Case No: CO/1192/03
CO/1308/03
CO/1536/03 
Neutral Citation Number: [2003] EWHC 1566 Admin
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
ADMINISTRATIVE COURT
Royal Courts of Justice
Strand, 
London, WC2A 2LL

Friday 27 June 2003
Before:

THE HONOURABLE MR JUSTICE MOSES
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Between: 
	THE QUEEN on the Application of 
(1) T-MOBILE (UK) Ltd
(2) VODAFONE Ltd
(3) ORANGE PERSONAL COMMUNICATION SERVICES Ltd	
Claimants	
	- and -		
	(1) THE COMPETITION COMMISSION
(2) THE DIRECTOR-GENERAL OF TELECOMMUNICATIONS	Defendants	

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(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040,  Fax No:  020 7831 8838
Official Shorthand Writers to the Court)
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Mr John Swift QC, Mr Michael Fordham and Mr Meredith Pickford (instructed by Allen & Overy) for T-Mobile (UK) Ltd    
Mr Ian Glick QC,  Mr Javan Herberg and Mr Andrew George (instructed by Herbert Smith) for Vodafone Ltd    
Mr Mark Brealey QC and  Marie Demetriou (instructed by Field Fisher Waterhouse) for Orange Personal Communications Services Ltd    

Mr Thomas Sharpe QC and Mr Matthew Cook (instructed by The Treasury Solicitor) for the Competition Commission    
Mr Richard Fowler QC, Jemima Stratford and Kelyn Bacon (instructed by The Treasury Solicitor) for The Director General of Telecommunications    

Mr David Pievsky (instructed by Freshfields) for  02    
Mr Philip Sales  and Mr Ben Hooper (instructed by Treasury Solicitor) for The Department of Trade and Industry    
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Judgment
As Approved by the Court
Crown Copyright ©

Mr Justice Moses: 

Introduction 

1.	Call termination, at issue in the present case, is a form of interconnection provided by each mobile network operator (“MNO”) on a wholesale basis to other network operators (both fixed and mobile). This allows customers of the other networks to call customers of the MNO’s network. About 70% of such calls are from a fixed network.

2.	The Director General of Telecommunications  (“the Director”) proposed price controls on the charges for terminating calls made by all four operators.  On its reference to the Competition Commission (“the Commission”), the Commission took the view that the charges exceeded its assessment of a fair charge and recommended a cap.

3.	T-Mobile (formerly One2One), Vodafone and Orange challenge the Commission’s recommendations.  They also challenge the Director’s imposition of such caps by way of licence modifications and proposal to continue such regulation after the new European regime falls to be implemented on 25 July 2003. That new regime came into force on 24 April 2002, in the period between the Director’s reference and the publication of the Commission’s Report in December 2002 (“the Report”). The Director’s actions were based upon the Commission’s recommendations. 

4.	At the heart of the dispute between the Commission, the Director and the three claimant operators lay a difference of approach as to the use of revenue derived from termination charges.  The rate charged by the operators enables them to use the revenue to attract new subscribers to their networks by, for example, offering cheap or free handsets.  The Commission takes the view that such subsidies should not be raised at the expense of the users of fixed networks.  But it accepts that there is some social benefit in expanding the mobile network as a whole.
5.	I am most grateful to all the parties for drafting, with some minor exceptions, the following factual and legislative introduction.
Legislative framework
6.	The telecommunications sector is highly regulated, both at national level and at EU level – in the latter case primarily by a number of Directives, which have been transposed into domestic law. The regulatory regime is, however, in a state of transition. On 24 April 2002, a number of Directives were published in the Official Journal of the European Communities which set out a wholly new, harmonised regime for the telecommunications sector in the EU. The new Directives entered into force on their date of publication (24 April 2002), but require their significant changes to be implemented and applied no later than 25 July 2003.
Current legislative regime – basic provisions
7.	Under the current legislative framework, every telecommunications network operator requires a licence under the Telecommunications Act 1984 (“the 1984 Act”). The conditions of each licence are set by the Secretary of State and the Director pursuant to the duties imposed upon them by the 1984 Act. 
8.	The overriding duties of the Secretary of State and the Director, in exercising their functions under the 1984 Act, are set out in Section 3 of the Act. These consist of a primary duty in Section 3(1) to ensure that services satisfy all reasonable demand, and that the operators are able to finance the provision of the services, and a secondary duty in Section 3(2) to take into account specific public interest considerations.
9.	Section 7(3) of the 1984 Act provides that a licence may be granted either to all persons, to persons of a particular class, or to a particular person (known as an “individual licence”). All four MNOs operate their networks under individual licences. 
10.	Section 7(5)(a) of the 1984 Act permits licences to be granted subject to conditions imposed by the Secretary of State or the Director, having regard to the Section 3 duties and specified EU legislative provisions. The relevant UK statutory provisions have been adjusted, where necessary, to implement EU legislation. Since the 1990s, various Directives have been adopted to establish common principles for the licensing regimes in the individual Member States. For present purposes, the most important are Directives 97/13 and 97/33.
11.	Directive 97/13, known as the “Licensing Directive”, sought to provide a common framework for telecommunications services licensing in the EU. Recognising the different types of licensing systems in the various Member States, it set out provisions governing both the grant of individual licences (such as those held by the MNOs), and general authorisations, which permit the provision of services and/or the establishment of networks without an explicit decision by the national regulatory authority (“NRA”).
12.	Pursuant to Article 3(2), the conditions which may be attached to authorisations are those listed in the Annex to the Licensing Directive. These include conditions which may be attached to all authorisations, conditions which may be attached to general authorisations, and conditions which may be attached to individual licences. Article 8(1) provides that individual licences may, where justified, include all three types of conditions. 
13.	Directive 97/33, known as the “Interconnection Directive”, sets out specific principles designed to promote interconnection of public telecommunications networks. These include, in particular, provisions concerning the pricing for interconnection, and the responsibilities (both rights and duties) of NRAs. The Interconnection Directive provides in Article 4(3) that an organisation is presumed to have SMP (“SMP”) if it has a share of more than 25% of a particular telecommunications market in the geographical area in a Member State within which it is authorised to operate. The Interconnection Directive governs the specific conditions under which the Director may regulate call termination charges.
Current legislative regime – licence modifications
14.	Article 8(4) of the Licensing Directive makes clear that Member States may amend the conditions attached to an individual licence in objectively justified cases and in a proportionate manner.
15.	The specific UK provisions for modification of licences are set out in Sections 12-15 of the 1984 Act. Sections 12 and 12A provide for the case where a modification is agreed by the licensee. 
16.	In the absence of agreement, a modification may be made following a reference to the Commission under Sections 13. Section 14(1) sets out the duties of the Commission in making a report following a Section 13 reference. Finally, Section 15 sets out the duties of the Director following a Commission report.
17.	Pursuant to these provisions, the Director has implemented the proposals of the Commission by modifications to the MNOs’ individual licences, which were made on 4 April 2003. The modifications require that, by 24 July 2003, the MNOs must reduce their “Average Interconnection Charge” so that it does not exceed a defined “Target Average Charge”. 
New legislative regime
18.	The current EU legislative regime is to be replaced from 25 July 2003 by a package of measures designed to harmonise and, to a certain extent, deregulate the authorisation of telecommunications networks and services. The relevant provisions for present purposes are contained in Directive 2002/21 – the “Framework Directive”, Directive 2002/20 – the “Authorisation Directive” and Directive 2002/19 – the “Access Directive”.
19.	The most significant change is the structure of regulation – under the new regime, Member States are no longer permitted to grant individual licences, but are required to grant general authorisations for telecommunications networks and services (Article 3(2) of the Authorisation Directive).
20.	Member States may continue to impose obligations and controls upon undertakings providing telecommunications services, including price controls (Article 13 of the Access Directive). However, the imposition of price controls under that Article is subject to two key conditions. 
21.	First, the NRAs must designate the relevant undertakings as having SMP (Article 8(3) of the Access Directive). SMP under the new regime equates to the concept of dominance in Article 82 EC (see Article 14(2) of the Framework Directive). Articles 15-16 of the Framework Directive set out the procedure for the determination of SMP. In essence:
a.	The European Commission must adopt a Recommendation identifying product and service markets whose characteristics justify the imposition of regulatory obligations, and must publish Guidelines for market analysis and the assessment of SMP.
b.	NRAs must analyse the relevant markets recommended by the Commission, taking account of the Guidelines, and determine whether or not they are effectively competitive.
c.	If a relevant market is not effectively competitive, the authority must identify undertakings with SMP, and impose, maintain or amend obligations as appropriate.
22.	The European Commission published the required Guidelines on 11 July 2002, and adopted its Recommendation identifying relevant product and service markets on 11 February 2003. That Recommendation identifies, as a relevant market, the market for “Voice call termination on individual mobile networks”.
23.	Secondly, the national authorities must consult interested parties where the controls have a significant impact upon the market (Article 6 of the Framework Directive), and must consult the European Commission and the NRAs of other Member States (Article 7(3)-(5) of the Framework Directive). In exceptional situations, provisional measures may be introduced without such consultation (Article 7(6) of the Framework Directive).
Commencement date and transitional provisions
24.	Under Article 28 of the Framework Directive, Member States must adopt and publish the laws, regulations and administrative provisions necessary to comply with the Directive not later than 24 July 2003, and “shall apply” their measures implementing the new Directives “from 25 July 2003”. On 25 July 2003, the Licensing Directive and the Interconnection Directive will be repealed (Article 26 of the Framework Directive). In principle, on 25 July 2003 individual licences granted under the current regime fall away, and are replaced by general authorisations and specific obligations under the new provisions.
25.	This raises the question of the extent to which regulatory controls and obligations imposed as conditions of the current individual licences can be continued or replicated.  This is a question which lies at the heart of the challenges based on the relevant legislation.
 UK implementation of new regime
26.	In the UK, it is the Government’s intention to implement the majority of the provisions of the new Directives through a Communications Act, which will repeal the majority of the 1984 Act. The Government commenced its consultation on the draft Communications Bill in May 2002. The Bill was introduced to the House of Commons on 19 November 2002, and to the House of Lords on 5 March 2003. It is intended that the Bill will have received Royal Assent before 25 July 2003.
27.	The Communications Bill transfers a number of functions to a new regulatory authority, Ofcom, which will replace (inter alia) and the Office of Telecommunications (“Oftel”) and the Director.  However, for a transitional period, some of Ofcom’s functions in the Bill will be carried out by the Director. In particular, the Director will have the power to set certain conditions referred to in Clauses 42 and 43, such as access-related and SMP services conditions. The subject matter of the latter expressly includes the imposition of price controls where a person has been determined to have SMP in an identified services market.
28.	In relation to the period before Community consultation under Article 7 of the Framework Directive can be completed, the Government has proposed a number of transitional measures under the Communications Bill. In particular, transitional provisions relevant to price controls are set out in paragraph 7 of Schedule 18 to the Bill. These provisions will, in effect, empower the Director to give the current licence holders a Continuation Notice before 25 July 2003. The effect of such a notice will be that certain conditions included in telecommunications licences will continue to have effect after the abolition of licensing and until such time as the Director (or Ofcom) has decided whether or not to impose a relevant obligation under the Communications Act. 
 	Background to Commission investigation and Report
29.	In 1998, the Monopolies and Mergers Commission (“MMC”) conducted an investigation into the termination charges of Vodafone and BT Cellnet (now O2). It concluded that the level of their termination charges was too high and contrary to the public interest. On the basis of the MMC recommendations, Oftel set a ceiling for Vodafone’s and 02’s termination charges for 1999/2000, and required the ceiling to be reduced further over the next two years. The controls were due to expire in March 2002, but were extended for a further year to 31 March 2003.
30.	In July 2000, Oftel reviewed competition in the mobile markets, to determine whether termination charges should be controlled and, if so, for which operators. It concluded in September 2001 that each MNO had market power in respect of mobile termination to its own network, and proposed price controls on all four operators.
31.	Since the MNOs objected to the proposed price controls, Oftel referred the matter to the Commission on 7 January 2002. The Commission’s conclusions following this reference are the subject of the present challenge.
The Commission’s conclusions
32.	In summary, the Commission’s principal conclusions were:
a.	The termination charges of each of the MNOs operate against the public interest, with the adverse effects that termination charges in 2002/3 are 30 to 40% in excess of the Commission’s estimate of the Fair Charge.
b.	In the absence of a charge control, the termination charges of the MNOs may be expected to operate against the public interest, with the adverse effect that termination charges may be expected to be up to double the level of the Fair Charge by 2005/6, if such charges were retained at their current levels in real terms
c.	As a result, absent charge controls, a number of specified detriments to consumers occur and might be expected to occur over at least the next three years.
d.	The specified adverse effects could be remedied by licence modifications effecting a 15% reduction in termination charges in real terms to take effect before 25 July 2003, and by further recommended reductions of RPI-15% (Vodafone and O2) and RPI-14% (Orange and T-Mobile) for each of the years 2003/4, 2004/5 and 2005/6.
The Director’s position
33.	The Commission delivered its Report to the Director on 31 December 2002. Following his careful consideration of the Commission’s findings, the Director announced on 22 January 2003 that he accepted the Commission’s recommendation of a 15% reduction in termination charges in real terms by 24 July 2003. 
34.	The Director then considered whether the licence modifications specified in the Report were requisite for the purpose of remedying or preventing the adverse effects specified in the Report. The Director first consulted the MNOs on an informal basis. To that end, Oftel wrote to each of them on 14 February 2003 inviting comments on draft licence modifications which require that the MNOs’ Average Interconnection Charges (as defined) do not exceed Target Average Charges (as defined) on 24 July 2003. Oftel considered all comments duly made and, as a result, made some changes to the draft modifications. 
35.	On 28 February 2003, the Director commenced a 28-day public statutory consultation on those modifications under Sections 15 of the 1984 Act. Having considered all representations duly made, and making some non-material changes to the modifications, the Director made the licence modifications on 4 April 2003. 
36.	The arrangements for additional control of termination charges (such as the RPI-X type price cap mechanism recommended by the Commission) after July 2003 were considered in the market review to be undertaken by Oftel under the requirements of the new Directives. Oftel carried out the relevant market analysis and related work and published its consultation document on the Director’s initial conclusions on 15 May 2003.  
37.	On 13 May 2003, the Director wrote to the MNOs proposing to continue the price cap after 25 July 2003 until completion of his market review (the Continuation Notice).
38.	It has been ordered that these three applications, by T-Mobile, Vodafone and Orange, should be heard together and, in view of the urgency, that the applications for permission should be heard with the substantive applications for judicial review.

