Robert MacDougall Competition Group Ofcom Riverside House 2a Southwark Bridge Road London SE1 9HA. 27 July 2007

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1 Hutchison 3G UK Limited T +44(0) Star House F +44(0) Grenfell Road Maidenhead SL6 1EH United Kingdom Robert MacDougall Competition Group Ofcom Riverside House 2a Southwark Bridge Road London SE1 9HA 27 July 2007 Dear Robert, Hutchison 3G UK Limited ( H3G ) response to Draft determinations to resolve mobile call termination rate disputes between Hutchison 3G and each of O2 and Orange (the Draft Determination ), published 17 July 2007 Case Reference: CW/00950/03/07 Summary 1. Ofcom has erred in its approach to dispute resolution in this dispute and in its earlier determination of case CW/00942/12/06 (the BT OCCN determination ). Its approach is inconsistent with its legal obligations and has illogical consequences that are detrimental for consumers. a. Section 188(5) of the Communications Act 2003 (pursuant to the Communications Directives) provides for disputes to be properly determined on their merits within 4 months. Ofcom should not blatantly seek to circumvent this by way of producing a decision that wholly disregards the interests of consumers so as to justify regulation through SMP Conditions. b. The Competition Appeal Tribunal (the "CAT") found that Ofcom could determine disputes where there was no SMP, which must a fortiori apply where SMP has been found but no price control remedy was originally determined to be appropriate. Yet Ofcom has in the draft determinations, de facto, failed to do so. 2. Ofcom s rationale for rejecting any analysis of costs in determining appropriate MTRs is incorrect and inconsistent with its duties and the previous findings of the CAT. a. Ofcom s approach of requiring H3G to pay any rate requested by O2 and Orange is inconsistent with the tentative findings of the previous market review and with common sense. Such an approach also creates the situation that other operators A Hutchison Whampoa Company Registered Office: Hutchison House, 5 Hester Road, Battersea, London SW11 4AN Registered Number: England and Wales

2 who are not subject to an SMP determination can request any rate at all no matter what harm that does to consumers or competition. b. Ofcom's suggestion that it cannot use its powers to properly resolve disputes relating to the previous market review period fails to take into account the significant changes in circumstances since the market review decision. For example O2 and Orange had not even launched 3G services at the time of the relevant market review. c. Ofcom initiated the mobile LRIC cost modelling work (in 2005) explicitly to consider both the market review and potential interconnection disputes. As a matter of principle, it should make use of this model in order to determine this dispute, and it has erred in failing to do so. Ofcom has erred in its approach to dispute resolution Ofcom s Draft Determination must be considered alongside Ofcom s determination in the BT OCCN determination. In that earlier determination, Ofcom concluded that it should resolve the dispute by reference only to the end-to-end connectivity obligation imposed by Ofcom on BT on 13 September 2006 (the e2e obligation ). It concluded, on this basis, that the proper approach was to adopt a novel gains from trade analysis rather than perform any cost-based assessment. In its response to the draft BT OCCN determination, H3G averred that Ofcom had erred both in its approach to the e2e obligation and in its failure to take account of other obligations including the requirements of section 185 of the Communications Act 2003 and General Condition 1.1. H3G s view was that Ofcom should have conducted a cost-based assessment, on a LRAC basis. H3G also noted the problems that Ofcom s approach would cause in resolving disputes with parties not subject to the e2e obligation. H3G concluded that Ofcom s approach would not appear to give Ofcom any ability to intervene in such matters [where a party is not subject to the e2e obligation or is unregulated]. This cannot be right, either as a matter of policy or of law. Ofcom s Draft Determination demonstrates the veracity of H3G s observation and the flawed nature of Ofcom's position. Ofcom has been called to resolve a dispute between parties who are not subject to the e2e obligation and has, predictably, concluded that it would not be appropriate to intervene to set prices. Ofcom s position in the Draft Determination is effectively that ANY rate, no matter how high or unrelated to cost, requested by an operator (which is not subject, with respect to those rates, to an explicit SMP price control condition) must be determined by Ofcom to be reasonable. This is a stronger version of the position (or at least de facto the same as) which Ofcom maintained in H3G s previous appeal of its SMP designation 1 (where Ofcom merely held that it could not determine a price where there was no finding of SMP). 1 Hutchison 3G (UK) Limited v. OFCOM [2005] CAT [39] at [134]. [

