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BT charged rivals 'unjustified' prices to use network – Appeals Court

Competitors claimed the telco overcharged them, 'distorted' the market

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The prices that BT charged rivals to access parts of its network to provide services to their subscribers were not justified, the Court of Appeal has ruled.

The Court rejected claims by BT that the Competition Appeal Tribunal (CAT) had not acted in accordance with EU telecoms laws when it considered whether what it had charged rivals was acceptable. Instead it ruled that BT's prices had served to distort the market to the detriment of its rivals and consumers.

Virgin Media and Cable & Wireless were among the telecoms firms that had challenged whether BT had breached charging restrictions imposed on it by the UK's telecoms regulator.

Ofcom had conducted an investigation into the 'partial private circuits' (PPCs) market in 2004. That market relates to components of a telecoms network that communications providers can buy from BT in order to provide internet access to consumers. The providers can buy access to 'terminating segments' within the network to provide those services or to both 'trunk' and terminating segments, depending on their needs.

Ofcom found that BT could fix and maintain prices for rivals' access to the network components at "an excessively high level" with "adverse" consequences for consumers and that, in particular, what BT charged for the 'trunk segments' was "significantly above the competitive level".

The regulator imposed a 'cost orientation obligation' on BT that required the company to ensure that "each and every charge" it levied rivals for network access could be "reasonably derived from the costs of provision based on a forward looking long run incremental cost approach and allowing an appropriate mark up for the recovery of common costs including an appropriate return on capital employed."

In 2008, however, some of BT's rival providers complained to Ofcom that the telecoms giant had overcharged them for network access and had breached the charging controls measure imposed on it by Ofcom. Ofcom investigated and found that some of BT's charges were "likely" to cause economic harm to rival providers and to consumers, and ordered the company to repay over £41 million to the competing firms.

BT appealed but its arguments were rejected by the CAT. It subsequently brought its appeal to the Court of Appeal, but it too has dismissed its claims.

The Court said that BT's claim that it was not within Ofcom's "jurisdiction" to rule on the dispute was not "seriously arguable". The company had claimed that the Communications Act had set out that Ofcom could only rule on "current or prospective" disputes and not on "historic" issues which were "to be completed within four months", but the Court said that this was not the case.

BT had also said that what it had charged rivals for 'trunk segments' was justified because the price it levied for 'terminating segments' had been low. It said that, taken together, what it had obtained from the charges to its rivals had been an "appropriate" return on the capital it had invested in setting up the network infrastructure.

However, the Court said that what BT had obtained from rivals was "was far in excess" of what it had portrayed it had calculated.

BT claimed EU telecoms regulations required that both the trunk and terminating segments markets should have been considered together, and that the CAT had failed to review its charging regime in that light. However, the Court of Appeal said that "aggregating" the "economically distinct" markets for the purposes of regulation "would have the effect of conflating distinct schemes of regulation". In any case, BT had actually sold the terminating segments "at the maximum prices that were permitted" under charge controls it had been required to adhere to, contrary to its claim that those prices were low.

The Court of Appeal said the "burden was on BT to justify its prices for trunk segments of PPCs" but that it had failed to do so.

"[BT] has sought to [justify the prices for trunk segments] on the basis that the regulatory scheme and the [EU telecoms laws'] objectives require that there be taken into account the overall price charged by BT for entire PPCs, including terminating segments, and to have regard to BT's average [return on capital employed] and [weighted average cost of capital] on that basis," Lord Justice Etherton said in the ruling. "That justification is fundamentally misconceived since it would undermine the regulatory regime and its objectives applicable during the relevant period and would (as the Tribunal said) conflate distinct schemes of regulation."

BT had also claimed that both Ofcom and the CAT had not followed principles established by case law in England when determining the amount of compensation it had to pay to rival communications providers over the over-charging. However, the Court of Appeal ruled that the wording of the Communications Act provides Ofcom with sufficient discretion to "to make such order for repayment as will best achieve the objectives of the Act and the [EU telecoms laws] on the particular facts of the case."

The Court therefore said there was "no proper basis for reaching a different conclusion from both Ofcom and the Tribunal on the remedy they considered appropriate."

"Overcharging for trunk segments disadvantages those [communication providers] whose networks are such that they require more trunk segments than other [providers]," Lord Justice Etherton said. "It also distorts the decision of [providers], who would require trunk segments, whether or not to purchase trunk sections or to self-supply them, or indeed whether to invest in PPCs at all."

"Both Ofcom and the Tribunal were perfectly entitled to conclude that it is not consistent with the regulatory regime and the objectives of [EU telecoms laws] to leave BT with the benefit of its excessive charging for trunk segments in breach of [the cost orientation obligation] in the light of those economic consequences as well as the economic harm suffered by the ultimate retail customers," he added.

Copyright © 2012, Out-Law.com

Out-Law.com is part of international law firm Pinsent Masons.

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