Significant Market Power (T-Mobile)

39.	T-Mobile contends that under the Licensing and Interconnection Directives it was unlawful for the Commission to recommend, and the Director to impose, restrictions on inter-connection charges in the absence of notification that T-Mobile had SMP in a particular telecommunications market.  No such notification occurred prior to the imposition of licence conditions 70A and 70B.
40.	By Article 4(3) of the Interconnection Directive:-
“3.  An organisation shall be presumed to have SMP when it has a share of more than 25% of a particular telecommunications market in the geographical area in a Member State within which it is authorised to operate.
National regulatory authorities may nevertheless determine that an organisation with a market share of less than 25% in the relevant market has SMP. They may also determine that an organisation with a market share of more than 25% in the relevant market does not have SMP. In either case, the determination shall take into account the organisation’s ability to influence market conditions, its turnover relative to the size of the market, its control of the means of access to end-users, its access to financial resources and its experience in providing products and services in the market.”			 
41.	This quantitative definition has been replaced by a quantative definition under the Directives introduced in April 2002.  Identification of SMP under the new Directive is equivalent to dominance (see Article 14(2) of the Framework Directive).
“2.	An undertaking shall be deemed to have SMP if, either individually or jointly with others, it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers.”
42.	Notification to the European Commission is required by recital of the Inter-connection Directive:-
“(2)	Whereas a general framework for interconnection to public telecommunications networks and publicly available telecommunications services … is needed in order to provide end-to-end interoperability of services for Community users …;”.

43.	The Interconnection and Licensing Directives of 1997 must be read together.  Article 7 of the Licensing Directive (covering the scope of individual licences) confers power on Member States to impose specific obligations:-
“in accordance with Community Competition Rules, where the licensee has SMP, as defined in Article 4(3) of the Interconnection Directive....”
Article 8 of the Licensing Directive provides:-
				
“Conditions attached to individual licences
1.	The conditions which, in addition to those set out for general authorisations, may, where justified, be attached to individual licences are set out in points 2 and 4 of the Annex.… .
Such conditions shall relate only to the situations justifying the grant of such a licence, as defined in Article 7.
4.	Member States may amend the conditions attached to an individual licence in objectively justified cases and in a proportionate manner. When doing so, Member States shall give appropriate notice of their intention to do so and enable interested parties to express their views on the proposed amendments.”
44.	The Annex to the Licensing Directive identifies at paragraph 2:-
“Conditions which may be attached to all authorisations, where justified and subject to the principle of proportionality:
....2.3 conditions intended to prevent anti-competitive behaviour in telecommunications markets, including measures to ensure that tariffs are non discriminatory and do not distort competition;”
	Paragraph 4 of the Annex contains:
“Specific conditions which may be attached to individual licenses, where justified and subject to the principle of proportionality:
4.6 conditions applied to operators having SMP, as notified by Member States under the Interconnection Directive, intended to guarantee interconnection or the control of SMP”.
45.	T-Mobile contend, accordingly, that under the Licensing Directive, specific control of prices is limited to those licensees with SMP, pursuant to the combination of Articles 7(1)(d), 7(2) and 8(1) and the conditions identified in paragraph 4.6 of the Annex.
46.	Consistent with T-Mobile’s construction of the Licensing Directive are its contentions in relation to the Interconnection Directive.  Recital 5 identifies the purpose of ensuring that those organisations authorised to provide public telecommunications networks or publicly available telecommunications services should be free to negotiate the connection agreements on a commercial basis subject to necessary intervention by national regulatory authorities.  Recital 6 introduces the concept of those organisations with SMP.  Recital 10 provides:-
“Whereas pricing for interconnection is a key factor in determining the structure and the intensity of competition in the transformation process towards a liberalised market; whereas organisations with SMP must be able to demonstrate that their interconnection charges are set on the basis of objective criteria and follow the principles of transparency and cost orientation, and are sufficiently unbundled in terms of network and service elements offered; whereas publication of a list of interconnection services, charges, terms and conditions enhances the necessary transparency and non-discrimination; whereas flexibility in the methods of charging for interconnection traffic should be possible, including capacity-based charging; whereas the level of charges should promote productivity and encourage efficient and sustainable market entry, and should not be below a limit calculated by the use of long-run incremental cost and cost allocation and attribution methods based on actual cost causation, nor above a limit set by the stand-alone cost of providing the interconnection in question; whereas charges for interconnection based on a price level closely linked to the long-run incremental cost for providing access to interconnection are appropriate for encouraging the rapid development of an open and competitive market.”

  	Recital 12 emphasises the important role of national regulatory authorities in encouraging the development of the competitive market and in particular provides:-
“Whereas national regulatory authorities have an important role in encouraging the development of a competitive market in the interests of Community users, and of securing adequate interconnection of networks and interoperability of services; whereas adequate interconnection takes account of the requests of the operator wishing to interconnect, in particular concerning the most appropriate interconnection points, with each operator having responsibility for carrying calls and setting charges to each other up to the interconnection point; whereas negotiation of interconnection agreements can be facilitated by national regulatory authorities setting down certain conditions in advance.”
47.	Article 4.2 of the Interconnection Directive provides:-
“Organisations authorised to provide public telecommunications networks and publicly available telecommunication services as set out in Annex 1 which have SMP shall meet all reasonable requests for access to the network including access at points other than the network termination points offered to the majority of end users.”
48.	Article 7 of the Interconnection Directive provides:-
“1.  Member States shall ensure that the provisions of paragraphs 2 to 6 apply to organisations operating the public telecommunications networks and/or publicly available telecommunications services as set out in Parts 1 and 2 of Annex I, which have been notified by national regulatory authorities as having SMP.
2.  Charges for interconnection shall follow the principles of transparency and cost orientation. The burden of proof that charges are derived from actual costs including a reasonable rate of return on investment shall lie with the organisation providing interconnection to its facilities. National regulatory authorities may request an organisation to provide full justification for its interconnection charges, and where appropriate shall require charges to be adjusted. This paragraph shall also apply to organisations set out in Part 3 of Annex I which have been notified by national regulatory authorities as having SMP on the national market for interconnection.”
49.	Article 9 provides:
“1. National regulatory authorities shall encourage and secure adequate interconnection in the interests of all users, exercising their responsibility in a way that provides maximum economic efficiency and gives the maximum benefit to end-users. In particular, national regulatory authorities shall take into account:
-	the need to ensure satisfactory end-to-end communications for users,
-	the need to stimulate a competitive market,
-	the principles of non-discrimination (including equal access) and proportionality,
3.	In pursuit of the aims stated in paragraph 1, national regulatory authorities may intervene on their own initiative at any time … in order to specify issues which must be covered in an interconnection agreement, or to lay down specific conditions to be observed by one or more parties to such an agreement. National regulatory authorities may, in exceptional cases, require changes to be made to interconnection agreements already concluded, where justified to ensure effective competition and/or interoperability of services for users.
Conditions set by the national regulatory authority may include inter alia conditions designed to ensure effective competition, …. tariffs, 
The national regulatory authority may, on its own initiative at any time … also set time limits within which negotiations on interconnection are to be completed….”
50.	T-Mobile contends that Article 7 of the Interconnection Directive limits the imposition of price control of termination charges to operators notified as having SMP. Read together, the general provisions of Article 9.3 of the Interconnection Directive and paragraph 2 of the Annex to the Licensing Directive make an important distinction between those who have SMP and those who have not.  The conditions in paragraph 2(3) are concerned only with those without SMP.  They are to be contrasted with those conditions, which may be imposed on those with SMP under paragraph 4.6 of the Annex to the Licensing Directive.  A similar contrast is to be drawn between Article 7.2 of the Interconnection Directive applying only to those with SMP and Article 9.3 of the Interconnection Directive which applies to those without.  The Commission and the Director failed to recognise that distinction.  The imposition of a price control on an operator such as T-Mobile which entered the market later than Vodafone and O2 is highly intrusive and exceptionally severe.  It inhibits the operation of a market designed to encourage competition and particularly protect those who have entered the market late.  Moreover, it was argued by Mr Swift QC on behalf of T-Mobile, the general provisions contained in paragraph 2.3 of the Annex to the Licensing Directive and Article 9(3) of the Interconnection Directive must yield to the specific power conferred only in relation to those with SMP.
51.	Whilst I agree that a distinction is made within the Directives in relation to those with and those without SMP, I do not agree that the conclusions which T-Mobile seek to draw from that distinction follow.  The starting point must be Article 4(2) of the Interconnection Directive.  This imposes upon operators with SMP an obligation to meet all new requests for access to the network.  Those with SMP are obliged to interconnect others to their network.  Article 6 requires those who are obliged to meet reasonable requests for access to do so in a non-discriminatory and transparent fashion.  Article 7 amplifies the implications of the provision of reasonable access.  Were charges for interconnection not to be subject to the principles of transparency and cost orientation (Article 7(2)) it would be all too easy for an operator with SMP to impede access to its network.  Thus the obligation under Article 7(2) is an obligation which follows from the obligation to meet all reasonable requests for access.  It is in those circumstances that Member States are obliged to control charges in accordance with the principles identified in Article 7(2).
52.	In contrast to those provisions which oblige regulatory authorities to ensure that charges follow the principles specified, under Article 9 a power is conferred to impose controls, for example in relation to tariffs in accordance with the principles set out in Article 9(1).  That power may only be exercised, pursuant to Article 9(3), in relation to existing arguments in exceptional cases and where justified to ensure effective competition and/or inter-operability of services.  I shall turn later to the separate question whether the circumstances in which termination charges were capped were exceptional.  It is clear to my mind that Article 9(3) empowers a NRA to impose specific conditions in relation to tariffs where there is a dispute between the parties to an agreement.  Equally, such a power is conferred on them in relation to exceptional cases.  The distinction between the obligations imposed on NRAs in relation to those with SMP and the powers conferred on them in relation to those without such authorities then is consistent with Recital 10, relating to those with SMP and Recital 12, which has a wider application.
53.	Properly construed, Article 8 of the Licensing Directive does not preclude control of tariffs in relation to those without SMP.  The final paragraph of 8(1) provides that the conditions set out in the Annex at paragraphs 2 and 4 may only be imposed upon individual  licences where they relate to situations justifying the grant of such a licence.  It does not prohibit control of tariffs in respect of those without SMP.  The final paragraph of 8(1) of the Licensing Directive refers to “situations”. The situations are identified in Article 7(2), namely:-
“The provision of ....other networks involving the use of radio frequencies”.
	That is a situation which applies to operators of mobile networks who do not have SMP.  Paragraph 2 of the Annex contains those conditions which may be attached to all authorisations and includes measures to ensure that tariffs do not distort competition.  It is true that paragraph 4.6 of the Annex overlaps with the conditions identified in paragraph 2.3.  That provides no warrant, in my view, for reading paragraph 4.6 as restricting the power of tariff control to those with SMP.  The terms of paragraph 4.6 which refer to the “guarantee” of interconnection, are consistent with the scheme of the Directives which requires those with SMP to provide interconnection services, subject to restrictions in relation to tariffs.  I conclude that paragraph 2 of the Annex to the Licensing Directive and Article 9(3) of the Interconnection Directive confer power upon the Director to impose restrictions on the charges for termination.
54.	Moreover, this conclusion is fortified by the views of the European Commission.  The Eighth Report from the Commission on the implementation of the telecommunications Regulatory Package (COM (2002) 695 final) dated 3 December 2002 records that:-
“regulators have taken a range of measures within the margins set by the current framework to regulate tariffs.”
55.	The Netherlands, Portugal and the United Kingdom have ordered a reduction in mobile termination tariffs on of mobile operators not designated as having SMP (see pages 22 to 23).  The European Commission’s lack of any adverse comment is consistent with other views it has expressed.  It is true that, as T-Mobile emphasised, in the Commission Communication dated 19 March 1998 (98/C 84/03), a recommendation to assist in carrying out obligations under the Interconnection Directive, the European Commission stated at 5.1.1:-
“The cost of call termination on a mobile network is in most cases not subject to price regulation under the Interconnection Directive.  The one exception occurs if the mobile operator is designated by its NRA as having SMP....
The implications of this statement are that the Commission does not support on the basis of the Interconnection Directive a general obligation for cost orientated interconnection tariffs on mobile operators that do not have SMP....”
56.	During the course of the MMC investigations into Vodafone and BT Cell-Net, as it then was, which resulted in price controls on those two mobile network operators in respect of termination charges the European Commission was specifically asked whether there was power to impose such controls on those without SMP.  It replied:-
“The imposition, on a case-by-case basis and following a specific investigation, of some form of price control on interconnection charges of individual mobile operators that do not have SMP on the national market for interconnection, is not precluded.  National regulatory authorities (NRAs) are specifically empowered to do this on the basis of paragraphs 1 and 2 of Article 9(3) of the Interconnection Directive.” (Quoted at paragraph 25 of Appendix 2.1 of the MMC’s 1998 Report).
57.	Thus the European Commission’s views either support the power, which the Director has sought to exercise, or the European Commission has said two different things leaving it to this court to identify the source of the power the Director has sought to exercise.
58.	Nor do I believe my conclusion to be inconsistent with the decision of the European Court of Justice in Case C-79/00 Telefónica de Espana SA [2001] ECR I 10075.  Telefónica challenged Spanish legislation requiring it to offer interconnection at local and higher-level switching centres.  It contended that that should only be a matter of agreement between operators.  It should be recorded that Telefónica had been notified as having SMP.  The provision it challenged did not fall within those matters identified in part 1 of Annex VII of the Interconnection Directive, which identifies those areas where a NRA may set ex ante conditions.  The Court ruled that the absence of any reference in Part 1 did not preclude an NRA from laying down ex ante conditions provided they were referred to in Part 2.
“When such authorisation appears necessary in order to facilitate the introduction of competition and further the interests of users”.
59.	The issue in Telefónica was different to that in the present case, but it does provide assistance as to the approach to the Directives, in particular in relation to the dangers of reading into the provisions a prohibition from the mere absence of any specific reference.  The Court said:
“28.	 the Directive permits Member States to limit the freedom of those operators to decide whether to enter into interconnection agreements in order to ensure the adequacy of those agreements.
29.	On the other hand, as stated in Recital 2, the directive merely puts in place the general framework within which its objective must be pursued, without seeking to achieve complete harmonisation…
31.	As regards Article 4(2), it is clear from its wording that it merely imposes obligations on operators having SMP.
32.	However the fact that such operators are required under Article 4(2) of the Directive to satisfy only reasonable requests for interconnection does not mean that Member States are precluded under that provision from permitting their national regulatory authorities to impose ex ante on those operators conditions or obligations with regard to access. 
35.	It cannot be inferred from the wording of that provision [Article 9(2)] that it is only in the areas set out in Part 1 of Annex VII to the directive, that the Member States may authorise their national regulatory authorities to lay down ex ante conditions or obligations.”
60.	The importance of flexibility in relation to control was emphasised by Advocate General Jacobs in his Opinion.  But he also emphasised, as T-Mobile pointed out, the difference in treatment or, as he put it, “asymmetric regulation” within the provisions of the Interconnection Directive.  He said:-
“The Directive recognises.. that there will be different types of market players in the Member States.  For each type it aims to strike a balance between rights and obligations in accordance with their relative position in the market.” (Paragraph 64).  
	He pointed out the distinction between those with SMP referred to in Annex 1 and others in Annex II (see paragraphs 67 and 68).  But he did identify the significant margin of manoeuvre, open to Member States, for implementation of the Directive (see paragraph 69).  He said:-
“73.	That flexibility is perhaps a necessary corollary of the speed of technological and economic developments in the field of telecommunications and the divergent degrees of liberalisation in the Community.  In Member States, where as a result of former special or exclusive rights, the incumbent has a very strong position in the market, asymmetric regulation and strict supervision of access and interconnection agreements is indispensable in order to create competitive markets.  In other countries in which markets are already competitive, a heavy-handed regulatory approach might on the contrary have detrimental effects on investments in infrastructure.  Member States must thus necessarily enjoy a certain margin of appreciation to adapt their regulatory framework to the evolving economic features of their national telecommunications market.
74.	It follows that Directive 97/33 is essentially characterised by … asymmetric provisions which impose special obligations on players with a strong position in the market”.
61.	I do not read the Advocate General’s opinion as providing authority for T-Mobile’s proposition that the only power to control tariffs is contained within those provisions relating to organisations with SMP.  He speaks of “special obligations” in relation to those with SMP. On the contrary, his opinion and the view of the Court is, in my view, consistent with a conclusion that such power exists even in the absence of SMP.
62.	The Competition Commission also contended that it was not open to challenge the recommendations or the action of the Director on this ground because of delay.  The point, it submitted, should have been taken at the outset of the enquiry.  I do not reject T-Mobile’s submissions on the ground of delay.  Even if the point had been taken earlier, it could and would have been raised later when the Director sought to impose modifications to the licence.  It could have been taken by way of defence in enforcement proceedings.
63.	For the reasons I have given, I reject T-Mobile’s submissions based on the absence of SMP.
Legislative transition. No power to introduce New Regulation after 24 April 2002.
64.	The incoming regime came into force on 24 April 2002 and is required to be implemented into domestic law on 25 July 2003.  Any price controls, it is contended, must therefore comply with the provisions of the new regime and in particular in relation to the new regulation of access and interconnection charges.  It is contended that the modifications to the Claimants’ licences are unlawful because they do not comply with that new regime.
65.	The central purpose of the new regime was to achieve harmonisation.  The old system of licensing is repealed and a new system of general authorisation takes its place.  Recital 5 of the Framework Directive refers to all transmission networks and services being covered by a single regulatory framework.  Recital 16 requires NRAs to have a harmonised set of objectives and principles.  It requires co-ordination.  Recital 36 speaks of the objective of consistent application in all Member States.  Recital 37 requires co-operation between NRAs and the European Commission in a transparent manner.
66.	In pursuit of those objectives, Article 15 requires the European Commission, after consultation, to adopt a recommendation on relevant product and service markets identifying those markets in accordance with Annex I, which refers inter alia to call termination on public mobile telephone networks, in accordance with Article 7 of the Access Directive.  Article 16 provides for a market analysis procedure.  Article 16(2) provides:-
“2. Where a national regulatory authority is required under … Articles 7 or 8 of Directive 2002/19/EC (Access Directive) to determine whether to impose, maintain, amend or withdraw obligations on undertakings, it shall determine on the basis of its market analysis referred to in paragraph 1 of this Article whether a relevant market is effectively competitive.”
	Article 16(3) provides:-
“3.	Where a national regulatory authority concludes that the market is effectively competitive, it shall not impose or maintain any of the specific regulatory obligations referred to in paragraph 2 of this Article.”
Article 16(4) provides:-
“4.  Where a national regulatory authority determines that a relevant market is not effectively competitive, it shall identify undertakings with SMP on that market in accordance with Article 14 and the national regulatory authority shall on such undertakings impose appropriate specific regulatory obligations referred to in paragraph 2 of this Article or maintain or amend such obligations where they already exist.”
Article 16(6) provides:-
“Measures taken according to the provisions of paragraphs 3, 4, and 5 of this Article shall be subject to the procedures referred to in Articles 6 and 7.”
Recital 12 of the Access Directive provides:-
“(12)	In order to ensure continuity of existing agreements and to avoid a legal vacuum, it is necessary to ensure that obligations for access and interconnection imposed under Articles 4, 6, 7, 8, 11, 12, and 14 of Directive 97/33/EC of the European Parliament and of the Council of 30 June 1997 on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of open network provision (ONP), obligations on special access imposed under Article 16 of Directive 98/10/EC of the European Parliament and of the Council of 26 February 1998 on the application of open network provision (ONP) to voice telephony and on universal service for telecommunications in a competitive environment, and obligations concerning the provision of leased line transmission capacity under Council Directive 92/44/EEC of 5 June 1992 on the application of open network provision to leased lines, are initially carried over into the new regulatory framework, but are subject to immediate review in the light of prevailing market conditions. Such a review should also extend to those organisations covered by Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop.”
Article 7 provides:-

