intended to harmonise licensing procedures throughout the European Union. [18] The Licensing Directive was in force at all relevant times. [19] 1 The third "whereas" recital in the preamble to the Licensing Directive stated, " market entry should be restricted on the basis only of objective, non-discriminatory, proportionate and transparent selection criteria relating to the availability of scarce resources or on the basis of the implementation by national regulatory authorities of objective, non-discriminatory and transparent award procedures ". 2 The thirteenth "whereas" recital stated, " Whereas the introduction of individual licensing systems should be restricted to limited, pre-defined situations; whereas Member States may limit the number of individual licences for any category of telecommunications services only to the extent required to ensure the efficient use of radio frequencies or for the time necessary to make available sufficient numbers in accordance with Community law ". 3 Article 3 paragraph 3 of the Licensing Directive provided, " Member States may issue an individual licence only where the beneficiary is given access to scarce physical and other resources or is subject to particular obligations or enjoys particular rights, in accordance with the provisions of Section III. " (Section III deals with individual licences.) 4 Article 10 paragraph 3 stated, " Member States shall grant such individual licences on the basis of selection criteria which must be objective, non-discriminatory, detailed, transparent and proportionate. Any such selection must give due weight to the need to facilitate the development of competition and to maximize benefits for users ." 5 Article 11 provided as follows:
" 1. Member States shall ensure that any fees imposed on undertakings as part of authorization procedures seek only to cover the administrative costs incurred in the issue, management, control and enforcement of the applicable individual licences. The fees for an individual licence shall be proportionate to the work involved and be published in an appropriate and sufficiently detailed manner, so as to be readily accessible. 2. Notwithstanding paragraph 1, Member States may, where scarce resources are to be used, allow their national regulatory authorities to impose charges which reflect the need to ensure the optimal use of these resources. Those charges shall be non-discriminatory and take into particular account the need to foster the development of innovative services and competition ."
On 14 December 1998 the European Parliament and Council took Decision No. 128/1999/EC on the coordinated introduction of a third-generation mobile and wireless communications system (UMTS) in the Community (the "UMTS Decision"). [20] In the UMTS Decision: - 6 The tenth "whereas" recital in the preamble stated, " Whereas organisations providing UMTS networks or services over those networks should be able to enter the market without unnecessary constraints or excessive fees to allow for a dynamic market and a broad competitive service offering ". 7 The eighteenth "whereas" recital stated, " Whereas spectrum availability and appropriate pricing, coverage and quality will be essential aspects to the success of UMTS development; whereas any spectrum pricing method should not adversely impact on the competitive structure of the market, and respect the public interest, while ensuring efficient use of the spectrum as a valuable resource ". 8 The twenty-first "whereas" recital stated, " Whereas the second generation cellular digital mobile communications systems were originally defined in Council Directive 87/372/EEC of 25 June 1987 on the frequency bands to be reserved for the coordinated introduction of public pan-European cellular digital land-based mobile communications in the Community as operating in the 900 MHz bands; whereas DCS-1800 has to be considered as part of the GSM family and of such second generation; whereas the Community should build on the success of the current generation of mobile digital technology including GSM both in Europe and in the world, taking into consideration interworking between UMTS and second-generation systems; whereas there should be, pursuant to Community law, no discrimination between GSM operators and new entrants in UMTS markets; whereas UMTS should develop in one seamless environment including full roaming with GSM as well as between the terrestrial and satellite components of UMTS networks, which is likely to make hybrid terminals such as dual mode/band GSM/UMTS terminals and terrestrial/satellite terminals necessary. " 9 Article 3 paragraph 1 of the UMTS Decision stated that " Member States shall take all actions necessary in order to allow, in accordance with Article 1 of Directive 97/13/EC, the coordinated and progressive introduction of the UMTS services on their territory by 1 January 2002 and in particular shall establish an authorisation system for UMTS no later than 1 January 2000 ." 10 Article 3 paragraph 3 required Member States to " ensure, in compliance with Community legislation, that the provision of UMTS is organised … in frequency bands which are harmonised by CEPT " (the European Conference of Postal and Telecommunications Administrations). [21] Member States essentially used two different approaches to award licences in relation to the spectrum allocated to UMTS: a price based auction and comparative bid. Subject to any points that the Member States concerned may wish to make in these proceedings, the parties understand that auctions (of different types and procedural rules) were organised in seven of the then Member States (Austria, Belgium, Denmark, Germany, Greece, the Netherlands and the United Kingdom); that comparative bid processes (or "beauty contests") were used in seven other of the then Member States (Finland, France, Ireland, Luxembourg, Portugal, Spain and Sweden); and that Italy opted for a hybrid approach (See Annex 1 for details). [22] Legal and Factual Background to the Grant of 3G Licences in the United Kingdom In the United Kingdom, the basic regulatory mechanism for spectrum allocation at all material times was found in section 1(1) of the Wireless Telegraphy Act 1949 ("the WTA 1949"), which provided that; " No person shall establish or use any station for wireless telegraphy or install or use any apparatus for wireless telegraphy except under the authority of a licence in that behalf granted under this section - (a) by the Secretary of State ". Sections 1A to 1C of the WTA 1949 then provide for a number of criminal offences ancillary to that prohibition. There was therefore a general prohibition on the use of the electro-magnetic spectrum save where an exemption applied or by persons holding a licence granted by the Secretary of State which, inter alia , restricted the frequencies at which the licensee was permitted to transmit. In carrying out his functions under the WTA 1949 (and, later, the Wireless Telegraphy Act 1998 ("WTA 1998")) the Secretary of State at all material times and for all relevant purposes acted through the Radiocommunications Agency ("RA"), an executive agency of the Department for Trade and Industry (the "DTI"). [23] On 31 July 1997, the DTI issued a consultation document entitled "Multimedia Communications on the Move". The consultation document contained detailed proposals, on which comments were invited before any decisions were taken, for a framework for granting licences to operators to establish and use 3G networks [24] within the United Kingdom [25] ("3G Licences"). One of the main proposals in the consultation document was that 3G Licences should be awarded by an auction (the "Auction"), subject to passage of the Wireless Telegraphy Bill, then before Parliament (this Bill ultimately became the WTA 1998; see paragraphs 0 et seq. below). The consultation document stated that the competing operators should have licensing certainty before the end of financial year 1998/1999 (i.e. by April 1999 [26] ). It expressed the view that any individual company or consortium, including the existing four UK mobile telephony operators (see paragraph 0 below), should be eligible to bid, and, in the context of encouraging a possible new entrant to the market, the document suggested that " all four [existing mobile telephony] operators should now actively review whether it is time to negotiate national roaming agreements for their [existing] GSM and PCN networks ". [27] Among the other matters on which comments were invited were the following: - the possibility that licences should last for 15 years, and on how the spectrum should be divided for auction purposes [28] ; the appropriate number of licences, the minimum amount of the spectrum each operator would require and whether each operator required the same amount of the spectrum [29] (the consultation document envisaged that at least three licences should be offered); [30] and the proposition that Government should include provision in Third Generation licences to ensure the early, efficient and effective introduction of Third Generation national roaming, with open and fair rules for charging, which would be referred to Oftel in the event of a dispute. The document also asked for views on the Government's belief that there would be significant advantages to consumers if roaming between Second and Third Generation networks was made possible. [31] Comments were invited to be sent to the DTI by 17 October 1997 and responses were published on 18 November 1997. As the consultation document had indicated, it was necessary to pass legislation before the 3G Licences could be awarded by Auction; although fees for the grant of wireless telegraphy licences could be charged under section 2 of the WTA 1949, those fees could not, under that Act, be set at a level greater than that reasonably required to meet the administrative costs of the RA. In 1998, Parliament passed the WTA 1998, which received Royal Assent on 18 March 1998 and came into force on 18 June 1998. A DTI press release issued on 18 March 1998 described the legislation as providing " a modern framework for management of the radio spectrum – the first major modernisation of the radio licensing framework for almost half a century ." [32] Section 2 of the WTA 1998 provided that:
"(1) In exercising his powers under section 1 to prescribe sums payable in respect of wireless telegraphy licences of any description, the Secretary of State shall have regard, in particular, to the matters specified in subsection (2); and accordingly may, if he thinks fit, prescribe sums which are greater than would be necessary for the purposes of recovering costs incurred by him in connection with any functions relating to wireless telegraphy. (2) Those matters are- (a) the extent of the part of the electro-magnetic spectrum available for use under licences of that description, (b) the demand and likely future demand for the use of the part of the electro-magnetic spectrum to be used under licences of that description, and (c) the desirability of promoting- (i) the efficient use and management of the electro-magnetic spectrum, (ii) any economic benefits arising from the use of wireless telegraphy, (iii) the development of innovative services, and (iv) competition in the provision of telecommunication services"
. Section 3 of the WTA 1998 provided that:
"(1) Having regard to the desirability of promoting the optimal use of the electromagnetic spectrum, the Secretary of State may by regulations provide that, in such cases as may be specified in or determined by him under the regulations, applications for the grant of wireless telegraphy licences must be made in accordance with a procedure which – (a) is set out in a notice issued by him under the regulations, and (b) involves the making by the applicant of a bid specifying an amount which he is willing to pay to the Secretary of State in respect of the licence"
. The WTA 1998 therefore provided a basis in UK law for the Secretary of State to award 3G Licences by means of an Auction. The Secretary of State was to exercise that power by means of regulations made under section 3, which directed him to have regard to the " desirability of promoting the optimal use of the electromagnetic spectrum ". On 18 May 1998, Barbara Roche, MP, the then Parliamentary Under-Secretary of State for Small Firms, Trade and Industry at the DTI, announced the UK Government's intention to hold an auction of 3G Licences. The Minister gave the following written statement in an answer to a Parliamentary Question:
" The UK has been at the forefront of developing mobile telecommunications in Europe, and I am determined that it should remain in that position. Third generation mobile … offers exciting prospects for new jobs, new services and new investment, and I aim to ensure that the UK benefits fully from this new technology. To that end, we intend to hold an auction of UMTS licences in the summer of 1999, subject to market and other developments and to final decisions nearer the time. This timetable takes account of responses to the Government's consultation document 'Multimedia Communications on the Move', further discussions with industry and advice from NM Rothschild and Sons. In offering through an auction licences to use specified frequencies for the delivery of UMTS, the Government's overall aim is to secure, for the long-term benefit of UK consumers and the national economy, the timely and economically advantageous development and sustained provision of UMTS services in the UK. Subject to this overall aim, the Government's objectives are to (i) utilise the available UMTS spectrum with optimum efficiency; (ii) promote effective and sustainable competition for the provision of UMTS services; and (iii) subject to the above objectives, design an auction which is best judged to realise the full economic value to consumers, industry and the taxpayer of the spectrum ". [33] According to the NAO Report (the background to which is explained at paragraph 0 below): - [34] " [The] objective [of 'realising the full economic value'] was worded so as to make it clear that the interests of industry and consumers should be taken into account, rather than to mean simply maximising the proceeds for the taxpayer. It recognised that a strong industry would generate economic growth and receipts from taxation. Nevertheless, subject to the main objectives of promoting economic use of the spectrum, and competition between operators, the [UK] Government saw the potential to raise greater proceeds from the allocation of licences than they had raised in previous allocations. Following economic advice from National Economic Research Associates, an international economic consultancy, that auctions provided a sound economic basis for the allocation of spectrum, they decided to allocate spectrum through an auction. They considered this to be consistent with the prime objectives [of promoting economic use of the spectrum and competition between operators] because by awarding licences to the highest bidder, spectrum would be allocated to the mobile telephone operator that valued it most and could be expected to exploit it to the greatest advantage. A bidder that had paid a market-based valuation for spectrum would be incentivised to roll-out services as quickly as possible, to achieve the returns required by its stakeholders. On 24 November 1999, the Secretary of State exercised his powers under, inter alia , section 3(1) of the WTA 1998 to make the Wireless Telegraphy (Third Generation Licences) Regulations 1999 [35] ("the 1999 Regulations"). The 1999 Regulations set out a framework for the grant of five licences [36] for the provision of 3G services; the spectrum covered by each licence was set out in the Schedule to the 1999 Regulations. The detailed rules for the operation of the auction were then set out in a Notice dated 22 December 1999, made under and conforming with regulation 4 of the 1999 Regulations. Those involved in the design of the Auction The RA was responsible for the conduct of the Auction for 3G Licences on behalf of the Secretary of State. Its functions included bearing the costs of the Auction process; proposing the design of the licences to be auctioned; managing the process of consulting with the telecommunications industry over the design of the licences and the auction process; and collecting the licence fees. [37] In December 1997, the RA appointed an investment bank, NM Rothschild & Sons Limited ("
