2006/951/EC: Commission Decision of 12 October 2006 the United Kingdom's application of the tax on non-domestic property to telecommunications infrastructure in the United Kingdom (No C 4/2005 (ex NN 57/2004, ex CP 26/2004) (notified under document number C(2006) 4378) Text with EEA relevance
Date: 2006-10-12
Institutions: European Commission
Subjects: State aid, United Kingdom, control of State aid, property tax, tax relief, telecommunications industry

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COMMISSION DECISION

of 12 October 2006

the United Kingdom's application of the tax on non-domestic property to telecommunications
infrastructure in the United Kingdom (No C 4/2005 (ex NN 57/2004, ex CP 26/2004)

(notified under document number C(2006) 4378)

(Only the English text is authentic)

(Text with EEA relevance)

(2006/951/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

— Broadband Stakeholders Group, received by letter

Having regard to the Treaty establishing the European Commu-
nity, and in particular Article 88(2) thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

dated 13 May 2005

— BT, received by letter dated 18 May 2005

— Cable and Wireless Group plc. (‘Cable and Wireless’),

received by letter dated 29 June 2005

Having called on interested parties to submit their comments
pursuant to the provisions cited above (1) and having regard to
their comments,

— Communications Management Association, received

by letter dated 30 March 2005

Whereas:

I.

PROCEDURE

(1) On 17 February 2004,

the Commission registered a
complaint
from Vtesse Networks Ltd (‘Vtesse’), a UK
telecommunications operator, concerning alleged preferen-
tial tax treatment in favour of B T plc (‘BT’), the incumbent
telecommunications operator in the United Kingdom.

(2)

By letter dated 19 January 2005, the Commission informed
the UK authorities that it had decided to initiate the formal
investigation procedure laid down in Article 88(2) of the EC
Treaty in respect of the measure at issue (‘decision to initiate
the procedure’). The Commission decision to initiate the
procedure was published in the Official
the
European Union on 12 March 2005 (2). The Commission
called on interested parties to submit their comments on
the measure.

Journal of

(3)

Following the extension of the deadline, the UK authorities
responded by letter of 4 April 2005 to the request for
comments in the decision to initiate the procedure.

(4)

The Commission received comments from the following
interested parties:

— AboveNet Communications UK Ltd.
received by letter dated 29 April 2005

(‘AboveNet’),

— Altnet Task Force (‘Altnet’), received by letter dated

2 May 2005

(1) OJ C 62,12.3.2005, p. 10.
(2) See note 1.

— Easynet Group Plc. (‘Easynet’), received by letter dated

3 May 2005

— Gamma Telecom Ltd.,
1 December 2005

received by letter dated

— Hutchinson Network Services UK Ltd. (‘Geo’), received

by letter dated 6 May 2005

— Global Crossing Ltd., received by letter dated 6 May

2005

— GVA Grimley, received by letter dated 27 April 2005

— Kingston Communications Plc, received by letter dated

29 April 2005

— NTL Group Ltd., received by letter dated 29 April

2005

— Telewest Broadband Ltd., received by letter dated

28 April 2005

— Thus Plc., received by letter dated 4 May 2005

— UK Competitive Telecommunications Association
(‘UKCTA’), received by letter dated 25 April 2005

— Vanco Ltd., received by letter dated 19 April 2005

— Viatel (UK) Ltd., received by letter dated 6 July 2005

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— Vtesse, which provided comments

and further
information by letters or e-mail dated 28 January
2005, 4 February 2005, 16 February 2005, 22 Feb-
ruary 2005, 15 March 2005, 29 March 2005, 28 April
2005, 28 July 2005, 17 August 2005, 2 September
2005, 4 November 2005, 23 November 2005,
30 November 2005, 1 December 2005, 11 January
2006, 19 January 2006, 16 March 2006, 20 March
2006 and 8 July 2006

— Anonymous, received by letter dated 1 February 2005

(5)

(6)

The Commission forwarded these comments to the UK
authorities by letters dated 20 June 2005, 4 August 2005
and 9 August 2005, in order to give them the opportunity
to react. They provided their comments by letters dated
10 October 2005 and 22 November 2005.

the Commission asked
By letter dated 26 July 2005,
OFCOM,
the UK independent authority regulating the
telecommunications sector, to submit its comments on the
decision to open the procedure. OFCOM replied by letter
dated 21 September 2005. OFCOM provided further
information on 7 December 2005, 6 January 2006 and
21 March 2006.

(7) On 14 July 2005 and 4 October 2005, two meetings were
held with representatives of BT, which provided further
information on 23 November 2005 and on 23 March
2006.

(8) On 16 March 2005, 9 September 2005 and 4 July 2006,
three meetings with the UK authorities took place.

(9)

By letter dated 26 September 2005,
the Commission
requested further information from the UK Authorities, to
which they replied by letter dated 18 November 2005. They
provided further information on 23 November 2005,
23 January 2006, 21 February 2006, 13 March 2006,
21 March 2006, 27 March 2006, 20 April 2006, 2 May
2006, 4 July 2006 and 20 July 2006.

(10) On 23 November 2005, a meeting took place with Vtesse,

the complainant.

the Local Government Finance Act 1988 (‘LGFA 1988’). The
implementation of
the system is further regulated by
statutory instruments and case-law.

(12) The property unit that is valued for rating purposes is called
the ‘rateable hereditament’ and includes land, buildings and
rateable plant and machinery. Liability for the rates falls on
the person in occupation of the rateable hereditament, i.e.
the person who is in ‘paramount control’ of the assets,
defined by case-law as the actual, exclusive and non-
transient occupation of the hereditament, which brings
commercial benefits to the occupier.

(13) The tax rate, which applies equally to all business properties
is determined annually by the Secretary of State and applies
equally to all operators. It was set at 45,6 % for the fiscal
year 2004/5 in England and 45,2 % in Wales. The base of
this tax, the so-called rateable value,
is the hypothetical
annual rent at which the hereditament might reasonably be
expected to be let from year to year in an open market
transaction at a certain valuation date. The full statutory
definition is contained in Schedule 6 to the LGFA 1988. (3)

(14) The valuation of this hypothetical annual rent is carried out
by the Valuation Office Agency (‘VOA’), an executive agency
of
the Inland Revenue, part of central government.
Revaluations are carried out every five years. For the period
1995-2000, the rateable value is the hypothetical annual
rent of the property if available on the market on 1 April
1993, which is called the ‘antecedent valuation date’. For
the period 2000-2005, the antecedent valuation date was
1 April 1998 and for the on-going period 2005-2010, the
date was 1 April 2003. The lapse of time between the
antecedent valuation date and the date when the valuation
enters into force is meant to allow the VOA to carry out the
valuation based on actual evidence at
the antecedent
valuation date.

Valuation

(15) The VOA has a choice of four methods for calculating the
‘rateable value’,
i.e. the hypothetical annual rent, of the
hereditament, with a hierarchy between the different
methods according to the decision to initiate the procedure:

II.

DETAILED DESCRIPTION OF THE MEASURE

(a)

If there is direct and actual evidence of the property's
rent, the rental method is to be applied.

A.

Description of the measure

Rating system

(11) Business rates are a UK property tax levied on non-
domestic property. Its aim is to contribute towards the
costs of services provided by Local Authorities. The primary
legislation on non-domestic rating in England and Wales is

(b)

If direct rental evidence is not available, a comparison
with the rental evidence of other comparable proper-
ties can be made. This is the Tone of the list method.
For matters of convenience, both the rental method

(3) Available

at

http://www.opsi.gov.uk/acts/acts1988/Ukp-

ga_19880041_en_1.htm

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and tone of the list method, which both rely on
market rental evidence, will be referred to in this
decision as ‘rental method’.

(c)

to replicate,

typically utilities.

The Receipt and Expenditure (‘R&E’) method is to be
applied for properties that are seldom let or are
difficult
It seeks to
replicate the thought process that a putative tenant
might go through when assessing the profitability of a
commercial venture involving the renting of a
property. He would estimate his future receipts and
deduct his future costs. From that, he would deduct
the return he requires,
the rest representing the
maximum rent he would be prepared to pay.

(d) The Contractor's basis method is based on the
replacement costs of a business property: a putative
tenant would be unwilling to pay more as an annual
rent for a hereditament than it would cost him in the
way of annual interest on the capital sum necessary to
build a similar hereditament. This method is normally
used for hereditaments that are not let or do not
generate profits (e.g. hospitals).

Rating of telecommunications infrastructure

(16) Business rates are levied on telecommunications infra-
structure as on other non-domestic properties. The
Valuation for Rating (Plant and Machinery)
(England)
Regulations 2000 (4) lay down that plant and machinery
that are rateable for telecommunications infrastructure are
‘cables, fibres, wires, conductors or any system of such
items …, used or intended to be used in connection with
the transmission of communications signals’.

(17) Telecommunication property has been subject to business
rates since 1855. Following the privatisation of BT in 1984,
this tax was also levied on the latter's infrastructure, as well
as on Mercury Communications, BT's only competitor
during the duopoly situation of the 1980's. Initially, for the
1990-1995 period, the tax amount was determined by
applying a prescribed ‘standard formula’. When the
telecommunications industry was gradually opened to
competition, starting in 1992, the tax was levied on all
telecommunications infrastructures.

Application of the property tax to BT

(18) For the period 1995-2000, the VOA applied the R&E
method to BT. This valuation was adjusted following a
negotiated settlement with BT which had constructed its
own valuation on the Contractor's basis method and
appealed against
the original valuation to the Central
London Valuation Tribunal and then to the Lands Tribunal.

in 2000. The
BT and the VOA reached a settlement
outcome was an agreement to set the rateable value of BT's
network assets at GBP 445 million in England and GBP
25 million in Wales for the fiscal year 1995/1996. With a
multiplier of 43,2 %, BT's tax liability amounted to GBP
203 million for that fiscal year, which represented 2 % of
BT's relevant annual revenues.

(19) For the 2000-2005 period, the VOA settled BT's asset
valuation at GBP 467 million in England and GBP
26 million in Wales. The valuation was carried out on
the basis of
the R&E method and was based on the
principles and values agreed at the same time the 1995 list
was settled. For the 2005-2010 period, the VOA applied
again the R&E method to BT's network.

(20)

In principle, a review of the valuation takes place every five
years. However, in its decision to initiate the procedure, the
Commission noted that subsequent downward revisions
were made to reflect the loss of market share of
the
company in the UK fixed telecommunications market
resulting from the physical roll-out of competing tele-
communications networks. The decision to initiate the
procedure noted that no similar upward adjustment was
apparently made to reflect possible extensions or upgrades
of the network.

Application of the property tax to Kingston

(21) Kingston Communications plc (‘Kingston’) is the incumbent
telecommunications operator and the owner of the only
local access network in the region of Hull. During the
privatisation of most publicly-owned telecommunications
networks in the United Kingdom in the late 1980s, the
company remained the property of the municipality, until
the share capital was opened to the public in 1999. Hull
City Council remains the only substantial single share-
holder. Kingston was the only other telecommunications
operator valued under the R&E method.

(22) However, Kingston also owns a subsidiary, Torch Commu-
nications Ltd, which constructed a fibre backbone network
outside Kingston's local access network area (i.e. Hull
conurbation) and operates that backbone network as a
separate subsidiary. As a result,
the Torch backbone
network can be separately valued on the basis of the rental
method.

Application of the property tax to Vtesse

(4) S.I. 2000/540.

(23) Vtesse is the complainant. It is a ‘fibre to the business’
service provider offering high capacity retail leased lines,

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It directly
mainly supplied to large corporate users.
competes with BT's leased line offers. In order to connect
its customers, Vtesse leases ‘dark’ fibre from other backbone
operators and complements
this with its own built
infrastructure. The property rented from other parties is
included in the rateable hereditament of Vtesse. The VOA
has decided to rate Vtesse based on the ‘tone of the list’
method, which is then applied each time new fibre is rented
and lit.