“1.  Member States shall maintain all obligations on undertakings providing public communications networks and/or services concerning access and interconnection that were in force prior to the date of entry into force of this Directive under Articles 4, 6, 7, 8, 11, 12 and 14 of Directive 97/33/EC, Article 16 of Directive 98/10/EC, and Articles 7 and 8 of Directive 92/44/EC, until such time as these obligations have been reviewed and a determination made in accordance with paragraph 3.

2.   The Commission will indicate relevant markets for the obligations referred to in paragraph 1 in the initial recommendation on relevant product and service markets and the Decision identifying transnational markets to be adopted in accordance with Article 15 of Directive 2002/21/EC (Framework Directive).

3.  Member States shall ensure that, as soon as possible after the entry into force of this Directive, and periodically thereafter, national regulatory authorities undertake a market analysis, in accordance with Article 16 of Directive 2002/21/EC (Framework Directive) to determine whether to maintain, amend or withdraw these obligations. An appropriate period of notice shall be given to parties affected by such amendment or withdrawal of obligations.”
Article 8 provides:-
“1.  Member States shall ensure that national regulatory authorities are empowered to impose the obligations identified in Articles 9 to 13.

2.  Where an operator is designated as having SMP on a specific market as a result of a market analysis carried out in accordance with Article 16 of Directive 2002/21/EC (Framework Directive), national regulatory authorities shall impose the obligations set out in Articles 9 to 13 of this Directive as appropriate.

3.  Without prejudice to [various provisions not relevant in the present case] national regulatory authorities shall not impose the obligations set out in Articles 9 to 13 on operators that have not been designated in accordance with paragraph 2.”
Article 13 provides:-
“1.  A national regulatory authority may, in accordance with the provisions of Article 8, impose obligations relating to cost recovery and price controls, including obligations for cost orientation of prices and obligations concerning cost accounting systems, for the provision of specific types of interconnection and/or access, in situations where a market analysis indicates that a lack of effective competition means that the operator concerned might sustain prices at an excessively high level, or apply a price squeeze, to the detriment of end-users. National regulatory authorities shall take into account the investment made by the operator and allow him a reasonable rate of return on adequate capital employed, taking into account the risks involved.

2.  National regulatory authorities shall ensure that any cost recovery mechanism or pricing methodology that is mandated serves to promote efficiency and sustainable competition and maximise consumer benefits. …”
67.	Provisions of the old regime and in particular the Interconnection and Licensing Directives are repealed from 25 July 2003 (see Article 26 of the Framework Directive).  Article 27 of the Framework Directive requires Member States to maintain all obligations under Article 7 of the Access Directive and Article 16 of the Universal Service Directive until such time as a determination is made by NRAs under Article 16 of the Framework Directive, the market analysis procedure.  Article 28 requires Member States to adopt and publish the laws of the Directive not later than 24 July 2003 and apply them from 25 July 2003.
68.	T-Mobile contend that Member States are required to maintain all the obligations contained within the articles of the Directives identified in Article 7(1) of the Access Directive 24 April 2002, and, as soon as possible thereafter, undertake a market analysis in accordance with Article 16 to determine whether to maintain, amend or withdraw the obligations referred to in Article 7(1).  Thus, it submits, the Director had no power to introduce new controls over termination call prices after 24 April 2002.  The Director’s powers were limited to maintaining pre-April 2002 obligations so long as they fell within those provisions identified in Article 7(1) and in preparing for the new regime.  In particular, Mr Swift QC draws attention to the obligation to review provisions which were in force “prior to the date of entry into force of the Framework Directive” – i.e. 24 April 2002.  It would be anomalous if there was no such obligation to review any new controls introduced after 24 April 2002.  Article 7 does not envisage and contains no reference to any new obligations introduced after 24 April 2002.
69.	I reject the proposition that after 24 April 2002 Member States were prohibited from introducing any new regulation of prices from 24 April 2002 up to 25 July 2003.  In my view, there was no such restriction over that period of 15 months.  Article 7 contains no express provision on the introduction of new controls after 24 April 2002.  The submission depends upon implication.  But there is no ground for implying so dramatic a prohibition.  It is true that Article 7 imposes an obligation to review, by the operation of a market analysis, pre April 2002 obligations as identified in Article 7(1).  There was, in my view, no need for Directives to introduce a parallel system of review in relation to regulation after April 2002, since the principles of Community law, founded upon Article 10 of the Treaty, are sufficient.  The principles were explained in Case C-129/96 Inter-Environnement Wallonie ASBL v Région Wallonne [1997] ECR I/7411.  Member States are required to refrain from taking any measures liable seriously to compromise the results prescribed by a Directive, even though the date for its implementation has not yet expired.  The principle in Wallonie carries with it the implication that Member States are empowered to introduce new regulation so long as such regulation does not seriously compromise the new regime.  This principle renders it unnecessary for the Directives under the new regime to make any express provision in relation to new regulation whilst the existing regime persists during the transitional period.
70.	Moreover, any prohibition, creating a legislative gap during the 15-month period, would be inconsistent with the new regime, designed, as it is, to promote fair competition.  It may well be, as the Commission and the Director have agreed, that existing obligations are insufficient for the purposes of maintaining and promoting fair competition.  It would be surprising, illogical and inconsistent with the new Directives if a situation has arisen which inhibits fair competition but which Member States are powerless to prevent.  If, as the Commission found, prices for termination are between 30-40% higher than is justified, it is difficult to see why the Director should be powerless to act.  After all, until 25 July 2003 the current regime is in place and the Director’s duties and powers remain in existence.  In particular, the obligation under Article 9(1) of the Interconnection Directive which sets the framework for Article 9(3) remains in force until repealed on 25 July 2003.  The Director, as the NRA, cannot perform his responsibility in the face of the asserted legislative holiday.
71.	I conclude that the new regime as contained in the Directives which came into force on 24 April 2002 does not prohibit a Member State from introducing new regulations between 24 April 2002 and 25 July 2003.
Power to require changes in exceptional cases. Article 9.3
72.	Under the existing regime, the Director has no power to impose modification of the licences save in exceptional cases.  The source of the power to impose such a modification is contained, as I have concluded, in Article 9(3) of the Interconnection Directive.  It is argued that there is nothing exceptional about the control of termination charges.  Indeed, such a control was imposed on Vodafone and O2 in 1998.  High termination charges are intrinsic to the way in which new entrants, as well as the initial entrants to the market, conducted their business.
73.	I disagree.  At paragraph 1.8 in its summary of its Report, the Commission concluded that the termination charges operated against the public interest with adverse effects, being 30-40% in excess of the Commission’s estimation of a fair charge.  It is true that a monopoly in relation to call termination arises from the very nature of the industry.  But it does not follow that the consequences, namely a 30-40% excess, are not exceptional.  The rate of charge which was found by the Commission to be unfair and contrary to the public interest was, as Mr Sharpe QC on behalf of the Commission contended, manifestly exceptional.  In those circumstances I take the view that Article 9(3) entitled the Commission to make the recommendations for a cap and the Director to introduce price control.

The incompatibility of a one-day price cut with the Directives
74.	Even if it was open to the Director to impose price control in the period between April 2002 and July 2003, it is contended that it was not open to the Commission to recommend a price control lasting but one day nor for the Director to impose such a one-day cap.  Two essential submissions are made; both of which assume that some price control after 24 April 2002 but before 25 July 2003 was lawful and, accordingly, that the earlier submissions I have identified fail.  Firstly, it is contended that the one-day price cap depends for its legality upon its continuation after 24 July 2003 yet any recommendation of the Commission, and action by the Director, based upon such a recommendation, exposes an unlawful “reach” into the period of the new regime.  The Commission’s answer that its recommendations were “self-standing” demonstrates, secondly, that the one-day price control was disproportionate.  All the claimant mobile network operators in these applications make these submissions in different forms.
75.	The circumstances in which a one-day price cap under the existing regime was imposed, are outlined in paragraphs 6-8 of the statement of David Edmonds, the Director, dated 6 June 2003.  When the new Directives came into force on 24 April 2002, it was understood that the regulatory authorities of the Member States, including Oftel, were required to carry out a market analysis for the purposes of determining appropriate ex ante obligations under the new regime “as soon as possible” after the adoption of the Commission Recommendation on relevant markets (Article 16 of the Framework Directive) and as soon as possible after the entry in force of the Access Directive and Universal Service Directive (Article 7(3) of the Access Directive and 16(3) of the Universal Service Directive).  But the European Commission’s Recommendation was not published until 11 February 2003, much later than originally expected.  The European Commission had encouraged completion of all the procedures envisaged under Articles 15 and 16 as soon as possible and ideally before 25 July 2003 (guidance of April 2002).  The Director had intended to carry out all necessary market analyses and consultations before 25 July 2003 so that price controls could be imposed as obligations under the new regime from 25 July 2003.  It was expected that this would be a seamless continuation.  Following publication of the Commission Report, the Director pronounced on 22 January 2003 that he accepted the Commission’s recommendations of a 15% reduction in termination charges by 24 July 2003.  He then consulted the mobile network operators on an informal basis and conducted a 28-day public consultation pursuant to Section 15 of the 984 Act.   consultation period concluded on 28 March 2003 and the licence modifications were made on 4 April 2003.  In the meantime the European Commission published its recommendation on 11 February 2003 identifying the relevant product and service markets.  On 25 March 2003 the Communication Committee published its working document on Timing of notifications under Article 7 of the Framework Directive” suggesting that it would not be possible for NRAs to commence Community consultations under Article 7 of the Framework Directive until 25 July 2003.  The Director still hoped that price controls could be introduced under the new regime prior to 25 July 2003.  But on 9 April 2003 the Commission advised that NRAs could not make notifications of the outcome of their market analyses either to the Commission or to other NRAs of other Member States before 25 July 2003.  Accordingly, the Director decided that, pending completion of the consultations, control would be based on the provisions of the new Directives allowing provisional measures to be adopted.  
76.	I turn later to the lawfulness of a price cap under the asserted power to allow provisional measures and the amendments to the proposed transitional provisions contained in paragraph 7 of Schedule 18 to the Communications Bill tabled on 30 April 2003.  But for the present it is important to note that the Director’s justification of the controls depends upon a continuation starting with the Commission’s recommendations before July 2003 and continuing forward beyond that date.  This gives rise to the submission that the one-day cap was unlawful.  Orange submits that the Commission had no power to recommend price reductions for any period after 24 July 2003 and yet its report makes it plain that its recommendation is dependant upon the continuation of the pre-25 July 2003 controls into the period of the new regime.
77.	The Report recommended at paragraphs 2.579 and 2.580 that call termination charges should be:-
“a)	be reduced by 15% in real terms before 25 July 2003; and
b)	be subject to further reductions of RPI-[14 or 15] from 25 July 2003 to 31 March 2004, RPI-[14 or 15] from 1 April 2004  to 31 March 2005 and RPI-[14  or 15] from 1 April 2005 to 31 March 2006”.
78.	The Commission’s powers are contained within Sections 13 and 14 of the 1984 Act:-
“Section 13
Licence modification references to the Commission

