The freephone and local rate calls battle – who’s lost?

2G and 3G masts on a mobile base station

The war between fixed network operators and mobile network operators is a central feature of most mature electronic communications markets, where few operators provide both fixed and mobile networks and services. The UK is no exception.

In the UK the most recent battle in this ongoing war has been in the freephone and local rate calls markets, known by the number prefixes used for the relevant number ranges of 080 (freephone) and 0845/0870 (local call or reduced call rate). In their bid to win customers from each other and reduce their own loss of customers, ie to reduce their churn rate, mobile network operators (MNOs) or their wholesale customers, the mobile virtual network operators (MVNOs) have developed a bewildering array of tariffs. These usually involve a range of bundles for minutes of calls, numbers of text messages and data rates for mobile broadband. A key part of these bundle offerings is the careful selection of which types of calls are included within the minutes permitted in any bundle. In most cases, the MNOs or MVNOs exclude calls to 080 or 0845/0870 numbers (the 08 Calls), perhaps because these calls are almost universally made to fixed network operators’ (FNOs) customers.

As a consequence, MNO and MVNO customers rarely know how much they are being charged to make these 08 Calls (see OFCOM’s Simplifying Non-Geographic Numbers consultation paper of 16 December 2010). The tariffs are not key differentiators or even factors customers consider when selecting an MNO or MVNO. As a result, there is little or no competitive pressure on MNOs and MVNOs for the 08 Calls. It is therefore not surprising that the tariffs charged for these calls can far exceed the network costs to the MNOs of setting up the calls (originating them) and handing them over to the FNOs to route to the called party (or to terminate them). FNOs, on the other hand, as terminating operators, have a monopoly on the market for terminating calls on their networks. Competition law can therefore ensure that the charges the FNOs make to MNOs to terminate the 08 Calls are not abusive, but are fair and non-discriminatory. Consequently, FNOs have long been aggrieved that the majority of revenue generated by for 08 Calls has been retained by the MNOs (and MVNOs).

British Telecommunications plc (BT) was the first to try to change their charges for terminating 080 Calls to get an increased share of this 080 Calls revenue. It was obvious that any change would be opposed by the MNOs. So when BT sought to change their terminating charges by use of Network Charge Change Notices (NCCN), these were disputed by the MNOs.  When these disputes could not be resolved, they were referred by the MNOs to the Office of Communications (OFCOM) for resolution using its statutory dispute resolution powers (see sections 185 to 191 of the Communications Act 2003).

OFCOM issued two determinations in respect of disputes between BT and various MNOs regarding BT’s termination charges and its relevant NCCNs:

• the first dealing with 080 calls on 5 February 2010 – the MNOs concerned being T-Mobile UK Limited (T-Mobile), Orange Personal Communications Services Limited (Orange), Vodafone Limited (Vodafone) and Telefónica O2 UK Limited (O2); and
• the second dealing with 0845 and 0870 calls on 10 August 2010 – the MNOs concerned being Vodafone, T-Mobile, Hutchison 3G UK Limited (H3G), O2, Orange and Everything Everywhere Limited (EE). EE is a 50%-50% joint venture between France Telecom and Deutsche Telekom, which was formed from the combination of their UK subsidiaries Orange and T-Mobile, who operated under the name of EE as a single entity from 1 July 2010.

In each determination OFCOM set out a number of near-identical principles, which it used to assess whether BT’s proposed termination charges were “fair and reasonable”. OFCOM considered that BT’s new charges were not fair and reasonable, as in each determination certain of these principles were not met.  BT was therefore not entitled to introduce the proposed tariffs.

BT appealed OFCOM’s determinations on both the 080 and the 0845/0870 disputes. BT had no fundamental dispute with the principles used by OFCOM to determine whether the proposed tariffs were fair and reasonable; it merely believed that OFCOM had misapplied its own principles.

EE also appealed OFCOM’s 0845/0870 determination.  It’s primary appeal ground was that OFCOM’s principles had failed to address an even more fundamental principle, that BT’s proposed tariffs should be cost-orientated or “cost reflective”. As they were not, they were unlawful. EE’s secondary position was that if OFCOM’s principles for determining the fairness and reasonableness of BT’s tariffs were upheld on appeal, then they had been correctly applied and OFCOM’s conclusions ought also to be upheld.

