Précis  - On 21 December 2012, Ofcom published its final determination in relation to three related disputes in respect of BT's charges for wholesale Ethernet services between 2005-2011. In determining that a number of the services charged for were not "cost-orientated", it ordered BT to make repayments to Sky, Talk Talk, Virgin Media, Cable and Wireless (CWW) and Verizon for the full amounts by which it is said to have overcharged.

What?

Following the abolishment of the UK licensing regime, telecommunications operators have been governed by a set of general conditions which were implemented in the UK by the Communications Act 2003. Under these obligations, special conditions for particular operators are imposed in certain circumstances, for example following a determination that an operator holds Significant Market Power (SMP) in a particular market. Following consultation, Ofcom determined that BT had SMP in the alternative interface symmetric broadband origination (AISBO) market which includes the provision of BT's Ethernet services known as Wholesale Extension Services (WES) and Backhaul Extension Services (BES). As a consequence, various special conditions were imposed on BT, in particular, condition HH3.1 which places an obligation on BT to ensure and be able to demonstrate that its WES and BES charges are cost-orientated.

The Disputes

Each of the disputes raised against BT alleged that it had failed to comply with its regulatory obligations by overcharging for its BES and/or WES services. Whilst Virgin Media and CWW focused upon the period April 2006-March 2011, Talk Talk and Sky, in their joint claim, went somewhat further in suggesting that the overcharging commenced on 24 June 2004, the date on which condition HH3.1 was first implemented.

Ofcom

Ofcom accepted that commercial negotiations between the parties had failed and it therefore agreed to use its Communications Act 2003 powers to resolve the dispute. BT's challenge to Ofcom's powers was dismissed by the Competition Appeal Tribunal (CAT) who confirmed that it was correct for Ofcom to resolve these disputes.

Final Determination

Following the resolution of BT's challenge to Ofcom's authority to resolve the dispute, Ofcom issued its final determination. Ofcom concluded that BT had not demonstrated to its satisfaction that the charges in dispute were cost-orientated during the relevant periods. Further, BT could not demonstrate that its charges were nevertheless appropriate by comparing the Ethernet charges with their distributed stand alone costs, nor were there any other relevant factors that could affect Ofcom's decision.

Ofcom resolved the disputes by applying the terms of Condition HH3.1 to each and every charge in dispute separately. This approach had been approved by the CAT in an earlier decision relating to BT's charges for partial private circuits. BT unsuccessfully argued that Ofcom should apply the terms of Condition HH3.1 to the charges for connections and rentals in aggregate.

In reaching its decision, Ofcom used much of the data provided by BT in its Regulatory Financial Statements (RFS), including revenues, volumes and calculations of the costs of services which are subject to cost-orientation obligations.

In light of its findings, Ofcom determined that BT should be required to make repayments to each of the communications providers for the full amount of the overcharge (being £94,823,000). However, Ofcom concluded that it did not have sufficient evidence to determine whether it should also award interest as this would involve setting aside a clause in the relevant contracts.

So what?

BT are said to be considering the options open to them, including appealing the decisions on the basis that they consider that they have complied with their regulatory obligations.

The decision is of importance to both operators and communications providers for differing reasons. Following this decision, it is now clear that Ofcom are prepared to come down heavily on those operators falling foul of the special conditions. Moreover, the decision will likely be a warm welcome to communications providers who have felt somewhat hard done by in previous years. The decision is likely to have come as a stark warning to BT, particularly given that Ofcom indicated that if other BT customers approach BT seeking similar repayments of an overcharge for the relevant Ethernet services, BT should take account of the conclusions in this determination when ascertaining the most appropriate way to proceed.