(1)	The Director may make to the Competition Commission (in this Act referred to as “the Commission”) a reference which is so framed as to require the Commission to investigate and report on the questions – 
(a)	whether any matters which relate to the provision of telecommunication services or the supply of telecommunication apparatus by a person authorised by a licence under section 7 above to run a telecommunication system and which are specified in the reference operate, or may be expected to operate, against the public interest; and
(b)	if so, whether the effects adverse to the public interest which those matters have or may be expected to have could be remedied or prevented by modifications of the conditions of that licence.
(8)	In determining for the purposes of this section whether any particular matter operates, or may be expected to operate, against the public interest, the Commission shall have regard to the matters as respects which duties are imposed on the Secretary of State and the Director by section 3 above.
Section 14 
Reports on licence modification references
(1)	In making a report on a reference under section 13 above, the Commission – 
(a)	shall include in the report definite conclusions on the questions comprised in the reference together with such an account of their reasons for those conclusions as in their opinion is expedient for facilitating proper understanding of those questions and of their conclusions;
(b)	where they conclude that any of the matters specified in the reference operate, or may be expected to operate, against the public interest, shall specify in the report the effects adverse to the public interest which those matters have or may be expected to have; and
(c)	where they conclude that any adverse effects so specified could be remedied or prevented by modifications of the conditions of the licence, shall specify in the report modifications by which those effects could be remedied or prevented.”
79.	Section 14(1)(b) requires the Commission to specify the effects adverse to the public interest which any matters specified in the reference have or may be expected to have.  Section 14(1)(c) requires the Commission to report modifications by which those effects could be remedied or prevented.  But that duty is limited to specification of only those modifications, which could be achieved by means of conditions in the licence.  The price reductions recommended by the Commission in paragraphs 2.579 and  2.580(b) of the Report cannot be given effect by way of licence modification since they are designed to take place after 24 July 2003 when the mobile network operators’ licences will cease to exist.
80.	Further, Section 13(1) limits the scope of investigation to any matters relating to the provision of telecommunications services by a person authorised by licence under Section 7.  After 24 July 2003 the mobile network operators are no longer persons authorised by licence under Section 7.  Thus the recommendations under paragraphs 2.579(b) and 2.580(b) are unlawful and ultra vires.  The Commission’s response, particularly in the first witness statement of Professor Geroski at paragraph 159, describes those recommendations as “persuasive”.  I agree with the submission of the mobile network operators that the distinction sought to be drawn between a binding and a persuasive recommendation is without foundation.  None of the recommendations are binding.  By Section 15(2) of the 1984 Act, the Director is only required to “have regard” to modifications specified in the Report.  A “binding” recommendation, besides being an oxymoron, is inconsistent with Section 15(2).
81.	The Commission’s response is that its recommendations at 2.579(a) and 2.580(a) are “self-standing”.  It contends that its recommendation of a modification to the licence was not dependent on future control.  At paragraph 2.505 the Report turns to the proposals for controlling charges.  The cap it proposed was designed to remedy the adverse effects which flowed from the termination charges which the mobile operators exacted, identified in paragraph 2.449 of the Report.  Once the Commission had identified the remedy for those adverse effects, it turned to the question of the form of the licence modification in paragraphs beginning at 2.525.  At paragraph 2.526 it identified the problem:
“We have found the question of the actual design of the licence modifications difficult.  Although this is a difficult question generally, the difficulty is made more acute by legal circumstance.  The model licence modification presented by the DGT sought to regulate termination charges within the period to 31 March 2006.  During the course of the enquiry it has become clear that the current licences of the MNO’s will be abolished by 25 July 2003.  Consequently, any licence modification that we are able to recommend will have a very short life.  Indeed, it is likely to have effect for a few months at best.  Nonetheless, it is our view that a licence modification which lasts but a few months could remedy the problem of excess termination charges for the period of the duration of the licence and that the sums involved are sufficiently material to warrant such a modification.”
	At paragraph 2.530 it considered the imposition of immediate and complete reduction of termination charges to the level of the fair charge.  But it rejected such a modification on a number of grounds, particularly that it would lead to significant disruption (see paragraph 2.530).  It concluded that a 15% reduction should be imposed:-
“to take effect within the period 1 April to 25 July 2003.”  (paragraph 2.537).
	It then stated that:-
“This is to be followed by a reduction in the average termination charge [over the following years to 31 March 2006].  The effect of these reductions will be to bring termination charges down to the level of the fair charge by the end of the period, as shown in Table 2.12.”

82.	It is apparent that in the passages I have identified, the Commission was well aware that in respect of the adverse effects flowing from an excessive termination charge, it could only lawfully recommend a modification to the licence in the short period it identified between 1 April to 25 July 2003.  It is true that the period of assessment which led to its conclusions and the suggested modification period extended beyond 24 July 2003.  Indeed Professor Geroski in his first witness statement at paragraph 246 describes the set of price controls as being logically related.  But I do not accept that the adoption of a period of analysis ending on 31 March 2006 discloses that the Commission acted outwith its powers.
83.	The questions referred for investigation and report pursuant to Section 13 of the 1984 Act required definite conclusions to be made in the Report under Section 14(1)(a).  The Commission was perfectly entitled to adopt a period expiring at the end of March 2006 in order to answer those questions.  Equally, it was entitled to consider such a period in deciding whether any of the matters specified in the reference, namely the absence of a charge control mechanism on termination of charges, operated or may be expected to operate against the public interest.  In reaching a conclusion as to the effects adverse to the public interest, the Commission was entitled to look to the future as well as to the current period.  It was only in respect of modifications of the conditions of the licence that the Commission was restricted to the period whilst licences remained in existence, namely before 25 July 2003.  Accordingly I agree with Professor Geroski when he states in paragraph 169 of his first witness statement that the Commission was not constrained in the length of its assessment period, even though it was not open to it to recommend a modification for any period longer than 115 days.
84.	Nevertheless, Mr Brealey QC on behalf of Orange, contends that there was no power in the Commission to say anything about a future period, let alone make the recommendations it did at paragraph 2.580(b).  For the reasons I have given, I take the view that under Section 14(1)(a) and (b) the Commission was entitled to make recommendations for the future provided only that they did not consist of modifications of the conditions of the licence.  There is, in my view, no prohibition within Section 14 on making the recommendations provided only that they do not constitute modifications of the conditions of the licence.  I accept that read on its own, paragraph 2.580 like paragraph 2.579 makes no distinction between the recommendations as to the period before 25 July 2003, and the period after 25 July 2003 and up to 31 March 2006.  But when the Report is read as a whole and in particular the paragraphs previously identified at 2.526, 2.530 and 2.537, it is plain to me that the Commission did understand the distinction and reflected the limitations on its power imposed by Section 14(1)(c) in its Report.
85.	The mobile network operators further contend that the fact that the Commission adopted a period of analysis up to March 2006 taints its recommendation of a licence modification up to 25 July 2003.  It is contended that it is impossible to regard the recommendation of a licence modification as freestanding when it depends upon the continuation of controls.  I do not accept that the recommended licence modification depends upon the continuation of control after 25 July 2003.  The passages I have already identified in the Commission’s Report demonstrate, to my mind, that the Commission identified adverse effects due to excessive charging in the period up to 25 July 2003.  One remedy, as it acknowledged, was to impose a complete reduction forthwith.  It eschewed such a remedy on the grounds of, amongst other things, disruption to the market by so sudden and dramatic a price cap.   It lessened the impact by imposing a smaller reduction of 15%.  Although that reduction was based upon a longer period of analysis, it does not follow that such a reduction was not necessary to combat the adverse effects of the excessive price charge for termination, which the Commission perceived to be contrary to the public interest.  The justification for the recommended licence modification lay in the identified adverse effects of the excessive charge.  The excessive charge was being operated in the period up to 25 July 2003.  The remedy in that period was designed to combat its adverse effects.
86.	As it turned out, the Director, faced with the difficulties outlined in his witness statement, imposed the price cap for only one day on 24 July 2003.  This leads to an important submission advanced with particular force by Vodafone in its reply, but relied upon also by the other claimants, that a freestanding one-day price cap was disproportionate.  As Mr Glick QC on behalf of Vodafone argued, such a one-day price cap could not possibly be regarded as a proportionate or justifiable recommendation.  The Commission can only make recommendations which are lawful.  The Director can only have regard to lawful modifications specified in the Report.  A disproportionate and one-day price cap cannot possibly be regarded as lawful.  Accordingly, the Director’s modifications to the licence, based as they were upon the specified modifications, were themselves unlawful.
87.	I accept that if the Commission’s recommendation of a modification, on which the Director based his action, was unlawful, it follows that the Director’s actions were themselves unlawful.  At first and last blush, it appears that both the Commission and the Director are seeking to have it both ways; the Commission’s recommendations are said to be free-standing and not dependent upon a continuation of the price control but the Director’s justification depends upon a continuation of control beyond the one-day price cap.
88.	Any remedy proposed by the Commission and implemented by the Director must be proportionate (see for example Article 3.2 of the Licensing Directive and the opening paragraph 2 of the Annex).  Further, Section 15(1) of the 1984 Act requires licence modifications to be requisite for the purpose of remedying or preventing the adverse effects specified in the Report.  A one-day price control could not possibly be regarded as effective to remedy the adverse effects identified.
89.	This the Director acknowledges: a one-day price control cannot be justified.  Such adverse effects as identified in paragraph 2.449, for example significant distortions in competition because mobile network operators are not obliged to charge the economic cost of handsets, could not be remedied in one day (see 2.449(d)).  But the Director justifies the one-day price cap, by means of modification to the licences, by reference to continuing controls.  When the one-day price cap is viewed in the context of continuing controls, he contends, it can be justified as the start of a continuing process whereby the termination charges are reduced to a fair charge.  This contention, the mobile network operators submitted, is wholly inconsistent with the submissions of the Commission and indeed reveals the illegality of its recommendation.  If a one-day charge is accepted by the Director to be disproportionate in the absence of future controls, the Commission had no power to make such a recommendation since it had no power to make recommendations in relation to future control.
90.	In my view the mobile network operator’s submissions fail to draw an important distinction between the recommendations of the Commission and the actions of the Director, even though the actions of the Director had regard to the modifications specified in the Report and were based upon the Commission’s conclusions.
91.	The Commission did not, in my view, recommend a one-day price cap.  Its recommendations were those I have identified in paragraph 2.526.  It recommended a licence modification, which it expected to last for a few months.  It was for the Commission and not for this court to take the view that the short period, during which the modification of the licences would last, would provide some but not a complete remedy.  The argument of the mobile network operators seems to me to be based upon the false view that the Commission’s recommendations, because they incorporated the one-day cap, were themselves a recommendation for a one-day licence modification.  As paragraph 2.526 makes clear, that was not the Commission’s recommendation.  The Commission recommended a licence modification for a few months.
92.	Once the Commission had recommended a licence modification to last for a few months including the final day of the old regime, namely 24 July 2003, it was, in my view, open to the Director to impose that licence modification for one day in the context of his proposed action to continue the price control under the new regime.  Of course, if the proposed cap under the new regime is itself unlawful, then both his proposed action and his previous modification will be unlawful because the modification depends upon the legality of future action.  But the fact that the Director’s actions themselves depend upon the legality of future action under the new regime, does not lead to the conclusion that the Commission’s own recommendations were unlawful or that the Director’s action and proposed action, based upon the Report, were themselves unlawful.
93.	Accordingly, I conclude that the Commission was entitled to make a recommendation for a licence modification to last but a few months.  It did not recommend a one-day price cap.  The Director was entitled to impose a one-day cap by way of modification to the licence, provided that his proposed action under the new regime is itself lawful.  It is to that point I now turn.
Continuation Notice
94.	By letters dated 13 May 2003, the Director signified his intention to issue a Continuation Notice.  He intends to continue the price control of 24 July 2003 beyond that date until such time as he is in a position to complete the market review and conclude whether to impose further obligation.  In his defence, the Director relies upon Article 7(6) of the Framework Directive.  This matter is of particular concern to the Secretary of State for Trade and Industry whom I allowed, on the first day of this hearing, to be joined as an Interested Party.  The Government has introduced amendments to paragraph 7 of Schedule 18 in order to give a statutory foundation for the Continuation Notice.  On 15 May 2003, the Director published his EU market review indicating that he would impose the price control on termination charges as contained in the Commission’s Report.  T-Mobile, joined by the other claimants, contends that the Continuation Notice and the amendment to paragraph 7 of Schedule 18 infringe Article 10 of the Treaty and the principle in Wallonie in that they will seriously compromise the objectives of the new directives.  
95.	The first objection to the Continuation Notice echoes the submissions T-Mobile and Orange advanced in relation to the transitional period between 24 April 2002 and 25 July 2003.  The prohibition against continuing the price cap is to be found in Article 7, and re-inforced in Article 8(3) of the Access Directive (set out above).  In Article 8(3) of the Access Directive there is an express prohibition against the imposition of obligations, which include price control and cost accounting obligations under Article 13, against operators not designated under Article 16 of the Framework Directive as having SMP on a specific market. Further requirements to maintain obligations in respect of undertakings identified as having SMP are imposed in relation to retail tariffs under Article 16 of the Universal Service Directive and in relation to other regulatory obligations under Article 17.
96.	In my view Articles 7 and 8 contain no such prohibition.  As I have said, Article 7 imposes a duty to maintain the obligations to which it refers, but it does not prohibit the continuation of other obligations provided they are consistent with other provisions in the new regime.  Article 8 is concerned only with the requirement that NRAs impose the obligations set out in Articles 9-13.  The significant words are “shall impose”. Article 8 is not concerned with the continuation of obligations imposed after 24 April 2002 but before 25 July 2003.  It is concerned only with the imposition of new obligations after 25 July 2003.
97.	 Moreover, it cannot be doubted but that the new regime envisaged a coherent and seamless transition to the new regulatory regime which itself was designed to ensure effective competition and protection of end-users.  The new regime’s objective of harmonisation and consolidation finds expression in the Framework Directive at Article 7. Article 7 provides:-
 “Consolidating the internal market for electronic communications