(24) Based on benchmarks of actual rents paid, the VOA has set
the annual rate under the rental method at GBP 1 200 per
km of pair of optic fibre in the London metropolitan area
and GBP 1 000 per km in the other parts of the United
Kingdom for the 2000-2005 period. In addition, in 2001, a
so called ‘oversupply allowance’ was granted by the VOA to
fibre providers assessed under the rental method, equalling
a 15 % discount on the rateable value effective as of 1 April
2001 and 25 % as of 1 April 2002. This allowance was
meant to reflect the overinvestment in fibres during the
telecommunications boom of
the late 1990s and the
subsequent drastic reduction in value of these assets due to
physical oversupply. There is a further discount of 10 % for
networks over 3 000 km. Following these discounts, the
rental value of a fibre pair fell to GBP 900 per km in the
London area and GBP 750 per km in the other parts of the
country in the years 2002-2004. For the 2005-2010
period, the rental value of a fibre pair was set at GBP 600
per km in the London area and GBP 500 per km in the rest
of the United Kingdom. (5) According to Vtesse,
its tax
liability was around 7 % of its recurring revenues in 2003/
04.

(25) As to revisions, the tone of the list rate is applied to each
fibre which is rented and lit. Vtesse has the obligation to
regularly inform the VOA of extensions to its network so
that the valuation of its hereditament can be adjusted. As a
consequence, whenever it procures fibre to provide services
to its customers, Vtesse claimed that it is liable for rates that
may equal up to 20-30 % of the revenues of a new contract.

(26) As to the other

telecommunications operators in the
market, they are valued under the rental method, with the
exception of cable TV operators, which are valued on the
basis of a method derived from the contractor's basis
method. (6)

B.

Reasons for initiating the formal investigation

procedure

(27)

In its decision to initiate the procedure, the Commission
considered that the application of the property tax to BT

(5) The 2005-2010 rental value of optic fibre set by the VOA is the
object of an appeal, and could be lowered if the appeal is successful.
(6) They are actually valued on a rateable value per home connected.
This method is based on a contractor's valuation involving
decapitalised costs with end allowances to reflect penetration rates.

and Kingston could confer an advantage on these two
firms. They seem to benefit from a reduction of their tax
base as compared with the other competitors. This was
reflected by the fact that BT paid in the range of around 2 %
of
in tax, while Vtesse and other
competitors might have to pay in the range of around
7 %, and up to 20-30 % on an incremental basis.

revenues

relevant

(28) The decision to initiate the procedure expressed the view
that this apparently discriminatory taxation could be the
result of the application of a particular asset valuation
method to BT and Kingston, while the other telecommu-
nications operators are valued under the rental method,
again with the exception of cable TV operators, which are
valued on the basis of a method derived from the
contractor's basis method. The non-uniformity of
the
system and the discretionary powers which are given to the
VOA to apply the general provisions to specific operators
and which were used in the context of the settlement
negotiated with BT, may have resulted in a specific
advantage to BT and Kingston.

(29) The decision to initiate the procedure questioned the view
that the rental method could not be applied to BT's and
Kingston's hereditaments. It suggested that the rent received
by BT when renting out its own infrastructure could serve
as guidance for the value of the network. Moreover, BT's
retail business units effectively rent infrastructure and buy
network services from BT Wholesale Ltd. (‘BT Wholesale’),
the business unit that manages BT's infrastructure: the
internal transfer prices between BT's retail business and BT
Wholesale could provide a basis for estimating the rental
value. Moreover,
liberalisation and network element
unbundling have resulted in a variety of wholesale products
which could serve as benchmarks for valuing the rental
value of the various infrastructure elements of BT's and
Kingston's networks. As to the argument that there is no
network nearly as large or diverse as BT's whose rental
value could serve as benchmark, the decision to initiate the
the taxation of cable TV
procedure suggested that
companies, which are also active in the telecommunication
market, could serve as a benchmark.

(30) As regards the application of the R&E method itself, the
Commission noted that this method estimates the rental
value of the assets concerned on the basis of the revenues
derived from the use of these assets. The result would
therefore depend on the level of profitability with which
these assets are used, which could lead to results that

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penalise operators whose assets are valued under a different
method. The Commission questioned whether the neces-
sary adjustments were made when applying the R&E
method to BT and Kingston in order to assume that their
assets are used at capacity and profitability. The Commis-
sion also enquired how the universal service obligations are
taken into account in the valuation of BT.

(31) The decision to initiate the procedure further questioned
the method used for revisions of the rateable value. It noted
that BT seems to enjoy a downward revision mechanism,
while there does not seem to be a similar systematic review
faced by competitors. The
of
apparent failure to take into account the increase in the
value of BT's infrastructure between two five-year review
periods while charging competitors incrementally as the
value of
their network increases appears to confer an
advantage on BT.

the market conditions

(32) Finally, the decision to initiate the procedure underlined the
fact that the VOA apparently enjoyed broad discretionary
powers, which enable it
It
underlined that the settlement reached with BT should
respect the principle of non-discrimination, and should not
unduly discriminate among operators.

to negotiate settlements.

III.

COMMENTS FROM INTERESTED PARTIES

A.

Comments from interested parties other than BT and

Kingston

(33) The comments submitted by interested parties other than
BT and Kingston generally support
the
application of the property tax to BT and Kingston may
give them an advantage.

the view that

(34) Vtesse first pointed out that, after the decision taken in
March 1998 by the Valuation Tribunal which confirmed
that the R&E method had to be applied to BT's network and
that its rateable value was GBP 553 000 000 for England
and Wales, BT appealed the decision before the Lands
Tribunal. Before the appeal was heard, BT and the VOA
settled the valuation at GBP 470 000 000, which represents
a 15 % reduction compared to the initial valuation. Vtesse
suggests that BT and the VOA settled a final amount and
that the VOA adjusted the numbers to match the agreed
result.

(35) Vtesse put forward new elements that tend to show that the
hereditament of BT is under-valued under the R&E method.
Thus, supposing that the rateable value of BT's whole
network (7) was attributed to its optic fibre network

(7) GBP 554 100 000 in 2005 for England and Wales.

(7 300 000 km in 2005), the annual rateable value per km
of fibre would be GBP 74. According to Vtesse, this figure is
to be compared to the annual rateable values of GBP 1 000
and GBP 1 200 per km of optic fibre pair for telecommu-
nication operators that are assessed under
the rental
method. Similarly, setting the value of BT's optic fibre to
zero, and given that BT has 29 million final users
connections,
the annual rent per line would be GBP
18,57. This figure is to be compared with the annual GBP
122 paid by telecommunication operators for access to BT's
unbundled local loops (8).

(36) Vtesse also notes that, in 2001, BT transferred the leasehold
and freehold of most of its property portfolio to ‘Telereal’, a
joint venture between Land Securities and the Williams
Pears Group for GBP 2,4 billion. The deal
involved
5,5 million sq m in total. Following the deal, BT paid
GBP 190 million in annual rents for the freehold plus GBP
90 million for the leasehold in 2001. On the basis of this
transaction, Vtesse concludes that BT pays GBP 35 per sq m
in rents for its buildings, while, according to Vtesse, other
telecommunication operators are rated on average at GBP
115 per sq m on their commercial property. Vtesse asserts
that the actual rent paid in 2001 by BT for its buildings to
Telereal, i.e. GBP 280 million, represented more than 50 %
of its rateable value that year, despite the fact that most of
this rateable value should be mainly attributable to its
network and not to its buildings. Vtesse seems to imply that
this is evidence that BT's network is undervalued under the
R&E method.

(37)

submission,

In Vtesse's
the discrepancy between the
rateable value of the different components of BT's network
and those of the networks of the other telecommunication
operators proves that the R&E method has resulted in a
lower valuation of BT's hereditament than would have been
achieved under the rental method.

(38) Vtesse provides further elements to compare the respective
burden of business rates on BT and on other telecommu-
nications operators. Vtesse advocates the rates/receipts
ratio, which allegedly amounted to 13,46 % in its case in
2004. It claims that this ratio must be adjusted in order to
allow direct comparison with BT. According to Vtesse, since
most operators pay significant fees for the carriage and
termination of traffic and since those connection fees do
the fees should be
not relate to their rateable assets,
deducted from their receipts when calculating their rates/
receipts ratio. This view is supported by Gamma Telecom

(8) The local loop is the last mile connection linking the final customers
to the local telephone exchange. BT has to provide access to these
local loops to its competitors, at regulated conditions.

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for

the same reasons, argues

the most
which,
appropriate ratio for comparing the respective burden of
business rates should be the rates/added value ratio.

that

(39) Furthermore, Vtesse compared the prices of BT's Wholesale
Extension Services (‘WES’) with the rates that an operator
valued under the rental method would have to pay if it were
lighting optic fibres for the purpose of providing the same
service. Depending on the capacity and distances of the
WES, Vtesse claims that such an operator could have to pay
rates worth up to 87 % of the price charged by BT. Vtesse
considers that this is further evidence of the fact that BT's
optic network is undervalued: if its network were valued in
the same way, BT should charge more for its WES in order
to cover the real costs of the business rates.

(40) Vtesse also makes the claim that the rates/receipt ratio is
particularly high for new entrants such as Vtesse. More
established firms can load up fibres with as much traffic as
possible in order to amortise the rental and tax costs over
as many customers as possible. BT is not subject to this
constraint because allegedly it is not taxed marginally. That
means that, for established firms, the rates/receipts ratio will
decrease in the long run.

(41) On the question of marginal taxation, Vtesse emphasises
that the disadvantage that it suffers stems from the fact that
BT is rated as an indivisible network, while Vtesse is rated
on each individual metre of optic fibre cable that it lights. It
considers that the unit of analysis should be the individual
contract in the market, on which Vtesse and BT compete.
Vtesse gives more precise figures on the impact of these
differences in marginal taxation of contracts: taking the
example of
the
provision of backbone and access telecommunication links,
Vtesse claims that its rates liability on that bid represented
16 % of its revenue. On the same bid, Vtesse claims that BT
was not taxed marginally, or was taxed, at most, at the
average of 2 % of revenues, which BT allegedly pays in rates.
That difference would explain why Vtesse lost the bid to a
consortium involving BT.

the bid launched by Kent MAN for

(42) Vtesse also notes that BT has recently rented some 2 000
route kilometres of optic fibres on the network of Geo, one
of Vtesse's suppliers, probably on the same commercial
terms as Vtesse. In Vtesse's view, BT should be considered in
occupation of these fibres. Vtesse questions whether this
extension of BT's network was taken into account in its
valuation, and suggests that BT should have been assessed
on similar terms as Vtesse when it rents fibres from the
same operator.

(43) The Altnet Task Force, which represents a number of
alternative fixed-line telecommunication operators, submits

that the R&E method should only be applied to regulated
monopolies with little comparable rental evidence.
It
considers that the VOA had ample evidence of rental value
to evaluate BT on a rental method, such as BT's wholesale
line rental tariffs or its published prices for Local Loop
Unbundling products which could be used to evaluate the
rental value of its copper cables. It also considers that the
rental method has an incremental effect on the operators'
tax liabilities. No such effect occurs under the R&E method,
since the value of
the infrastructure is established in
advance and therefore BT's decision to light dark fibres is
fiscally neutral. According to Altnet, the effects of these
distortions were made worse by the fact that the settlement
reached by BT and the VOA was perpetuated for two
valuation periods, which gave a substantial advantage to the
incumbent, in terms of increased certainty, while Altnet
firms are facing costly and outstanding appeals and
negotiations. Altnet claims that BT faces 74 % of the total
tax burden, in relation to telecommunications networks,
while its market share is at least 80 %.