Rothschilds"), as financial advisers in relation to the Auction. Rothschilds' role was, in essence, to provide financial and specialist telecommunications advice on every aspect of the policy framework, auction methodology and implementation, to assist in the overall project management and to issue an Information Memorandum on behalf of the UK Government. A further role was to promote the 3G opportunity and market the Auction. [38] Rothschilds paid particular attention, through consultation with potential bidders, to providing advice on how the auction could be designed so as to encourage the participation of new entrants. [39] Rothschilds was remunerated by a flat fee of £4,070,000 with an additional achievement fee dependent on the number of bidders participating in the Auction, up to a maximum of £700,000 if there were at least 11 bidders [40] . In the event, as there were thirteen bidders, Rothschilds received the maximum £700,000 achievement fee. [41] Rothschilds held informal meetings with potential bidders and marketed the Auction to a wide variety of potential bidders both in the UK and abroad, whilst generally acting as the communication channel for the RA on all matters concerning the Auction. The UMTS Auction Consultative Group (the "UACG") was set up in early 1998. This was a consultative group through which the UK Government presented its proposals for the Auction. It acted as a forum for discussion between the UK Government and industry as to how the Auction should be designed and implemented. The UACG comprised telecommunications firms (i.e. potential bidders in the auction process), electronics manufacturers, relevant trade and professional organisations and representatives from the UK Government and its advisers. The Director General for Telecommunications (the UK body then charged with regulating the telecommunications industry, "Oftel"), and the DTI were also involved in UACG meetings. The Communications and Information Industries Directorate of the DTI also advised the RA in relation to telecommunications licensing matters, UK Government policy on telecommunications and international spectrum and standard issues; and the RA consulted Oftel on regulatory issues. There were other advisers on technical and commercial issues concerning the spectrum. Quotient Communications and Ovum Consulting were commissioned by the RA to consider the spectrum requirements of terrestrial UMTS in the UK. Market forecasts of demand were performed by Ovum and these were then converted into spectrum demand by Quotient. Analysys Consulting were sub-contracted by Rothschilds to advise on the size of the prospective 3G market. Professor Kenneth Binmore, at ELSE (the ESRC [42] Centre for Economic Learning and Social Evolution), an interdisciplinary research centre based at University College London ("UCL"), led the team that provided economic advice on different options for the design of the Auction [43] with the assistance of a team of economists, including Professor Paul Klemperer of Oxford University who was the principal auction theorist. [44] Professors Binmore and Klemperer were experts in auction and game theory. Licence and Auction Design The design of the spectrum "package" available under each licence (that is, the frequency bands in which the licensee's radio equipment would be permitted to operate) was one of the matters on which the RA consulted through the UACG. One proposal, put forward by the advisory group SMAG [45] (made up of industry representatives and on which the RA Chief Executive also sat), was that three licences, each carrying the right to use radio equipment in 2 x 20MHz of paired spectrum [46] , be allocated. SMAG's reasoning was based on the belief that 2 x 20MHz was the minimum spectrum width needed to provide 3G services, which meant that only three licences could be issued. However in assessing the requirements for spectrum to provide services, the industry and technical advisers subsequently concluded that each licensee would need only 2x15 MHz of paired spectrum to provide 3G services, with the result that it was technically feasible to issue four licences. By that stage (August 1998), the RA's position – put forward for discussion in the UACG – was that " While five licences would secure a new entrant, it could also compromise the ability of all licensees to run effective UMTS networks, a four licence scenario could therefore be more attractive to a successful new entrant bidder ". [47] The RA, in consultation with the UCL team of economic advisers, then considered a number of different auction designs within a four licence scenario. [48] On 9 February 1999, Michael Wills MP, the then Parliamentary Under-Secretary of State for Small Firms, Trade and Industry, announced a government consultation on the possibility of offering five licences, with a larger licence to be reserved for a new entrant. [49] The Government considered that reserving one of the two larger licences for a new entrant would encourage market entry [50] and foster competition. [51] On 6 May 1999, the RA confirmed its intention to offer five licences. The spectrum packages were as follows: Licence A (the licence which allowed use of radio equipment in the greatest bandwidth and was to be reserved for a new entrant): 2x15 MHz of paired spectrum and 5 MHz of unpaired spectrum; Licence B: 2x15 MHz of paired spectrum; and Licences C, D and E: 2x10 MHz of paired spectrum and 5 MHz of unpaired spectrum. [52] That was the structure laid down in the 1999 Regulations. Once the number of licences on offer was greater than the number of incumbents, new entrants could be attracted without the need for a sealed bid. Moreover, because the five licences on offer were of unequal value, no auction design involving a sealed bid stage was feasible. The RA therefore considered several auction designs based on that used by the Federal Communications Commission in the US which, in effect, was a simple "English" ascending auction. [53] The design finally adopted, as set out in the Notice of 22 December 1999, was of this type. In essence, the structure of the Auction was as follows. 11 All bidders had to meet certain pre-qualification requirements. The conditions which an applicant in the UK had to fulfil in order to be allowed to bid related to the proper establishment and good standing of the company and its officers, details of its ownership and control structure and its relationship with other potential bidders. They also had to pay a deposit (see paragraph 1.12). Bidders were not required to submit any form of business plan to the RA outlining their proposals for rolling out 3G services. 12 All qualifying bidders had to pay a deposit of £50 million (€82.37 million), increasing to £100 million (€164.74 million) when the bids reached £400 million (€658.96 million [54] ). According to the NAO Report, the deposit requirement was a deterrent to any possible tendency to bid prices of licences beyond their estimated value at the expense of incumbents. [55] These deposits would be forfeited if a successful bidder failed to take up a licence which it had won; otherwise, they were returned (to the unsuccessful bidders) or set against the cost of the licence (for successful bidders). 13 Each licence had a minimum opening bid, and thus effectively a 'reserve price', as follows: 13.1 Licence A: £125 million; 13.2 Licence B: £107.1 million; and 13.3 Licences C to E: £89.3 million. 14 All bidders simultaneously put in bids, each bidder being allowed to bid for one licence. 15 The highest bid for each licence became "current". It was irrevocable and had to be paid if the auction ended at that point. Bidders with current highest bids were not allowed to bid in the next round. 16 Unless a bidder held a current highest bid, it had to (i) bid in the next round or (ii) use a waiver (each bidder had three waivers). Otherwise, it had permanently to withdraw from the auction. Once the number of bidders fell to eight, each bidder had the right to call for up to two "recess days" in which no bidding took place. [56] 17 If there were more bidders in the auction than licences available (i.e. more than five bidders), there was another round, in which bidders other than those with current highest bids were allowed to bid. A new bid had to be in multiples of £100,000, and had to be a certain percentage (fixed by the RA at the end of each round) over the current highest bid provided that the money value of that percentage was at least £1 million (the percentage fell from 5% to 1.5% over the course of the auction) ("the minimum bid"). There was a maximum bid in each round, i.e. twice the minimum opening bid (or the minimum bid for that round, if higher). 18 The number of rounds per day was set by the RA on the previous day. There was at least one round each working day (except for recess days). The number of rounds per day increased as bidders became comfortable with the process. [57] 19 The rounds continued until a round where there were no new bids or waivers. 20 There was no upper limit to the amount any successful bidder could pay for its licence; but no such suggestion had been made during the consultation process leading up to the Auction. However, the Select Committee on Public Accounts stated in its Thirtieth Report [58] that "[t]he [RA] conceded that they had performed no risk assessment based on such high proceeds and said that observers had also been astonished by the outcome. Risk assessments on similar exercises in the future should model the possibility of a wide range of outcomes." 21 The Auction provided for a "lump sum" payment, subject to the possibility of payment by instalments, as opposed to royalty payments over time. [59] In the event, all successful bidders chose to pay the lump sum up front. 22 The bids were fully transparent. Each bidder knew who the other bidders were. Price bids and price bidders were made public to all bidders at the end of each round, together with information on the use of waivers or recesses. Licensee obligations The licences auctioned and granted under the WTA 1949 and the WTA 1998 (example licence attached at Annex 3) contained the following conditions - 23 requirements as to maximum power and interference levels of equipment and its compliance with performance standards; 24 the requirement that the licensee install, maintain and use Radio Equipment [as defined in the licence] in such a way as to enable the provision of, by no later than 31 December 2007, and to maintain thereafter, a telecommunications service by means of the Radio Equipment to an area where at least 80% of the population of the UK live; 25 the requirement to obtain site clearances; 26 the requirement to provide information; and 27 the condition that the licence was not transferable. In order to operate a telecommunications system so as to provide a telecommunications service in the United Kingdom an operator also required a licence under section 7 of the Telecommunications Act 1984 (example licence attached at Annex 4). [60] These contained the following conditions, among others: the requirement to provide mobile telecommunications services to the Crown, and Emergency Organisations [as defined in the licence], among others; [61] the requirement to provide directory services; [62] the requirement to provide access to emergency call services and operator assistance; [63] requirements as to metering and billing arrangements; [64] requirements as to chatline and live message services; [65] requirements as to services for disabled persons; [66] requirements as to numbering arrangements. [67] Both the licence granted under the WTA 1949 and the WTA 1998 and the licence granted under the Telecommunications Act 1984 contained certain other details relating to, inter alia, the term of the licence. The RA also wished to ensure that any new entrant should be able to obtain access for its subscribers to the 2G network of an incumbent that also had a 3G licence. This was so that the new entrant would not be competitively disadvantaged while it built its own network infrastructure. The requirement was only to last until 2009 (i.e for the first nine years of the licence). Oftel attempted to implement this policy by introducing a new condition into the operating licences of the incumbents. The attempt was successfully challenged in the High Court by One2One and Orange. [68] Though Oftel subsequently won on appeal to the Court of Appeal, Vodafone and BT meanwhile (and before the opening of the Auction) voluntarily accepted the condition, and the Government did not then impose the condition on One2One (now T-Mobile) or Orange. Participants in the Auction Process All four of the then existing mobile telephone operators in the UK – British Telecommunications Plc ("BT") [69] (BT's mobile business has since been demerged as mmO 2 Plc), Orange, T-Mobile (then One2One) and Vodafone participated in the Auction. [70] In addition to these incumbent operators, the following nine potential new entrants participated: TIW UMTS (UK) Limited; 3G (UK) Limited (a member of the Eircom group); Crescent Wireless Limited (whose shareholders had a significant interest in Global Crossing); Epsilon Tele.Com Plc (a wholly owned subsidiary of the Nomura group); NTL Mobile Limited (jointly owned by NTL and France Telecom); One.Tel Global Wireless Limited (a subsidiary of One.Tel); Spectrum Co Limited (owned in the majority by Sonera, a Finnish telecommunications company); Telefonica UK Limited (a wholly owned subsidiary of Telefónica SA) and WorldCom Wireless (UK) Limited (wholly owned by MCI Worldcom). In late 1999/early 2000 Vodafone launched a bid for Mannesmann AG. The formal offer period for this bid commenced on 24 December 1999. At that time, Mannesmann AG controlled Orange, having bought it in October 1999. By 9 February 2000, Vodafone had received acceptances in respect of over 50% of the shares for its bid for Mannesmann AG. [71] Vodafone's purchase of Mannesmann AG was subject to approval by the European Commission under the EC Merger Regulation. [72] On 12 April 2000, the European Commission approved the acquisition on the condition that Vodafone sold its shareholding in Orange. [73] But, in the meantime, under the rules of the Auction, Vodafone and Orange were as from February 2000 "Associated Bidders" [74] and were therefore prevented, following the acquisition, from both participating in the Auction [75] without a contrary determination by the Secretary of State. On 10 February 2000 the Secretary of State made a determination that both of these incumbent operators could participate in the Auction provided that Vodafone gave a number of specific undertakings in relation to its shareholding in Orange and the conduct of Vodafone and Orange in the Auction (i.e. to ensure the complete separation and independence of their respective bidding decisions); [76] further, no 3G Licence would be granted to these operators until they had de-merged. After Vodafone and Orange had each succeeded in bidding for a 3G Licence, Orange was sold to France Telecom in May 2000 for around £6 billion more than Mannesmann had paid for it in October 1999, before the Auction. [77] 3G Licences were then granted to Vodafone and Orange. The Auction This was the world's first 3G auction. [78] Paul Klemperer, the principal auction theorist advising the RA at the time, has since stated (expressly recording his own views rather than those of the Government) that "[g]oing to market first was a deliberate strategy of the UK auction team" [79] and that the team "deliberately maintained this strategy even when the complications engendered by the Vodafone-Mannesman takeover battle led many to suggest that the U.K. auction be postponed." [80] In a press notice (P2000/116) of 18 February 2000, the then Minister for E-commerce and Small Business Patricia Hewitt said:
"Early licensing certainty for 3G mobile is essential if the UK is to remain at the forefront of the global telecommunications market. This will be the first spectrum auction in the UK and the first auction for 3G mobile spectrum in Europe. The Government is delivering on its commitments to begin the auction this financial year and to introduce measures to attract one or more new entrants. The increased competition and innovation in the mobile market that this will bring is good news for the UK economy and for consumers. It will be an important contribution to the Government's aim of making the UK the best place in the world to conduct e-commerce. With thirteen high quality bidders participating I look forward to a competitive auction. The progress of the auction will be published round by round on the auction website. "
The Auction commenced on 6 March 2000. [81] There were 150 rounds [82] of bidding, lasting until 27 April 2000. The process lasted 52 days, running five days a week (subject to recess periods and public holidays). [83] The successful bidders and the prices they paid were as follows: [84] Licence Winner Final Bid [85] Licence A [reserved for a new entrant] TIW UMTS (UK) Limited (now Hutchison 3G UK Limited) [a new entrant] £4,384,700,000 (€7,485,121,370) Licence B Vodafone Limited [an incumbent operator] £5,964,000,000 (€10,181,144,400) Licence C BT3G Limited [86] [an incumbent operator] £4,030,100,000 (€6,879,783,710) Licence D One2One Personal Communications Limited (now T-Mobile (UK) Limited) [an incumbent operator] £4,003,600,000 (€6,834,545,560) Licence E Orange 3G Limited [an incumbent operator] £4,095,000,000 (€6,990,574,500) Total fees paid £22,477,400,000 (€38,371,169,540) The provisional winners were announced by the DTI in a press release issued on 27 April 2000. [87] The press release set out the provisional winners and then added the following: - "Mr Byers [i.e. the Rt. Hon. Stephen Byers MP, the then Secretary of State for Trade and Industry] said:
'The outcome of this auction supports the Government's commitment to early licensing of 3G and to increasing competition in the UK mobile telecoms market. It will ensure the UK maintains its position as a world leader in mobile telephony, and is a vital step towards our goal of making the UK the best place in the world for e-commerce. '
I welcome the introduction of a new entrant to the UK mobile telecoms market. This has been a direct result of the decision to auction five licences. Greater competition will spur faster roll-out of more innovative services, as well as delivering greater choice and lower prices to the consumer. '3G has the potential to transform everyday life, opening up full scale, multi-media access to millions of people. 3G users will be able to surf the net, download e-mails, music and high quality pictures and hold video conferences all on the move. 'This was the world's first 3G spectrum auction and UK consumers will be among the first in the world to reap the benefits of this exciting new technology. The outcome of this auction is good news for business, the consumer, the economy, and the taxpayer.' This is the first time spectrum has been allocated in the UK by auction allowing the licensing process to reflect the commercial value of spectrum. Previously licences have been allocated by comparative selection ('beauty contest') with licence fees set to cover administration costs. The auction began on Monday 6 March and was managed by the Radiocommunications Agency, which is responsible for the licensing and administration of the radio spectrum." The acquisition of the majority of the share capital of TIW UMTS (UK) Limited by Hutchison 3G UK Holdings Limited was completed on 29 June 2000 following which TIW UMTS (UK) Limited changed its name to Hutchison 3G UK Limited. The outstanding share capital of TIW UMTS (UK) Limited was acquired by Hutchison 3G UK Holdings Limited some six months later. [88] According to the NAO Report, the transaction suggested that after the Auction the 3G Licence held by TIW had an implied value of £6 billion (as opposed to the £4.385 billion TIW had actually paid) [89] . The successful bidders paid for their licences in 2000 (licences A and D were issued on 9 May 2000; Licence C on 16 May 2000; and Licences B and E on 1 September 2000). [90] Winning bidders could either pay in full at the end of the Auction or in instalments. [91] If they chose to pay by instalments the RA required a bank guarantee against default. [92] All of the successful bidders chose to pay in full due to the cost of a bank guarantee and due to the size of interest payments payable on the outstanding amount. [93] The licences were for a term expiring on 31 December 2021 unless earlier revoked by the Secretary of State or surrendered by the licensee. [94] The total cost to the RA of developing and managing the Auction was approximately £8,000,000. [95] These costs were comprised mainly of consultancy fees, the cost of legal services provided by the DTI and the cost of the RA's own staff. [96] Factors Affecting the Revenues Generated by the Auction On 19 October 2001, the Comptroller and Auditor General of the National Audit Office, Sir John Bourn, published a report entitled:
"The Auction of Radio Spectrum for the Third Generation of Mobile Telephones" (the "
NAO Report"). The purpose of the NAO Report was to report to Parliament, and in particular to the Public Accounts Committee of the House of Commons, on the efficiency and effectiveness with which the RA had conducted the Auction. Paragraphs 6-12 of the Executive Summary, and Part 2, of the NAO Report addressed the question of whether the Auction had realised the full economic value to consumers, industry and the taxpayer of the spectrum in the light of the fact that it raised more money than had been expected. The key findings of the NAO Report on that question were as follows. The United Kingdom was the first country in the world to allocate spectrum for 3G mobile telephony by auction. [97] The revenue generated by the Auction greatly exceeded revenues raised from previous allocations of spectrum in the United Kingdom, all of which had been under a legal regime that allowed for licence fees to be set only so as to cover the costs of licensing. [98] The spectrum proved a difficult asset for the RA to value, because there had been no previous auction to provide a benchmark, and the RA found it difficult to obtain valuations from the industry itself, having no access to potential bidders' bidding plans. The RA and its financial advisers, Rothschilds, believed that variances in financial market conditions and between the mobile telephone operators made it very difficult to predict likely revenues. These difficulties were shared by outside commentators. [99] In April 1999, the grant of the 3G licences by auction was estimated by the RA and its advisers to realise in the region of £1.5 billion and reserve prices for the auction were set accordingly. By January 2000, on receipt of 13 applications, this estimate was increased to a range of £1 billion to £3 billion. The highest estimate of proceeds, published shortly after the commencement of the auction by Lehman Brothers' investment analysts, was £6 billion, a figure that reflected recent developments such as a boom in telecommunications industry stocks and a steeply upward trend in mobile telephone use in the UK. [100] The high level of proceeds from the UK auction arose from the strong convergence of several positive factors, some of which were attributable to the actions of the RA and others of which originated from external causes. These factors were as follows: - The NAO Report stated that in reserving the large A licence for a new entrant, the RA accepted the risk that this might lead to lower proceeds. [101] However, Peter Cramton (the NAO's economic adviser) stated that revenues would probably have been slightly lower if Licence A had not been reserved. [102] Although the premium that the four existing mobile telephone operators placed on a larger licence could not be predicted in advance [103] , allocating that large licence to a new entrant, leaving only one other large licence (Licence B) created a situation in which the two largest existing operators, Vodafone and BT Cellnet, went "head to head" for the only remaining large licence, sustaining its price level at a similar level per MHz as the other licences. [104] The UK Auction benefited from more competition than other later auctions of spectrum elsewhere in the EU. The decision to auction five licences was fundamental. Given that there were four incumbent operators, five licences guaranteed that a new entrant would win one, creating a strong incentive for potential entrants to enter the bidding. Setting aside the largest, best licence, for a new entrant was an additional incentive to enter. Peter Cramton stated in a report appended to the NAO Report that the "[t]otal auction revenues would likely be slightly lower with six licenses." [105] Hutchison told the NAO that they regarded the imposition of a "roaming" condition on incumbent operators (see paragraph 38 above) as important or very significant in reducing a barrier to entry to the market and encouraging the participation of new entrants [106] . Most of the new entrant bidders told the NAO that marketing by Rothschilds had encouraged them to bid. [107] The RA consulted widely, in particular through the UACG. [108] The RA decided not to invite one-off sealed bids, on advice from their advisers in game theory (i.e. Professors Binmore and Klemperer at UCL – see paragraph 27 above). The NAO noted that " there is widespread evidence that single sealed bids can produce irrational results in which similar lots realise wildly different proceeds, though sealed bids may be advisable if there are insufficient bidders to sustain an open competition ". [109] The NAO considered that the format of the Auction gave bidders confidence in bidding higher, since they were able to see that numerous competitors were doing likewise, presumably based on their own business projections and strategic priorities. [110] Further, an ascending auction spread over seven weeks gave the bidders ample time to revise their initial budget constraints through authorisation from their top management and external financial advisers. The NAO observed, citing the report of Peter Cramton, that a slow-paced auction can lead to increased costs and reduced interest by bidders. The RA could, it found, have quickened the Auction by: setting higher minimum opening bids; increasing the size of the bid increment; or increasing the number of rounds per day [111] . However, Peter Cramton's report stated that "[a]lthough the auction could have been conducted much faster, there was little economic loss from the gradual pace. The high stakes and great uncertainty about value probably justified the conservative course taking [sic] by the UK Government." [112] The final price for the 3G Licences was largely determined by the point at which the last unsuccessful bidder, NTL, dropped out of the auction. NTL told the NAO that it had based its bidding on: - Its strong existing UK customer base (in cable television and fixed telecommunications) Its position as supplier of transmitters to existing UK mobile telephone operators; Its past experience of running a mobile telephone company in the US; and Its track record in raising finance on the scale required to establish a 3G network. [113] The UK Government saw early implementation of 3G mobile telephony in the United Kingdom as advantageous for operators and customers alike. [114] One mobile telephone operator (Vodafone) told the NAO that winning the first licences to be available in a key European market was important to bidders because: - It enabled winners to approach equipment suppliers with realistic requirements before operators in other companies placed orders, allowing the licensees in the United Kingdom to influence the design of the products and to secure supplies; and It provided them with a stronger basis on which to bid for licences in other countries, whether allocated through auctions or "beauty contests". [115] The NAO found a general view on the part of bidders that many European and global telecommunications companies saw success in the UK Auction as important to qualifying to be one of a small number of pan-European operators in the decade 2000-2010, after a process of consolidation in the industry. [116] The Auction coincided with a period of positive sentiment in global financial markets towards the telecommunications industry and a boom in share prices. The four incumbents saw dramatic rises in the value of their shares – shareholder values that had to be protected against failure to win a licence with the associated risk of loss in investors' confidence in operators' ability to offer a range of up-to-date products, and loss of customers to new entrants offering superior 3G services. [117] Delays caused largely by the companies' legal challenges to the roaming proposals (paragraph 40 above) deferred the auction to a date coinciding with the peak of the internet stock bubble and an all-time peak in the share values of telecommunications companies. [118] This resulted in auction prices which were probably significantly higher than had the delay not occurred, since it indicated an ample supply of cheap debt and equity funding, with which successful bidders could finance their licences and infrastructure. A subsequent downturn in the stock market and capital markets in the year 2000 meant that these indications were not fulfilled. [119] Spectrum Trading Relevantly for this document, "spectrum trading" means the transfer, by a person who is permitted to use certain frequencies in the electro-magnetic spectrum for certain purposes, of the right to use all or some of those frequencies for those purposes, together with concomitant obligations, to a third party. [120] Spectrum trading could in principle, however, take a number of different forms. [121] In the UK, the consultative document The Future Management of the Radio Spectrum, dealing with all types of use of the spectrum, published by the Radiocommunications Agency in March 1994 and the White Paper Spectrum Management: into the 21 st Century (Cm 3252, June 1996) raised the possibility of reforms, including the introduction of spectrum trading. In October 1998 the RA published a consultative document entitled Managing Spectrum through the Market, which said, "The Radiocommunications Agency…is keen to promote the economically efficient distribution of spectrum through market mechanisms within a framework of effective spectrum management. The Agency is currently in the process of implementing spectrum pricing and now wishes to explore the opportunities offered by spectrum trading." [122] By way of proviso, it stated that "it would not be possible to introduce forms of spectrum trading that were incompatible with Community law. The Radiocommunications Agency is discussing the position with the European Commission." [123] In October 1998, the RA published a consultative document on spectrum trading called 'Managing Spectrum through the Market', again dealing with all types of use of the spectrum. At section 4.6 of this document, it is stated that "[t]he spectrum market would complement, not replace, the issue of licences by the [Radiocommunications] Agency. Spectrum trading would enable users to be given a choice in some cases between obtaining a licence from the Agency direct or acquiring one on the spectrum market. The availability of an alternative supply of spectrum would broaden choice and increase opportunities. Public and private sector suppliers co-exist and work in tandem in other sectors of the economy, for example, housing, health and education, and there seems no reason why this should not also be the case for spectrum." The Information Memorandum published in connection with the Auction on 1 st November 1999 included the following statement of the Government's position (at Paragraph 2.2.8):
" 2.2.8 Trading of licences under Wireless Telegraphy Acts During the passage of the WT Act [the Wireless Telegraphy Act 1998] as a Bill through Parliament, Ministers indicated that they saw potential advantage in introducing trading in licences under the Wireless Telegraphy Acts [1949 to 1998] as a development of spectrum pricing. On 8 th October 1998, the RA published a consultative document, ' Managing Spectrum through the Market '. This document and the responses to it (except where confidentiality was requested) are available on the RA website. The introduction of spectrum trading would require amendments to be made to the Wireless Telegraphy Acts. Some forms of spectrum trading would also require changes to be made to the Licensing Directive. The Government announced on 25 th May 1999 that, in light of the favourable response to the consultation, the RA would work closely with industry to develop detailed proposals to introduce spectrum trading, subject to the necessary legislative changes being made. However, the prospects for spectrum trading are uncertain. The EC Commission may decide against amending the Licensing Directive to facilitate spectrum trading. Even if changes are made, the timing cannot be foreseen with certainty. In any event, spectrum trading will not be introduced before the Auction and (on current estimates) is unlikely to be available before the financial year 2002-03 . Were spectrum trading to be introduced, the Government's current thinking is that existing licences issued under the Wireless Telegraphy Acts, including those to be auctioned, should be varied to be made assignable in the same way as any new licence s issued after the introduction of spectrum trading. It is therefore possible that the 3G WT Act Licences might become assignable at some point in the future. However, the timing of this cannot be predicted at this stage; nor can the nature of any restrictions or other conditions that might be imposed ."
Since the Auction: - The Framework Directive 2002/21/EC was made on 7 March 2002. It was required to be implemented by Member States by 24 July 2003. The Framework Directive permits but does not require spectrum trading. Under Article 9(3) Member States may make provision for undertakings to transfer rights to use radio frequencies to other undertakings. Article 9(4) lays down obligations on Member States in relation to the transfer of rights to use radio frequencies, in particular that competition is not distorted as a result of any such transaction and that where radio frequency use has been harmonised by Community measures, any such transfer shall not result in change of use of that radio frequency. The UK has not to date introduced spectrum trading, although Ofcom was given power by section 168 of the Communications Act 2003 (which came into force on 29 December 2003) to make regulations permitting spectrum trading. In November 2003, the RA and Ofcom issued a joint consultation document on spectrum trading, which covered all types of use of the spectrum. At section 4.5, it states that:
"Following recognition that a centrally-based administrative system of spectrum management would be unlikely to produce the best allocation of spectrum, the spectrum management regime was reformed in the Wireless Telegraphy Act 1998. It introduced market mechanisms, such as administrative incentive pricing of spectrum and competitive auctions of spectrum, in an attempt to encourage efficient use. "
Spectrum trading has for some time been seen as a desirable and logical development of those reforms. The December 2000 White Paper:
'A New Future for Communications' reaffirmed the UK Government's commitment to spectrum trading. The EU Framework Directive (Directive 2002/21/EC), which is now implemented in UK law under the Communications Act 2003, enables Member States to introduce trading. It permits a wide range of approaches, subject to the need to ensure that competition is not distorted as a result of any trade and that the use of spectrum harmonised under Community measures does not change. "The Communications Act 2003, which will come fully into force in December 2003, contains provisions allowing Ofcom to establish a spectrum trading regime. Ofcom is given power to make regulations authorising the holder of a WT Act licence or the holder of a grant of Recognised Spectrum Access (RSA) to transfer the rights and obligations under its licence or grant of RSA to another person. This will enable the development of a market in rights arising under licences and grants of RSA." At section 9.4.5, the same document states: "Ofcom believes that it would not be appropriate to introduce trading in cellular spectrum until issues relating to the future re-farming of 2G spectrum and identification of potential 3G expansion bands have been resolved, internationally and within the EU. The timing on both these decisions is subject to international harmonisation and agreement with the EU. For these reasons, Ofcom proposes that trading in cellular licences should not commence before end 2007". Annex 1: Comparison of Licensing Process in EU Member States Annex 2: Glossary of Terms and Acronyms 900 MHz The band of frequencies around 900 MHz available for mobile telephony. 1800 MHz The band of frequencies around 1800 MHz available for mobile telephony. 2G Second-generation mobile telephony (digital cellular voice telephony). 3G Third-generation mobile telephony. 3G refers to the collection of third generation mobile technologies that are designed to allow mobile operators to offer integrated data and voice services over mobile networks. Frequency The number of cycles per second of an electromagnetic wave. Expressed for radio waves in Hertz. GSM Global System for Mobile Communications, the standard used for second-generation mobile telephony in Europe. IMT-2000 International Mobile Telecommunications-2000. The international standard for third generation mobile telephony of which UMTS is the European component. MHz MegaHertz, or millions of cycles per second. Refarming The re-allocation of radio spectrum (in particular the re-allocation of radio spectrum currently licensed for use with equipment complying with GSM 1800 standards to allow the use of equipment complying with a third-generation standard). Roaming The ability of a mobile phone customer to use a network other than the one to which he or she subscribes. Spectrum A continuous block of frequencies. Spectrum Allocation Spectrum is allocated to various different uses (eg. radio broadcasting, radio astronomy). Spectrum Assignment Government authorisation granted to a particular operator for use of specific frequencies or frequency pairs within a given allocation, usually at a stated geographic location. UMTS Universal Mobile Telecommunications System: a third-generation mobile and wireless communications system capable of supporting in particular innovative multimedia services, beyond the capability of second-generation systems such as GSM, and capable of combining the use of terrestrial and satellite components. ANNEX 3 Example licence granted under the Wireless Telegraphy Acts 1949 and 1998 ANNEX 4 Example licence granted under section 7 of the Telecommunications Act 1984 IN THE VAT AND DUTIES TRIBUNAL CENTRE: LONDON HUTCHISON 3G UK LIMITED (LON/2003/0861) mmO 2 Plc (LON/2003/0878) ORANGE 3G LIMITED (LON/2003/0852) T-MOBILE (UK) LIMITED (LON/2003/0859) VODAFONE GROUP SERVICES LIMITED (LON/2003/0983) Appellants - and - H M COMMISSIONERS OF CUSTOMS & EXCISE Respondents AGREED STATEMENT OF FACTS Linklaters FRESHFIELDS BRUCKHAUS DERINGER One Silk Street 65 Fleet Street London EC2Y 8HQ London EC4Y 1HS Tel: (44-20) 7456 2000 020 7936 4000 Fax: (44-20) 7456 2222 Ref: NPL/PMTK Solicitors for the Appellants Solicitors for the Appellant The Solicitor to HM Commissioners of Customs and Excise, 1 st Floor East, New King's Beam House 22 Upper Ground London SE1 9PJ Tel: 0870 785 8053 Fax: 0870 785 8169 Solicitor to the Respondents Introduction Articles 4(1) and 4(2) of the Sixth Directive " any person who independently carries out … any economic activity specified in paragraph 2, whatever the purpose or results of that activity ". Article 4(5) of the Sixth Directive "States, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions. However, when they engage in such activities or transactions, they shall be considered taxable persons in respect of these activities or transactions where treatment as non-taxable persons would lead to significant distortions of competition. In any case, these bodies shall be considered taxable persons in relation to the activities listed in Annex D, provided they are not carried out on such a small scale as to be negligible. Member States may consider activities of these bodies which are exempt under Article 13 or 28 as activities which they engage in as public authorities." First sub-paragraph of Article 4(5) - acting as a public authority Second sub-paragraph of Article 4(5) - distortion of competition Third sub-paragraph of Article 4(5) and Annex D - telecommunications Value Added Tax Act 1994 " VAT shall be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him ." Section 41(1) of the VAT Act 1994 provides: " This Act shall apply in relation to taxable supplies by the Crown as it applies in relation to taxable supplies by taxable persons ." Section 41(2) of the VAT Act 1994 provides: " Where the supply by a Government department of any goods or services does not amount to the carrying on of a business but it appears to the Treasury that similar goods or services are or might be supplied by taxable persons in the course or furtherance of any business, then, if and to the extent that the Treasury so direct, the supply of those goods or services by that department shall be treated for the purposes of this Act as a supply in the course or furtherance of any business carried on by it ." (a) Whether (and if so, how) the answer to the question of whether the Activity (as defined in the Questions below) was an "economic activity" is determined by what the Respondents claim is its objectively regulatory nature. (b) Whether (and if so, how) the answer to the question of whether the Activity was an "economic activity" is affected by the aim or purpose of (i) the Secretary of State or (ii) the Appellants in their capacity as successful bidders for the Licences. (c) Whether (and if so, how) the answer to the question of whether the Activity was an "economic activity" is affected, as the Appellants claim, by the extent to which a result of the Activity was to generate proceeds in excess of costs and/or to use or distribute any such excess of proceeds over costs for general purposes and not for the further regulation or promotion of the use of the electro-magnetic spectrum. (d) Whether, having regard to the case law of the Court of Justice of the European Communities, [8] the question whether or not the Secretary of State acted as a "public authority" in engaging in the Activity is determined by the extent, if any, to which the legal regime applicable to the Secretary of State involves substantially different legal conditions from those applicable to private traders, bearing in mind that the laws of the different Member States of the European Union may draw the distinction between public or administrative law, on the one hand, and private law on the other hand, in different ways. (e) Whether (and if so, how) the answers to the questions of: (i) whether the Activity was an "economic activity"; and (ii) whether the Secretary of State was acting as a "public authority", are affected by the existence and terms of the Licensing Directive, the UMTS Decision, the Wireless Telegraphy Acts 1949 and 1998 and any UK secondary legislation made under the Wireless Telegraphy Act 1998. (f) [ To be agreed ] (g) If the Court of Justice of the European Communities were to determine in response to Question 6.3 that the Activity is partly chargeable to VAT under the Sixth Directive and partly not, it would be unclear how the respective parts should be assessed. (h) The answer to Question 6.4 may be that a future or conditional risk of distortion of competition created by the treatment of the Secretary of State as a non-taxable person in respect of the Activity is capable of being a qualifying distortion of competition for the purposes of the second sub-paragraph of Article 4(5). Equally, the answer to Question 6.5 may be that such a risk of distortion of competition is a relevant factor in construing the third sub-paragraph of Article 4(5) and the word "telecommunications" in Annex D. In either of these cases, it will be argued by the Appellants before this Tribunal that there was a prospect at the time of the Auction (as disclosed in the Agreed Statement of Facts) that a secondary market in the right to use spectrum would come into existence during the term of the Licences alongside continuing primary assignments by the Government, and that such a prospect represents such a qualifying distortion of competition created by the treatment of the Secretary of State as a non-taxable person in respect of the Activity. The law on this issue seems to the Tribunal to be uncertain. SCHEDULE B AGREED STATEMENT OF FACTS HUTCHISON 3G UK LIMITED (LON/2003/0861) mmO 2 Plc (LON/2003/0878) ORANGE 3G LIMITED (LON/2003/0852) T-MOBILE (UK) LIMITED (LON/2003/0859) VODAFONE GROUP SERVICES LIMITED (LON/2003/0983) Appellants - and - HM COMMISSIONERS OF CUSTOMS & EXCISE Respondents AGREED STATEMENT OF FACTS Introduction This statement of facts covers the following areas: Background to 3G (paragraphs 0 to 0) Legal and Factual Background to the Grant of 3G Licences in the UK (paragraphs 0 to 0) Those involved in the Auction process (paragraphs 0 to 0) Licence and Auction Design (paragraphs 0 to 0) Licensee Obligations (paragraphs 0 to 0) Participants in the Auction Process (paragraphs 0 to 0) The Auction (paragraphs 0 to 50) Factors Affecting the Revenues Generated by the Auction (paragraphs 51 to 53) Spectrum Trading (paragraphs 54 to 58) Background to 3G The third generation of mobile devices ("3G") represents an important technological development in the mobile telecommunications market. 3G mobile devices offer a greater capacity for the fast transfer of data than previous generations of mobile telephones, enabling the provision (or greatly enhanced provision) of multimedia services, such as video-conferencing, mobile office services, virtual banking, home shopping, internet access and on-line entertainment. [9] The radio spectrum is a range of radio frequencies, used by the public and private sector to deliver services such as broadcasting, radar, and mobile communications. It is a finite resource of great and growing economic importance. [10] Global demand for spectrum is increasing, especially in ranges suitable for mobile communications. [11] To avoid interference, the spectrum must be allocated in some way among the various potential uses to which it can be put. Historically, this has been done by allocating spectrum to specific uses. Where the spectrum is allocated to uses such as broadcasting or mobile communications (as opposed to, for example, military use), the spectrum is then typically assigned to individual users through a licensing process. Though national governments retain the right to regulate the use of spectrum within their territories, decisions about which parts of the spectrum to allocate for which services are often made in the context of international agreements. [12] The standards [13] developed to enable the provision of 3G services are based upon work undertaken by the International Telecommunications Union ("ITU"), a United Nations agency [14] whose responsibilities include the oversight and facilitation of inter-governmental negotiations needed to develop legally binding agreements between sovereign states governing the use of the spectrum. [15] In 1992, the ITU World Administrative Radio Conference ("WARC 92") identified the frequency bands for the development of both the satellite and terrestrial parts of the Future Public Land Mobile Telecommunications System (FPLMTS), later renamed International Mobile Telecommunications-2000 ("IMT-2000"). The IMT-2000 3G mobile system concept was developed at a world level on the basis of ITU Resolution 212. [16] Within Europe, a specific system called the Universal Mobile Telecommunications System ("UMTS") has been developed which satisfies the IMT-2000 standard. [17] By Directive 97/13/EC of the European Parliament and Council of 10 April 1997 "on a common framework for general authorizations and individual licences in the field of telecommunications services" (the "Licensing Directive") a framework had been established for telecommunications licensing which was intended to harmonise licensing procedures throughout the European Union. [18] The Licensing Directive was in force at all relevant times. [19] 1 The third "whereas" recital in the preamble to the Licensing Directive stated, " market entry should be restricted on the basis only of objective, non-discriminatory, proportionate and transparent selection criteria relating to the availability of scarce resources or on the basis of the implementation by national regulatory authorities of objective, non-discriminatory and transparent award procedures ". 1 The third "whereas" recital in the preamble to the Licensing Directive stated, " market entry should be restricted on the basis only of objective, non-discriminatory, proportionate and transparent selection criteria relating to the availability of scarce resources or on the basis of the implementation by national regulatory authorities of objective, non-discriminatory and transparent award procedures ". 2 The thirteenth "whereas" recital stated, " Whereas the introduction of individual licensing systems should be restricted to limited, pre-defined situations; whereas Member States may limit the number of individual licences for any category of telecommunications services only to the extent required to ensure the efficient use of radio frequencies or for the time necessary to make available sufficient numbers in accordance with Community law ". 2 The thirteenth "whereas" recital stated, " Whereas the introduction of individual licensing systems should be restricted to limited, pre-defined situations; whereas Member States may limit the number of individual licences for any category of telecommunications services only to the extent required to ensure the efficient use of radio frequencies or for the time necessary to make available sufficient numbers in accordance with Community law ". 3 Article 3 paragraph 3 of the Licensing Directive provided, " Member States may issue an individual licence only where the beneficiary is given access to scarce physical and other resources or is subject to particular obligations or enjoys particular rights, in accordance with the provisions of Section III. " (Section III deals with individual licences.) 3 Article 3 paragraph 3 of the Licensing Directive provided, " Member States may issue an individual licence only where the beneficiary is given access to scarce physical and other resources or is subject to particular obligations or enjoys particular rights, in accordance with the provisions of Section III. " (Section III deals with individual licences.) 4 Article 10 paragraph 3 stated, " Member States shall grant such individual licences on the basis of selection criteria which must be objective, non-discriminatory, detailed, transparent and proportionate. Any such selection must give due weight to the need to facilitate the development of competition and to maximize benefits for users ." 4 Article 10 paragraph 3 stated, " Member States shall grant such individual licences on the basis of selection criteria which must be objective, non-discriminatory, detailed, transparent and proportionate. Any such selection must give due weight to the need to facilitate the development of competition and to maximize benefits for users ." 5 Article 11 provided as follows: 5 Article 11 provided as follows: " 1. Member States shall ensure that any fees imposed on undertakings as part of authorization procedures seek only to cover the administrative costs incurred in the issue, management, control and enforcement of the applicable individual licences. The fees for an individual licence shall be proportionate to the work involved and be published in an appropriate and sufficiently detailed manner, so as to be readily accessible. 2. Notwithstanding paragraph 1, Member States may, where scarce resources are to be used, allow their national regulatory authorities to impose charges which reflect the need to ensure the optimal use of these resources. Those charges shall be non-discriminatory and take into particular account the need to foster the development of innovative services and competition ." On 14 December 1998 the European Parliament and Council took Decision No. 128/1999/EC on the coordinated introduction of a third-generation mobile and wireless communications system (UMTS) in the Community (the "UMTS Decision"). [20] In the UMTS Decision: - 6 The tenth "whereas" recital in the preamble stated, " Whereas organisations providing UMTS networks or services over those networks should be able to enter the market without unnecessary constraints or excessive fees to allow for a dynamic market and a broad competitive service offering ". 6 The tenth "whereas" recital in the preamble stated, " Whereas organisations providing UMTS networks or services over those networks should be able to enter the market without unnecessary constraints or excessive fees to allow for a dynamic market and a broad competitive service offering ". 7 The eighteenth "whereas" recital stated, " Whereas spectrum availability and appropriate pricing, coverage and quality will be essential aspects to the success of UMTS development; whereas any spectrum pricing method should not adversely impact on the competitive structure of the market, and respect the public interest, while ensuring efficient use of the spectrum as a valuable resource ". 7 The eighteenth "whereas" recital stated, " Whereas spectrum availability and appropriate pricing, coverage and quality will be essential aspects to the success of UMTS development; whereas any spectrum pricing method should not adversely impact on the competitive structure of the market, and respect the public interest, while ensuring efficient use of the spectrum as a valuable resource ". 8 The twenty-first "whereas" recital stated, " Whereas the second generation cellular digital mobile communications systems were originally defined in Council Directive 87/372/EEC of 25 June 1987 on the frequency bands to be reserved for the coordinated introduction of public pan-European cellular digital land-based mobile communications in the Community as operating in the 900 MHz bands; whereas DCS-1800 has to be considered as part of the GSM family and of such second generation; whereas the Community should build on the success of the current generation of mobile digital technology including GSM both in Europe and in the world, taking into consideration interworking between UMTS and second-generation systems; whereas there should be, pursuant to Community law, no discrimination between GSM operators and new entrants in UMTS markets; whereas UMTS should develop in one seamless environment including full roaming with GSM as well as between the terrestrial and satellite components of UMTS networks, which is likely to make hybrid terminals such as dual mode/band GSM/UMTS terminals and terrestrial/satellite terminals necessary. " 8 The twenty-first "whereas" recital stated, " Whereas the second generation cellular digital mobile communications systems were originally defined in Council Directive 87/372/EEC of 25 June 1987 on the frequency bands to be reserved for the coordinated introduction of public pan-European cellular digital land-based mobile communications in the Community as operating in the 900 MHz bands; whereas DCS-1800 has to be considered as part of the GSM family and of such second generation; whereas the Community should build on the success of the current generation of mobile digital technology including GSM both in Europe and in the world, taking into consideration interworking between UMTS and second-generation systems; whereas there should be, pursuant to Community law, no discrimination between GSM operators and new entrants in UMTS markets; whereas UMTS should develop in one seamless environment including full roaming with GSM as well as between the terrestrial and satellite components of UMTS networks, which is likely to make hybrid terminals such as dual mode/band GSM/UMTS terminals and terrestrial/satellite terminals necessary. " 9 Article 3 paragraph 1 of the UMTS Decision stated that " Member States shall take all actions necessary in order to allow, in accordance with Article 1 of Directive 97/13/EC, the coordinated and progressive introduction of the UMTS services on their territory by 1 January 2002 and in particular shall establish an authorisation system for UMTS no later than 1 January 2000 ." 