1.	In carrying out their tasks under this Directive and the Specific Directives, national regulatory authorities shall take the utmost account of the objectives set out in Article 8, including in so far as they relate to the functioning of the internal market.
2.	National regulatory authorities shall contribute to the development of the internal market by cooperating with each other and with the Commission in a transparent manner to ensure the consistent application in all Member States, of the provisions of this Directive and the Specific Directives.  To this end, they shall, in particular, seek to agree on the types of instruments and remedies best suited to address particular types of situations in the market place.
3.	In addition to the consultation referred to in Article 6, where a national regulatory authority intends to take a measure which:

(a)	falls within the scope of Articles 15 or 16 of this Directive, Articles 5 or 8 of Directive 2002/19/EC (Access Directive) … and
(b) 	would affect trade between Member States,

it shall at the same time make the draft measure accessible to the Commission and the national regulatory authorities in other Member States, together with the reasoning on which the measure is based, in accordance with Article 5(3), and inform the Commission and other national regulatory authorities thereof. national regulatory authorities and the Commission may make comments to the national regulatory authority concerned only within one month or within the period referred to in Article 6 if that period is longer. The one-month period may not be extended.”
 	Article 7.5 provides:
“The national regulatory authority concerned shall take the utmost account of comments of other national regulatory authorities and the Commission and may, except in cases covered by paragraph 4, adopt the resulting draft measure and, where it does so, shall communicate it to the Commission.”
Article 7(6) provides:
“In exceptional circumstances, where a national regulatory authority considers that there is an urgent need to act, by way of derogation from the procedure set out in paragraphs 3 and 4, in order to safeguard competition and protect the interests of users, it may immediately adopt proportionate and provisional measures. It shall, without delay, communicate those measures, with full reasons, to the Commission and the other national regulatory authorities …”.
98.	Article 8(2) of the Framework Directive provides:-
“The national regulatory authorities shall promote competition and the provision of electronic communications networks…by inter alia:
b)	ensuring that there is no distortion or restriction of competition in the electronic communications sector.”
Recital 12 of the Access Directive provides:-
“In order to ensure continuity of existing agreements and to avoid a legal vacuum, it is necessary to ensure that obligations for access and interconnection imposed under Articles 4, 6, 7, 8, 11, 12, and 14 of Directive 97/33/EC of the European Parliament and of the Council of 30 June 1997 on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of open network provision (ONP), obligations on special access imposed under Article 16 of Directive 98/10/EC of the European Parliament and of the Council of 26 February 1998 on the application of open network provision (ONP) to voice telephony and on universal service for telecommunications in a competitive environment, and obligations concerning the provision of leased line transmission capacity under Council Directive 92/44/EEC of 5 June 1992 on the application of open network provision to leased lines, are initially carried over into the new regulatory framework, but are subject to immediate review in the light of prevailing market conditions. Such a review should also extend to those organisations covered by Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop”.
Article 5(1) of the Access Directive  provides:-
“1.	National regulatory authorities shall, acting in pursuit of the objectives set out in Article 8 of Directive 2002/21/EC (Framework Directive), encourage and where appropriate ensure, in accordance with the provisions of this Directive, adequate access and interconnection, and interoperability of services, exercising their responsibility in a way that promotes efficiency, sustainable competition, and gives the maximum benefit to end-users”.
If there is no power to issue a Continuation Notice imposing pre-25 July 2003 price regulation in the period of the new regime from that date, the new Directives, by virtue in particular of the penultimate sentence in Article 7(3) of the Framework Directive, permit a one-month regulatory holiday.  Such a holiday is contrary to the objectives of the new regime, in particular effective competition, protection of consumer’s interest and a coherent and seamless transition from the old to the new regulatory system. Those seeking to imply a prohibition against the Continuation Notice have failed to identify any sensible objective promoted by their argument.  
99.	However, although no prohibition is to be found against continuing price regulation imposed in the period between April 2002 and July 2003, it is necessary to identify the source within the new Directives of a power to issue the Continuation Notice.
100.	The power is to be found, if at all, within Article 7(6) of the Framework Directive.  Mr Swift QC on behalf of T-Mobile contends that Article 7(6), which derogates from Articles 7(3) and 7(4), must be construed strictly.  A NRA, acting under Article 7(6) is still required to undertake the market analysis for which Article 16 of the Framework Directive makes provision. Further, it is precluded from imposing any price controls unless the operator is designated as having SMP under Articles 8 and 13 of the Access Directive.
101.	I disagree.  In my view Article 7.6 permits a NRA to adopt a proportionate and provisional measure of price regulation outwith the provisions of Article 8 of the Access Directive.  It is not necessary that such an operator be designated as having SMP.  
102.	It is plain from its reference to paragraph 3, which includes a reference at 3(a) to Article 8 of the Access Directive, that Article 7(6) may apply to measures which fall within the scope of Article 8 of the Access Directive.  But the reference in Article 7(6) of the Framework Directive to Article 7(3) is designed to identify a category of measures and is not designed to identify those in respect of whom the power under Article 7(6) may be exercised. That power is not confined to those designated as having SMP.
103.	Further, a contrast can be drawn between the reference to exceptional circumstances in the final paragraph of Article 8(3) of the Access Directive and the reference to exceptional circumstances in Article 7(6) of the Framework Directive.  Article 7(6) of the Framework Directive makes no reference to those having SMP.  The final sentence of Article 8(4) of the Access Directive requires consultation in accordance with Articles 6 and 7 of the Framework Directive where obligations are imposed under Article 8 of the Access Directive.  Thus a distinction may be drawn between the requirements to consult, in accordance with the procedure under Article 7.3 of the Framework Directive, under Article 8 of the Access Directive, in relation to those designated as having SMP, and the more general power to act, in the circumstances identified, under Article 7(6).
104.	Articles 5(1) and 5(3) of the Access Directive fortify this distinction.  They are not limited in their application to those having SMP in respect of whom Article 8 imposes duties on Member States. They are expressed to be without prejudice to Article 8.
105.	 I conclude that there is no requirement under Article 7(6) to designate an operator as having SMP before the power under Article 7(6) is exercised.  Indeed such designation might inhibit action taken in response to the urgent need to which Article 7(6) refers.
106.	Even if I am wrong, identification of those having SMP must follow the market analysis procedure set out under Article 16.  This, as I have said, has taken place.  But Article 16 does not require the consultation referred to in Article 7(3) to take place prior to designation. Once a market analysis has been undertaken, the Director may act under Article 7(6).  Article 16(6) provides that:-
“Measures taken according to the provisions of paragraphs 3, 4 and 5 of this Article shall be subject to the procedures referred to in Articles 6 and 7.”
	The reference to Article 7 incorporates a reference to Article 7(6).  The last words confer a power on the Director to act under Article 7(6) following market analysis in accordance with Article 16.  In short, it is open to the NRA to identify operators with SMP on a provisional basis.
107.	I conclude that there is power under Article 7(6) to continue price regulation, for which the one-day price cap under the old regime is the springboard, without consultation under Article 7(3) of the Framework Directive.
108.	Orange contends that there are no exceptional circumstances and is no urgent need to act.  Thus the preconditions of Article 7(6) do not apply.  In my view the need for urgent price control after 25 July 2003 is amply explained in the Commission’s Report. Exceptional circumstances exist in the light of what was found to be an excessive charge of between 30-40% above a fair charge. Further, the new regime envisages the possibility that Member States may not have adopted and published the provisions of the new regime before 24 July 2003. In those circumstances, a Member State is entitled not to designate a NRA and not to notify the Commission until that date.  Thus the Framework Directive must admit of the possibility that no action in pursuance of Article 7(3) may be taken until one month after the old regime is repealed and the new regime has application.
109.	 The impossibility of consultation, in such circumstances, itself amounts, in my view, to an exceptional circumstance.
110.	I should conclude by recording that Vodafone does not pursue, in this hearing, arguments as to whether it would be open to the Director to designate it as having dominance in the relevant market.
111.	The Secretary of State submits that some support for the conclusion which I have reached is to be derived from a meeting with a representative of the European Commission and John Arnott, an official of the Department of Trade and Industry on 14 March 2003.  At that meeting, Mr Arnott says the representative suggested that Article 7(6) of the Framework Directive could be used to underpin domestic legislation in order to affect the continuation of obligations into the new regulatory regime.  Thus, it would provide support for the Continuation Notice.  Mr Watson, a partner in the solicitor’s firm acting for T-Mobile, had a later discussion on the telephone on 6 June 2003.  He says that it became clear that the European Commission’s view was not directed at regulation introduced after 24 April 2002, but concerned only with obligations imposed before then.  This is denied by Mr Arnott in a second witness statement.
112.	It is not possible to determine this issue in these proceedings.  Nor do I believe it necessary.  It was obviously of importance that the Department of Trade and Industry discuss these matters with the European Commission.  But I have reached my views as to the legislation and its scheme independently of the disputed versions of the European Commission’s views.  For the reasons I have given, the Continuation Notice is not inconsistent with the Directives of the new regime.
Section 3(1) of the 1984 Act
113.	At the heart of the dispute between the mobile network operators, the Commission and the Director lies controversy as to the meaning of “all reasonable demands” under Section 3(1)(a) of the 1984 Act.  Section 3 provides:-
“(1)	The Secretary of State and the Director shall each have a duty to exercise the functions assigned or transferred to him by or under Part II or Part III of this Act in the manner which he considers is best calculated – 
(a) 	to secure that there are provided throughout the United Kingdom, save in so far as the provision thereof is impracticable or not reasonably practicable, such telecommunication services as satisfy all reasonable demands for them including, in particular, emergency services, public call services, directory information services, maritime services and services in rural areas; and
(b)	without prejudice to the generality of paragraph (a) above, to secure that any person by whom any such services fall to be provided is able to finance the provision of those services.
(2)	Subject to subsection (1) above, the Secretary of State and the Director shall each have a duty to exercise the functions transferred to him by or under Part II or Part III of this Act in the manner which he considers is best calculated – 
(a)	to promote the interests of consumers, purchasers and other users in the United Kingdom (including, in particular, those who are disabled or of pensionable age) in respect of the prices charged for, and the quality and variety of, telecommunication services provided and telecommunication apparatus supplied;
(b)	to maintain and promote effective competition between persons engaged in commercial activities connected with telecommunications in the United Kingdom; 
(c)	to promote efficiency and economy on the part of such persons;
(d)	to promote research into and the development and use of new techniques by such persons.”		
114.	Vodafone’s breathless submission is that a demand is reasonable if its satisfaction contributes to the consumption of mobile services in the form and to the extent calculated to attain maximum value to consumers consistent with the recovery of an operator’s total costs including a reasonable rate of return on the capital employed.  T-Mobile describe it as a duty to act in a way that provides maximum economic efficiency.  I describe this issue as going to the heart of the case because the MNOs take the view that their ability to attract subscribers to their network depends, at least in part, upon the use of revenue from termination charges to subsidise those who would not otherwise subscribe to their service.  A demand to be connected to a network is an inelastic demand in the sense that it does not depend upon the price charged by the network operator for termination.  (See paragraph 2.145 of the Report).  It is consistent with the principle of maximum economic efficiency to charge a price for termination, which is not dictated merely by the cost of termination.  The essential argument of the mobile network operators is that costs should be calculated according to what the cognoscenti describe as “Ramsey Pricing”.  That is an approach to pricing whereby common costs are recovered to a greater extent from less price sensitive services (those in respect of which there is an inelastic demand) and to a lesser extent from more price sensitive services (see the glossary in Vol. 3 of the Report).  The Commission, on the other hand, has taken the view that termination charges should reflect the cost of termination.  They describe that as the “cost-causation principle”. (See paragraph 1.6 of the summary of their Report.)  Revenue from less price sensitive services may be used to increase the pool of subscribers to their network.
115.	The Commission rejected the argument of the MNOs that they should be allowed call termination charges consistent with the principle of maximising economic efficiency. Calculating the fair charge on the basis of cost causation, it took the view that the termination charges in 2002-3 were 30-40% in excess of the Commission’s estimation of the fair charge and that that operated against the public interest (see 1.8 of the summary of the Report).  The consequences were, for example, that consumers making fixed to mobile or off-net calls unfairly subsidised those who mainly received calls on their mobile phones or mainly made on-net calls (see paragraph 1.8(c)).  Thus the mobile network operators’ submissions as to the construction of Section 3(1) are fundamental to their contentions as to whether termination charges should be regulated in the manner the Director has sought to regulate them.
116.	There is no dispute that Section 3(1) introduces an objective test.  The question of whether a demand is reasonable is objective.  But it is left to the Director to decide how best to satisfy that reasonable demand.  In R v The Director General of Telecommunications ex parte Cellcom Ltd [1999] ECC 314, p. 330 Lightman J. expressed it thus:-
“It is clear that Section 3 draws a distinction between “means” (namely how the demand is to be met) and “ends” (the satisfaction of reasonable demands) and that as a matter of language, whilst the Director is expressly made the arbiter of the means to the end, he is not so made the arbiter of the ends.  Section 3 recognises that there is a public interest in reasonable demands for telecommunication services being met and the court is intended to be the guardian of that public interest.  The exercise in deciding whether a demand is reasonable or not requires no sophisticated exercise necessitating the Director’s experience, expertise and fund of knowledge of this and other markets.  The court is well equipped and experienced in deciding questions of reasonableness.”
117.	The section requires all reasonable demands to be met; whether those demands are reasonable is a matter for objective judgment.  The best means of achieving that objective are left to the decision of the Director.  My only qualification to the dicta of Lightman J. is that the question whether a demand is reasonable will not always be as simple as Lightman J. thought it was.
118.	The question whether a demand is reasonable depends, as it seems to me, on many factors.  I reject the notion that it has one particular meaning, namely to maximise economic efficiency.  In particular I reject the notion that the question as to whether a demand is reasonable, can be answered by the application of a definition applicable in every case.  In short, the question is not “hard-edged”.  It seems to me that there is a “range of possible criteria” about which opinions might legitimately differ in deciding whether a demand is reasonable.  The statutory criterion is not clear-cut and is sufficiently broad to allow of different conclusions by different decision-makers, each acting rationally.