3 Paragraph 118 of the previous CAT judgment 2 notes that Ofcom s reasoning is flawed due to two errors. The second of these errors relates to an apparent misunderstanding of Ofcom s dispute resolution powers. This is explained at paragraphs of the judgment. In particular: nothing in the wording of the Act suggests that SMP had to be found before the regulator decided a dispute over price. And there is no basis, as a matter of construction of Article 5, for separating out disputes as to price. Indeed, it would be illogical to do so. Pricing may be at the heart of a dispute; and some disputes about connection may have aspects which are not, by themselves, directly disputes about price, but may have pricing consequences so that one cannot decide one without the other. H3G can see no reason why Ofcom is effectively persisting in this error given the clear indication of the CAT and invites Ofcom to correct this matter in the final determination of this dispute. H3G will not repeat here all the arguments that it has made previously about the proper scope of Ofcom s powers and the approach it should adopt to dispute resolution. H3G refers Ofcom to its comments in its response to the draft BT OCCN determination and also to pages 23 to 33 of its Notice of Appeal in the current appeal (Hutchison 3G (UK) Limited v Ofcom, Case 1083/3/307). It is appropriate, however, to make some observations about the practical effect of the approach adopted by Ofcom in the BT OCCN determination and now taken to its logical conclusion in the Draft Determination. Ofcom is effectively abrogating its dispute resolution responsibilities in all situations. Even where a party does have SMP Ofcom is not taking this in to account in dispute resolution. This is an entirely arbitrary restriction on Ofcom's obligations that is not present in either the UK or EU legislation. Further, it elides Ofcom s responsibilities for dispute resolution and enforcement so as to leave the former with no practical significance. H3G fully understands the resource implications of dispute resolution for Ofcom, particularly given the statutory four month timescale. However, Parliament (and the EU institutions) decided that, as a matter of principle, it was important that NRAs, including Ofcom, should play a role in dispute resolution within a set period. Moreover, the timescale of four months was set for a reason, namely the absence of speedy decisions was proving to produce anti-competitive effects. 3 It is not appropriate for Ofcom to de facto unilaterally renounce the powers thus granted and the responsibilities these entail. Ofcom's refusal to act leaves consumers unavoidably exposed and creates yet further uncertainty for the industry. The inescapable conclusion from the Draft Determination is that Ofcom would not have intervened however high the rates that O2 and Orange had tried to set. The actual rates in question are above what Ofcom has subsequently determined to be appropriate in its Mobile Call Termination statement of 27 March 2007 and significantly higher than H3G's rate imposed by BT 2 Hutchison 3G (UK) Limited v. OFCOM [2005] CAT [39]. 3 See, for example pp of the report by the Joint Committee on the Draft Communications Bill, 25 July Stephen Carter (then at NTL) is quoted thus: Stephen Carter of NTL expressed this frustration when he said, whether it is light touch or heavy touch, whether it is appropriate and proportionate or disproportionate and inappropriate, if it is done slowly and languorously over time, in an industry that is changing apace, it is of no value to anyone

4 at launch. They are not however, as high as they would undoubtedly have been had O2 and Orange anticipated this approach to dispute resolution from Ofcom. It is no answer to say that O2 and Orange would be constrained by what BT might be prepared to pay (given the possibility of transit) because Ofcom s gains from trade approach to disputes under the e2e obligation means that they could demand any charges that would be passed on to consumers which means all charges, as BT has noted. It is thus consumers who bear the brunt of Ofcom s decisions not to intervene. H3G further notes that the draft determination merely exacerbates the imbalance of payments H3G currently experiences between it and the other Mobile Operators and the fact that H3G is effectively subsidising its competitors. This is an issue which is currently before the CAT. 4 The previous market review does not require any rate to be accepted In paragraphs 6.27 and 6.28 of the draft determination, Ofcom states that: Ofcom does not consider it appropriate to use the dispute resolution process as a substitute for (or in a manner that is inconsistent with) decisions already taken under the appropriate regulatory processes for addressing the question of significant market power as set out in Articles 15 and 16 of the Framework Directive Ofcom does not consider that it would be appropriate therefore to effectively retrospectively impose regulation on providers in a situation in which it has explicitly chosen not to impose SMP-type price regulation. This is in order to ensure regulatory certainty and consistency. As a justification to this approach, Ofcom refers to its Statement Wholesale Mobile Voice Call Termination of 1 June 2004, (the 2004 Statement). In the 2004 Statement, Ofcom concluded that no specific ex ante regulation of 3G voice call termination services is at present required. 5 (emphasis added). However, in reaching that conclusion, Ofcom stated that: At such an early stage of roll-out, the costs of 3G voice call termination are unclear, and robust cost information is difficult to ascertain. Thus, in terms of the charges set for 3G voice call termination, there is currently insufficient evidence to conclude that such charges are excessive. 6 (emphasis added) Further, the original SMP conditions imposed by the June 2004 market review statement were implemented at a time when Orange and O2 were not charging a different 3G rate blended into their overall rate. It is true that there was nothing to prevent the charging of a different separate 3G rate (prior to the current SMP conditions coming into force on 1 April 2007). In its correspondence with Orange and O2 H3G has not questioned the principle that a separate 3G rate could be applied but rather the level of the rate which Orange and O2 both separately identified as their 3G rate without providing any justification to H3G of that 3G rate. Ofcom is proposing (in paragraph 6.17 of the Draft Determination) that it only needs to consider whether the blended charge is appropriate. This is an artificial distinction, in that Orange and O2 both specified separate 3G rate which were part of the blended charge. Therefore, determining 4 See H3G s Appendix: Price Control Matters - Reference To The Competition Commission, 23 May Paragraph Paragraph 5.30