9 Article 3 paragraph 1 of the UMTS Decision stated that " Member States shall take all actions necessary in order to allow, in accordance with Article 1 of Directive 97/13/EC, the coordinated and progressive introduction of the UMTS services on their territory by 1 January 2002 and in particular shall establish an authorisation system for UMTS no later than 1 January 2000 ." 10 Article 3 paragraph 3 required Member States to " ensure, in compliance with Community legislation, that the provision of UMTS is organised … in frequency bands which are harmonised by CEPT " (the European Conference of Postal and Telecommunications Administrations). [21] 10 Article 3 paragraph 3 required Member States to " ensure, in compliance with Community legislation, that the provision of UMTS is organised … in frequency bands which are harmonised by CEPT " (the European Conference of Postal and Telecommunications Administrations). [21] Member States essentially used two different approaches to award licences in relation to the spectrum allocated to UMTS: a price based auction and comparative bid. Subject to any points that the Member States concerned may wish to make in these proceedings, the parties understand that auctions (of different types and procedural rules) were organised in seven of the then Member States (Austria, Belgium, Denmark, Germany, Greece, the Netherlands and the United Kingdom); that comparative bid processes (or "beauty contests") were used in seven other of the then Member States (Finland, France, Ireland, Luxembourg, Portugal, Spain and Sweden); and that Italy opted for a hybrid approach (See Annex 1 for details). [22] Legal and Factual Background to the Grant of 3G Licences in the United Kingdom In the United Kingdom, the basic regulatory mechanism for spectrum allocation at all material times was found in section 1(1) of the Wireless Telegraphy Act 1949 ("the WTA 1949"), which provided that; " No person shall establish or use any station for wireless telegraphy or install or use any apparatus for wireless telegraphy except under the authority of a licence in that behalf granted under this section - (a) by the Secretary of State ". Sections 1A to 1C of the WTA 1949 then provide for a number of criminal offences ancillary to that prohibition. There was therefore a general prohibition on the use of the electro-magnetic spectrum save where an exemption applied or by persons holding a licence granted by the Secretary of State which, inter alia , restricted the frequencies at which the licensee was permitted to transmit. In carrying out his functions under the WTA 1949 (and, later, the Wireless Telegraphy Act 1998 ("WTA 1998")) the Secretary of State at all material times and for all relevant purposes acted through the Radiocommunications Agency ("RA"), an executive agency of the Department for Trade and Industry (the "DTI"). [23] On 31 July 1997, the DTI issued a consultation document entitled "Multimedia Communications on the Move". The consultation document contained detailed proposals, on which comments were invited before any decisions were taken, for a framework for granting licences to operators to establish and use 3G networks [24] within the United Kingdom [25] ("3G Licences"). One of the main proposals in the consultation document was that 3G Licences should be awarded by an auction (the "Auction"), subject to passage of the Wireless Telegraphy Bill, then before Parliament (this Bill ultimately became the WTA 1998; see paragraphs 0 et seq. below). The consultation document stated that the competing operators should have licensing certainty before the end of financial year 1998/1999 (i.e. by April 1999 [26] ). It expressed the view that any individual company or consortium, including the existing four UK mobile telephony operators (see paragraph 0 below), should be eligible to bid, and, in the context of encouraging a possible new entrant to the market, the document suggested that " all four [existing mobile telephony] operators should now actively review whether it is time to negotiate national roaming agreements for their [existing] GSM and PCN networks ". [27] Among the other matters on which comments were invited were the following: - the possibility that licences should last for 15 years, and on how the spectrum should be divided for auction purposes [28] ; the appropriate number of licences, the minimum amount of the spectrum each operator would require and whether each operator required the same amount of the spectrum [29] (the consultation document envisaged that at least three licences should be offered); [30] and the proposition that Government should include provision in Third Generation licences to ensure the early, efficient and effective introduction of Third Generation national roaming, with open and fair rules for charging, which would be referred to Oftel in the event of a dispute. The document also asked for views on the Government's belief that there would be significant advantages to consumers if roaming between Second and Third Generation networks was made possible. [31] Comments were invited to be sent to the DTI by 17 October 1997 and responses were published on 18 November 1997. As the consultation document had indicated, it was necessary to pass legislation before the 3G Licences could be awarded by Auction; although fees for the grant of wireless telegraphy licences could be charged under section 2 of the WTA 1949, those fees could not, under that Act, be set at a level greater than that reasonably required to meet the administrative costs of the RA. In 1998, Parliament passed the WTA 1998, which received Royal Assent on 18 March 1998 and came into force on 18 June 1998. A DTI press release issued on 18 March 1998 described the legislation as providing " a modern framework for management of the radio spectrum – the first major modernisation of the radio licensing framework for almost half a century ." [32] Section 2 of the WTA 1998 provided that: "(1) In exercising his powers under section 1 to prescribe sums payable in respect of wireless telegraphy licences of any description, the Secretary of State shall have regard, in particular, to the matters specified in subsection (2); and accordingly may, if he thinks fit, prescribe sums which are greater than would be necessary for the purposes of recovering costs incurred by him in connection with any functions relating to wireless telegraphy. (2) Those matters are- (a) the extent of the part of the electro-magnetic spectrum available for use under licences of that description, (b) the demand and likely future demand for the use of the part of the electro-magnetic spectrum to be used under licences of that description, and (c) the desirability of promoting- (i) the efficient use and management of the electro-magnetic spectrum, (ii) any economic benefits arising from the use of wireless telegraphy, (iii) the development of innovative services, and (iv) competition in the provision of telecommunication services" . Section 3 of the WTA 1998 provided that: "(1) Having regard to the desirability of promoting the optimal use of the electromagnetic spectrum, the Secretary of State may by regulations provide that, in such cases as may be specified in or determined by him under the regulations, applications for the grant of wireless telegraphy licences must be made in accordance with a procedure which – (a) is set out in a notice issued by him under the regulations, and (b) involves the making by the applicant of a bid specifying an amount which he is willing to pay to the Secretary of State in respect of the licence". The WTA 1998 therefore provided a basis in UK law for the Secretary of State to award 3G Licences by means of an Auction. The Secretary of State was to exercise that power by means of regulations made under section 3, which directed him to have regard to the " desirability of promoting the optimal use of the electromagnetic spectrum ". On 18 May 1998, Barbara Roche, MP, the then Parliamentary Under-Secretary of State for Small Firms, Trade and Industry at the DTI, announced the UK Government's intention to hold an auction of 3G Licences. The Minister gave the following written statement in an answer to a Parliamentary Question: " The UK has been at the forefront of developing mobile telecommunications in Europe, and I am determined that it should remain in that position. Third generation mobile … offers exciting prospects for new jobs, new services and new investment, and I aim to ensure that the UK benefits fully from this new technology. To that end, we intend to hold an auction of UMTS licences in the summer of 1999, subject to market and other developments and to final decisions nearer the time. This timetable takes account of responses to the Government's consultation document '
Multimedia Communications on the Move', further discussions with industry and advice from NM Rothschild and Sons. In offering through an auction licences to use specified frequencies for the delivery of UMTS, the Government's overall aim is to secure, for the long-term benefit of UK consumers and the national economy, the timely and economically advantageous development and sustained provision of UMTS services in the UK. Subject to this overall aim, the Government's objectives are to (i) utilise the available UMTS spectrum with optimum efficiency; (ii) promote effective and sustainable competition for the provision of UMTS services; and (iii) subject to the above objectives, design an auction which is best judged to realise the full economic value to consumers, industry and the taxpayer of the spectrum ". [33] According to the NAO Report (the background to which is explained at paragraph 0 below): - [34] " [The] objective [of 'realising the full economic value'] was worded so as to make it clear that the interests of industry and consumers should be taken into account, rather than to mean simply maximising the proceeds for the taxpayer. It recognised that a strong industry would generate economic growth and receipts from taxation. Nevertheless, subject to the main objectives of promoting economic use of the spectrum, and competition between operators, the [UK] Government saw the potential to raise greater proceeds from the allocation of licences than they had raised in previous allocations. Following economic advice from National Economic Research Associates, an international economic consultancy, that auctions provided a sound economic basis for the allocation of spectrum, they decided to allocate spectrum through an auction. They considered this to be consistent with the prime objectives [of promoting economic use of the spectrum and competition between operators] because by awarding licences to the highest bidder, spectrum would be allocated to the mobile telephone operator that valued it most and could be expected to exploit it to the greatest advantage. A bidder that had paid a market-based valuation for spectrum would be incentivised to roll-out services as quickly as possible, to achieve the returns required by its stakeholders. On 24 November 1999, the Secretary of State exercised his powers under, inter alia , section 3(1) of the WTA 1998 to make the Wireless Telegraphy (Third Generation Licences) Regulations 1999 [35] ("the 1999 Regulations"). The 1999 Regulations set out a framework for the grant of five licences [36] for the provision of 3G services; the spectrum covered by each licence was set out in the Schedule to the 1999 Regulations. The detailed rules for the operation of the auction were then set out in a Notice dated 22 December 1999, made under and conforming with regulation 4 of the 1999 Regulations. Those involved in the design of the Auction The RA was responsible for the conduct of the Auction for 3G Licences on behalf of the Secretary of State. Its functions included bearing the costs of the Auction process; proposing the design of the licences to be auctioned; managing the process of consulting with the telecommunications industry over the design of the licences and the auction process; and collecting the licence fees. [37] In December 1997, the RA appointed an investment bank, NM Rothschild & Sons Limited ("Rothschilds"), as financial advisers in relation to the Auction. Rothschilds' role was, in essence, to provide financial and specialist telecommunications advice on every aspect of the policy framework, auction methodology and implementation, to assist in the overall project management and to issue an Information Memorandum on behalf of the UK Government. A further role was to promote the 3G opportunity and market the Auction. [38] Rothschilds paid particular attention, through consultation with potential bidders, to providing advice on how the auction could be designed so as to encourage the participation of new entrants. [39] Rothschilds was remunerated by a flat fee of £4,070,000 with an additional achievement fee dependent on the number of bidders participating in the Auction, up to a maximum of £700,000 if there were at least 11 bidders [40] . In the event, as there were thirteen bidders, Rothschilds received the maximum £700,000 achievement fee. [41] Rothschilds held informal meetings with potential bidders and marketed the Auction to a wide variety of potential bidders both in the UK and abroad, whilst generally acting as the communication channel for the RA on all matters concerning the Auction. The UMTS Auction Consultative Group (the "UACG") was set up in early 1998. This was a consultative group through which the UK Government presented its proposals for the Auction. It acted as a forum for discussion between the UK Government and industry as to how the Auction should be designed and implemented. The UACG comprised telecommunications firms (i.e. potential bidders in the auction process), electronics manufacturers, relevant trade and professional organisations and representatives from the UK Government and its advisers. The Director General for Telecommunications (the UK body then charged with regulating the telecommunications industry, "Oftel"), and the DTI were also involved in UACG meetings. The Communications and Information Industries Directorate of the DTI also advised the RA in relation to telecommunications licensing matters, UK Government policy on telecommunications and international spectrum and standard issues; and the RA consulted Oftel on regulatory issues. There were other advisers on technical and commercial issues concerning the spectrum. Quotient Communications and Ovum Consulting were commissioned by the RA to consider the spectrum requirements of terrestrial UMTS in the UK. Market forecasts of demand were performed by Ovum and these were then converted into spectrum demand by Quotient. Analysys Consulting were sub-contracted by Rothschilds to advise on the size of the prospective 3G market. Professor Kenneth Binmore, at ELSE (the ESRC [42] Centre for Economic Learning and Social Evolution), an interdisciplinary research centre based at University College London ("UCL"), led the team that provided economic advice on different options for the design of the Auction [43] with the assistance of a team of economists, including Professor Paul Klemperer of Oxford University who was the principal auction theorist. [44] Professors Binmore and Klemperer were experts in auction and game theory. Licence and Auction Design The design of the spectrum "package" available under each licence (that is, the frequency bands in which the licensee's radio equipment would be permitted to operate) was one of the matters on which the RA consulted through the UACG. One proposal, put forward by the advisory group SMAG [45] (made up of industry representatives and on which the RA Chief Executive also sat), was that three licences, each carrying the right to use radio equipment in 2 x 20MHz of paired spectrum [46] , be allocated. SMAG's reasoning was based on the belief that 2 x 20MHz was the minimum spectrum width needed to provide 3G services, which meant that only three licences could be issued. However in assessing the requirements for spectrum to provide services, the industry and technical advisers subsequently concluded that each licensee would need only 2x15 MHz of paired spectrum to provide 3G services, with the result that it was technically feasible to issue four licences. By that stage (August 1998), the RA's position – put forward for discussion in the UACG – was that " While five licences would secure a new entrant, it could also compromise the ability of all licensees to run effective UMTS networks, a four licence scenario could therefore be more attractive to a successful new entrant bidder ". [47] The RA, in consultation with the UCL team of economic advisers, then considered a number of different auction designs within a four licence scenario. [48] On 9 February 1999, Michael Wills MP, the then Parliamentary Under-Secretary of State for Small Firms, Trade and Industry, announced a government consultation on the possibility of offering five licences, with a larger licence to be reserved for a new entrant. [49] The Government considered that reserving one of the two larger licences for a new entrant would encourage market entry [50] and foster competition. [51] On 6 May 1999, the RA confirmed its intention to offer five licences. The spectrum packages were as follows: Licence A (the licence which allowed use of radio equipment in the greatest bandwidth and was to be reserved for a new entrant): 2x15 MHz of paired spectrum and 5 MHz of unpaired spectrum; Licence B: 2x15 MHz of paired spectrum; and Licences C, D and E: 2x10 MHz of paired spectrum and 5 MHz of unpaired spectrum. [52] That was the structure laid down in the 1999 Regulations. Once the number of licences on offer was greater than the number of incumbents, new entrants could be attracted without the need for a sealed bid. Moreover, because the five licences on offer were of unequal value, no auction design involving a sealed bid stage was feasible. The RA therefore considered several auction designs based on that used by the Federal Communications Commission in the US which, in effect, was a simple "English" ascending auction. [53] The design finally adopted, as set out in the Notice of 22 December 1999, was of this type. In essence, the structure of the Auction was as follows. 