119.	This approach to the meaning of “all reasonable demands” will strike a chord in all those familiar with the speech of Lord Mustill in R v Monopolies & Mergers Commission ex parte South Yorkshire Transport Ltd and Another [1993] 1 WLR 23 at page 32.  In the same way as the meaning of “a substantial part of the United Kingdom” was broad enough to call for the exercise of judgment in that case, so is the meaning to be attached to all “reasonable demands”.  The Commission and Director took the view that a demand is reasonable if the caller would be willing to pay the true cost including the cost of what was described as an “externality surcharge”.  This is explained from paragraphs 2.334 to 2.335 in the Report.  It refers to the benefit to existing subscribers or those using a fixed telephone derived from the ability to contact a new subscriber.  Each caller to a mobile network should, therefore, pay a proportion of the cost of this social benefit insofar as it derives from an increase in the size of the mobile phone network generally.  
120.	The mobile network operators argue that the Commission’s view that a demand is reasonable if a caller is willing to pay the true cost is inconsistent with the particular examples identified in Section 3(1)(a).  A caller using emergency services or calling from a rural area may be making a demand which is reasonable notwithstanding that that caller is not prepared to pay the true cost.  I do not agree that the particular examples given within Section 3(1)(a) are inconsistent with the Commission’s views.  They demonstrate that, in some circumstances, a demand may be reasonable even where the caller is not prepared to pay the true cost.  To my mind, those examples are consistent with the proposition that whether a demand is reasonable will vary according to the circumstances.  The Commission was entitled to take a broad view of “all reasonable demands”.  The Commission took the view that considerations of equity and fairness were relevant; to subsidise access and call charges by inflated termination charges was not reasonable.
121.	It was contended that such a construction was inconsistent with Section 3(2) of the 1984 Act, which refers to efficiency and economy on the part of operators, called, in argument, “productive efficiency”.  The Commission’s interpretation, it was argued, was limited to productive efficiency.  It was contended that Section 3(1) must therefore refer to something other than productive efficiency, namely the efficiency with which the market delivers services so as to achieve maximum value to consumers by ensuring that resources are allocated appropriately to achieve that objective, called “allocative efficiency”.  Whilst I agree that Section 3(1)(a) is dominant, I see no inconsistency between a broad definition under Section 3(1)(a) and specific factors which the Director is required to achieve in the exercise of his functions.  The fact that productive efficiency is a factor in determining whether a demand is reasonable under Section 3(1)(a) does not render those references to such efficiency under Section 3(2)(c) otiose, even if there is some overlap. 
122.	It was further submitted that any definition of Section 3(1)(a) other than maximising economic efficiency would be inconsistent with Article 9(1) of the Interconnection Directive.  I see no inconsistency. Firstly, Article 9(1) in its second sentence requires NRAs to take into account the need to stimulate a competitive market.  The Commission took the view that regulation of termination charges was necessary since it took the view that each mobile network operator had a monopoly of call termination on its own network (see paragraph 1.4 of the summary of the Report).  Secondly, the term “maximum economic efficiency” is itself protean.  In his witness statement Mr Myers, Director of Compliance at the Oftel, speaks of the complexity of analysing what is meant by economic efficiency.  The concept itself involves value judgments (see paragraphs 26 to 31).  As Professor Geroski of the Competition Commission says, at paragraph 175 of his first statement, there is no unique definition of economic efficiency and no necessary dichotomy between efficiency and the principles of equity which the Commission sought to apply.  
123.	Accordingly, I reject the submission that the Commission’s conclusions on which the Director acted were inconsistent with Section 3.  The Commission is only required to have regard to the duties imposed on the Director under Section 13(8) in determining whether any particular matter operates against the public interest (as the Commission itself recorded at paragraph 2.449 of its Report).  At paragraph 2.514 it stated:-
“We do not accept that we are putting the Section 3(2) duty above the Section 3(1) duty or that the Section 3(1) principle… necessitates a Ramsey approach.  Nor do we accept Vodafone’s view that “best calculated” means we have to elevate efficiency considerations above those of equity.  It is clear that the Act requires us to pursue the primary duties laid down in Section 3(1) in whatever rational way we see fit, taking all the relevant factors into account, of which efficiency may be one; and that once we are satisfied that we have, we can consider the Section 3(2) duties.  We are satisfied that our own recommendation not only satisfies all the requirements of Section 3, but may be expected to fulfil the duties in Section 3(1) while bringing about a more equitable distribution of benefits among fixed and mobile callers than would be obtained under a Ramsey system of pricing.”
124.	This is an approach which in my view is not only consistent with Section 3(1) but is correct.  It requires the Commission and subsequently the Director to look at all the circumstances in determining whether a demand is reasonable.  The need to maximise economic efficiency is merely one of the circumstances which the Commission may take into account.  The citation of that passage of the Report merely demonstrates the importance of this argument to the mobile network operators in seeking to justify a system of low access and call charges and high termination charges.  The Commission was entitled to take a different view in determining the reasonableness of demands.
Lack of logic in the Commission’s approach to externality surcharge
125.	Vodafone elegantly seeks to finesse arguments as to the correct construction of all reasonable demands, whilst supporting T-Mobile’s attack on those words.  In a forcefully argued submission Mr Glick QC points out that the Commission itself sought to achieve a result whereby those not prepared to pay the full cost were attracted by means of a subsidy to subscribe to a network or to remain as subscribers.    Such subscribers are known as “marginal subscribers”. (There are 2.9 million renewing marginal subscribers each year (paragraph 8.234 of the Report) and 300,000 new marginal subscribers susceptible to being attracted to mobile networks each year (26%) (see Appendix 8.1, paragraph 3 of the Report). The Commission itself recognised the importance of attracting or retaining marginal subscribers.  But, submits Mr Glick QC on behalf of Vodafone, it failed to achieve the very objective it accepted.  The approach the Commission adopted is described at paragraph 2.373.  It:-
“involves capping the surcharge at a level that corresponds to the amount of subsidy which, targeted at marginal customers for whom it would make the difference between joining and not joining a mobile network, brings about at least as much external benefit as the amount of the subsidy.”
126.	The approach also involves retaining marginal subscribers as subscribers to a mobile network.  Thus, Vodafone stress, the Commission did adopt the objective of seeking to achieve maximum economic efficiency by seeking to calculate a surcharge which would attract or retain those who are not prepared to pay the full cost.
127.	Vodafone contends that, in considering the approach which the Commission decided to adopt at paragraph 2.373, namely that the amount of subsidy should to be targeted at marginal customers, two considerations were relevant.  The first question was whether such a subsidy could be targeted at marginal subscribers.  It said:-
“we take the view that the MNOs could, if required to do so, target with a broad degree of accuracy any subsidy funded through a surcharge on call termination to existing marginal subscribers and potential new subscribers.” (2.370).
The second consideration is whether a mobile network operator would have any incentive to do so.  This was a question which the Commission acknowledged but failed to answer.  At paragraph 8.189 in the second volume of the Report the Commission said:-
“It is another question all together whether, if the MNOs were able to target the subsidy at marginal customers through price discrimination, they would have any incentive to do so or whether, in fact, they would opt to devote any extra resources to retaining more valuable infra-marginal customers. This is discussed in paragraph 8.142”.
As Vodafone point out, it is not discussed in paragraph 8.142.  Nowhere is there any discussion as to why a mobile network operator would have an incentive to target the subsidy effectively at marginal subscribers.
128.	The “marginal resource cost”, the subsidy, is derived from a pence per minute (“ppm”)surcharge on all incoming minutes to mobile subscribers.  Thus MNOs obtain no greater commercial benefit from retaining or attracting marginal subscribers than from retaining non-marginal subscribers or attracting non-marginal subscribers from other networks.  Such non-marginal (infra-marginal) subscribers use their mobiles more than marginal subscribers (see Report 8.217).  
“O2 said that if a termination surcharge was passed through in higher mobile-to-mobile retail call prices this would increase the usage costs faced by mobile subscribers and in turn increase the subsidy required to induce marginal subscribers on to the network and O2 said that we had not taken this into account. However, we note that the extent to which higher usage costs affect the overall costs incurred by mobile subscribers depends on the level of usage and marginal subscribers are thought to have lower levels of usage.”
129.	In those circumstances, the only commercial incentive a MNOs has is to provide the most subsidy to non-marginal subscribers, as the Commission recognised at 8.234. Even if the mobile network operator ignored such an obviously commercially rational approach and sought to apply the subsidy to all subscribers or only to non-marginal subscribers, it would be subjected to a commercial disadvantage from those who applied the subsidy to all subscribers or only to non-marginal subscribers.  In short, the only incentive is for MNOs to attract those subscribers who generate the highest volumes of incoming calls and thus the highest call termination revenues.
130.	The Commission’s approach to an externality surcharge can be followed within Volume 1 of the Report.  The starting point was a surcharge of .11ppm (calculated at paragraph 35, of Appendix 8.1, pages 338 to 339 of Volume 3 of the Report).   The Commission then raised that estimate to .34ppm on the basis of the factors they describe at paragraphs 2.374 and 2.376 such as estimating a period of four years for the length of time that handsets of marginal customers would last before being lost, stolen or broken and an estimate of the minimum price of a handset. At paragraph 2.379, amplified at paragraph 8.234, the Commission acknowledged the very problem which, it is said, it failed to solve:-
“Thus, a customer whose handset was lost, stolen or broken might require a discount of almost the full price of a handset if his or her spend was very low; on the other hand, customers with very high spend might require little or no subsidy. Assuming as before that marginal customers are evenly distributed between £0 and £70 according to their personal valuations of network membership, the average discount that the MNOs would have to offer is £35. Provision of a £35 (average) discount to the 3 million current subscribers who would be marginal every year because their handset was lost, stolen or broken would require a surcharge of 0.34 ppm (see paragraph 8.234).”
“However, it should be noted that while the MNOs may in principle be able to target these marginal customers in this way, it would involve the MNOs paying most subsidy to the customers with the smallest private valuation of joining. Thus on the assumption that customers’ private valuation corresponds to the number of minutes of calls made and received and thus to the revenue they will provide to the MNOs, the MNOs’ incentive in practice would be to provide most subsidy to customers with the highest valuation of joining. (see paragraph 8.234).”
131.	Thus the Commission itself recognised that the subsidy of an average £35 would not address the problem of targeting.  It recognised that customers who used the network most (with a very high spend) might require little or no subsidy but that there was no means of targeting the subsidy away from them to those who used the network least and who were marginal subscribers.  At paragraphs 2.380 to 2.382 it justified an increase in the subsidy from .34ppm to .41.  Oftel was alive to the difficulty of targeting, objected to the Commission’s calculation and argued against a surcharge of .5ppm.  This the Commission rejected (see paragraph 2.385):-
 “We conclude that the mark-up on the termination charge that should be allowed in order to take account of externalities is 0.45 ppm, because this lies mid-way between 0.41 and 0.5.”
132.	Further, the Commission accepted that extra revenues derived from an externality surcharge on termination charges would be used to capture what it described as “revenue streams” by offering discounts and incentives to potential subscribers to encourage them to join their networks.  Having done so the mobile network operators would impose such charges as would maximise their revenues (see 2.436 of the Report).
133.	The Commission’s failure to grapple with the problem of lack of incentive undermines its conclusion as to the amount of subsidy.  Its failure to deal with the problem means its conclusions in relation to the externality surcharge are illogical and without foundation. 
134.	If the Commission had grappled with the question whether there was any incentive to target the subsidy it was left with three choices:  firstly, to leave the charge where it was at .45ppm or to extinguish it as, effectively, Oftel contended or to raise it to such an extent that marginal subscribers would be attracted to join a mobile network or would remain as subscribers.  Since the Commission did not deal with this problem it never determined the issue of the externality surcharge, fundamental to the calculation of a fair charge, in a rational manner.
135.	These are powerful arguments.  I accept the premises upon which Mr Glick’s QC arguments are based.  There was clearly a problem, acknowledged by the Commission at paragraph 8.189, as to whether the mobile network operators would have any incentive to do other than to devote the extra resources raised from the externality surcharge to those whom the Commission itself described as the “more valuable non- marginal subscribers”.  I also accept that the problem was not discussed at paragraph 8.142.  But I reject his conclusion.  In my view the Commission, looking at the Report as a whole, did reject two out of the three options open to it in response to the difficulty of lack of incentive. It rejected the second possibility, namely the extinction of the surcharge, at paragraphs 2.383 to 2.384.  Equally, it also rejected the possibility of raising the surcharge (see in particular 2.357).  It was fundamental to the Commission’s approach that the current level of surcharge had the effect of consumers paying too much for fixed-to-mobile and off-net calls (see paragraph 2.449(a)).  Patterns of telephone use were distorted (paragraph 2.449(b)) and those who made more fixed-to-mobile calls unfairly subsidised those who mainly received calls on their mobile phones (2.449(c)).  Subscribers were not obliged to pay the economic cost of handsets distorting competition (2.449(d)).  Higher prices of calls from fixed-to-mobile phones and lower price on–net mobile calls encouraged greater use of mobile as opposed to fixed technology (2.449(e)).  It is plain, therefore, that the Commission rejected the view that termination charges should remain the same.  In those circumstances it is fanciful to assume that even if it had specifically grappled with the problem of lack of incentive the Commission would have recommended raising the surcharge which would have had greater adverse effects than those it had identified.
136.	Moreover, the Commission was alive to the commercial realities.  Indeed it was commercial reality which led it to the conclusion that, absent any price control, mobile network operators would have an incentive to raise termination charges above the current levels (see 2.445).  The Commission recorded that:-
“the MNOs would have the incentive to raise termination charges above their current levels. As we have seen, Vodafone thought that charges could rise to up to 20 ppm compared to an efficient level in the range 11 to 15 ppm. Oftel told us that termination charges might rise to more than 20 ppm in the absence of regulation. The MNOs justify the raising of termination charges on grounds of both economic efficiency and benefit to society at large, since higher termination charges, used for example to subsidize handsets, generate more subscribers for mobile networks, but we have already said that we do not accept that this is necessarily an efficient outcome. By raising termination charges the MNOs would, in accordance with their pricing strategies, enable subscription prices to be kept at levels capable of attracting and retaining subscribers. However, if the mobile sector approached saturation and new subscribers required even larger subsidies to induce them to become mobile subscribers, the MNOs’ call termination charges would need to be increased commensurately (although clearly subject to some upper limit, defined by the continued willingness of fixed-line customers to call mobile phones). In these circumstances, it is possible that termination charges could exceed the 20 ppm maximum level suggested by Vodafone, if there were no regulation in place to contain them.”