The Competition Appeal Tribunal (CAT) has recently published its decision in the joined appeals ([2011] CAT 24, 1 August 2011). The CAT had to decide if BT was entitled to impose its proposed tariffs. To do so, the CAT:

• reviewed OFCOM’s approach to resolve the tariff disputes, including OFCOM’s setting of its three cumulative principles according to which the fairness and reasonableness of BT’s tariffs were to be judged and their application to the facts;
• considered whether OFCOM correctly complied with its dispute resolution powers and the process set out in the Communications Act 2003; and
• considered what criteria the CAT must itself apply when hearing appeals of OFCOM’s determinations of disputes.

In a lengthy but well-structured judgement, the CAT had no argument with the principles adopted by OFCOM to resolve the 080 Calls’ tariffs disputes.  It found that Principle 1 (that MNOs should not be denied the opportunity in any tariff structure to recover their efficient originating costs for the calls) was satisfied. The CAT also considered that Principle 3 (that the proposed tariff structure was reasonably practical to implement) was also satisfied.

This left Principle 2, which was made up of several parts.  Principle 2(i) concerned whether the proposed tariffs had benefits to consumers. Principle 2(ii) concerned whether the tariffs avoided material distortion of competition. The CAT did not see how these were cumulative principles so that if either one failed, a new tariff could not take effect. Most importantly for future developments in the electronic communications market and its regulation, the CAT considered that OFCOM had failed to take into account a third factor: the contractual rights of BT.

The CAT believed that Principle 2(ii) concerning distortion of competition was satisfied; the imposition of a “stringent test for the introduction of price changes” by BT itself had the effect of distorting competition by placing a restraint on BT and other operators who wishes to impose similar laddered pricing structures. On Principle 2(i), the CAT did not say that it found the proposed tariffs to be beneficial to consumers; it considered that the outcome was inconclusive. However, it did criticise OFCOM for failing to take into account BT’s relevant market share in the call-hosting market, which, being limited, would dilute the impact of BT’s proposed tariffs. The CAT did not consider that the correct test was that the new tariffs had to be shown to benefit consumers, as this placed undue importance upon OFCOM’s own policy preference over Principle 2(i) and BT’s contractual rights. Instead, this policy preference could only have overridden the other factors OFCOM considered if it could have been clearly and distinctly demonstrated that the new tariffs would act as a material disbenefit to consumers.  An inconclusive finding by OFCOM was not enough to override BT’s contractual rights.

The CAT has therefore recognised the importance of freedom of contract in the promotion of competition. As an aside, this is exactly the argument put forward by Cable & Wireless, as an intervener and FNO in support of BT (see the closing arguments of Daniel Beard QC).

So who lost? This is a difficult question, but on one level the losers may be mobile phone customers. Clearly the MNOs were making healthy profits on their 080 Calls, using this additional revenue to cross-subsidise their bundle packages. These bundles may now reflect more their underlying costs, or in EE’s words, be “cost-reflective”, as more of the 080 Calls revenue is shared with FNOs.

As an aside, it became clear during the dispute from OFCOM’s draft determinations that a retail price of 12.5ppm was a rate that permitted MNOs on average to recover their efficient costs of originating calls to FNOs, both for 080 Calls and to geographic numbers. This rate is therefore is a useful benchmark with which consumers can check the tariffs being offered to them by MNOs and MVNOs.

[Disclaimer: I led the Charles Russell LLP team that acted for Cable & Wireless in the CAT. All information in this post is, as far as I am aware, available in the public domain. Any views expressed here are strictly my own and not those of Charles Russell LLP or Cable & Wireless.]

Comparative law: chalk and cheese

Charles Russell Brand Image

On the same day as the Telecommunications Regulatory Authority (TRA) of the United Arab Emirates (UAE) announced a ban on BlackBerry Messenger, E-Mail and Web-browsing services from 11 October 2010, the Emirates News Agency (ENA) published a comparative law paper on aspects of US, UK and UAE telecommunications law (see pervious post Blast! BlackBerry blanked for links).  No author is cited on the ENA study, but it seems to imply that the banning of BlackBerry services by the TRA UAE was a regulatory measure that could have been taken appropriately and proportionately by Ofcom under UK telecommunications law.

In this post I set out why I consider this to be a fundamentally mistaken analysis.

