Flip Flopping: Telefonica UK v Office of Communications

What should Ofcom do when mobile network operators (“MNOs”) spot a loophole in the regulator’s price control mechanism and proceed to “game” the system over several years, increasing their revenues by many millions of pounds?

This unsuccessful appeal before the Competition Appeal Tribunal was brought by Telefonica, the only MNO that had failed to exploit the loophole, against Ofcom’s decision that, although it intended to amend the price control regime prospectively, it would not interfere with charges that had already been levied in accordance with the letter, if not the spirit, of the regime. The case raises an interesting point about the value to be placed on legal certainty by Ofcom.

By way of background, Ofcom had in 2007 imposed an ex ante price control regime limiting the wholesale charges that an MNO could levy for receiving and directing calls to customers on its network. The MNOs soon discovered that the formula used to cap these charges could be exploited by radically altering the amounts charged for weekend and weekday calls from month to month: a practice known as “flip flopping”. Ofcom was aware that this behaviour was motivated by securing additional revenue beyond that envisaged by the regulator when it had set the price control regime ([33]) and the Tribunal accepted that “no commercial justification for the changes [in the price of weekend and weekday calls] could possibly be advanced beyond a desire to exploit the system…” ([9]).

As the only MNO that was not benefitting from flip flopping, Telefonica in September 2010 disputed charges that had been levied by Vodafone and Hutchison 3G. The dispute was subsequently referred to Ofcom in March 2011 to resolve pursuant to its dispute resolution powers under the Competition Act 2003 and Framework Directive. Ofcom’s conclusion in September 2011 was that it was fair and reasonable in light of the prevailing regulatory regime for Vodafone and Hutchison 3G to levy the impugned charges. Telefonica exercised its right of appeal under section 192 if the Communications Act.

The first interesting point in the Tribunal’s judgment concerns the weight to be attached to the existing price control regime, and compliance with the letter of that regime, when determining whether the charges levied were fair and reasonable. By the time of the hearing, Ofcom had accepted that that an MNO’s compliance with ex ante regulation does not necessarily prevent Ofcom from imposing additional regulation on that party’s pricing behaviour through the dispute resolution process and that in resolving that dispute it was necessary for Ofcom to have regard to the full range of regulatory duties and responsibilities under the Common Regulatory Framework ([52]). The Tribunal was also satisfied that it would have been wrong for Ofcom to regard compliance with the regime as being necessarily conclusive of the dispute ([53]).

This is an important point for the regulated MNOs as it leaves open the possibility that an MNO that complies with the letter of regulatory price controls will still face the prospect of its charges being unpicked further down the line in the context of a dispute resolution procedure. The value of legal certainty will clearly be an important consideration for Ofcom when it performs its dispute resolution function, but the weight to be attached to this consideration is likely to be a matter for Ofcom’s judgment (see [53]).

The second point relates to the extent to which that judgment will be interfered with by the Tribunal. This case was the first appeal against an Ofcom decision to be determined by the Tribunal following the Court of Appeal’s judgment in the “08-numbers” case. The Tribunal summarised the effect of the 08-numbers case as being that the weight to be attached to different considerations in forming a value judgment is a matter for Ofcom, as the regulator charged with the duty of resolving disputes, and in the absence of any misdirection by Ofcom the Tribunal will normally respect its determination, whether or not the Tribunal would itself have balanced the considerations in the same way and reached the same conclusion ([45]).

Whilst in this case Ofcom declined to interfere with charges that complied with the letter of the applicable ex ante regime, it clearly remains open to Ofcom to take a different line in subsequent disputes. Affected parties may find such a decision difficult to overturn so long as Ofcom expressly weighs in the balance the value of legal certainty.

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One response to “Flip Flopping: Telefonica UK v Office of Communications

  1. Pingback: Competition round-up: January 2013 | Competition Bulletin

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