(44) Global Crossing confirms that incremental taxation (i.e. on
newly lit fibres) favours BT since, when Global Crossing
illuminates a new fibre, the incremental taxation liability is
incurred on the entire length of
from its
customer's site to its core network nodes. Global Crossing
claims that
the
unfavourable taxation treatment.

it has lost business to BT because of

the circuit

(45) Thus plc and Viatel (UK) Ltd. also claim that they face
incremental tax liability as a result of connecting new
customers' sites to their networks, while BT, their main
competitor, does not incur such an incremental tax liability.
Above Net makes the same claim, indicating that it lost
business to BT, possibly because of BT's alleged lower
taxation

(46) UKCTA, a trade association representing the interests of
fixed-line communications operators competing against BT
for voice and data services, expressed the view that the
property taxation system is severely lacking in transparency,
since it is characterised by confidential bilateral deals agreed
between network operators and the tax authorities. UKCTA
considers that the settlement reached by BT has provided it
with ten years of certainty and stability, while other
operators did not benefit
level of
predictability. It notes that the property tax system has
entrenched BT's dominant position, since taxation has been
more affordable to BT and has therefore impaired new
entrants' ability to compete fairly, and since BT, unlike other
competitors, does not face direct increases in business rates
following a
liability for lighting more fibres. However,
request from the Commission, UKCTA indicated that it was

from a

similar

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impossible to indicate what Altnet operators might have
had to pay in rates, had they been assessed on the same
basis as BT.

(50) Although BT is valued under a different method, there is no
discriminatory treatment between BT and other ratepayers:
the statutory test is the same, and all methods aim at
assessing the hypothetical rent at which it is estimated that
the business property in question might reasonably be
expected to be let from year to year.

(47) GVA Grimley, consultants in the field of business rates for
telecommunications companies, criticise the application to
BT of an adjustment mechanism which reflects change in its
market shares and whose application is opaque. GVA
Grimley claims that for all other hereditaments valued
under the R&E method, normal practice is for there to be a
five yearly revaluation without a market share mechanism.
they question the way this market share
Furthermore,
adjustment mechanism is applied to BT, noting that it is
difficult to see why BT's rateable value should have been
declining from 1995 to 1999, in a context of improving
turnover and profit. They further claimed that the VOA
declared that a pair of unbundled copper wires had a
rateable value of circa GBP 50, while BT's local loops are
valued at around GBP 16 (dividing BT's total rateable value
by the number of
loops). The discrepancy would
indicate that BT's network is undervalued.

local

(48) Some of the respondents already mentioned and others,
such as Telewest Broadband, Cable and Wireless, or
Easynet, raise other issues that concern business rates, but
do not appear to be directly related to the facts described in
the decision to initiate the procedure. For instance, some of
those firms are concerned about the possible application of
the property tax treatment in the context of local loop
unbundling. They also complain about the fact that the
business rates are set at too high a level (9), which represents
an impediment to investment, and that a period of five
years is incompatible with the structure and pace of
technological change in the telecommunications indus-
try (10). One firm also claims that some competitors are not
rated (11).

B.

Comments from BT and Kingston

Comments from BT

(49) BT first explained that, contrary to what is claimed in the
opening decision, there is no accepted hierarchy between
the valuation methods, and no principle that the rental
method,
the most
rental evidence is available,
appropriate method. The method which the VOA uses is
dictated by the nature of the property being assessed and by
available evidence. Thus, there is not discretion for the VOA
as to the choice of method.

is

if

(9) Comments from Cable and Wireless, Telewest and Viatel.
(10) Comments from Telewest.
(11) Comments from Easynet.

(51) BT claims that there is no evidence that the rateable value
assessed for BT's hereditament has given BT an advantage in
the form of a reduced tax base compared to competitors.
The only evidence the Commission has provided to support
this allegation is a comparison of rateable values with
respect to turnovers.

(52) BT further submits that the VOA correctly concluded that
the R&E method was the only appropriate method to value
BT's network, mainly because of the lack of rental evidence
to estimate the rateable value of BT's hereditament as a
whole. Neither
rental
evidence (13) was available at the time of the 1995 and
2000 valuations.

loop (12) nor wholesale

local

in 1995.

the VOA:

(53) BT denies that there was any bias in the appeal system or in
its application to BT. Everybody has a right to appeal and a
possibility to settle. The valuation of BT's network was the
object of an appeal
Its settlement before the
Valuation Court was not unusual, and does not imply
the possibility of
discretion on the part of
reaching a settlement does not relieve the VOA of
its
statutory duty to determine the annual rental value of the
hereditament under the hypothetical tenancy. According to
BT, it is also wrong to say that the 1995 valuation also
served as a basis for determining the 2000 values and
conferred ten years of certainty on BT: the settlement
concerning the 1995 valuation only took place in 2000
because of delays in the legal proceedings. Thus, BT was
subject to five years of uncertainty as regards the 1995
valuation. The 2000 list was settled at the same time.

(54) BT explained that in the course of the five-year period,
revisions of the valuation can take place in cases of ‘material
share
changes
adjustment mechanism was seen as an efficient means of
reflecting, on an annual basis,
these
MCCs (14).

(‘MCCs’). A market

in circumstances’

the net effect of

(12) The first local loop unbundling rental tariff applied from 31 May
2001, considerably after the relevant antecedent valuation dates of
1 April 1993 and 1 April 1998.

(13) The first set of regulatory accounts that reflected transfer charges for

BT's access services were produced for the year 2001/02.

(14) The details of this market-share based mechanism are explained in

the description of the comments from the UK Authorities.

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(55) Therefore, BT explained that the Commission's decision to
initiate the procedure was wrong to claim that any increase
in the value of BT's infrastructure is not taken into account:
in fact, BT has been subject to upward as well as downward
revisions, depending on whether factors increasing BT's
value outweighed decreasing factors (15).

(56) According to BT, the revision system applicable to Vtesse
appears to be based on the same principles, albeit on a
different manner: newly occupied fibres become an
additional part of its hereditament and are valued as part
of it. In the case of Vtesse, market share is not a suitable
means for assessing changes in rateable value since any
changes are likely to be imperceptible due to Vtesse' small
market shares.

(57) Finally,

if the Commission were to decide that BT did
receive State aid, BT submits that the Commission could
not order recovery because of BT's legitimate expectation
that any such aid was lawful, or, alternatively, that it would
constitute existing aid.

Comments from Kingston

(58) Kingston claims that the Commission has not established
the existence of an advantage, either by showing that BT
and Kingston have benefited from a selective reduction in
the burden of tax, or by showing that other operators face
an exceptional
in the case of
Kingston, the Commission has no idea how it has been
rated.

It notes that

increase.

(59) Kingston considers that the only evidence that an advantage
may have been granted to BT is the difference in the rates/
revenue ratio between BT and Vtesse. However, this ratio is
irrelevant in the case of property tax, which is not a tax on
revenues. For such ratio to be relevant, Vtesse and Kingtson
or BT should be directly comparable firms, which is not the
case given the differences in size, turnover and economic
activities. Finally, it estimates Vtesse's ratio at 0,39 %, while
its own rates/revenue ratio is allegedly at 4,5 % (16).

(60)

It denies that the existence of several methods bestows a
selective advantage on Kingston. The VOA has, in its view,
some discretion in the valuation process, but this is not
unfettered discretion: the nature of the hereditament and
the nature of the evidence determine its choice, which is
further constrained by a considerable body of case-law. It is
not possible to demonstrate that the R&E method favours
Kingston or BT, since the rental method is not applicable to

(15) Thus, in 2003, BT's rateable value in England was increased from
GBP 443,5 million to GBP 447,5 million. In 2004, it was increased
in England to GBP 450,6 million.

(16) Kingston' hereditament in the Hull conurbation area which was
assessed under the R&E method was valued at GBP 5,1 million in the
2000 list. Kingston claims that the turnover derived from that area
was approximately GBP 50 million. Applying the appropriate
multiplier of 44 %, this would result in a revenue/rate ratio of about
4,5 %.

them, while the R&E method is not applicable to Vtesse,
since it is not profitable.

(61)

It further submits that there is no demonstration of a
distortion of competition, with no reference to the other
operators that compete with Kingston. As a subsidiary legal
submission,
it suggests that any potential aid granted
through the application of the UK rating system would be
existing aid.

IV.

COMMENTS FROM THE UNITED KINGDOM

(62) The UK authorities submit

that

the rates system is a
uniform statutory system, applicable to all non-domestic
hereditaments in England and Wales, which aims at
establishing a common yardstick, by which to assess the
value of the premises. This yardstick is the rent at which it is
estimated that the hereditament might be expected to be let
from year to year, under certain statutory assumptions
concerning the state of repair of the hereditament and the
terms of the hypothetical tenancy.

(63) This value is established by the VOA, which employs
professionally qualified chartered surveyors, and is required
by law to exercise its expertise independently. Its decisions
are subject to the independent scrutiny of the Valuation
Tribunal, and upwards to the Lands Tribunal and the Court
of Appeal.

(64) The UK authorities further explain that, in order to value
this hypothetical rent, the VOA can use several methods.
These valuation methods have the same objective, namely
the ascertainment of the hypothetical tenancy and should
all, properly applied, yield the same result. The existence of
several methods is meant to cater for the wide range of
circumstances to which rates are applied. The selection of
the appropriate valuation method is not a discretionary
decision: it will depend on the nature of the hereditament
and the nature of the available evidence. Thus, for instance,
for
if
occupation, the R&E method is not applicable and the
VOA is likely to judge that the most appropriate method is
the contractor's basis.

there is no profit motive (hospitals,

schools)

4.1.

Choice of the method applied to BT and

Kingston

(65) The UK authorities explain that the R&E method was the
only one that was available to assess BT's and Kingston's
team of
hereditament. They claim that

the VOA's

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independent experts (17) that worked on assessing their
hereditament concluded for all valuation periods, including
2005-2010, that there was not enough evidence to assess
the rateable value of BT's and Kingston's networks on the
basis of the rental method. This finding was accepted by the
Valuation Tribunal in the case at hand (18). They further
claim that the R&E method is the only one that could
reflect the unique advantage of ubiquity which BT enjoys.

for

(66) The UK authorities claim that the rental method was not
applicable to BT and Kingston. On this point, they first
emphasise that the question of the availability of rental
evidence has to be assessed at the time when the valuation
was conducted. Thus,
the possibility of
applying the rental method for the period 1995-2000
can be considered only on the basis of information that was
available at the ‘antecedent valuation date’, i.e. 1 April 1993.
Therefore, the UK authorities claim that third parties and
the Commission are wrong to assume that market evidence
that is now available is relevant to the question as to
whether the 1995 and 2000 lists could have been compiled
on the basis of the rental method.

instance,

(69) As to the 2005 list, the same remarks as above apply. The
UK authorities also deny that, contrary to the suggestion
made by Altnet, tariffs for local loop unbundling provide
any rental evidence on the basis of which BT's hereditament
could have been assessed. For instance, the Wholesale Line
Rental (WLR) tariff was available from August 2002. It is a
product which BT is obliged to provide
to other
telecommunications operators, and which enables them
to offer both line rental and calls to customers over BT's
local network. However,
the payment made by the
telecommunications provider to BT is not equivalent to a
rent for the local network. It is a payment for a service,
since BT has to provide, inter alia, maintenance of the line,
exchange accommodation, billing and R&D, fault repair,
the UK
pair gain equipment, and power. Therefore,
authorities claim that, contrary to Vtesse and Altnet's
assumption, it cannot be equated with a rent per line for the
local loops. They come to the same conclusion with respect
to the Calls and Access tariff, which was a precursor to the
WLR product, was available from 1998 and covered the
same services as the WLR. Furthermore, BT's wholesale line
rental tariff and local loop unbundling fee are regulated by
OFCOM. They are not open market rents and as such little
weight can be given to these tariffs as evidence of rental
value (19). Therefore, the VOA claims to have no rental
evidence on the essential parts of the networks of BT and
Kingston, i.e. their local access networks.

the procedure,

(67) Therefore, with respect to the 1995 lists, only information
available in 1993 could be taken into account.
In its
the Commission
decision to initiate
suggested two possible sources of rental evidence: either
the rent
its own
received by BT when renting out
infrastructure or transfer prices between BT's retail business
and BT's wholesale business. The UK authorities claim that
neither of those approaches was available to the VOA in
1993. In 1993, BT was not renting out any significant part
of its infrastructure and it was not structured in a way that
separated its retail and wholesale businesses.