11 All bidders had to meet certain pre-qualification requirements. The conditions which an applicant in the UK had to fulfil in order to be allowed to bid related to the proper establishment and good standing of the company and its officers, details of its ownership and control structure and its relationship with other potential bidders. They also had to pay a deposit (see paragraph 1.12). Bidders were not required to submit any form of business plan to the RA outlining their proposals for rolling out 3G services. 11 All bidders had to meet certain pre-qualification requirements. The conditions which an applicant in the UK had to fulfil in order to be allowed to bid related to the proper establishment and good standing of the company and its officers, details of its ownership and control structure and its relationship with other potential bidders. They also had to pay a deposit (see paragraph 1.12). Bidders were not required to submit any form of business plan to the RA outlining their proposals for rolling out 3G services. 12 All qualifying bidders had to pay a deposit of £50 million (€82.37 million), increasing to £100 million (€164.74 million) when the bids reached £400 million (€658.96 million [54] ). According to the NAO Report, the deposit requirement was a deterrent to any possible tendency to bid prices of licences beyond their estimated value at the expense of incumbents. [55] These deposits would be forfeited if a successful bidder failed to take up a licence which it had won; otherwise, they were returned (to the unsuccessful bidders) or set against the cost of the licence (for successful bidders). 12 All qualifying bidders had to pay a deposit of £50 million (€82.37 million), increasing to £100 million (€164.74 million) when the bids reached £400 million (€658.96 million [54] ). According to the NAO Report, the deposit requirement was a deterrent to any possible tendency to bid prices of licences beyond their estimated value at the expense of incumbents. [55] These deposits would be forfeited if a successful bidder failed to take up a licence which it had won; otherwise, they were returned (to the unsuccessful bidders) or set against the cost of the licence (for successful bidders). 13 Each licence had a minimum opening bid, and thus effectively a 'reserve price', as follows: 13 Each licence had a minimum opening bid, and thus effectively a 'reserve price', as follows: 13.1 Licence A: £125 million; 13.1 Licence A: £125 million; 13.2 Licence B: £107.1 million; and 13.2 Licence B: £107.1 million; and 13.3 Licences C to E: £89.3 million. 13.3 Licences C to E: £89.3 million. 14 All bidders simultaneously put in bids, each bidder being allowed to bid for one licence. 14 All bidders simultaneously put in bids, each bidder being allowed to bid for one licence. 15 The highest bid for each licence became "current". It was irrevocable and had to be paid if the auction ended at that point. Bidders with current highest bids were not allowed to bid in the next round. 15 The highest bid for each licence became "current". It was irrevocable and had to be paid if the auction ended at that point. Bidders with current highest bids were not allowed to bid in the next round. 16 Unless a bidder held a current highest bid, it had to (i) bid in the next round or (ii) use a waiver (each bidder had three waivers). Otherwise, it had permanently to withdraw from the auction. Once the number of bidders fell to eight, each bidder had the right to call for up to two "recess days" in which no bidding took place. [56] 16 Unless a bidder held a current highest bid, it had to (i) bid in the next round or (ii) use a waiver (each bidder had three waivers). Otherwise, it had permanently to withdraw from the auction. Once the number of bidders fell to eight, each bidder had the right to call for up to two "recess days" in which no bidding took place. [56] 17 If there were more bidders in the auction than licences available (i.e. more than five bidders), there was another round, in which bidders other than those with current highest bids were allowed to bid. A new bid had to be in multiples of £100,000, and had to be a certain percentage (fixed by the RA at the end of each round) over the current highest bid provided that the money value of that percentage was at least £1 million (the percentage fell from 5% to 1.5% over the course of the auction) ("the minimum bid"). There was a maximum bid in each round, i.e. twice the minimum opening bid (or the minimum bid for that round, if higher). 17 If there were more bidders in the auction than licences available (i.e. more than five bidders), there was another round, in which bidders other than those with current highest bids were allowed to bid. A new bid had to be in multiples of £100,000, and had to be a certain percentage (fixed by the RA at the end of each round) over the current highest bid provided that the money value of that percentage was at least £1 million (the percentage fell from 5% to 1.5% over the course of the auction) ("the minimum bid"). There was a maximum bid in each round, i.e. twice the minimum opening bid (or the minimum bid for that round, if higher). 18 The number of rounds per day was set by the RA on the previous day. There was at least one round each working day (except for recess days). The number of rounds per day increased as bidders became comfortable with the process. [57] 18 The number of rounds per day was set by the RA on the previous day. There was at least one round each working day (except for recess days). The number of rounds per day increased as bidders became comfortable with the process. [57] 19 The rounds continued until a round where there were no new bids or waivers. 19 The rounds continued until a round where there were no new bids or waivers. 20 There was no upper limit to the amount any successful bidder could pay for its licence; but no such suggestion had been made during the consultation process leading up to the Auction. However, the Select Committee on Public Accounts stated in its Thirtieth Report [58] that "[t]he [RA] conceded that they had performed no risk assessment based on such high proceeds and said that observers had also been astonished by the outcome. Risk assessments on similar exercises in the future should model the possibility of a wide range of outcomes." 20 There was no upper limit to the amount any successful bidder could pay for its licence; but no such suggestion had been made during the consultation process leading up to the Auction. However, the Select Committee on Public Accounts stated in its Thirtieth Report [58] that "[t]he [RA] conceded that they had performed no risk assessment based on such high proceeds and said that observers had also been astonished by the outcome. Risk assessments on similar exercises in the future should model the possibility of a wide range of outcomes." 21 The Auction provided for a "lump sum" payment, subject to the possibility of payment by instalments, as opposed to royalty payments over time. [59] In the event, all successful bidders chose to pay the lump sum up front. 21 The Auction provided for a "lump sum" payment, subject to the possibility of payment by instalments, as opposed to royalty payments over time. [59] In the event, all successful bidders chose to pay the lump sum up front. 22 The bids were fully transparent. Each bidder knew who the other bidders were. Price bids and price bidders were made public to all bidders at the end of each round, together with information on the use of waivers or recesses. 22 The bids were fully transparent. Each bidder knew who the other bidders were. Price bids and price bidders were made public to all bidders at the end of each round, together with information on the use of waivers or recesses. Licensee obligations The licences auctioned and granted under the WTA 1949 and the WTA 1998 (example licence attached at Annex 3) contained the following conditions - 23 requirements as to maximum power and interference levels of equipment and its compliance with performance standards; 23 requirements as to maximum power and interference levels of equipment and its compliance with performance standards; 24 the requirement that the licensee install, maintain and use Radio Equipment [as defined in the licence] in such a way as to enable the provision of, by no later than 31 December 2007, and to maintain thereafter, a telecommunications service by means of the Radio Equipment to an area where at least 80% of the population of the UK live; 24 the requirement that the licensee install, maintain and use Radio Equipment [as defined in the licence] in such a way as to enable the provision of, by no later than 31 December 2007, and to maintain thereafter, a telecommunications service by means of the Radio Equipment to an area where at least 80% of the population of the UK live; 25 the requirement to obtain site clearances; 25 the requirement to obtain site clearances; 26 the requirement to provide information; and 26 the requirement to provide information; and 27 the condition that the licence was not transferable. 27 the condition that the licence was not transferable. In order to operate a telecommunications system so as to provide a telecommunications service in the United Kingdom an operator also required a licence under section 7 of the Telecommunications Act 1984 (example licence attached at Annex 4). [60] These contained the following conditions, among others: the requirement to provide mobile telecommunications services to the Crown, and Emergency Organisations [as defined in the licence], among others; [61] the requirement to provide directory services; [62] the requirement to provide access to emergency call services and operator assistance; [63] requirements as to metering and billing arrangements; [64] requirements as to chatline and live message services; [65] requirements as to services for disabled persons; [66] requirements as to numbering arrangements. [67] Both the licence granted under the WTA 1949 and the WTA 1998 and the licence granted under the Telecommunications Act 1984 contained certain other details relating to, inter alia, the term of the licence. The RA also wished to ensure that any new entrant should be able to obtain access for its subscribers to the 2G network of an incumbent that also had a 3G licence. This was so that the new entrant would not be competitively disadvantaged while it built its own network infrastructure. The requirement was only to last until 2009 (i.e for the first nine years of the licence). Oftel attempted to implement this policy by introducing a new condition into the operating licences of the incumbents. The attempt was successfully challenged in the High Court by One2One and Orange. [68] Though Oftel subsequently won on appeal to the Court of Appeal, Vodafone and BT meanwhile (and before the opening of the Auction) voluntarily accepted the condition, and the Government did not then impose the condition on One2One (now T-Mobile) or Orange. Participants in the Auction Process All four of the then existing mobile telephone operators in the UK – British Telecommunications Plc ("BT") [69] (BT's mobile business has since been demerged as mmO 2 Plc), Orange, T-Mobile (then One2One) and Vodafone participated in the Auction. [70] In addition to these incumbent operators, the following nine potential new entrants participated: TIW UMTS (UK) Limited; 3G (UK) Limited (a member of the Eircom group); Crescent Wireless Limited (whose shareholders had a significant interest in Global Crossing); Epsilon Tele.Com Plc (a wholly owned subsidiary of the Nomura group); NTL Mobile Limited (jointly owned by NTL and France Telecom); One.Tel Global Wireless Limited (a subsidiary of One.Tel); Spectrum Co Limited (owned in the majority by Sonera, a Finnish telecommunications company); Telefonica UK Limited (a wholly owned subsidiary of Telefónica SA) and WorldCom Wireless (UK) Limited (wholly owned by MCI Worldcom). In late 1999/early 2000 Vodafone launched a bid for Mannesmann AG. The formal offer period for this bid commenced on 24 December 1999. At that time, Mannesmann AG controlled Orange, having bought it in October 1999. By 9 February 2000, Vodafone had received acceptances in respect of over 50% of the shares for its bid for Mannesmann AG. [71] Vodafone's purchase of Mannesmann AG was subject to approval by the European Commission under the EC Merger Regulation. [72] On 12 April 2000, the European Commission approved the acquisition on the condition that Vodafone sold its shareholding in Orange. [73] But, in the meantime, under the rules of the Auction, Vodafone and Orange were as from February 2000 "Associated Bidders" [74] and were therefore prevented, following the acquisition, from both participating in the Auction [75] without a contrary determination by the Secretary of State. On 10 February 2000 the Secretary of State made a determination that both of these incumbent operators could participate in the Auction provided that Vodafone gave a number of specific undertakings in relation to its shareholding in Orange and the conduct of Vodafone and Orange in the Auction (i.e. to ensure the complete separation and independence of their respective bidding decisions); [76] further, no 3G Licence would be granted to these operators until they had de-merged. After Vodafone and Orange had each succeeded in bidding for a 3G Licence, Orange was sold to France Telecom in May 2000 for around £6 billion more than Mannesmann had paid for it in October 1999, before the Auction. [77] 3G Licences were then granted to Vodafone and Orange. The Auction This was the world's first 3G auction. [78] Paul Klemperer, the principal auction theorist advising the RA at the time, has since stated (expressly recording his own views rather than those of the Government) that "[g]oing to market first was a deliberate strategy of the UK auction team" [79] and that the team "deliberately maintained this strategy even when the complications engendered by the Vodafone-Mannesman takeover battle led many to suggest that the U.K. auction be postponed." [80] In a press notice (P2000/116) of 18 February 2000, the then Minister for E-commerce and Small Business Patricia Hewitt said:
"Early licensing certainty for 3G mobile is essential if the UK is to remain at the forefront of the global telecommunications market. This will be the first spectrum auction in the UK and the first auction for 3G mobile spectrum in Europe. The Government is delivering on its commitments to begin the auction this financial year and to introduce measures to attract one or more new entrants. The increased competition and innovation in the mobile market that this will bring is good news for the UK economy and for consumers. It will be an important contribution to the Government's aim of making the UK the best place in the world to conduct e-commerce. With thirteen high quality bidders participating I look forward to a competitive auction. The progress of the auction will be published round by round on the auction website. "
The Auction commenced on 6 March 2000. [81] There were 150 rounds [82] of bidding, lasting until 27 April 2000. The process lasted 52 days, running five days a week (subject to recess periods and public holidays). [83] The successful bidders and the prices they paid were as follows: [84] Licence Winner Final Bid [85] Licence A [reserved for a new entrant] TIW UMTS (UK) Limited (now Hutchison 3G UK Limited) [a new entrant] £4,384,700,000 (€7,485,121,370) Licence B Vodafone Limited [an incumbent operator] £5,964,000,000 (€10,181,144,400) Licence C BT3G Limited [86] [an incumbent operator] £4,030,100,000 (€6,879,783,710) Licence D One2One Personal Communications Limited (now T-Mobile (UK) Limited) [an incumbent operator] £4,003,600,000 (€6,834,545,560) Licence E Orange 3G Limited [an incumbent operator] £4,095,000,000 (€6,990,574,500) Total fees paid £22,477,400,000 (€38,371,169,540) The provisional winners were announced by the DTI in a press release issued on 27 April 2000. [87] The press release set out the provisional winners and then added the following: - "Mr Byers [i.e. the Rt. Hon. Stephen Byers MP, the then Secretary of State for Trade and Industry] said:
'The outcome of this auction supports the Government's commitment to early licensing of 3G and to increasing competition in the UK mobile telecoms market. It will ensure the UK maintains its position as a world leader in mobile telephony, and is a vital step towards our goal of making the UK the best place in the world for e-commerce. '