Section 132 Communications Act 2003

The UK analysis begins with a discussion of section 132 of the Communications Act 2003, which permits the Secretary of State, upon reasonable grounds where considered necessary to protect against threats to public safety, public health or in the interests of national security, to order that certain networks or services are suspended or restricted.  Immediately it can be seen that the grounds upon which the Secretary of State can act are more narrow than in the UAE, where the TRA UAE can act on the grounds of public interest.  As the provision states that the Secretary of State must only act on reasonable grounds, by implication these must also be published.

Further weight is given to this implied obligation of the Secretary of State (and Ofcom) to publish their reasons for acting from the fact that this section has its roots in European Union law.  The Explanatory Notes that were published with the Communications Bill in the House of Lords state that the clause which was enacted as section 132 was the UK expression of the derogation permitted at Article 3(1) of the Authorisation Directive 2002/21/EC.  This only permits member states of the EU to suspend or restrict networks or services as set out at Article 52(1) TFEU (formerly Article 46(1) TEC), being the public safety, public health and national security grounds.  However, Recital (4) of the Authorisation Directive makes clear that it provides for a regulatory regime which allows operators to “benefit from objective, transparent, non-discriminatory and proportionate rights, conditions and procedures”.

Once ordered, Ofcom is required to give operators directions to implement the Secretary of State’s order.  It should be noted that section 132 (and its sister section, section 133) come under the heading of “Powers to deal with emergencies“.  Headings in statutes in UK legislation can be used as extrinsic aids to interpretation.  Given that other provisions in the Communications Act 2003 and elsewhere provide the regulatory means to obtain communications data or traffic data (which phrases have specific meaning under UK telecommunications law) routinely, a UK court would be likely to find that section 132 only applied to urgent threats requiring imminent action.  It is unlikely that a perceived threat that has been in existence since the introduction of BlackBerries, at least since June 2007 for BlackBerry 8800 or December 2009 for BlackBerry Bold for Etisalat, would be considered to be an emergency. 

Enforcement Powers of Ofcom

As the UK has an authorisation regime, all communications providers must comply with general conditions made by Ofcom under section 45 of the Communications Act 2003.  These are analogous to standard licence conditions for licensed operators.  The ENA paper describes Ofcom’s suspension powers following breaches of these general conditions, as well as conditions dealing with premium rate services or provisions concerning the supply of requested information to the regulator.  This is largely irrelevant when considering the TRA’s actions, other than to note that Ofcom can under certain circumstances order the suspension of services.  However, under UK administrative law, any Ofcom order to suspend services made without reasoning that showed their regulatory action to be objective, transparent, non-discriminatory and proportionate would immediately be vulnerable to an appeal to the Competition Appeal Tribunal (under section 192 of the Communications Act 2003).  Merely stating that a direction was made upon the grounds of public safety, public health or national security would not be sufficient.  No regulatory intervention could be made under UK law on public interest grounds alone.

Interception

The EMA paper faithfully sets out the interception of communications regime under UK telecommunications law.  It notes that interception by a public telecommunications operator in accordance with the terms of a properly authorised warrant is lawful, and notes that public telecommunications operators are required to maintain interception capabilities.  Where necessary, encryption keys and decryption technologies must also be disclosed in order to enable the relevant persons to decrypt interception information obtained by them under a warrant.

Right to Privacy

The starting point for UK telecommunications law on access to communications or traffic data is the right to privacy, which is set out in the Human Rights Act 1998.  This incorporates the European Convention of Human Rights into UK law.  Article 8 of the Convention states:

Article 8 – Right to respect for private and family life

1. Everyone has the right to respect for his private and family life, his home and his correspondence.

2. There shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others.

It is extremely difficult to imagine the circumstances that would need to exist in the UK so that a provision similar to the  TRA’s Article 11.1 of the Policy on Radiocommunications dated 23 July 2008, which prohibits the use of any encryption techniques unless authorised by TRA, would be considered “necessary in a democratic society”.

Divergent Approaches

The laws of the UK start with the presumption that encryption is lawful and permitted.  A regulatory mechanism exists to enable the relevant authorities to obtain access to encrypted communications, and the encryption keys and decryption technologies, where necessary and on an exception basis, in order to monitor or intercept certain communications in the interests of public safety, public health and national security subject to justiciable warrants (see Part IV of the Regulation of Investigatory Powers Act 2000).