(68) Concerning the 2000 list, based on information available in
1998, the UK authorities admit that by that date, there was
limited rental evidence from fibre optic networks which
started to be provided to operators under
so-called
Indefeasible Rights of Use (IRU) contracts. However, that
evidence was limited and applied only to fibre optic
networks used for carriage of high volume services, and was
therefore relevant to an extremely limited proportion of
BT's hereditament. They also admit that there were separate
the access
retail and wholesale divisions in 1998, but
business, which is an essential part of BT's activities, was
operated on an ‘end to end’ basis with no transfers to the
other divisions. Therefore, transfer payments could not be
used to value the whole of BT's network.

(17) These included specialist consultants from National Economic
Research Associates (NERA), who were commissioned by the VOA
to prepare a model providing an estimate of BT's future revenues and
operating costs.

(70) Furthermore,

the UK authorities explained that rental
evidence used when applying the rental method to
telecommunications operators other than BT and Kingston
cannot be used to value the hereditament of these two
firms. BT and Kingston, on the one hand, and other
telecommunication operators, on the other hand, are not
remotely comparable. The networks of BT and Kingston are
primarily local access networks,
serving millions of
individuals in the case of BT, while the networks of most
other
telecommunication operators are primarily core
networks serving a small number of high value, high
is
volume customers. The value of a hereditament
influenced by a number of factors including its function,
its physical layout, its extent and the regulatory environ-
ment under which it operates. Thus, given the differences in
the hereditaments and the lack of comparability, rental
evidence from telecommunications operators, for instance
on their optic fibre network, cannot be applied directly to
BT/Kingston. For the same reasons, the UK authorities

(18) British Telecommunications plc v Central Valuation Officer, 19 March

(19) The UK authorities quote Poplar Union Assessment Committee v Roberts

1998.

[1922] 2 AC 93

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claim that, contrary to the suggestion made by the
Commission in its decision to initiate the procedure, rental
evidence from Cable TV companies cannot be applied to BT
or Kingston.

Valuation of BT

(71) As to the suggestion that parts of BT's hereditament could
have been valued by reference to rental evidence derived
from other networks and then on an R&E method for the
remainder, the UK authorities claim that such an approach
was not feasible. Such an approach would pre-suppose that
there are distinct physical parts of the BT network for each
of the different businesses in which BT is engaged. However,
the UK authorities note that according to British case-law
rates (20), contiguous
on the application of business
property in the same occupation,
such as BT's and
Kingston's networks, must be valued as a single heredita-
ment. Disaggregating property in single occupation would
introduce valuation distortions, since the sum of the value
of the parts of a property rarely equates to the value of the
whole.

(72) More specifically, to seek to disaggregate BT's core trunk
route, high volume, fibre optic network, which competes
with Vtesse's business, and to assess its rateable value by
reference to rents paid by competing telecommunications
is because that same
providers is not possible. That
infrastructure is also used by low volume telephony
services provided to BT's 29 million domestic customers.
BT's or Kingston's networks are physically incapable of
being divided into self-contained units capable of being
separately let or occupied, by reason of their physical and
functional integration.

(73)

In any case, even if it were possible to value separate parts
of BT's and Kingston's hereditaments and value them under
a different method than the R&E method, the problem
would remain of how to value the remainder, since the R&E
method can be applied only in respect of the whole of
those undertakings' networks.

4.2.

The application of the R&E method to BT and

Kingston.

(74) The UK authorities provided detailed explanations on the
way the R&E method is applied to BT and Kingston.

(20) See for instance Brewin (VO) v Railway Executive (1952) 45 R&IT 553

(75) The valuations are carried out by independent experts in
accordance with the general rules on the application of the
R & E method (21). Although the modelling and the
resulting calculations are complex,
the following para-
graphs provide a brief overview on how the valuation was
done for the 1995-2000 period.

(76) The R & E valuation takes the expected receipts, which are
relevant to the rateable occupation of BT's hereditament,
and deducts the relevant expenses. Specialist consultants
(National Economic Research Associates — NERA) were
commissioned by the VOA to prepare a model to provide
an estimate of future revenues and operating costs over a
five-year period arising from occupation of the BT Central
List hereditaments in England & Wales, together with the
remainder of
the network in Scotland and Northern
Ireland. A summary description of the NERA model and
underlying spreadsheets for the 1995, 2000 and 2005
valuations were submitted by the UK authorities.

(77) The objective of

the NERA model was to predict the
revenues and operating costs likely to arise from the BT
network throughout the United Kingdom, in the context of
the rating hypothesis over a five year period. That
hypothesis envisages a letting of the rateable portion of
the BT network at 1 April 1993, but having regard to its
physical state and that of competing networks and the
remainder of the physical environment as at 1 April 1995.
The NERA model proceeded from the basis of actual
revenues and operating costs, arising in the year preceding
the antecedent valuation date, as these would be known to
the bidders for the hypothetical tenancy. Observations of a
long series of past statistics were used to derive elasticities
which were used to forecast movements in the total
telecoms market and BT's share thereof over a five-year
period.

(78)

In the case of BT, the VOA decided to use forecast costs and
revenues over a five-year period rather than the usual one-
year period. The UK authorities explained that in certain
circumstances, the application of the R&E method may
involve considering levels of profitability over a number of
future years if performance over a single year is not likely to
In the case of BT, the VOA
be typical of
anticipated that, viewed from the antecedent valuation date
(‘AVD’), the future pattern of profitability would be affected
by the prospect of increased competition, regulatory price
control, a significant growth in competitors' networks and
changes in the types of services offered. For these reasons,
an approach based on anticipated profitability over a five

the future.

(21) The Receipts and Expenditure Method of Valuation for Non-
Domestic Rating, A Guidance Note — July 1997. Published by the
Royal Institution of Chartered Surveyors (RICS).

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that a
year period was necessary to value the rent
hypothetical tenant, looking at the AVD, would be ready
to pay for BT's network over that period (22).

throughout the year. The present value of each year's cash
flow (at 16,2 %) is then summed up and divided by the sum
of the present value factors (equalling 5 years purchase at
16,2 %).

(79) Having anticipated receipts and operating costs over five
years, the next stage in the R&E valuation is a deduction of
the hypothetical tenant's estimated capital expenditure over
the five-year forecast period on items which do not form
part of the hereditament, but which are necessary in order
to earn the forecast receipts. These items fall
into two
categories: (a) non-rateable plant & machinery required to
be procured during the five year period, whether as
replacement for existing equipment or otherwise; and (b)
additions to the network not in existence at 1 April 1995,
but which are forecast to be made over the five-year period.

(80) The next step is the predicted change in working capital
over each of the five years of the forecast period. The
annual change is deducted from receipts net of expenses
and the capital expenditure described above. This produces
a divisible balance representing the total of rent and the
tenant's required cash flow. The next step is the estimation
of the tenant's required cash flow.

(81) This is the tenant's required return on his capital at the
commencement of the year, adjusted for change in that
capital over the course of the year. The tenant's capital at
the commencement of the hypothetical tenancy consists of
working capital and tangible assets, namely non-rateable
plant and machinery. The change in the tenant's total
capital is estimated for each year. Changes in tangible asset
values will occur each year as a result of changes in
replacement asset costs, depreciation of existing assets, and
acquisition of new or replacement assets, and these changes
have been forecast over a five-year period.

(82) The tenant's required return was taken to be 16,2 % in
nominal terms (23). This is an estimate of BT's weighted
average cost of capital (‘WACC’) in nominal pre-tax terms at
1 April 1993 — the relevant antecedent valuation date. In
this way the tenant's required cash flow at the year end is
computed. Since receipts, expenses and capital expenditure
are incurred throughout the year, just as rent is payable
the year-end required cash flow is
during the year,
expressed in mid year terms by applying a present value
factor for 6 months at 16,2 %.

(83) The tenant's required cash flow is deducted from the
divisible balance, leaving a residual cash flow for each year,
since that cash flow arises from transactions taking place

(22) It must be borne in mind that, although the hypothetical tenancy
must be from year to year, it must not be assumed that it will last
only for a year. On the contrary, it must be assumed that there is a
reasonable prospect of continuance. See R v. South Staffordshire
Waterworks Co (1865) 16 QBD 359 at 370.

(23) 12,27 % in real terms.

(84) The result, GBP 700 636 855, represents the estimated
rental bid which the hypothetical tenant could afford to
make in order to retain a return of 16,2 % on the capital
investment which he would of necessity make in order to
generate the receipts upon which his bid would be
predicated. The penultimate stage of the valuation involves
the apportionment of the UK ‘cumulo’ value of over GBP
700 million to England and Wales. In the absence of any
direct evidence of telecommunications traffic in each of the
countries of the United Kingdom, it has been assumed that
the apportionment most likely to be accurate should have
regard to the distribution of economic activity between the
constituent parts of the United Kingdom. On the basis of
this evidence, 84,8 % of the UK ‘cumulo’ was apportioned
to England and 4,2 % to Wales.

(85) The resulting figures include a number of properties which
are owned and occupied by BT but not included in the
Central List hereditaments. These properties were capable
of being valued directly on the basis of the rental method
and separately assessed at GBP 149 167 870 in England
and GBP 3 822 485 in Wales. The final stage of
the
those separately
valuation involves the subtraction of
assessed rateable values in order to arrive at the final
rateable value for the Central list hereditaments, which was
GBP 445 million in England and GBP 25 million in Wales.

(86) The same method was applied for the following two
valuation periods, using as a basis BT's actual accounts for
the year 1997/98 for the 2000-2005 period, and for the
year 2002/03 for the 2005-2010 period. The VOA used a
tenant's required return of capital investment of 14,25 %
for the 2000-2005 period and a required return of 12,25 %
for the 2005-2010 period,
this decrease reflecting the
evolution of inflation.

(87) The application of the R&E method to BT has resulted in

the following rateable values since 1995:

List

England

Wales

1995-2000

GBP 445 million

GBP 25 million

2000-2005

GBP 467 million

GBP 26 million

2005-2010

GBP 530 million

GBP 24 million

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(88) On the specific question of the 1995-2000 valuation, the
UK Authorities acknowledge that the application of the
R&E method to BT for that period was the object of a
settlement, following more than five years of litigation and
subsequent negotiations. The VOA is entitled to settle,
the
which is common practice in the application of
property tax (24). It cannot reach a settlement on a basis that
does not
the
the correct
hereditament concerned. The UK Authorities emphasise
that the settlement concluded with BT confirmed that its
hereditament was to be valued on the basis of the R&E
method rather than the contractor's basis method, which
was favoured by BT, and that it resulted in a rateable value
that was significantly higher than the value BT contended
for.

rateable value of

represent

(89) Concerning the allegation made by Vtesse that, after the
decision of the Valuation Tribunal (25), the VOA and BT
settled on a rateable value of BT's network that was 15 %
lower than the initial valuation made by the VOA, the UK
authorities explained that the difference can be accounted
for by the fact that the valuation carried out after the
Valuation Tribunal's decision was the product of a more
thorough analysis. When preparing the first valuation,
which was presented before the Valuation Tribunal, the
VOA and its economic consultant NERA were not able to
obtain full details of BT's historic revenues, prices, volumes
and costs since, in particular they did not have the tools to
force disclosure of this information by BT. BT appealed to
the Lands Tribunal against the decision. The Lands Tribunal
hearing is a de-novo hearing (26). Furthermore, at that stage
the VOA could issue information
of
injunctions and obtain disclosure of relevant information
by BT. In particular, for the 2000 valuation, the VOA and
NERA were able to obtain significant data which were not
available to them in 1997, such as a full breakdown of BT's
1992/3 revenues and costs, BT's five-year plan produced
before the AVD, and historic data on line and call volumes
and prices and leased line volumes and prices. This new
information affected all the main parts of the valuation,
including forecast of revenues and operating costs, future
capital expenditure and the hypothetical tenant's required
return.

the procedure,

— The VOA finally used a tenant's required return of
12,27 % in real terms, instead of 12,5 %, as initially
adopted by the Valuation Tribunal.