137.	Accordingly, whilst I have accepted Mr Glick’s QC premise I reject his conclusion.  The three possible courses of action he proposes, had the Commission grappled with the problem, were considered by the Commission and, save for the conclusion as to the appropriate surcharge, were rejected.  The criticisms Vodafone raised, founded upon the problem of lack of commercial incentive, do not undermine the Commission’s conclusion.
Calculation of fair charge: minimum transmission equipment
138.	Vodafone contended that part of the common network cost was the equipment needed to allow a call to be made anywhere on a mobile network operator’s network.  There must, it contended, be equipment which was the minimum necessary to permit termination of a call.  The value should have been calculated as a common cost being the irreducible minimum required if either there were no originating calls or no termination of calls.  Common costs were identified by the Commission as those attributable to multiple services in the long run, leaving aside incremental costs attributable to particular services.  This issue was dealt with at paragraphs 2.261 to 2.264 of the Report.  Vodafone argued that since it was accepted that common costs consisted of site acquisition and lease costs of the minimum number of base station sites needed to provide coverage across the UK, together with the cost of the network management system (2.261), there must also be a minimum equipment cost.  In my view, the rejection of this argument was adequately reasoned.  At 2.264 the Commission concluded:-
“the fact that equipment is shared between services now does not necessarily mean that the cost of the equipment is common among services in the long run because if one service ceased, the amount of equipment needed could – and would – be scaled down to the level needed to run the other activity.  Shared equipment that is deployed on the sites that are needed for coverage could be defined either as common or incremental.  However, even if such shared equipment was found to be common, such apparently common costs can be allocated across the services in a reasonable manner on the basis of the extent to which each service makes use of the equipment.  In the long run, therefore, any equipment cost should be treated as variable.   We agreed with the DGT that site acquisition and lease costs for the coverage network and the network management system were strictly speaking, common costs because these costs could not be scaled down in the event that one service ceased.”
139.	This seems to me to be adequate reasoning which cannot be impugned by way of judicial review.

Calculation of a fair charge: home location registers
140.	Home location registers are databases which inform the operator of the location of each mobile whilst it is switched on.  They are necessary to identify the location of a subscriber for the purposes of enabling a call to reach him.  Vodafone accordingly argued that the costs of such registers should be attributed to termination.  It is apparent that at 2.271 the Commission agreed with that approach:-
“in the absence of call termination there would be no need for location updates.  Hence, the fairer approach would be to allocate the costs across terminating calls including on-net calls.”
141.	There was a dispute as to whether, having taken that decision, the Commission did in fact allocate the cost to terminating calls.  Vodafone contended that in Oftel’s LRIC (Long Run Incremental Costs) model the appropriate uplift of 31% was not apportioned correctly.  The Commission respond that it was in fact apportioned solely to the cost of termination.  It is impossible for this court to reach any sensible view on what are merely matters of evidence and fact.
Calculating a fair charge: non-network costs
142.	The Commission identified a range of non-network costs at paragraph 2.320.  It concluded that, in the long run, if expected call revenues from any service decreased mobile network operators would be expected to scale back their expenditure.  It did not consider that customer acquisition and retention expenditure was common to termination in the long run. (See paragraph 2.327).
143.	It allowed a very small element of customer service costs because most varied according to traffic volume or the number of subscribers.  (See paragraph 2.328).   In relation to administration overheads it allocated those across all areas of the business (see paragraph 2.329).
144.	It seems to me that the Commission’s approach to these non-network costs was similar to that which it took in relation to other costs to which I have already referred.  It does not seem to me that its conclusions lacked any reasoned basis or that the challenge to the conclusions is other than a challenge to the merits of those conclusions.
Calculating the fair charge: externality surcharge
145.	Vodafone contends that the calculation of the externality surcharge failed to take account of the fact that if the surcharge on off-net call termination is passed onto customers through retail charges this itself will increase overall usage costs of mobile subscribers and will result in a higher initial subsidy being required to retain or induce marginal subscribers to join the network.  In short, the marginal customer contributes to the subsidy which he is intended to enjoy when he pays for off-net calls.  It may be that, contrary to the arguments of the Commission, an increase in subsidy could enure to the benefit of an off-net caller.  I was shown an example of how this would work in Vodafone’s reply, to be met with a long written response while I was writing this judgment.  But it seems to me that the Commission was entitled to take the view that these considerations did not justify calculating the surcharge at a higher level.  It dealt with this argument at paragraph 8.217 of the Report:-
“02 said that if a termination charge was passed through in higher mobile to mobile retail call prices this would increase the usage costs faced by mobile subscribers and in turn increase the subsidy required to induce marginal subscribers onto the network and 02 said that we had not taken this into account.  However we note that the extent to which higher usage costs affect the overall costs incurred by mobile subscribers depends on the level of usage and marginal subscribers are thought to have lower levels of usage.”
Vodafone contend that that does not justify a failure to increase the subsidy to some extent.  This seems to me an argument which goes to the merits of the Commission’s conclusions.  The Commission took into account the argument and rejected it.  It is not open to this court to reach a different conclusion other than the one which, in my view, the Commission was entitled to reach.
Welfare gain
146.	The Commission considered the effect of its recommendations to cap termination charges.  It expected welfare gains of between around £325million and around £700 million over what it described as “the period of our recommended charge control”, i.e. until the end of March 2006.  (See paragraph 1.13(a) and paragraph 5.58).  Vodafone contend that the models used for such calculation were irrational and grossly exaggerated.  The error lay in its use of the Frontier Economics model, which  assumed an increase in the level of fixed costs and worked backwards from a variety of possible termination costs.  The problem was that, as the Commission thought, it was unable to vary the common or fixed charges in an appropriate proportion to the variation of termination charges.  Professor Mirrlees, the highly respected professor of political economy, was asked whether the Frontier Economics model had been used in a rational or tenable way.  He concluded that its use was incorrect and untenable (see paragraph 16 of his statement).  He concluded that if it had been properly used the welfare gain would not have been £54.4 million a quarter but rather £4.7 million per quarter.   This equates to a gain of approximately £13,000 a day.  This is far less than the expected gain in consequence of the irrational use of the Frontier Economics model.
147.	The criticisms of the model had been raised during the course of the preparation of the Report (see paragraph 9.77).  The Commission had been provided with a number of different models in order to investigate the effect on welfare of the imposition of a cap on termination charges (see paragraph 2.551).
148.	At paragraph 2.553 the Commission expressed three reservations as to the use of the models including the criticised use of the Frontier Economics model: firstly they are based on Ramsey prices, a basis the Commission rejected; secondly they made use of elasticity estimates which were believed to be unreliable and thirdly the models allocated costs on the basis that they were mostly fixed and common whereas the Commission believed the costs should be allocated on the cost-causation principle.  For those reasons the Commission took the view that the results from the models should be viewed only as an approximation of welfare gains (see paragraph 2.553).  In its conclusion the Commission accepted that the simulations could not be regarded as “precise” but took the view:-
“that the fact that most of the models produce large welfare gains under various assumptions lends strong support to the argument that termination charges should be regulated.”  (2.558)
149.	The Commission’s final conclusion overall was:-
“In summary we conclude that a price cap on termination charges to bring them down to the fair charge will benefit consumers by reducing the price of fixed-to-mobile and off-net calls and, depending how the MNOs respond, could be broadly neutral so far as concerns the effect on the MNO’s financial liability.  As their own business plans indicate, it is sufficient that the MNOs slow the decline of retail prices in order to recover the revenue loss from reduced termination charges that we are recommending, but average retail prices should still fall.”  (2.569)
150.	It is apparent that the Commission was well aware of the defects in the use of the Frontier Economics model.  At paragraph 9.64 of its Report it recorded the fact that it had increased the level of fixed and common costs until the “alternative scenario termination charge” is achieved.  It accepted that this was not representative of the actual outcome at a particular level of termination charge.  The models were used for the purposes only of welfare comparison.
151.	The essential submission of Vodafone is that if the Frontier Economics model could not be used properly it should not have been used at all, in particular because the consequences of its use provided powerful support for the Commission’s recommendation.
152.	I accept that there are cogent criticisms to be made of the use of the Frontier Economics model.  If its use undermined the Commission’s conclusion it is no answer to say that it was not possible at the time to use it properly.  Aware, as the Commission was, of its defects it was open to it to reject its use.  But I take the view that Vodafone places too much weight upon its use.  It was but one of a number of models used.  The Commission specifically refer to the use of a Rohlfs model in relation to comparing regulated and unregulated behaviour.  Whilst its conclusions were regarded as excessive, it nevertheless provided a basis for demonstrating that there would be gains rather than losses from the regulation of termination charges (paragraph 2.557).  The estimation of welfare gain did support the conclusions of the Commission but those conclusions were not dependant upon that estimate.  Read as a whole the Report establishes that current levels of termination charges were excessive and that the effects of those charges were adverse.  Capping was rationally designed to reduce and eventually eliminate that excess.  Even Professor Mirrlees accepts that there would be some benefit even though it was much smaller than that foreseen by the Commission.  In my judgment the criticisms of the Commission’s use of the Frontier Economics model do not vitiate the conclusions in the Commission’s Report.
Ability of T-Mobile to finance its services
153.	T-Mobile contend that the Commission’s conclusions are inconsistent with the provisions of Section 3(1)(b).  The radical reduction in termination charges will, it is said, have a profound effect upon T-Mobile which does not, as a new entrant to the market, make a profit.  In those circumstances it was not open to the Commission to recommend or to the Director to adopt price controls without satisfying itself of the ability of T-Mobile to finance the services it provides.  There is no evidence that it could do so and, in the absence of such evidence, the Report is in conflict with the obligation of the Commission to have regard to the financing requirement under Section 3(1)(b) to which the Director’s actions are also contrary.
154.	The short answer to the submission is that Section 3(1)(a) of the 1984 Act overrides Section 3 (1)(b).  Although the words “without prejudice to the generality of paragraph (a) above”, provide no warrant of conflict; if there is a conflict, then Section 3(1)(a) must prevail.  In any event Section 3(1)(b) imposes no obligation upon the Director to reach his conclusions in relation to Section 3(1)(a) in the face of an operator who is making a loss.  Section 3(1)(b) does not amount to a lifeline for a particular operator who is not prospering in the regulated sector.  The Commission took the view that loss of revenue could be rebalanced through the prices to be obtained in the retail sector (see paragraph 2.561, the “waterbed effect”).  It took the view that in the context of falling retail prices the only effect would be that the prices would fall at a lower rate (see paragraph 2.576).  The Commission did consider the position of T-Mobile (see paragraph 2.574).  The challenges to the effect of its recommendations on T-Mobile are merely challenges to the merits of its conclusions.
Orange’s inability to finance 3G mobile services
155.	Orange argued to the Commission that the introduction of a price control would damage its investment on 3G mobile services in respect of which the mobile network operators were faced with huge costs (see paragraph 12.4).  They developed those arguments as recorded at paragraphs 12.56, 12.58, 12.95 and 12.103.  They argue that the Commission’s rejection of their arguments was unreasoned.  At paragraph 2.422 the Commission said:-
“We broadly share Oftel’s and BT’s views on this matter.  We believe as a matter of principle that the MNO’s wish to invest in 3G does not justify termination charges that are in excess of a reasonable estimate of their costs, particularly if those charges are ultimately derived from customers of FNOs.”
156.	The previous two paragraphs 2.420 and 2.421 outline the arguments of Oftel and BT. In essence, both contended that 3G should stand or fall on its own merits and not depend upon excessive charges being permitted by the use of another existing technology.  The Commission was entitled to accept those arguments, and the challenge to its conclusions is merely a challenge to their merits.  Mr Brealey QC also referred to an inconsistency within the Director’s EU market review dated 15 May 2003.  At paragraph 3.108 the Director said of the policy of capping that it would:-
“imply that, from the point of view of originating operators, a common price would be paid for voice call termination on the 2G network and voice call termination on the 3G network.  Therefore, it would be reasonable to include them in the same economic market”.
157.	But, as it seems to me, the Director faced this point in the following paragraph in which he concluded that there was no case for defining separate markets since to do so would not reflect any substantive change in the constraints on the mobile network operators’ behaviour in setting the terms and conditions for 2G and 3G termination (paragraph 3.109).
158.	In any event the Director took the view that there should be no ex ante regulation in relation to 3G voice call termination services (see paragraph 6.85 of the EO market review).  In those circumstances, I observe no inconsistency in the approach of the Director.
Failure to ensure that price reductions are passed on
159.	The imposition of price controls on call termination will not remedy the adverse effects identified by the Commission unless price reductions are passed on to consumers, particularly subscribers to BT’s fixed network.  BT is under no obligation to pass on its savings.  On the contrary, there is no incentive for BT to do so in circumstances where there is what the Commission described as a marked lack of price sensitivity amongst those paying for the use of both fixed and mobile phones in respect of making calls.  The most important factor for many people in calling a mobile is the ability to reach someone straight away (see paragraph 2.145).  At paragraph 2.41, the Commission recalled the price control imposed on that part of the retail charge which BT was allowed to keep when calls originating on BT’s network were terminated on the mobile networks of 02 and Vodafone, called a retention.  At paragraph 2.42, it recalled that the Director had decided that retention should be controlled “as part of BT’s general retail basket of prices”.  The Commission asserted:-
“Because of BT’s retention, Oftel expects that any reduction in termination charges by the MNOs will be fully passed through one way or another into retail prices to the FNOs’ customers, although such pass-through would not necessarily be inter charges for fixed and mobile calls specifically.”
160.	Orange contends that a mere expectation is insufficient.  Moreover, the cap on the retention will not necessarily reduce charges for fixed to mobile calls.
161.	The answer of the Commission is contained in Professor Geroski’s first witness statement.  The amount BT is entitled to keep from the charge it imposes on subscribers for making a call to a mobile was until 1 August 2002 regulated separately.  Thereafter, the retention became part of the basket of retail prices, the overall price of which was capped.  In those circumstances, the Commission took the view that, even if price cuts were not passed on directly in the retail price of calling a mobile, they would be passed on to BT’s subscribers by way of a reduction to at least one other price in the basket (see paragraph 253).  Moreover, competition would inevitably force it to pass through the vast bulk of cuts in its fixed to mobile call prices.  In any event subsequently BT has announced its intention to pass on cuts in termination charges to its subscribers directly in the price that those subscribers pay for calls to mobiles (see paragraph 255).
162.	It is true that these matters are not fully covered in the Report.  But it must be recalled that the Report is addressed to those who are experts in telecommunication.  The operators, their advisers and economists, will be well familiar with the regulation of BT’s basket of retail prices.  The Commission was entitled to express their views based upon an expectation in that context.  Its expectation has proved to be fully justified and affords no basis of challenge by way of judicial review.
Conclusions 
163.	For the reasons I have given I conclude :-
1.	under the Licensing and Interconnection Directives, the Director is entitled to impose price regulation on those not designated as having SMP;

2.	the Commission was entitled to recommend and the Director to regulate termination charges, by way of licence modification, in the period between 24 April 2002, when the new regime came into force and 25 July 2003 when the new Directives must be implemented, pursuant to Article 9(3) of the Interconnection Directive;

3.	the one-day price cut, imposed by way of licence modification for 24 July 2003, is lawful and not disproportionate;

4.	the Continuation Notice proposing a continuation of the price regulation of termination charges, promulgated by the Director, is consistent with the provisions of the new Directives, in particular having regard to Article 7(6) of the Framework Directive;

5.	the Commission’s and the Director’s interpretation of Section 3(1)(a) of the Telecommunications Act, 1984 was not unlawful; a broad interpretation, including concepts of equity and fairness is legitimate;

6.	 the Commission adopted a reasoned and justifiable approach to its calculation of the externality surcharge;

7.	the Commission’s calculation of a fair charge in respect of :-
    a)   minimum transmission equipment;
    b)   home location registers;
    c)   non-network costs;
    d)  the externality surcharge; and
    e)   welfare gain
was reasoned and not irrational;

8.	the Commission considered the issue of T-Mobile’s ability to finance the services it provides in a manner consistent with Section 3(1)(b) of the 1984 Act;

9.	the Commission’s rejection of Orange’s arguments in relation to 3G services was adequately reasoned;

10.	the Commission was entitled to expect BT to pass on price reductions flowing from the termination charge cap.