 The UK system has recently (18 May 2010) been the subject of a ruling of the European Court of Human Rights (in the case of Kennedy v United Kingdom (Application 26839/05)), where it was determined to be consist with Article 8(2) of the Convention.  The case also illustrates how a citizen can challenge an interception warrant.

The TRA UAE Policy on Radiocommunications describes a fundamentally different approach.  In UAE the default presumption appears to be that encryption is not lawful or permitted.  It is only permitted by the TRA or competent authorities where the encryption is determined not to be a threat to public interest, safety or national security. 

Conclusion

In summary, the UK approach is that communications are a private matter, with the default position that all encryption or signalling methods being lawful unless subject of specific direction in order to protect against threats to public safety or public health or in the interests of national security.

In contrast, the UAE approach is that communications are not a private matter, with the default position that any form of encryption is not lawful, unless permitted by the TRA UAE.  Permission will not be granted if TRA UAE consider that refusing permission would be in the public interest, safety or national security interest.  This is not to suggest that this default position and regulatory approach is wrong, it just tackles the question of lawful encryption in a fundamentally different way from the UK.

What is wrong is to imply that the UAE and UK telecommunications regimes are in any way equivalent or comparable, given these diametrically opposed starting points, merely because both systems provide regulators with similar emergency and enforcement powers.  The approaches to privacy, and the systems that implement them, are as different as chalk and cheese.

You shall use ADR

Court of Justice, Luxembourg

There has been some reporting in the UK of a recent decision of the Court of Justice in Luxembourg on the legality of mandatory out-of-court settlement procedures for electronic communications disputes in the Joined Cases C-317/08, C-319/08 and C-320/08 Rosalba Alassini & Others.  The Court was asked to decide if a mandatory system made under national legislation (in Italy) implementing Art.34 of the Universal Services Directive 2002/22/EC was not precluded by other EU law, including Art.6 of the European Convention on Human Rights (right to fair hearing).  The short answer is that mandatory out-of-court alternative dispute resolution (ADR) is lawful.

Whilst this might change how consumer disputes are handled in other member states, this will not change practice in the UK.  We already have a system of compulsory ADR, as communications providers are required by the terms of the general authorisation to which they are all subject and made by Ofcom under the Communications Act 2003 to put in place complaints handling and dispute resolution procedures.  These procedures also require communications providers to refer consumer complaints to approved ADR providers.  Since 1 September 2009, such disputes can be referred by consumers after only 8 weeks of making a complaint.  There are still only 2 approved providers: OTELO and CISAS.  Ofcom publish a table to show which scheme each operator in the UK uses.

So for the UK, the Rosalba Alassini judgement is a cases of “Move along. Nothing to see here.”

ICLG: Telecommunication Laws 2010

A small plug for our contribution to the 3rd edition of the International Comparative Guide to Telecommunication Laws 2010.  We drafted the chapter on Bahrain, which will shortly be available on the ICLG website.

Until it is published, contact us at critique@charlesrussell.co.uk and we will send you a .pdf of the chapter.

ADR Terms of Reference for Communications Providers

Article 20(1) of the Framework Directive 2002/21/EC requires national regulatory authorities (“NRAs”) of member states to issue binding decisions to resolve certain regulatory disputes between communications providers.  However, Article 20(2) permits member states to make provisions for NRAs to decline to make such decisions where the NRAs consider that another mechanism, including mediation, exists and “would better contribute to resolution of the dispute in a timely manner in accordance with the provisions of Article 8.”

Article 8 sets out the policy objectives and regulatory principles that must be followed by NRAs in carrying out their tasks under the Framework Directive and its associated directives.

In the UK, Art. 20(2) has been implemented by s.186 of the Communications Act 2003.  In particular, s.186(3) states that unless there are alternative means of dispute resolution that are consistent with the Article 8 policy objectives and regulatory principles (the Community requirements set out in section 4 of the Communications Act 2003) (the “Community Requirements”) and provide prompt and satisfactory resolution, any dispute must be resolved by Ofcom.

Standard ADR clauses in electronic communications agreements do not, in our experience, routinely include the Community Requirements in any terms of reference for mediators, arbitrators or other dispute resolution third parties (e.g. third party evaluators for early neutral evaluation procedures).  If communications providers wish to avoid the possibility of a dispute being subject to Ofcom’s jurisdiction by the effect of s.186(3), arguably they should ensure that their ADR clauses provide for the inclusion of the Community Requirements in any ADR terms of reference.