— Capital expenditure on the tenant's non-rateable assets
were
in
significantly revised downward,
particular to the information provided by BT's 1993
business plan, which was not available in 1997.

thanks

— The cost per redundancy was reduced from GBP

50 000 to GBP 33 900 in 1992/3.

(91) The factor with the main downward effect on rateable value
was the change in forecast of future receipts and costs. The
revised version predicted higher profits in the first year but
lower in the subsequent years, compared with the forecasts
used in the 1997 valuation. More precisely, these changes
can be attributed to the following elements:

— The X factor in price cap (27) in 1997/8 was changed
from - 4,5 % to - 7,5 % since the move to - 4,5 %
which took place in 1997 and was used in the 1997
valuation could not have been reasonably anticipated
at the AVD.

— The forecast for the annual reduction in access deficit
contribution per minute (28) was increased from - 3 %
to - 12 %, since the 1997 forecast did not
take
sufficiently into account the reduction in the size of
the access deficit as exchange line prices increased
faster than costs.

— In the 1997 valuation, the VOA and NERA assumed
that inland leased line prices would be rising with
inflation. This assumption was not supported by the
data on historic leased line prices which was
subsequently released by BT, and these prices were
assumed to remain constant in the context of the
2000 valuation.

— In the 2000 valuation, an allowance was made for

additional outsourcing costs.

(90) Some of the changes tended to increase the rateable value.

This was the case of the following factors:

(92) The combined effect of these factors meant that the final
valuation was lower than that which had initially been
calculated by the VOA in 1997.

(24) For instance, for the valuations of the 2000-2005 rating lists, there
were more than 1,17 million appeals, of which about 845 000 were
withdrawn or have been settled.

(25) See note 18.
(26) The appeal to the Lands Tribunal

involves a complete de novo
hearing over a period of 13 weeks before a panel of two surveyors
members and a QC. In contrast, the Valuation Tribunal featured a lay
panel and took a mere four weeks.

(27) BT's core retail

telecommunications

services were subject

to
regulatory price control. In a given year, the price change for BT's
regulated retail services was not allowed to exceed RPI-X, where RPI
is the annual percentage change in the whole economy retail price
index. The X factor was set by OFCOM. In 1992, OFCOM had
determined that the value of the X factor would be 7,5 % in each
year from 1993/4 to 1996/7.

(28) BT's access deficit is the loss it made in providing exchange lines.

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(93) Finally, on the point raised by the Commission in its
decision to open the procedure as to whether the R&E
method correctly takes account of the possible inefficien-
cies and lower profitability of the firms to which the R&E
method is applied, the UK authorities reply that valuation
proceeds on the assumption of an average level of
efficiency. Where there is evidence of
less than average
efficiency, the valuer using the R&E method must make
adjustments to the estimated fair receipts and expenses. The
UK authorities claim that there is evidence that BT has an
average level of efficiency (29) and no adjustment was
deemed necessary to make a correct valuation of their
hereditament. On the question of the universal service
obligations (‘USO’) and the way in which they are taken into
account in the valuation of BT, the UK authorities explained
that no specific allowance is made for such USO. The costs
of the USO are included in the overall predicted capital
expenditure for growing the network and in the overall
operating expenses. The increased revenues resulting from
the service of customers under the USO and from the brand
enhancement resulting from the USO,
it exists, are
included in the anticipated receipts.

if

Valuation of Kingston

(94) A similar but much simpler staged approach to the R&E
method was applied to Kingston. No model predicting the
the
turnover likely to be derived from occupation of
hereditament over a five-year period was prepared. The
reason for this is that
there are no networks serving
residential customers competing with Kingston in the Hull
conurbation area, no cable TV and little competition for
lines. Due to the more stable situation in
commercial
Kingston's Hull market,
it was decided that a five-year
projection was not necessary.

available in 1998 and 2003 gave a rateable value of GBP
5,1 million for the 2000-2005 period and GBP 7 million
for the 2005-2010 period respectively.

4.3.

Revision mechanism

(96) The UK authorities also provided explanations concerning
the revision mechanism applied to BT. They explained that
under Schedule 6 to the LGFA 1988 BT, like any other rate
payer,
is entitled to have its rateable value altered if a
material change in circumstances (‘MCC’) occurs during its
five year valuation period. The MCC is taken into account
as if taking place at the antecedent valuation date. In the
case of BT, MCCs take place every day, either because of the
extension of BT's network (upward effect) or because of the
roll-out of competing networks (downward effects) (30).
Theoretically, a valuation using the R&E method should
take place every year, taking into account how these MCCs
may have changed BT's five-year plan at the time of the
antecedent valuation date. In preference to this complex
method, the UK authorities and BT agreed on a proxy
method of adjustment, based on the evolution of BT's
market share in comparison with its market share in the
year preceding the commencement of the rating list, and
using data published by OFCOM.

(97) This market share was calculated by dividing the total of all
categories of BT's relevant revenues by the total of all
corresponding categories of UK market revenues for fixed
telephony. The relevant categories are: (a) local calls; (b)
national calls, (c) international calls, (d) calls to mobiles; (e)
other calls, (f) exchange line connections, (g) exchange line
rentals,
inland private leased rentals (this category
includes the market on which BT and Vtesse compete), (i)
inland private leased connections, (j) international private
leased circuits, (k) interconnect and (l) telex (in 1995 list
only) .

(h)

(95)

tenant might

Instead, for the 1995-2000 period, regard was had to actual
turnover and operating costs for the 3 years preceding the
it has been assumed that the
AVD and based on this,
hypothetical
reasonably anticipate a net
income of around GBP 9,5 million per year before rent.
The tenant's required return has been taken to be 12,5 % on
the value of the non-rateable assets (assumed to be GBP
64 million), giving a return of GBP 8 million to be deducted
from net
income. The residue of GBP 1,5 million is
available for rent and was set as Kingston's rateable value
that period. The same method, using the figures
for

(98) Taking the example of the 2000-2005 list, BT's market
share thus calculated was 68,47 % in 2000. The rateable
value of its hereditament was GBP 467 million in England
and GBP 26 million in Wales in 2000. For the subsequent
year, BT's market share had fallen to 65,03 %. The rateable
value for 2001 for therefore set at GBP 467 million
×65,03 %/68,47 % = GBP 443 million for England and GBP
26 million × 65,03 %/68,47 % = GBP 24,7 million for

(29) The UK authorities had regard to evidence from studies indicating
that BT is efficient. For example, when compared with US local
exchange carriers, which are generally regarded as being reasonably
efficient and for whom detailed cost and volume data is available, BT
is at or close to the upper decile in terms of efficiency.

(30) The matters

that can be considered as material changes of
circumstances are described in paragraph 2(7) of Schedule 6. These
matters include in particular ‘matters affecting the physical state or
physical enjoyment of the hereditament’, and ‘matters affecting the
physical state of the locality in which the hereditament is situated’.

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Wales. The following year, OFCOM data suggested a small
reduction of its market share, which however led to no
reduction of BT's rateable value. In the years 2003/4 and
2004/5, BT's market share increased to 67,6 % and 68,0 %
respectively. Compared to the benchmark market share in
2000 (31), it led to rateable values of GBP 447,5 million and
GBP 450,6 million respectively (32).

was undertaken for the 1995 and 2000 rating lists on the
basis that no competitors built networks in the Kingston
upon Hull conurbation area and that Kingston already had
a network coverage of almost 100 % in the area, so it did
not extend its network.

(99) This method gave the following results for the 1995-2000

and 2000-2005 periods:

4.4.

Existence of an advantage

BT

List

England

Wales

01.04.1995

1995

01.04.1996

1995

01.04.1997

1995

01.04.1998

1995

01.04.1999

1995

01.04.2000

2000

01.04.2001

2000

01.04.2002

2000

01.04.2003

2000

01.04.2004

2000

GBP 445 mil-
lion

GBP 412 mil-
lion

GBP 392 mil-
lion

GBP 366 mil-
lion

GBP 347 mil-
lion

GBP 467 mil-
lion

GBP 25 million

GBP 23 million

GBP 22 million

GBP 20 million

GBP 19 million

GBP 26 million

GBP
443,5 million

GBP 24,7 mil-
lion

GBP
443,5 million

GBP 24,7 mil-
lion

GBP
447,5 million

GBP 24,9 mil-
lion

GBP
450,6 million

GBP 25,1 mil-
lion

(100) For the 2005-2010 period, the UK authorities indicated
that, due to the lack of available data from OFCOM, the
revision mechanism applied for the first two periods will be
discontinued (33). In place of the former system, the UK
authorities intend to apply a full R&E method annually,
which will reflect all physical changes, including new lit
fibres, but
the economic conditions
existing at the antecedent valuation date (34). This system is
still being finalised.

in the context of

(101) In the case of Kingston, no revision mechanism was
applied. According to the UK authorities, no adjustment

(31) Using a revised market share for BT in 2000, following fresh data

provided by OFCOM. This market share was 70,5 %.

(32) […]. The VOA is contending that the loss of traffic to mobile
telephony is not a material change within the 2000 rating list.
(33) Since BT's position in the market has changed, OFCOM no longer
has the same competence as before to gather relevant market data.
(34) It means that the forecast will be that which would have been
anticipated looking forward from 1 April 2003, but on the
assumption that the physical environment (including the physical
extent of the network of both BT and other operators) was in the
same state as it actually was at the commencement of the year in
which the revision is made.

(102) The UK Authorities first emphasise that all valuation
methods should arrive at the same result: the hypothetical
rent that would be paid for the hereditament. Therefore, the
fact that a different method of valuation was applied to BT
and Kingston, on the one hand, and to the other
is not an
telecommunications operators, on the other,
indication that an advantage could have been granted to the
former.

(103) They are of the opinion that there are two means by which
the existence of a selective advantage could be demon-
strated:

a)

an R&E valuation of
Either by showing that
telecommunications operators other
than BT and
Kingston would have yielded a lower rateable value
than that derived from the rental method, so as to
demonstrate that
the R&E method is flawed or
systematically understates value;

b) Or by showing that, using correct and relevant
comparisons, other
telecommunications operators
had a disproportionately high rateable value when
compared with BT and Kingston.

(104) In order to establish point (a), it would be necessary to
carry out an R&E valuation of the other telecommunica-
tions operators in order to see whether comparable results
were obtained under the R&E method and under the rental
method. None of the telecommunications operators has
undertaken such an exercise and the UK authorities assume
that if indeed the valuation of their network had been lower
under the R&E method, members of Altnet and Vtesse
would have raised this point (35). As to the VOA, it does not
have these telecommunications operators' business plans.
Therefore, it is not in a position to assess their anticipated
receipts and expenditure deriving from the occupation of
their network, and determine the rent they would be ready
to pay for it under the R&E method.

(35) The UK authorities note that, in its submission, Altnet suggested that
an R&E valuation for their networks for the 2000 list would have
yielded a nil valuation. The UK authorities responded that this is
inconsistent with the rents actually paid and with the business plans
upon which those actual rents must have been justified.

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(105) Concerning point (b), the UK authorities note that Vtesse
and the Commission suggested comparing the percentage
of receipts paid by Vtesse in rates compared with the
percentage of receipts paid by BT and Kingston. The UK
authorities first submit that this ratio is irrelevant. They
argue that rates are a tax on the value of property, not a tax
on receipts, profits or capital gains. The value of a property
is not a function of the turnover of the particular occupier:
two businesses may occupy identical properties, yet their
turnover could be very different depending on the nature
and success of their business. Even tenants in the same area
of business may have dramatically different
turnovers
depending on their efficiency. Consequently, revenue is no
indication as to the rent which would be arrived at in the
‘haggling of the market’ and placing any weight on an
alleged disparity between the percentage of receipts spent
on rates is wrong.