I welcome the introduction of a new entrant to the UK mobile telecoms market. This has been a direct result of the decision to auction five licences. Greater competition will spur faster roll-out of more innovative services, as well as delivering greater choice and lower prices to the consumer. '3G has the potential to transform everyday life, opening up full scale, multi-media access to millions of people. 3G users will be able to surf the net, download e-mails, music and high quality pictures and hold video conferences all on the move. 'This was the world's first 3G spectrum auction and UK consumers will be among the first in the world to reap the benefits of this exciting new technology. The outcome of this auction is good news for business, the consumer, the economy, and the taxpayer.' This is the first time spectrum has been allocated in the UK by auction allowing the licensing process to reflect the commercial value of spectrum. Previously licences have been allocated by comparative selection ('beauty contest') with licence fees set to cover administration costs. The auction began on Monday 6 March and was managed by the Radiocommunications Agency, which is responsible for the licensing and administration of the radio spectrum." The acquisition of the majority of the share capital of TIW UMTS (UK) Limited by Hutchison 3G UK Holdings Limited was completed on 29 June 2000 following which TIW UMTS (UK) Limited changed its name to Hutchison 3G UK Limited. The outstanding share capital of TIW UMTS (UK) Limited was acquired by Hutchison 3G UK Holdings Limited some six months later. [88] According to the NAO Report, the transaction suggested that after the Auction the 3G Licence held by TIW had an implied value of £6 billion (as opposed to the £4.385 billion TIW had actually paid) [89] . The successful bidders paid for their licences in 2000 (licences A and D were issued on 9 May 2000; Licence C on 16 May 2000; and Licences B and E on 1 September 2000). [90] Winning bidders could either pay in full at the end of the Auction or in instalments. [91] If they chose to pay by instalments the RA required a bank guarantee against default. [92] All of the successful bidders chose to pay in full due to the cost of a bank guarantee and due to the size of interest payments payable on the outstanding amount. [93] The licences were for a term expiring on 31 December 2021 unless earlier revoked by the Secretary of State or surrendered by the licensee. [94] The total cost to the RA of developing and managing the Auction was approximately £8,000,000. [95] These costs were comprised mainly of consultancy fees, the cost of legal services provided by the DTI and the cost of the RA's own staff. [96] Factors Affecting the Revenues Generated by the Auction On 19 October 2001, the Comptroller and Auditor General of the National Audit Office, Sir John Bourn, published a report entitled:
"The Auction of Radio Spectrum for the Third Generation of Mobile Telephones" (the "
NAO Report"). The purpose of the NAO Report was to report to Parliament, and in particular to the Public Accounts Committee of the House of Commons, on the efficiency and effectiveness with which the RA had conducted the Auction. Paragraphs 6-12 of the Executive Summary, and Part 2, of the NAO Report addressed the question of whether the Auction had realised the full economic value to consumers, industry and the taxpayer of the spectrum in the light of the fact that it raised more money than had been expected. The key findings of the NAO Report on that question were as follows. The United Kingdom was the first country in the world to allocate spectrum for 3G mobile telephony by auction. [97] The revenue generated by the Auction greatly exceeded revenues raised from previous allocations of spectrum in the United Kingdom, all of which had been under a legal regime that allowed for licence fees to be set only so as to cover the costs of licensing. [98] The spectrum proved a difficult asset for the RA to value, because there had been no previous auction to provide a benchmark, and the RA found it difficult to obtain valuations from the industry itself, having no access to potential bidders' bidding plans. The RA and its financial advisers, Rothschilds, believed that variances in financial market conditions and between the mobile telephone operators made it very difficult to predict likely revenues. These difficulties were shared by outside commentators. [99] In April 1999, the grant of the 3G licences by auction was estimated by the RA and its advisers to realise in the region of £1.5 billion and reserve prices for the auction were set accordingly. By January 2000, on receipt of 13 applications, this estimate was increased to a range of £1 billion to £3 billion. The highest estimate of proceeds, published shortly after the commencement of the auction by Lehman Brothers' investment analysts, was £6 billion, a figure that reflected recent developments such as a boom in telecommunications industry stocks and a steeply upward trend in mobile telephone use in the UK. [100] The high level of proceeds from the UK auction arose from the strong convergence of several positive factors, some of which were attributable to the actions of the RA and others of which originated from external causes. These factors were as follows: - The NAO Report stated that in reserving the large A licence for a new entrant, the RA accepted the risk that this might lead to lower proceeds. [101] However, Peter Cramton (the NAO's economic adviser) stated that revenues would probably have been slightly lower if Licence A had not been reserved. [102] Although the premium that the four existing mobile telephone operators placed on a larger licence could not be predicted in advance [103] , allocating that large licence to a new entrant, leaving only one other large licence (Licence B) created a situation in which the two largest existing operators, Vodafone and BT Cellnet, went "head to head" for the only remaining large licence, sustaining its price level at a similar level per MHz as the other licences. [104] The UK Auction benefited from more competition than other later auctions of spectrum elsewhere in the EU. The decision to auction five licences was fundamental. Given that there were four incumbent operators, five licences guaranteed that a new entrant would win one, creating a strong incentive for potential entrants to enter the bidding. Setting aside the largest, best licence, for a new entrant was an additional incentive to enter. Peter Cramton stated in a report appended to the NAO Report that the "[t]otal auction revenues would likely be slightly lower with six licenses." [105] Hutchison told the NAO that they regarded the imposition of a "roaming" condition on incumbent operators (see paragraph 38 above) as important or very significant in reducing a barrier to entry to the market and encouraging the participation of new entrants [106] . Most of the new entrant bidders told the NAO that marketing by Rothschilds had encouraged them to bid. [107] The RA consulted widely, in particular through the UACG. [108] The RA decided not to invite one-off sealed bids, on advice from their advisers in game theory (i.e. Professors Binmore and Klemperer at UCL – see paragraph 27 above). The NAO noted that " there is widespread evidence that single sealed bids can produce irrational results in which similar lots realise wildly different proceeds, though sealed bids may be advisable if there are insufficient bidders to sustain an open competition ". [109] The NAO considered that the format of the Auction gave bidders confidence in bidding higher, since they were able to see that numerous competitors were doing likewise, presumably based on their own business projections and strategic priorities. [110] Further, an ascending auction spread over seven weeks gave the bidders ample time to revise their initial budget constraints through authorisation from their top management and external financial advisers. The NAO observed, citing the report of Peter Cramton, that a slow-paced auction can lead to increased costs and reduced interest by bidders. The RA could, it found, have quickened the Auction by: setting higher minimum opening bids; increasing the size of the bid increment; or increasing the number of rounds per day [111] . However, Peter Cramton's report stated that "[a]lthough the auction could have been conducted much faster, there was little economic loss from the gradual pace. The high stakes and great uncertainty about value probably justified the conservative course taking [sic] by the UK Government." [112] The final price for the 3G Licences was largely determined by the point at which the last unsuccessful bidder, NTL, dropped out of the auction. NTL told the NAO that it had based its bidding on: - Its strong existing UK customer base (in cable television and fixed telecommunications) Its position as supplier of transmitters to existing UK mobile telephone operators; Its past experience of running a mobile telephone company in the US; and Its track record in raising finance on the scale required to establish a 3G network. [113] The UK Government saw early implementation of 3G mobile telephony in the United Kingdom as advantageous for operators and customers alike. [114] One mobile telephone operator (Vodafone) told the NAO that winning the first licences to be available in a key European market was important to bidders because: - It enabled winners to approach equipment suppliers with realistic requirements before operators in other companies placed orders, allowing the licensees in the United Kingdom to influence the design of the products and to secure supplies; and It provided them with a stronger basis on which to bid for licences in other countries, whether allocated through auctions or "beauty contests". [115] The NAO found a general view on the part of bidders that many European and global telecommunications companies saw success in the UK Auction as important to qualifying to be one of a small number of pan-European operators in the decade 2000-2010, after a process of consolidation in the industry. [116] The Auction coincided with a period of positive sentiment in global financial markets towards the telecommunications industry and a boom in share prices. The four incumbents saw dramatic rises in the value of their shares – shareholder values that had to be protected against failure to win a licence with the associated risk of loss in investors' confidence in operators' ability to offer a range of up-to-date products, and loss of customers to new entrants offering superior 3G services. [117] Delays caused largely by the companies' legal challenges to the roaming proposals (paragraph 40 above) deferred the auction to a date coinciding with the peak of the internet stock bubble and an all-time peak in the share values of telecommunications companies. [118] This resulted in auction prices which were probably significantly higher than had the delay not occurred, since it indicated an ample supply of cheap debt and equity funding, with which successful bidders could finance their licences and infrastructure. A subsequent downturn in the stock market and capital markets in the year 2000 meant that these indications were not fulfilled. [119] Spectrum Trading Relevantly for this document, "spectrum trading" means the transfer, by a person who is permitted to use certain frequencies in the electro-magnetic spectrum for certain purposes, of the right to use all or some of those frequencies for those purposes, together with concomitant obligations, to a third party. [120] Spectrum trading could in principle, however, take a number of different forms. [121] In the UK, the consultative document The Future Management of the Radio Spectrum, dealing with all types of use of the spectrum, published by the Radiocommunications Agency in March 1994 and the White Paper Spectrum Management: into the 21 st Century (Cm 3252, June 1996) raised the possibility of reforms, including the introduction of spectrum trading. In October 1998 the RA published a consultative document entitled Managing Spectrum through the Market, which said, "The Radiocommunications Agency…is keen to promote the economically efficient distribution of spectrum through market mechanisms within a framework of effective spectrum management. The Agency is currently in the process of implementing spectrum pricing and now wishes to explore the opportunities offered by spectrum trading." [122] By way of proviso, it stated that "it would not be possible to introduce forms of spectrum trading that were incompatible with Community law. The Radiocommunications Agency is discussing the position with the European Commission." [123] In October 1998, the RA published a consultative document on spectrum trading called 'Managing Spectrum through the Market', again dealing with all types of use of the spectrum. At section 4.6 of this document, it is stated that "[t]he spectrum market would complement, not replace, the issue of licences by the [Radiocommunications] Agency. Spectrum trading would enable users to be given a choice in some cases between obtaining a licence from the Agency direct or acquiring one on the spectrum market. The availability of an alternative supply of spectrum would broaden choice and increase opportunities. Public and private sector suppliers co-exist and work in tandem in other sectors of the economy, for example, housing, health and education, and there seems no reason why this should not also be the case for spectrum." The Information Memorandum published in connection with the Auction on 1 st November 1999 included the following statement of the Government's position (at Paragraph 2.2.8):
" 2.2.8 Trading of licences under Wireless Telegraphy Acts During the passage of the WT Act [the Wireless Telegraphy Act 1998] as a Bill through Parliament, Ministers indicated that they saw potential advantage in introducing trading in licences under the Wireless Telegraphy Acts [1949 to 1998] as a development of spectrum pricing. On 8 th October 1998, the RA published a consultative document, ' Managing Spectrum through the Market '. This document and the responses to it (except where confidentiality was requested) are available on the RA website. The introduction of spectrum trading would require amendments to be made to the Wireless Telegraphy Acts. Some forms of spectrum trading would also require changes to be made to the Licensing Directive. The Government announced on 25 th May 1999 that, in light of the favourable response to the consultation, the RA would work closely with industry to develop detailed proposals to introduce spectrum trading, subject to the necessary legislative changes being made. However, the prospects for spectrum trading are uncertain. The EC Commission may decide against amending the Licensing Directive to facilitate spectrum trading. Even if changes are made, the timing cannot be foreseen with certainty. In any event, spectrum trading will not be introduced before the Auction and (on current estimates) is unlikely to be available before the financial year 2002-03 . Were spectrum trading to be introduced, the Government's current thinking is that existing licences issued under the Wireless Telegraphy Acts, including those to be auctioned, should be varied to be made assignable in the same way as any new licence s issued after the introduction of spectrum trading. It is therefore possible that the 3G WT Act Licences might become assignable at some point in the future. However, the timing of this cannot be predicted at this stage; nor can the nature of any restrictions or other conditions that might be imposed ."
Since the Auction: - The Framework Directive 2002/21/EC was made on 7 March 2002. It was required to be implemented by Member States by 24 July 2003. The Framework Directive permits but does not require spectrum trading. Under Article 9(3) Member States may make provision for undertakings to transfer rights to use radio frequencies to other undertakings. Article 9(4) lays down obligations on Member States in relation to the transfer of rights to use radio frequencies, in particular that competition is not distorted as a result of any such transaction and that where radio frequency use has been harmonised by Community measures, any such transfer shall not result in change of use of that radio frequency. The UK has not to date introduced spectrum trading, although Ofcom was given power by section 168 of the Communications Act 2003 (which came into force on 29 December 2003) to make regulations permitting spectrum trading. In November 2003, the RA and Ofcom issued a joint consultation document on spectrum trading, which covered all types of use of the spectrum. At section 4.5, it states that:
"Following recognition that a centrally-based administrative system of spectrum management would be unlikely to produce the best allocation of spectrum, the spectrum management regime was reformed in the Wireless Telegraphy Act 1998. It introduced market mechanisms, such as administrative incentive pricing of spectrum and competitive auctions of spectrum, in an attempt to encourage efficient use. "