164.	I have attempted to identify the main issues raised by the different claimants, but this judgement does not purport to deal with all the arguments set out in the written arguments and orally which I read and listened to with awe.  I have considered whether it would be appropriate to refer questions relating to the interpretation of both the old and new Directives which clearly fall within Article 234(a) of the Treaty.  The answers are not acte claire. After all, uniformity of approach to these questions is vital to the success of the new regime.  But I have decided it is not appropriate to do so.  Any resolution of those questions by the Court, particularly in relation to Article 7.6 of the Framework Directive, is likely to be superceded by the outcome of the consultation process between the Commission and the national regulatory authorities of the Member States.  The clarity of the arguments of counsel has, in any event, enabled me to reach a conclusion with an Else degree of confidence in relation to the first two conclusions.  To them I hope it is not inappropriate 2 xpress thnx 4 all thr gr8 wrk. For the reasons I have given I reject all these applications.  Had there been less urgency and had the matter been before me for permission to bring them, I would have granted permission in relation to all the issues, save those identified in my conclusions at 7(a) to (d) and 8 to 10.  But I see no purpose in doing other than granting permission in respect of all the issues in all the applications, but in repeating my dismissal.
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MR JUSTICE MOSES:  For the reasons I have given in the judgment I have handed down, I grant permission in relation to all the applications and I dismiss them all.  So far as the handed‑down judgment most of the corrections, prompted by the hard work of all the parties, for which I am very grateful, I have accepted, I agree with them, and most of them have already, due to the very hard work of my clerk, gone into the judgment.  There is still some minor ones left to be done.  So far as publication, the present judgment can be published but the final corrections people shall get today and they will be sent to counsel electronically.  There will, no doubt, be floating around some hard copies.   
MR COOK:  Good morning, my Lord, I appear on behalf of the Competition Commission, I apologise on behalf of Mr Sharpe, who has unfortunately and unavoidably been detained elsewhere.  My Lord, the Commission has been completely successful in defending these matters and I would apply for my costs.
MR JUSTICE MOSES:  Yes.
MR FOWLER:  My Lord, I would also ask for the Director General's costs.
MR SALES:  My Lord, on behalf of the DTI we ask for our costs against T‑Mobile.  I hope my Lord received our skeleton argument? 
MR JUSTICE MOSES:  Yes, I did.  I am slightly puzzled, because although you quite sensibly took the running on the point, and had a particular interest that allowed you to be joined because of your bill, in fact I cannot quite see why the arguments could not have been made by the Director, he could have been briefed, if necessary, with anything that Mr Fowler had not thought of (which is unlikely) and he did not have to because you were going to do it.  The Director had to make the same points to justify his continuation notice.
MR SALES:  My Lord, as to that, that would in itself have increased the costs someway, we feel, for counsel on this side of the court, in order for that point to be dealt with.  We did deal with it at greater length. 
MR JUSTICE MOSES:  But why would it have increased the costs; would he have been put on a higher brief fee?
MR SALES:  In the sense that the time I spent in preparing for the point, and the time that I spent in developing it would have been time that would have had to be spent preparing such detailed arguments and presenting them by someone in opposition to‑‑‑‑ 
MR JUSTICE MOSES:  It would not have been quite as much, as it were, extra hours of Mr Fowler though, would it, and once you have a different body‑‑‑‑
MR SALES:  I accept that, but there would still have been some difference and I do ‑‑ my Lord has seen the point that we make at the end of our skeleton argument, as to the particular interest which the Secretary of State had in this matter.  The fact is that T‑Mobile had already opened the argument directly with the Secretary of State in correspondence, very shortly before it then amended its pleading in this case in order to argue the point‑‑‑‑ 
MR JUSTICE MOSES:  It was very sensible it did amend it, I mean it would have been madness to have left it all hanging.
MR SALES:  I am not quibbling with that, my Lord, all I am saying is that having started the argument correctly, I would acknowledge, with the Secretary of State, and in relation to the amendments to the Bill, that it hardly lies in T‑Mobile's mouth to complain that the Secretary of State wants to be joined in order to present the arguments that she needs to present, and in order to protect her own position and enact an Act of Parliament with regards to the amendments of the Bill, to which T‑Mobile had, shortly before, rejected.  That is what I wanted to say. 
MR JUSTICE MOSES:  Yes, thank you very much.  Yes, Mr Swift? 
MR SWIFT:  Five points, my Lord.  My learned friend has referred your Lordship to the Bolton case and I have a copy here.  The most important proposition that comes out of the Bolton case re‑affirms that the fundamental rule about costs is that there is no rule about costs; that is plainly stated by Lord Lloyd.  The other matter is not referred to in my learned friend's submission is that the third set of costs would be rarely justified.  We do not resist the Director General's application, we do not resist the Commission's application, we do resist the DTI application.  Although, as we said on day 1, we are very happy that the Secretary of State should be joined as a party.  We made no objection to that.  We recognised that there was an interest.  The Secretary of State was watching her Communications Bill going through Parliament, and we did not object to that.  What we certainly do object to is the thought of paying two sets of costs on an issue which did turn out to be critical, and it covers nine pages in your Lordship's judgment.  But it is an issue which was raised for the first time squarely by the Director General in his defence of 3rd May in paragraph 35, and that is where it was first raised. 
MR JUSTICE MOSES:  What did he raise? 
MR SWIFT:  The continuation notice.
MR JUSTICE MOSES:  Yes, quite.
MR SWIFT:  Once it became clear that the continuation notice forms part of the whole of the regulation decision‑making process‑‑‑ 
MR JUSTICE MOSES:  And without it he could not have justified his one day either.
MR SWIFT:  He could not have justified his one day.  So it lay fairly and squarely on him.  We have two exceptionally qualified advocates, if they decided to allocate the jobs to themselves as to how those points are ‑‑ Article 76 (inaudible) and all the other points ‑‑ that is a matter for them, but we, T‑Mobile, should not be asked to bear the costs for that.  That was 2 and 3.  
The fourth point, even if we are wrong, it seems grossly unfair to us that the DTI have singled out T‑Mobile.  T‑Mobile had the sense to realise that this point was bound to be vital in the decision‑making process, as your Lordship finds at page 44 of the judgment that I saw yesterday, we were joined by the other claimants.  Once my learned friend realise that this point was going to be a decisive point of the issue before your Lordship, they came up and supported us.  Apparently the DTI, so determined to get their costs against T‑Mobile, did not even give notice to my learned friends at Orange that this submission was being made.  
Finally, as these points are meant to be short, we do take particular objection at the very last paragraph of this note that went before your Lordship yesterday, in which my learned friend resorts to a military language of our "opening up a second front."  Not only is the language somewhat offensive, somewhat intemperate, more importantly, it is just wrong.  We did not open up a second front.  We simply responded to events‑‑‑‑ 
MR JUSTICE MOSES:  It all seems to be integral in the whole heart of the legislative case anyway.
MR SWIFT:  Well, there are five points, my Lord‑‑‑ 
MR JUSTICE MOSES:  I have them, yes.  Do you want to say anything more, Mr Sales?
MR SALES:  No. 
MR JUSTICE MOSES:  No.  So far as the Secretary of State's costs, although I hope I have said sufficient to explain why it was very sensible that she should be here if her points were not covered by others, I do not really see why they could not have been covered by the Director General, he could indeed have been instructed by the Secretary of State in addition; I do not see any conflict about that.  
The issue of the lawful source of the power to issue the continuation notice went to the very heart of the many criticisms relating to the challenges.  Clearly, the Director, if they were not going to be made by the Secretary of State, would have had to make them himself.  In those circumstances, I shall make no separate order for costs in favour of the Secretary of State.  
Does anybody else want to say anything about ordering costs in favour of both the Competition Commission and the Director General?  
MR SWIFT:  No, my Lord.
MR JUSTICE MOSES:  I shall order that their costs shall be paid by the claimants.  Right, that is that.  Any other applications? 
MR SWIFT:  My Lord, my application for permission to appeal.
MR JUSTICE MOSES:  Can I say how far I have reached on that subject to anything the Director or the Competition Commission or, indeed, the Secretary State say.  I was proposing to grant permission ‑‑ can I take it from my conclusions paragraph.
MR SWIFT:  Certainly, my Lord, very helpful. 
MR JUSTICE MOSES:  Paragraph 148.  I was proposing to grant permission in relation to issue 1: significant market power under the old directives in relation to regulation in the period between April and June 2002 and July 2003, that is (2); (3) the one‑day price cut; (4) the continuation notice; (5) the proper interpretation of section 3(1)(a); and (6), which does not emerge very clearly from that conclusion, but is the sort of "Glick point" on impossibility of targeting, describes it better, and not to grant permission on any of the other points, that is 7 to 10.
MR SWIFT:  My Lord, may I just address you briefly on ‑‑ because I am interested in points 1, 2, 3, 4, 5 and 8.
MR JUSTICE MOSES:  Yes.
MR SWIFT:  My Lord, at 8, which is 3(1)(b).
MR JUSTICE MOSES:  Yes. 
MR SWIFT:  It does, in my submission, involve an issue of law as to the appropriate construction of section 3(1)(a) and 3(1)(b) and how they inter‑relate to each other.  I would not put the point to you were it simply a question of assessing the evidence.
MR JUSTICE MOSES:  No, it is clearly not that, it is a legal point.
MR SWIFT:  In terms of future case management, if your Lordship were minded to move 8 into the permitted group, that at least would save possible further applications to the Court of Appeal, if I get that added.  So it may be that this is a case where the best, which of course your Lordship's judgment is (inaudible) of good, which is trying to get these matters on to the Court of Appeal, and it would be extremely helpful if we could transfer 8.  Having said that, of course, when we come to consider the grounds to go before the Court of Appeal everything your Lordship has said will be taken into account. 
MR JUSTICE MOSES:  It is a very short point, I suppose.
MR SWIFT:  It is a very short point.
MR JUSTICE MOSES:  It enables you to make your sort of opening flag‑waving remarks as you made, you know, about how tough it all is.
MR SWIFT:  It will endeavour to improve the submission I made to your Lordship, yes.
MR JUSTICE MOSES:  Right.  Thank you very much.  Shall I hear all the claimants first.  Any claimant want some extra points?  
MR BREALEY:  No, my Lord.
MR JUSTICE MOSES:  Right. Mr Cook, do you want to say anything on that? 
MR COOK:  My Lord, we would obviously resist the issue of appeal on those grounds, but having heard what you said, my Lord.
MR JUSTICE MOSES:  I will see what Mr Fowler says.  Yes, Mr Fowler?
MR FOWLER:  My view is the same, my Lord.
MR JUSTICE MOSES:  Do you want to amplify why I should not?
MR FOWLER:  The only point I would make, my Lord, it is clearly a matter that would have to be dealt with quickly if it were to be dealt with at all.
MR JUSTICE MOSES:  Yes.  You see, if I do not give permission there is going to be delay while it goes to a single Lord Justice.  I think some of them, I am not saying all of them, but I mean I do think there is some really quite serious points.  It is a very unusual situation this.  
MR FOWLER:  The one point that I would say, my Lord, is (6), my Lord which is‑‑‑‑ 
MR JUSTICE MOSES:  Which is the impossibility of targeting point?  
MR FOWLER:  Which is in a different category.
MR JUSTICE MOSES:  It is in a different category.  It is going to take up more time but, in a sense, you see, the Court of Appeal ‑‑ I do not know how to put this in a pertinent as opposed to impertinent way ‑‑ I mean they have to understand what it is about, and the great thing about (6) is that it does actually go to the heart of what the real quarrel is about, and the Competition Commission did make, I mean they are bound to, mistakes, and mere mistakes are not going to get anybody anywhere, but I mean when they said 'We will deal with incentive' and then do not, and then in the quotation say something ‑‑ that really is Mr Glick's point about you cannot target ‑‑ you know, they have made a bit of headway, and I am confident that they are wrong, but I can see your anxiety about that.
MR FOWLER:  In particular the time that is going to be taken, and that in itself urgent, and indeed is likely that on that point to be entirely academic by the time any judgment is given because we will be passed July 25th and, therefore, the Director would not be relying in any event on the powers arising under the telecommunications‑‑‑‑ 
MR JUSTICE MOSES:  Why would he not have a result by 24th?
MR FOWLER:  It is conceivable, my Lord, but that is likely to get in the way‑‑‑‑ 
MR JUSTICE MOSES:  Well, I do not know what is going to get in the way, unless Mr Glick throws his hand in on that point, which I think he will not.  It is going to take up time while he seeks to get permission to argue that.  Anyway, I have your point.  Do you want to say anything Mr Sales?
MR SALES:  No, my Lord. 
MR JUSTICE MOSES:  I shall give permission as I indicated to appeal in relation to ‑‑ have I sufficiently delineated what the points are, it is in relation to the points covered (1) ‑ (6); (6) being a reference to the impossibility of targeting the point, and (8).  You can have (8).  That is it, is it not?
It is not for me to say but you can cut down on the paper enormously, I would have thought, otherwise you will really not get it on by 24th.  It would be jolly useful if you could somehow tab the legislation so it says what the directives are on the tabs, because one gets in a terrible muddle which Article 7 of which directive, because there are two important Articles 7, and also sideline those particular bits you want, that would be jolly useful, then they will all be able to follow better than I could.  Thank you all very much.