(106) In any case, the UK authorities submit that the correct
rates/receipts (36) ratio for BT and Kingston in the UK were
the following :

1995/96

2000/01

2005/06

BT

Kingston

3,0 %

1,0 %

2,7 %

4,0 %

3,6 %

3,4 %

(107) The UK authorities explained that the difference between
the ratio that they obtain for BT and the ratio calculated by
Vtesse for BT (2 %) can be explained by the fact that Vtesse
compared BT's receipts in the UK with its network rateable
value in England and Wales. Vtesse failed to take into
account separately assessed properties and the rateable
in Scotland and Northern
value of BT's hereditament
Ireland. The difference between the ratios provided by
Vtesse and the UK authorities can be further explained by
the fact that the UK authorities calculated the rates/receipts
ratio by using revised revenues for BT and Kingston which
were adjusted to take account of non-relevant revenues and
were normalised to reflect projected future trends.

figures show that there is no systemic problem with the
valuation in the 1995 and 2000 lists.

(109) On the question of marginal taxation, the UK authorities
deny that the different way of rating additional
fibres
confers any advantage on BT or Kingston. The trigger for
rateability of telecommunication operators' fibres under the
rental method is the lighting of the fibres. This is not the
way new fibres are treated in the case of BT/Kingston under
the R&E method.

(110) The R&E method anticipates the receipts and expenditures
over the next five years. The fibres necessary for BT's
business throughout the five-year life of the list are taken
into account in the assessment of the rateable value because
the receipts from these fibres are included in the R&E
valuation. Business rates are therefore payable in respect of
optic fibres from the commencement date of the rating List,
not merely from the day when they are lit. Physical
additions to BT's hereditament are further
taken into
account by the annual revision mechanism which is based
on the evolution of BT's market shares described in recitals
96 to 100.

(111) The UK Authorities acknowledge that

the valuation
methods, of necessity, require a different approach to the
treatment of the lighting of additional fibres, but underline
that the end result of the valuation exercise in both cases is
that the value of the fibres to the occupier is reflected in the
rateable value.

V.

COMMENTS FROM OFCOM

(112) OFCOM is the independent regulator and competition
authority for
the UK communications industries. The
comments from the UK authorities were provided by the
UK central government and do not represent the views of
OFCOM. As a result, the Commission asked OFCOM to
provide its comments on the decision to initiate the
procedure by letter dated 26 July 2005. They were provided
by OFCOM by letter dated 21 September 2005.

(108) In any case, even if the percentage-of -receipts approach
was to have any validity, the UK authorities claim that the
figures provided by Vtesse and used by the Commission in
the decision to initiate the procedure, do not show the
existence of an advantage to BT. On the contrary, they note
that, when all the Altnet telecommunication operators as a
whole are compared with BT, the percentage of receipts
shows that BT does not pay less than the Altnet operators.
In the final year of the 2000 list, BT had about 70 % of the
total fixed telecoms rateable value and about 71,6 % of call
and access revenues and a smaller percentage of other fixed
market revenues. According to the UK authorities, these

(36) The level of receipts used in these valuations is a figure adjusted to
the United Kingdom, which takes out non-relevant revenues.

(113) OFCOM considered the extent to which differences in
methodology and practice may have effects on the
conditions of competition. Its general conclusion was that
the non-domestic rating system is currently not having an
adverse effect on the conditions of competition in the
telecommunications market.

(114) Concerning the rates/revenue ratio, OFCOM is of the view
that this ratio is not pertinent for assessing the fairness of
the non-domestic rates system. It points out that rates are
related to the expected market rents, which are likely to
reflect the efficient use of the assets. If an asset is used

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inefficiently by a firm, rates may be a significant proportion
of its revenues. For example, the rates/revenues ratio for a
fibre network may depend on the amount of data for which
it is used. Differences in the rates/revenue ratio of different
companies may thus simply reflect differences in the value
of the services they provide to customers through similar
rateable assets.

companies which are most similar to it regarding the local
access network, i.e. Kingston, NTL and Telewest. All four
are primarily local access providers. BT and Kingston are
valued on the basis of the R&E basis and NTL and Telewest
are valued on a method derived from the contractor's basis
method. The results of OFCOM's calculations are shown in
the table below. In the view of OFCOM, these rateable
values per connections do not vary much from one
operator to the other.

(115) Furthermore, OFCOM calculated the rates/revenue ratio for
a certain number of telecommunications operators in the
United Kingdom:

2005 rate liabi-
lity (GBP mil-
lion)

2005 revenues
(GBP million)

Rates/revenue
( %)

BT

NTL

Telewest

C&W

Kingston

Energis

Global Cross-
ing

Easynet

Thus

Your Commu-
nication

Fibernet

Gamma Tele-
com

238,31

18 623

24,26

15,49

16,37

3,35

3,27

3,13

1,77

2,41

1,09

1,08

0,46

1 930

1 300

1 602

364

720

270

78

341

186

47

72

1,28

1,26

1,19

1,02

0,92

0,45

1,16

2,28

0,71

0,59

2,32

0,63

(116) OFCOM also calculated Vtesse's ratio for 2003, the only
year for which it had available figures. This ratio was 2,1 %.
These figures show that
the rates/revenue ratio differs
significantly and with no clear pattern to volumes of
revenues. OFCOM concluded that not only is this ratio a
flawed methodology for assessing the fairness of the non-
domestic rating system, but the allegation that BT generally
pays a smaller amount in rates compared to its revenues
than its competitors appears to be false.

BT

NTL

Telewest

Kingston Communication

Rateable value/connection

GBP 21

GBP 22

GBP 21

GBP 26

(118) Therefore, in general, OFCOM concludes that there is little
evidence to support an argument that BT pays significantly
less than fibre backbone operators on any measure.

(119) OFCOM also analysed whether the rating system introduces
undue asymmetry in terms of marginal rate liability. On
this point, OFCOM notes that
the R&E method uses
projected figures for revenues and costs and therefore
conceptually includes any network build required to meet
these business plans. The R&E basis is not limited to the
state of BT's network at the start of the five-year period but
reflects the necessary changes that will be made to it over
the following five years, with annual reassessments to
capture and rate material changes to BT's hereditament. In
the view of OFCOM, although the incremental charge is
more apparent to smaller operators, as each fibre lit leads to
a specific additional rates charge, this does not mean that
BT's rateable value does not include amounts for similar
changes. OFCOM concluded that it has no evidence to
suggest that, unlike telecommunication operators assessed
under the rental method, BT pays no additional rates when
it lights a fibre. The system would appear to provide a
materially symmetrical outcome in the long term in each
case, albeit through different routes and with low levels of
transparency.

(117) OFCOM underlines the difficulty of making appropriate
comparisons between very different telecommunications
the average rateable value of a route
operators (e.g.
kilometre of a fibre network can be very different according
to the characteristics of the network to which it belongs and
to the number of lit fibres on that route). It nevertheless
suggested some alternative ways of comparing BT's taxation
with that of its competitors. For instance, it calculated the
ratio rateable value/connection for BT and the three

VI.

LEGAL ASSESSMENT

State aid assessment pursuant to Article 87(1) EC

(120) According to Article 87(1) EC, ‘any aid granted by a Member
State or through State resources in any form whatsoever which
distorts or threatens to distort competition by favouring certain
undertakings or the production of certain goods shall, in so far as
it affects trade between Member States, be incompatible with the
common market.’ Therefore, a measure constitutes State aid

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within the meaning of Article 87(1) EC if it fulfils the
following four criteria:

— It confers a selective advantage on the recipient(s)

— It is granted by the State through State resources

— It distorts or threatens to distort competition

— It is likely to affect trade between Member States.

(121) In order to determine whether the application of

the
property tax to BT and Kingston has resulted in an
economic advantage to these two firms, the Commission's
analysis must be two-fold:

— It must first determine whether the rules concerning
the property tax have been correctly applied to BT and
Kingston and in particular whether the application of
the R&E method was justified and properly applied.

— It must also consider whether the application of the
R&E method to BT and Kingston confers an advantage
on those firms in comparison with their competitors
that are valued under the rental method.

6.1. Correct application of the rules on property tax to BT and

Kingston

6.1.1. C h o i c e o f

t h e m e t h o d a p p l i e d t o B T

a n d K i n g s t o n

(122) The first point considered is whether it was appropriate for
the UK authorities to apply the R&E method to BT and
Kingston instead of the rental method, which appears to be
the generally applied method in the telecommunications
sector. The question is whether there was enough rental
evidence to assess BT's and Kingston's networks taking into
account the rental evidence for the 1995-2000, 2000-
2005 and 2005-2010 periods.

(123) In its decision to initiate the procedure, the Commission
suggested that the internal transfer prices between BT's
retail businesses and BT wholesale as well as the rent
received by BT when renting out its own infrastructure
could provide a basis for applying the rental method.
Among the third parties that commented on the decision,
the Altnet Task Force suggested specific sources of rental
evidence, such as BT's wholesale line rental tariffs or its
published prices for unbundled local loops, which could be
used to determine the rental value of its copper cables.

the UK authorities have explained that

the first two valuation periods (i.e. 1995-2000 and 2000-
2005). That is the case of the LLU rental tariffs, which were
applied from 31 May 2001 or the set of regulatory
accounts that reflected transfer charges for BT's access
services. Furthermore, even when that information was
available, for instance for the latest valuation period of
2005-2010, it was not relevant and could not be used for a
valuation of BT's and Kingston's very specific networks. For
instance,
the
Wholesale Line Rental Tariff and the LLU Tariff are a
payment for a service and, under existing case-law on the
property tax, cannot be considered rental evidence to value
the relevant part of BT's network. Furthermore the tariffs
are regulated by OFCOM and as such are not ‘open market
rents’. As such, little weight can be given to those fees as
evidence of rateable value. For these reasons, there is no
actual market-based evidence concerning the access part of
BT's or Kingston's networks, which is a unique character-
istic of their networks.

(125) It also appears that even when rental evidence derived from
other telecommunication operators exists, for instance on
optic fibres, the differences between the use of optic fibres
by those operators and the use that is made of them by BT
and Kingston means that this rental evidence is not fully
relevant to value the latter undertakings' hereditaments.
The fibre rent quoted by Vtesse is based on market evidence
for fibre trunk networks serving a small number of high
value, high volume customers. BT's and Kingston's network
are mainly local access networks serving millions of
individuals in the case of BT. The role of their optic fibre
network is mainly that of a backbone which interconnects
their local loops. Their networks are for this reason unique
and cannot be compared with any other in the United
Kingdom, including large networks such as that of Cable &
Wireless. It is true that parts of BT's network may be used
by BT to provide services that compete with Vtesse, but
they remain physically and functionally incapable of being
disaggregated from BT's whole network. Therefore, on the
whole, the two types of network do not fulfil the same
function, and are unlikely to have the same rental value.
This view is confirmed by OFCOM in particular, which
pointed out that the average value of a route kilometre of a
fibre network can be very different according to the
characteristics of the network to which it belongs and that
BT's core network topology is likely to be very different to
that of a backbone operator catering for the corporate
market.

(124) On these points, BT and the UK authorities have explained
that the rental method could not be applied to assess BT's
and Kingston's hereditaments. First, the evidence which the
Commission or Altnet suggested using was not available for

(126) As to the possibility of applying the rental method to parts
of BT's or Kingston's hereditaments for which rental
evidence may be available and the R&E method to the rest,

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that has also been ruled out by the VOA. The reason is that
the R&E method can only be applied to the whole
hereditament and it is not possible to separate parts of
these firms' hereditaments,
their optic fibre
networks, since the hereditament has to be assessed as a
whole under British case-law, since these parts are fully
integrated with the rest of the network (37).

such as

(127) The independent experts of the VOA therefore concluded
that
the rental method cannot be applied to BT and
Kingston. That conclusion that the R&E method was the
correct one, was confirmed by the Valuation Tribunal (38).
The Commission considers that
there is no probative
evidence showing the contrary. Consequently, the Commis-
sion concludes that there was not enough rental evidence
to assess BT's and Kingston's networks in the periods under
consideration and that the application of the R&E method
to assess the rateable value of their networks was therefore
justified.