Spectrum trading has for some time been seen as a desirable and logical development of those reforms. The December 2000 White Paper: 'A New Future for Communications' reaffirmed the UK Government's commitment to spectrum trading. The EU Framework Directive (Directive 2002/21/EC), which is now implemented in UK law under the Communications Act 2003, enables Member States to introduce trading. It permits a wide range of approaches, subject to the need to ensure that competition is not distorted as a result of any trade and that the use of spectrum harmonised under Community measures does not change. "The Communications Act 2003, which will come fully into force in December 2003, contains provisions allowing Ofcom to establish a spectrum trading regime. Ofcom is given power to make regulations authorising the holder of a WT Act licence or the holder of a grant of Recognised Spectrum Access (RSA) to transfer the rights and obligations under its licence or grant of RSA to another person. This will enable the development of a market in rights arising under licences and grants of RSA." At section 9.4.5, the same document states: "Ofcom believes that it would not be appropriate to introduce trading in cellular spectrum until issues relating to the future re-farming of 2G spectrum and identification of potential 3G expansion bands have been resolved, internationally and within the EU. The timing on both these decisions is subject to international harmonisation and agreement with the EU. For these reasons, Ofcom proposes that trading in cellular licences should not commence before end 2007". Annex 1: Comparison of Licensing Process in EU Member States Annex 2: Glossary of Terms and Acronyms 900 MHz The band of frequencies around 900 MHz available for mobile telephony. 1800 MHz The band of frequencies around 1800 MHz available for mobile telephony. 2G Second-generation mobile telephony (digital cellular voice telephony). 3G Third-generation mobile telephony. 3G refers to the collection of third generation mobile technologies that are designed to allow mobile operators to offer integrated data and voice services over mobile networks. Frequency The number of cycles per second of an electromagnetic wave. Expressed for radio waves in Hertz. GSM Global System for Mobile Communications, the standard used for second-generation mobile telephony in Europe. IMT-2000 International Mobile Telecommunications-2000. The international standard for third generation mobile telephony of which UMTS is the European component. MHz MegaHertz, or millions of cycles per second. Refarming The re-allocation of radio spectrum (in particular the re-allocation of radio spectrum currently licensed for use with equipment complying with GSM 1800 standards to allow the use of equipment complying with a third-generation standard). Roaming The ability of a mobile phone customer to use a network other than the one to which he or she subscribes. Spectrum A continuous block of frequencies. Spectrum Allocation Spectrum is allocated to various different uses (eg. radio broadcasting, radio astronomy). Spectrum Assignment Government authorisation granted to a particular operator for use of specific frequencies or frequency pairs within a given allocation, usually at a stated geographic location. UMTS Universal Mobile Telecommunications System: a third-generation mobile and wireless communications system capable of supporting in particular innovative multimedia services, beyond the capability of second-generation systems such as GSM, and capable of combining the use of terrestrial and satellite components. ANNEX 3 Example licence granted under the Wireless Telegraphy Acts 1949 and 1998 ANNEX 4 Example licence granted under section 7 of the Telecommunications Act 1984 IN THE VAT AND DUTIES TRIBUNAL CENTRE: LONDON HUTCHISON 3G UK LIMITED (LON/2003/0861) mmO 2 Plc (LON/2003/0878) ORANGE 3G LIMITED (LON/2003/0852) T-MOBILE (UK) LIMITED (LON/2003/0859) VODAFONE GROUP SERVICES LIMITED (LON/2003/0983) Appellants - and - H M COMMISSIONERS OF CUSTOMS & EXCISE Respondents AGREED STATEMENT OF FACTS Linklaters FRESHFIELDS BRUCKHAUS DERINGER One Silk Street 65 Fleet Street London EC2Y 8HQ London EC4Y 1HS Tel: (44-20) 7456 2000 020 7936 4000 Fax: (44-20) 7456 2222 Ref: NPL/PMTK Solicitors for the Appellants Solicitors for the Appellant The Solicitor to HM Commissioners of Customs and Excise, 1 st Floor East, New King's Beam House 22 Upper Ground London SE1 9PJ Tel: 0870 785 8053 Fax: 0870 785 8169 Solicitor to the Respondents Note 1 OJ L145, 13/06/1977 p.1. Unless stated otherwise, references to articles are to articles of the Sixth Directive. Note 2 See, for example, Opinion of Advocate General Lenz in Case C-155/94, Wellcome Trust Ltd v CEC [1996] ECR I-3013 , paragraph 39. Note 3 Case C-235/85, Commission v Netherlands [1987] ECR 1471 . Note 4 Directive 97/13/EC of the European Parliament and Council of 10 April 1997 on a common framework for general authorizations and individual licences in the field of telecommunications services, OJ L117, 07/05/1997 p.15. Note 5 Decision 128/1999/EC of the European Parliament and Council of 14 December 1998 on the coordinated introduction of a third-generation mobile and wireless communications system (UMTS) in the Community, OJ L17, 22/01/1999 p.1. Note 6 See, for example, Case 231/87, Ufficio Distrettuale delle Imposte Dirette di Fiorenzuola d’Arda v Comune di Carpaneto Piacentino [1989] ECR 3233 , paragraph 16. Note 7 See paragraph 16 of the judgment of the Court of Justice of the European Communities in Case 231/87, Ufficio Distrettuale delle Imposte Dirette di Fiorenzuola d’Arda v Comune di Carpaneto Piacentino [1989] ECR 3233 . Note 8 In particular, paragraph 16 of the judgment of the Court of Justice of the European Communities in Case 231/87, Ufficio Distrettuale delle Imposte Dirette di Fiorenzuola d’Arda v Comune di Carpaneto Piacentino [1989] ECR 3233 . Note 9 Silber J in R v Secretary of State for Trade and Industry ex parte BT3G [2001] INLR 455 , at paragraph 2 Note 10 The Auction of Radio Spectrum for the Third Generation of Mobile Telephones – Report by the Comptroller and Auditor General of the National Audit Office (the “NAO Report”), page 11. See paragraph 0 below for an account of the nature and purpose of that report. Note 11 NAO Report, page 11 Note 12 NAO Report, page 11 Note 13 http://www.itu.int/itunews/issue/2003/06/thirdgeneration.html, The Development of 3G Systems Note 14 http://www.itu.int/aboutitu/overview/history.html, paragraph 10 Note 15 http://www.itu.int/aboutitu/overview/o-r.html, paragraphs 5 and 3 Note 16 Decision No 128/1999/EC of the European Parliament and the Council, preamble paragraphs 5 and 6 Note 17 See Decision No 128/1999/EC of the European Parliament and the Council, preamble paragraph 6 Note 18 Silber J in R v Secretary of State for Trade and Industry ex parte BT3G [2001] INLR 455 , at paragraph 10 Note 19 It has since been repealed and replaced by Directive 2002/21/EC. Note 20 OJ L17/1, 22.1.1999 Note 21 Article 3 Note 22 NAO Report, page 19, figure 7 Note 23 The relevant responsibilities of the Secretary of State have now, under the Communications Act 2003, been transferred to the Office of Communications (OFCOM). Note 24 para 6.28, page 27 Note 25 Not including the Channel Islands or the Isle of Man Note 26 This expectation was not met, largely because of a dispute – leading in the end to litigation in the Administrative Court – between regulators and existing mobile telephony operators as to the imposition of a condition the effect of which would be to require them to enter into roaming agreements with a new entrant who succeeded in obtaining a 3G Licence. See paragraph 39 below. Note 27 para 6.17. A “roaming agreement” would enable customers who were not in range of their own operator’s network to “roam” onto another 3G operator’s network in the UK to complete their call using either 3G or current second-generation (“2G”) services, thereby enabling a new entrant to compete effectively in the period when it was rolling out its own network. Note 28 para 6.29 Note 29 para 4.5 Note 30 para 4.4 Note 31 paras 6.18 and 6.20 Note 32 “New Legislation on the Right Wavelength for Business, Consumers, Jobs” at www.spectrumauctions.gov.uk/press Note 33 Barbara Roche, MP on 18 May 1998, Column 233, Hansard Note 34 page 15, paras.1.15-1.16 Note 35 SI 1999/3162 Note 36 See paragraph 0 below for a discussion of the decision to provide for five 3G Licences. Note 37 NAO Report, p.13 Note 38 NAO Report, p.20 Note 39 NAO Report, p.20 Note 40 NAO Report, p.30 Note 41 NAO Report, p.30 Note 42 The Economic and Social Research Council Note 43 The Biggest Auction Ever: The Sale of the British 3G Telecom Licences , by Ken Binmore and Paul Klemperer, March 2002 ( The Economic Journal , 112 (March) C74-C96). Note 44 How (Not) to Run Auctions: the European 3G Telecom Auctions , article by Paul Klemperer in the European Economic Review , 2002 Note 45 The Spectrum Management Advisory Group. Note 46 “Paired spectrum” refers to two ranges of spectrum which are used simultaneously to provide a communications service. For example, a spectrum package of “2 x 10 MHz” refers to two separate ranges of spectrum of a bandwidth of 10 MHz each. “Unpaired spectrum” refers to a single range of spectrum. Note 47 UACG paper UACG (98) 10 Note 48 Professor Binmore at UCL recommended a combination of the “Dutch” and “English” auction designs. See UACG paper UACG (98) 14. This hybrid structure involved three stages: (1) an “English” stage under which multi-round open bidding continued until the number of bidders was reduced to one more than the number of available licences; (2) a “Dutch” stage under which the final five bidders submitted their “best and final offers” in the form of sealed bids with the four highest bidders winning a licence; and (3) a third stage under which the four winning bidders had an opportunity to further increase their bids so as to obtain their preferred assignment of spectrum. Within this process, two variants were proposed: (1) Anglo-Dutch Hybrid Variant 1 (“ADH1”) whereby winners pay, as a minimum, the sealed bid amount they pledge in Stage 2; and (2) Anglo-Dutch Hybrid Variant 2 (“ADH2”) whereby winners are ‘reset’ at the end of Stage 2 to the amount of the lowest running bid. Note 49 UACG Paper 99(5) Note 50 See UACG Paper 99(3) paragraph 7: “ It is recognised that new entrants face a greater challenge than existing operators in terms of rolling out infrastructure and establishing a customer base for 3G services. Existing operators have networks and sites that can be used to provide basic services to customers over a very wide geographical area… We therefore propose reserving one of the larger packages in the above scenarios for a new entrant. ” Note 51 Mobile Phones – The Next Generation – Competition the Key to the Future , issued by the Department for Trade and Industry on 6 May 1999. Note 52 NAO Report, page 18 Note 53 See UACG paper UACG (99) 8 Note 54 at the average interbank exchange rate on 6 March 2000, obtained from www.oanda.com Note 55 NAO Report page 23 para. 2.18 Note 56 In fact, this provision was invoked only once, when key members of Telefónica’s auction team were tied up in a major shareholder meeting: NAO Report, page 53 Note 57 NAO Report page 49 Note 58 “ The Auction of Radio Spectrum for the Third generation of Mobile Telephones” page 8 paragraph 31. Note 59 See minutes of the UACG meeting held on 10 July 1998 para 7: “…option a), which featured an upfront payment plus instalments in years 6-10 after the licence is awarded, meant there would be no further payment after year 10. It was suggested that payment should be made only when service started or when type-approved UMTS equipment were available. Mr. Clayton [of the Radiocommunications Agency] said that all views would be taken into account, but he found it hard to imagine that the Government would be prepared to receive nothing up front.” and para 8: “Mr. Clayton confirmed that the business risk of UMTS not being successful should be for industry; this would be reflected in bids. He said sharing risk by means of a royalty-based auction had been considered, but for both practical and economic reasons such an approach appeared unattractive.” Note 60 On 25 July 2003 the UK implemented the following Directives: Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities (Access Directive); Directive 2002/20/EC of the European Parliament and of the Council of 7 March 2002 on the authorisation of electronic communications networks and services (Authorisation Directive); Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services (Framework Directive); and Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users’ rights relating to electronic communications networks and services (Universal Service Directive). This involved the replacement of the licensing regime with a general authorisation regime. Note 61 Condition 1 Note 62 Condition 2 Note 63 Condition 4 Note 64 Conditions 11 & 12 Note 65 Condition 23 Note 66 Condition 25 Note 67 Conditions 26ff. Note 68 R (on the application of One2One Personal Communications Ltd) v Secretary of State for Trade and Industry [2003] 3 C.M.L.R 36 Note 69 BT owned a majority shareholding in BT Cellnet, the second largest mobile phone operator at the time of the auction. In November 1999, BT Cellnet became a wholly owned BT company following the sale by Securicor to BT of its 40 per cent stake in the company. In this statement of facts, references to BT include references to BT Cellnet. Note 70 Orange and BT did so through their subsidiaries Orange 3G Limited and BT3G Limited respectively. Note 71 http://www.vodafone.com/article_with_thumbnail/0,3038,CATEGORY_ID%253D201%2526LANGUAGE_ID%253D0%2526CONTENT_ID%253D70251,00.html Note 72 Council Regulation 4064/89/EEC Note 73 Commission Decision of 12 April 2000, Vodafone/Mannesmann M.1795 Note 74 “Associated Bidder” means, inter alia, any member of the licensee’s group or a person with a relevant interest (as defined) in a member of the licensee’s group or in whom a member of the licensee’s group has a relevant interest (The Wireless Telegraphy (Third Generation Licences) Notice 1999 paragraph 3.7.9. Note 75 No bidder was entitled to a grant of a licence (nor become liable to pay for the licence) until it had removed the pre-conditions as prescribed in paragraph 5.1.3 of the first draft Notice (paragraph 5.1.4 of the Notice). Note 76 R (on the application of BT3G Ltd) v Secretary of State for Trade and Industry [2001] EWCA Civ 1448 Note 77 Article by Professor Binmore, fn 43 above, page C91 Note 78 For the Government’s stated objectives see paragraph 19 above. Note 79 How (Not) to Run Auctions: the European 3G Telecom Auctions , by Paul Klemperer, dated November 2001, p.5 Note 80 ibid, p5, footnote 11 Note 81 NAO Report, page 17 Note 82 NAO Report, page 21 Note 83 The auction ran between 6 March and 27 April 2000 – NAO Report, page 17 Note 84 Ibid, page 18. Note 85 All fees were paid in sterling. Equivalents to the sterling value are expressed in € on the basis of the daily average inter-bank exchange rate quoted by Oanda for 27 April 2000 (see www.oanda.com). Note 86 BT3G was at that time owned by British Telecommunications Plc; on the demerger of BT’s mobile business as mmO2 (see paragraph 34 above), BT3G was renamed O2 Third Generation Limited. Note 87 Byers Announces 3G Mobile Licence Winners , DTI Press Release dated 27 April 2000 Note 88 http://www.tiw.ca/engl/Section1_Infos/C_Medias/year2000/jul12.shtml Note 89 NAO Report, page 43, para 4.29 Note 90 Commissioners’ Statement of Case (10 November 2003). The delay in payment for Licences B and E was because these were the Licences awarded to Vodafone and Orange, which had to de-merge before they could take up their Licences; paragraph 0 above. Note 91 NAO Report, page 31 Note 92 NAO Report, page 31 Note 93 NAO Report, page 31 Note 94 3G Mobile Licence issued by the RA on behalf of the Secretary of State Note 95 NAO Report, page 29 Note 96 NAO Report, page 29 Note 97 NAO Report, page 18 para 2.7 Note 98 NAO Report, page 17, para 2.2 Note 99 Ibid, paras 2.3-2.5 Note 100 Ibid Note 101 NAO Report, page 8, para 25. Note 102 See footnote 104 below. Note 103 Ibid. Note 104 Ibid, page 17, paras 2.3-2.5. See also Peter Cramton’s report – appended to the NAO Report – at page 52: “ The five-license option (without the best license set aside for a new entrant) does add another competitor in the wireless market. Moreover, unlike in the set-aside approach, the second large license would end up with the second strongest incumbent (BT [now mmO2 ]), rather than the entrant. This outcome is more efficient, since the second-strongest incumbent likely can make better use of the extra 5 MHz of paired spectrum. Revenues could be lower with this option, since Vodafone and BT would no longer have to compete for the only large license. The price for the large licenses would be set by Orange. Whether overall revenues would be higher or lower without the set-aside depends on how high Orange would be willing to bid for the extra 5 MHz. Based on the observed bidding, Orange only bid on the large licence when the spread between large and small was less than about £450 million. This suggests that revenues would probably be slightly lower without the set-aside. BT forced a spread of nearly £2,000 million between large and small. If without the set-aside, Orange forces a split of only £500 million, then revenues would fall ”. Note 105 See also Peter Cramton’s report, ibid, page 52, where he deals with the counter-factual situation in which six licences were to be awarded: “ Total auction revenues would likely be slightly lower with six licenses. There are two reasons. First, Telefonica would become the marginal bidder. In the five license auction, Telefonica dropped out at £3,668, compared with NTL’s dropout at £3,971. All six licenses would sell for approximately Telefonica’s dropout point. Second, Telefonica’s dropout point would be less, since it would be bidding to participate in a six-player market as opposed to a five-player market. The difference in revenues, however, likely would not be large.” Note 106 Ibid, pages 20-21, para 2.11 Note 107 Ibid, page 21, para 2.12 Note 108 Ibid, paras 2.13 to 2.14 Note 109 Ibid, page 23 para 2.15 Note 110 Ibid, page 23, para 2.15 Note 111 Ibid, para 2.16, 2nd bullet point Note 112 Ibid, page 55 Note 113 Ibid, para 2.17 Note 114 Ibid, para 2.20 Note 115 Ibid, para 2.20 Note 116 Ibid, page 25, para 2.20 Note 117 Ibid, page 52: “. .the auction occurred at the peak of an apparent high-tech stock bubble… Certainly for the incumbents, but also for the strongest new entrants, the question of value was transformed into a question of how much the stock price would be hurt if the company failed to win a licence.” Note 118 Ibid, page 26, para 2.21 Note 119 I> ibid, page 26, para 2.21 Note 120 Thus, section 168 of the UK Communications Act 2003 (passed over 3 years after the Auction) defines spectrum trading as “the transfer to another person by (a) the holder of a wireless telegraphy licence, or (b) the holder of a grant of recognised spectrum access, of rights and obligations arising by virtue of such a licence or grant”. Note 121 See, for example, section 5.1 of Implementing Spectrum Trading , a consultation document issued by the RA in July 2002: “Spectrum trading may take place in a number of ways characterised by mode of trade, duration and extent . Mode of trade refers to the range of freedoms available to buyers, from change of ownership to enhanced flexibility for reconfiguration (aggregating or partitioning assignments in frequency or geographical coverage or possibly time) and change of the use to which the spectrum can be put. Duration describes the permanence and duration of the transaction. Extent refers to the extent to which rights and obligations associated with the licence are transferred.” Note 122 Managing Spectrum through the Market , page 1 Note 123 Managing Spectrum through the Market , page 4

Cited in 1 later judgment