5 whether these separate 3G rates are appropriate is part and parcel of determining whether the blended charge is appropriate. Circumstances have changed since the previous market review What is more, this situation has since changed and Ofcom does have (and has had for the period of the disputes in question) sufficient information to ascertain the correct costs of 3G voice call termination, in light of its cost modelling work. This is crucially relevant given the justification provided by Ofcom for not imposing a price control in Further, the very fact that O2 and Orange have specified separate 3G rates in their overall blended rates constitutes a change in circumstances from those at the time of the previous market review when neither of these operators had even launched 3G services. H3G notes that Ofcom determined in the previous market reviews that O2 and Orange had SMP with respect to call termination on their networks (i.e. including both 2G and 3G call termination without distinction). It did not previously determine the relevant 3G rates to be reasonable (or, indeed, any 3G rates) but only that it lacked the information to justify action at that time. Action now is not in any sense inconsistent with the outcome of the market review. H3G notes too, in this regard, that Orange s response to the consultation on the 2004 market review supported non-imposition of a price control on the basis that there was no need for a price control because Ofcom could intervene later through dispute resolution. We are left in an ironic position where both parties to a dispute (Orange and H3G) have taken a view that Ofcom should set prices through dispute resolution, which appears to have been tacitly accepted by Ofcom previously, but where Ofcom now declines to act in any sensible manner. Mobile LRIC Modelling was initiated with specific aim of resolving disputes H3G notes that in its response to the Draft determinations to resolve the dispute between BT and each of H3G, O2, Orange, T-Mobile and Vodafone on 24 May 2007, H3G quoted specific correspondence from Ofcom that stated the 3G cost model would be used by Ofcom to investigate a complaint or dispute on the reasonableness of 3G termination charges. 7 Ofcom has never explained why or when it resiled from this. Other issues If the findings in the Draft Determination are confirmed, H3G will be in the position of being required to pay O2 and Orange more for 3G call termination than it has received from those operators in the relevant period. Such discrimination imposed by regulation is inconsistent with Ofcom s statutory duties (especially those to promote competition and to ensure that Ofcom s functions are not carried out in a way which favours one electronic communications provider over another) 8. 7 Letter from Jim Niblett to Tim Lord dated 10 February H3G notes that this point was not addressed by Ofcom in its consideration of responses in the final determination of 7 July. 8 That is Ofcom s statutory duties under sections 3 and 4 of the Communications Act 2003, especially in this context, sections 3(1) in relation to competition, 3(3) in relation to proportionate action and transparency, 3(4) in relation to promoting investment, innovation and competition, section 4(3) in relation to the promotion of competition, and section 4(6) on discrimination between electronic communications networks.

6 H3G also notes that the disputes referred to Ofcom relate to the period from 15 August 2006 with respect to Orange 9 and 1 September 2006 with respect to O2, to 31 March The Draft Determination explicitly recognises this in paragraph 3.21: Ofcom s consideration of these disputes is limited to charges for mobile voice call termination on each of the five [sic] MNOs networks for services provided for the period prior to 1 April. As such, H3G believes that it is inappropriate and incorrect for Ofcom to extend the period to which the rate applies beyond 1 April by the wording until such time as alternative charges are in place. The Draft Determination does not sufficiently explain why Ofcom considers to the contrary. H3G also notes that Ofcom has applied a different approach to that it recently applied to the dispute between each of the five mobile operators and BT in relation to the same services. That is, the Draft Determination does not consider it appropriate to apply a gains from trade test. As H3G has previously set out it considers that such a gains from trade approach to resolving disputes is inappropriate. However, H3G is concerned that additional uncertainty is being created by Ofcom using two different approaches to resolving similar disputes, apparently solely on the basis of the e2e obligation placed on BT. H3G refers Ofcom to its previous responses on this issue. Ofcom asked H3G to provide a substantial amount of data pursuant to section 191 of the Communications Act H3G has now completed this and will provide Ofcom with the requested data under a separate letter. H3G has had to devote a significant amount of time and resources to this exercise, which appears to have been an unnecessary waste of time, given that Ofcom has now issued a draft determination without this data. H3G submits that this is reflective of the confusion that lies at the heart of Ofcom's misguided approach to its dispute resolution powers and assessment of MCT rates. Conclusion The Draft Determination is based on an incorrect interpretation of the law and Ofcom s powers of dispute resolution. H3G notes that the issue of Ofcom s powers with respect to resolving disputes is once again before the CAT in H3G s current appeal concerning Ofcom s decisions of 27 March 2007 determining that H3G had SMP in the period June 2004 to March 2007 and has SMP with respect to the period April 2007 to March Yours sincerely, Tim Lord Regulatory Director 9 H3G notes that in the draft determination Ofcom refers to the dispute period with respect to Orange as effective from 1 September However, the notification from Orange of 11 July 2006 indicated an effective date of 15 August This increased rate was subsequently reflected in the August 2006 call termination invoice H3G received from Orange 10 Notice of Appeal re Significant Market Power and Price Control, 23 May 2007