6.1.2. C o r r e c t a p p l i c a t i o n o f t h e R & E m e t h o d

t o B T a n d K i n g s t o n

cyclical

light of

(128) The next question is whether the R&E method has been
correctly applied to BT and Kingston. On the basis of the
extended explanations provided by the UK authorities and
described at recitals 74 to 93, it appears to the Commission
that the method was applied in accordance with the general
rules on the R&E method, as laid down in the RICS
Guidance Note on the R&E method of valuation for non-
domestic (39). The use of anticipated revenues and costs
over a five-year period in the case of BT is not explicitly
contemplated in the RICS Guidance Note. However, the
guidance note does refer to the estimated future profit-
ability when considering the hypothetical tenant's bid in
the
changes which are
economic
predictable as at the AVD. Furthermore, a method based
on anticipated receipts and costs over a certain number of
years has also been used in the assessment of the rateable
values of hereditaments of gas and electricity operators, and
is therefore not specific to BT. In the case of BT, given the
prospect of increased competition and significant growth in
competitors' networks which characterise the telecommu-
nications sector, the use of forecast revenues and costs over
five years is a reasonable methodology for assessing the
hypothetical rent that a tenant with a reasonable prospect
of continued occupation would be ready to pay for BT's
network. Conversely, the stability of the market on which
Kingston is present, which is characterised by limited
competition, justified that a five year projection was not
deemed to be necessary.

in Wales) was lower than the rateable value initially set by
the Valuation Tribunal in its decision of 19 March 1998
(GBP 523 million for England and GBP 30 million in
Wales). These explanations, which are summarised in
recitals 88 to 92, show that the final lower rateable value of
BT's network was not negotiated between the VOA and BT,
as claimed by Vtesse, but was arrived at through the use of
revised and more precise data, which were disclosed by BT
following the decision of the Valuation Tribunal and which
were not available at the time of the 1997 valuation, and
through the use of more precise methods of valuation
following the Valuation Tribunal's decision.

(130) In relation to a point raised in the decision to initiate the
procedure, it is also to be noted that, when applying the
R&E method, the UK authorities do consider the level of
profitability of BT. As already explained in recital 93,
valuation under the R&E method must proceed on the
assumption of an average level of efficiency, and the UK
authorities have established that BT fulfils this criterion.
The Commission also notes that the Universal Services
Obligations are correctly taken into account since both the
costs and revenues deriving from such obligations are
included in the overall valuation.

(131) Concerning the application of a revision mechanism based
on the evolution of market shares, described at recitals 96
to 99, and discontinued in 2005, the information received
indicates that this was an ad-hoc adjustment mechanism. It
is the Commission's understanding that, under Schedule 6
to the LGFA, the VOA is under a statutory obligation to
alter the rateable value of an undertaking if a material
change in circumstances (MCC) takes place and to take this
MCC into account as if taking place at the Antecedent
Valuation Date. Given the size of BT's network, and the
conditions of the telecommunications market, with the
increasing development of competing networks,
is
accepted that MCCs take place on a daily basis and are
therefore difficult to take into account, especially in the
context of the application of the R&E method. This market
share based mechanism is supposed to reflect physical
extensions of BT's network (which should result in an
increase of
its
competitors' networks (which should result in a decrease of
BT's market shares). Therefore, this revision mechanism
appears to be a reasonable way of
taking MCCs into
account and can be justified by the characteristics of BT's
network and the telecommunications markets.

its market shares) and the roll-out of

it

(129) On the specific question of the settlement concerning the
1995-2000 period,
the UK authorities have provided
detailed explanations as to the reasons why the final
rateable value (GBP 445 million in England, GBP 25 million

(37) See the explanations provided by the UK authorities, described at

recitals 70 to 72.,

(38) British Telecommunications PLC v Central Valuation Officer, 19 March

1998.
(39) See note 21.

(132) The result of the application of this revision mechanism has
led to fluctuations in the evolution of BT's rateable values.
For instance, in 1999, in the last year of the 1995-2000
period, BT's rateable value in England and Wales was GBP
366 million. In 2000, in the first year of the 2000-2005
period, its rateable value was set at GBP 493 million. These

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fluctuations can be explained by the characteristics of the
property tax and by the economic situation of
the
telecommunications sector in the United Kingdom (40).

(133) It must first be recalled that, under statutory requirements,
for the 1995 valuation, BT's network was valued as it
physically existed as at 1 April 1995, but on the
assumption that it existed in that state in the economic
conditions of 1 April 1993. Material changes in circum-
stances were also treated as having occurred at 1 April
the same exercise was
1993. For the 2000 valuation,
carried out, but having regard to the assumption that the
hereditament was let in the economic context of 1 April
1998. This is also true for Kingston.

(134) That means that the 1999 rateable value is the value of the
hereditament as it physically existed in 1999, but in the
economic context of 1993, i.e. at 1993 price levels and in a
telecommunication market of the size it was in 1993.
However, the following year's rateable value, i.e. in 2000,
was calculated by reference to the economic conditions,
price levels and size of the telecommunications market as
they were in 1998. Similarly, the 2004 rateable value is set
by reference to the economic conditions of
the 1998
market, while the 2005 valuation is set by reference to the
2003 market conditions (41).

(135) The UK authorities have pointed out that the economic
conditions in the telecommunications sector were sub-
stantially different in 1993, 1998 and 2003. First, the
telecommunications market grew significantly between
1993 and 1998, and between 1998 and 2003. Thus BT's
physical network in 2000 was considered in a market that
was bigger than the market in which BT's physical network
was considered in 1999. This necessarily meant that its
2000 rateable value was likely to be significantly higher
than in 1999. Furthermore, in 1993, the telecommunica-
tions
in the process of opening up to
unprecedented competition and the effect on BT's trading
position was likely to be profound. That is confirmed by
the fact that BT's market shares fell from 87 % to below
70 % over that period. This anticipation had a downward
effect on BT's rateable value for each of the years of that
less competition could be
period. Conversely,
anticipated, which is again confirmed by BT's relatively
stable market shares of around 70 % over the 2000-2005
period. This anticipation was likely to have an upward
effect on BT's valuation over that period.

sector was

in 1998,

significantly increased with the
value of which has
exploitation of broadband DSL technology. This develop-
ment, which could not be fully anticipated in 1993, created
an upward effect on the valuations of BT's and Kingston's
networks and can explain why their valuations were
significantly increased in 2000 and 2005.

(137) The Commission also notes that the fact that only physical
changes can be taken into account in the economic context
of the AVD can explain why BT's rateable value fell over the
life of the 1995-2000 and 2000-2005 rating lists despite
the fact that its receipts or profits were stable or improving.
Indeed, such elements as the growth of the market, the
increase in price levels, technological changes or changes in
the pattern of demand, which are factors that can have a
positive impact on BT's results, cannot be taken into
account by the VOA when carrying out its yearly revisions
of the rating list.

(138) The Commission finally takes note that a new annual
revision system which will be applied to the 2005-2010
period is no longer based on the evolution of market
shares, but will consist of the application of a full annual
R&E valuation. The UK authorities have indicated that this
system will
including
fully reflect all physical changes,
newly lit fibres. However, since this revision system has not
been finalised yet,
the Commission has not had the
opportunity to analyse it and its final conclusion in the
Articles of this Decision will therefore be limited to the
1995-2005 period.

(139) The Commission concludes that the UK authorities applied
the appropriate valuation method to BT and Kingston and
that the general principles concerning the application of
the R&E method were respected by the UK authorities
when they applied that method to BT and Kingston.

(136) Furthermore, the most valuable parts of BT's and King-
ston's networks consist of their local access networks, the

(40) The rateable values of the telecommunications operators valued
under the rental method do not show the same fluctuations. It must,
however, be stated that any comparison is likely to be misleading
since their networks are rapidly expanding ones, while BT's and
Kingston's networks are relatively stable.
those
telecommunications operators also enjoyed significant decreases in
their rateable values, as explained in recital 173.

In any case,

(41) This explains why, contrary to the argument brought forward by BT,
the VOA does not accept that BT's rateable value in 2003 and 2004
should be affected by the growing popularity of mobile telephony.
The VOA considers that this is an economic change which took place
in the life of the 2000-2005 list, and cannot be seen as a material
change in circumstance to be taken into account as if taking place in
the economic environment of 1998. Similarly, the VOA considers
that it would not be correct to have regard to the opposite, upward
effect of subsequent extra demand from internet access not predicted
in 1998. Both economic phenomena could be taken into account
only in the context of the elaboration of the 2005-2010 list.

6.2. Does the R&E method confer an advantage with respect to

the rental method?

6.2.1. D o e s t h e R & E m e t h o d r e s u l t

i n a n
o v e r a l l u n d e r v a l u a t i o n o f B T ' s a n d
K i n g s t o n ' s n e t w o r k s ?

(140) The next point to be considered is whether the application
the R&E method to BT and Kingston confers an
of
advantage on those firms
in comparison with their
competitors that are valued under the rental method. The
question is whether this different treatment is likely to lead
to a different result than that which would arise if the

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L 383/89

In line with the comments of

valuation of those firms were carried out using the same
the UK
methodology.
authorities,
the
existence of an advantage to BT and Kingston could be
demonstrated in the following ways :

the Commission is of

the view that

(a)

by showing that the application of the rental method
to BT and Kingston would be possible and result in a
higher rateable value than the R&E method, or

(b)

(c)

by showing the application of the R&E method to the
other telecommunication operators would be possible
and would systematically result in a lower rateable
value than that derived from the rental method, or

by showing that, using other correct and relevant
comparisons, telecommunication operators that are
assessed under the rental method are taxed more
heavily as compared with BT and Kingston.

(141) Demonstrating the existence of a possible advantage to BT
(a)
and Kingston following the reasoning under point
supposes that the rental method is applicable to BT and
Kingston. For the reasons explained in recitals 124 to 127,
there is not enough rental evidence to assess the rateable
value of their hereditaments. Consequently, the Commis-
sion concludes that it is not possible to establish that BT's
and Kingston's rateable values would have been higher if
the rental method had been applied to them.

(142) Demonstrating the existence of an advantage to BT and
Kingston following the reasoning under point b) would
involve applying the R&E method to a representative
sample of telecommunication operators which have been
valued under the rental method. The Commission is not in
a position to carry out these valuations itself. The VOA has
also explained that, without the business plans of these
firms, it cannot carry out these valuations under the R&E
method. It is also noted that none of the third parties has
produced evidence that the application of the R&E method
would result in lower valuations of their hereditaments: in
its submission, UKCTA indicated that it could not calculate
what its members would have paid in rates under the R&E
method.

(143) On the basis of those considerations, the Commission must
therefore conclude that the method in point b) cannot be
used to demonstrate the existence of a possible advantage
to BT and Kingston.

available, BT was paying 2 % of its receipts in property tax,
while Vtesse was paying two or three times as much.

(145) As a preliminary remark on the use and application of the
rates/receipts ratio, the Commission notes that, according
to Vtesse's comments, the revenue of telecommunications
operators should be adjusted in order to allow a direct
comparison of BT's rates/receipts ratio with that of other
telecommunication operators. Vtesse claims that most
operators pay significant fees to BT for the carriage and
termination of traffic and that these fees do not relate to the
rateable assets of these operators and therefore should not
be used in any comparison of the rates burden.

