DSAC an appropriate test for assessing LRIC cost-orientation

Today’s CAT judgment confirmed that Ofcom’s use of distributed stand-alone cost (“DSAC“) was an appropriate method to assess whether a regulated Communications Provider who had been found to possess Significant Market Power in a particular market was charging in a way that was ‘reasonably derived from the costs of provision based on a forward-looking long run incremental cost approach, allowing an appropriate mark-up for the recovery of common costs and an appropriate return on capital.’ The judgment went on to confirm that where charges had not been compliant with the cost-orientation obligation that Ofcom had correctly exercised its discretion by ordering repayment of the amount of the overcharge.

DSAC is  a test that distributes the stand-alone costs of a broad increment of services pro rata amongst each of the services within that increment. DSAC is not widely used outside UK telecoms regulation – during the trial BT quoted contestable market theory in support of the proposition that combinatorial tests were the appropriate method of assessing compliance, and in the original dispute the complainants argued that fully allocated cost (or FAC) was the right test. However, the court found that DSAC was well-known and understood in the context of UK telecoms regulation (appearing, by way of example, as a price ‘ceiling’ within BT’s published regulatory accounts). The court considered these various tests, as well as alternatives including international benchmarking, and found that in this instance that there was ‘no satisfactory alternative’ to the use of DSAC, albeit that it should not be used in a mechanistic way.

The background to the case was that on 14 October 2009 Ofcom resolved a dispute between (i) Cable and Wireless UK, COLT, Global Crossing, Verizon and Virgin Media; and (ii) BT, by finding that BT had overcharged by more than £40 million for particular regulated wholesale leased lines (known in the UK as partial private circuits or PPCs) and ordered BT to repay to BT the amount of the overcharge.

BT appealed Ofcom’s decision in December 2009, with a six day trial heard in October 2010. The trial involved witnesses of fact and significant expert economic evidence. BT’s appeal had a numbers of grounds:

  1. Ofcom misused their dispute resolution powers 
  2. Ofcom failed to give proper regard to economic harm
  3. Ofcom’s refusal to consider trunk and terminating segments in aggregate was flawed and improper
  4. Ofcom made an error of law and appreciation in the approach to cost orientation and their use of DSAC
  5. Ofcom misused their power under s190(2)(d) of the Communications Act 2003 to order repayment of the overcharges.

The Court unanimously found against BT on all grounds.

BT may apply for permission to appeal – I await their decision with interest.

The Watcher needs to declare an interest: he represented the overcharged companies in the dispute before Ofcom and subsequent appeal, so readers should ‘filter’ this post accordingly.