(146) That argument cannot be accepted. The ratios to be
compared should relate rates either to gross receipts or to
net receipts. The ‘halfway’ approach suggested by Vtesse
which consists of deducting some specific costs, such as
seem
interconnection fees, and not others does not
accurate. First, it is not correct to assert, as Vtesse does,
that the fees for the carriage and termination of traffic do
not relate to the rateable assets of the operator under
consideration: those fees are on the contrary necessary for
the origination and termination of some of the traffic
carried over their networks and therefore they directly
relate to the operation of those networks. Secondly, those
fees have a direct impact on the hypothetical rent that a
putative tenant would be ready to pay for the network
under consideration, since they are part of the costs that are
borne
those
interconnection fees are also a significant part of BT's
income and as a result, they have a clear upward effect on
BT's rateable value. Since the fees affect the hypothetical
rent and rateable value of all telecommunications operators
concerned, there is no justification for deducting them
from the revenues generated by the telecommunications
operators when carrying out a proper comparison between
their rates/revenues ratios.

that network. Finally,

the use of

for

the rates/receipts

ratio is not pertinent

their comments and objections,

(147) On the question of the relevance of the rates/receipts ratio,
the Commission notes that, in the view of the VOA and
OFCOM,
for
assessing the burden of rates on the different operators.
the
In the light of
Commission can agree that this ratio is not a correct tool
for assessing the fairness of the rates system, which is a tax
on the value of a property, and not a tax on receipts or
added value (42). As argued by OFCOM in particular,
it
appears that this ratio will vary according to the value of
the services the operators provide to customers through
similar rateable assets and according to how efficiently they
use their assets. The Commission can therefore conclude
indicative and that no firm
this ratio is at best
that
conclusion can be drawn from it.

(144) The method suggested in point c) would be to use relevant
comparisons to establish that BT and Kingston are under-
taxed under the R&E method. This method was suggested
by the Commission in the decision to initiate the
procedure: according to the information that was then

(42) This point is sufficient to rebut the suggestion, made by Gamma
Telecom in its comments, that the respective burden of the business
rates should be assessed on the basis of a comparison between the
rates/added value ratio of BT and its competitors.

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the

(148) Moreover, even if this ratio is to be taken into considera-
tion, it does not allow any useful conclusion to be drawn.
twelve
According to figures provided by OFCOM for
telecommunication operators,
ratio
rates/receipts
ranges from 0,59 % for Your Communication to 2,32 %
for Fibernet, with BT standing at 1,28 % and Kingston
standing at 0,92 %. It appears that neither BT nor Kingston
pays a significantly smaller share of
their revenues in
business rates than most of the other telecommunications
operators. On this question, it is further to be noted that
there is some disagreement on the calculation of Vtesse's
rates/receipts ratio. For 2004, Vtesse claims that this ratio
was 13,46 %. This figure was based on a rateable value of
GBP 429 000 (which implied rates of GBP 195 624) and
‘recurring revenues’ of GBP 1 453 146. However, according
to the UK authorities, Vtesse' rateable value for 2004 was
subsequently reduced to GBP 145 000 (implying rates of
GBP 66 120), since it appeared that it was not actually in
occupation of a hereditament in Hounslow, valued at GBP
284 000. Furthermore, it appears from Vtesse's report and
financial statements for the year ended 31 December 2004
that its total turnover in 2004 was GBP 4 744 228. On the
basis of its total turnover, which is the figure used by
OFCOM for comparison in the case of
the other
telecommunications operators, Vtesse's rates/turnover ratio
in 2004 falls to 1,4 %, or 2,2 % if one includes the rates
paid by Vtesse on its offices, which are valued separately.
These figures are more in line with the conclusions of
OFCOM, which found that Vtesse had paid 2,1 % of its
revenues in rates in 2003. On the basis of these figures,
there is no clear difference in the tax burden borne by BT
and by Vtesse.

than the others,

(149) Other ways of comparing the tax burden imposed on the
different
telecommunications operators have been sug-
gested by OFCOM and the UK authorities. OFCOM
suggested that the rateable value/connection ratio for BT,
Kingston, NTL and Telewest should be compared. The ratio
is very similar for these four companies. In fact, Kingston is
valued at a slightly higher level than the other operators,
which may be explained by the fact that, being significantly
smaller
it may not have the same
economies of scale. OFCOM's suggested comparison is all
the more relevant given the similarities between these four
companies, as locally provided access network services are
an important part of their overall business.
It is true,
however, that NTL and Telewest are valued on the basis of
method derived from the contractor's basis method.
Therefore, such a ratio is not directly pertinent for assessing
the alleged discrepancy between the valuations carried out
under the rental method and under the R&E method.
Nevertheless, it shows that using different methodologies
and comparing BT and Kingston with firms more directly
comparable than Vtesse leads to similar results, which tends
to corroborate the VOA's assertion that, in principle, all
valuation methods should lead to the same result.

(150) As to the UK authorities, they indicated that, in the final
year of the 2000 list, BT represented about 70 % of the
total rateable value in the fixed-line telecommunications
sector, and about 71,6 % of
fixed-line call and access
revenues according to OFCOM figures (43). The Commis-
sion can agree that a comparison of BT with all the Altnet
operators taken together may provide more pertinent
conclusions than a comparison of BT individually with
small operators such as Vtesse. On this basis, it appears that
BT pays a proportion of the total rateable value in the fixed-
line telecommunications sector that is very similar to its
share in the fixed-line telecommunications market. It must
be recalled, however,
this is again a comparison
between rates and revenues, the relevance of which is
limited and at best only indicative.

that

(151) It must be noted that, instead of BT's market share of the
total call and access revenues, Vtesse recommends that BT's
market share of access revenues be taken into account. On
that market, BT commands a share of over 80 %. In the
view of Vtesse, this is further evidence that BT's heredita-
ment is undervalued since BT only represents 70 % of the
total rateable value in the fixed line telecommunication
sector. The Commission cannot agree with this argument.
First, BT's share in total access and call revenues seems a
more appropriate benchmark for the purpose of assessing
the burden of business rates: call revenues represent a larger
share of BT's total revenues than access revenues (44).
Therefore, call revenues have a very significant impact on
the hypothetical rent and rateable value of BT's network
and should be taken into account in any comparison
between revenues and rateable values. Secondly, even if BT's
share of access revenues only is to be used, the difference
between that share (80 %) and BT's share in the total
rateable value in the fixed-line telecommunications sector
(70 %) at a specific moment in time is not such as to raise
questions on the level of BT's rateable value, especially in
view of the limited value of any comparison between rates
and revenues.

fibres,

components

(152) Vtesse suggests another method for proving the existence
of an advantage to BT. It consists of pointing to the alleged
discrepancy between the rateable values per unit of the
different
connections,
(e.g. optic
buildings) of BT's network and those applied to other
telecommunications operators. On that basis, Vtesse
concludes that the R&E method has resulted in a lower
valuation of BT's hereditament
than would have been
achieved under the rental method. Vtesse points out, for
instance, that BT is rated at GBP 34 per square metre for
buildings compared with GBP 115 per square metre in the
case of other telecommunication operators, at GBP 74 per
kilometre of optic fibre compared with the GBP 1 000/
1 200 per optic fibre pair in the case of other operators,
and GBP 19 per connection per year, compared with the
annual fee of GBP 122 actually paid by operators for
unbundled local loops.

(43) Available at http://www.ofcom.org.uk/research/cm/nov05/
(44) In 2004, call revenues represented 59,5 % of BT's call and access

revenues.

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(153) That approach is not satisfactory for a number of reasons.
First of all, the UK authorities have convincingly argued
that those figures,
if they are correct, are not directly
comparable. For reasons already stated in recital 125, BT's
and Kingston's optic fibre networks are of a different nature
from, and not comparable with, those of other operators. It
is therefore not possible to apply rental evidence derived
from other operators' optic fibre networks to BT or
Kingston. In any case, the calculations and comparisons
made by Vtesse are flawed.

(154) First, for an appropriate comparison, it would be necessary
to take only BT's lit fibres into account since only lit fibres
are rated. More importantly, Vtesse compared BT's average
rateable value of km of optic fibre with the rental value of a
fibre pair per route. In fact, the rental value of an optic fibre
as applied by the VOA will vary according to the number of
optic fibres per route. The more fibres per route, the lower
their rental value will be (45). Thus, taking the lit fibre rent
tone applied as of 2005, it appears that the rental value of
two optic fibre (i.e. a single fibre pair) per route km for
networks above 3 000 km (46) will be GBP 450 (47). The
rental value of three optic fibres per route km will be GBP
540, i.e. GBP 180 per optic fibre (48). At the lower end of
the table, the rental value of 48 optic fibres per route km
will be GBP 1 728, i.e. GBP 36 per optic fibre (49). The VOA
claims that these values are market based (50).

(155) It is clear that BT's core network has, on average, dozens of
lit fibres per route. It means that the rateable value of BT
per km of optic fibre should be compared with the lower
end of the rating list used by the VOA. On that basis, it
appears that, contrary to what is claimed by Vtesse, a
comparison between BT's rateable value per km of optic
fibre and the rental values used by the VOA does not show
any significant discrepancy or indicate an undervaluation of
BT's network.

(156) Concerning the comparison between the LLU tariff and
BT's rateable value per connection, it is noted, first, that,
according to the UK authorities, the LLU tariff is not the
same as the rent for the rateable asset, since a significant
proportion of the tariff relates to system and maintenance
costs, billing, and costs of using BT's non-rateable plant and
machinery. It is therefore not directly comparable with the

(45) It reflects the general principle that the rent per square metre of a
large building rented as a whole will be lower than in the case of a
small building. OFCOM confirmed in its comments that, on the basis
of the available information, rental prices for fibres are lower where
more fibres are rented.

(46) As explained above, networks above 3 000 km benefit from a 10 %
reduction, which is based on market evidence. This is the proper
benchmark to make a comparison with BT's network given its size.

(47) GBP 500 in the London area.
(48) GBP 720 and GBP 240 respectively in the London area.
(49) GBP 2 256 and GBP 47 respectively in the London area.
(50) It is the Commission's understanding that the VOA has no direct
evidence above 12 fibres and therefore, the top of the scale is based
on decapitalised costs, i.e. on the assumption that an operator would
set its maximum rental bid a network with 13 fibres and above at no
more than the decapitalised costs of building the network itself.

reflect

the provision of LLU services

legal definition of the rateable value. Secondly, the UK
authorities have indicated that some local loops will in fact
have a high value, some a low value and some may even
have a negative value. On the other hand, according to
OFCOM,
is aimed at
stimulating competition in broadband services (51). Local
Loop Unbundling is therefore also affected by the demand
for broadband services and there is no demand for
broadband services on a large number of BT's local loops,
which are only required for telephony. Therefore, the LLU
the average value of all BT's
tariff does not
connections, and no conclusion can be drawn from a
comparison of BT's rateable value per connection and the
LLU tariff. As shown by OFCOM in its comments on the
this ratio is almost
decision to initiate the procedure,
identical for BT, NTL and Telewest, despite the fact that a
different valuation method was applied to the last two
companies. For the reasons explained above, the ratio for
NTL and Telewest appears to be more appropriate a
benchmark than the LLU tariffs quoted by Vtesse, and the
comparison between these ratios does not show any
discrepancy between the different operators. It is further to
be noted that, under its assessment, the VOA is considering
applying a rateable value in the range of GBP 15 — GBP 20
per unbundled local loop (52), which again is in line with
the valuation of BT's rateable value per connection.

(157) As to the alleged difference in rateable value per square
metre for buildings, the Commission first notes that the
correct figure derived from the Telereal transaction (53) is
not GBP 35 per square metre as alleged by Vtesse but,
applying a calculation similar to that of Vtesse, GBP 51 per
square metre. Furthermore, this figure is compared by
Vtesse with an alleged GBP 115 per square metre for other
telecommunications operators. The basis and comparability
of
this figure is not clear and it does not reflect the
variations that are likely to exist as a result, in particular, of
the respective geographical locations of the telecommuni-
cation operators. The UK authorities have pointed out that
BT's property portfolio covers the whole of the United
Kingdom, including its most deprived and isolated areas,
which has a downward effect on the average rental value of
its properties.

(51) OFCOM consultation document, ‘Local loop unbundling: setting the
fully unbundled rental charge ceiling and minor amendment to SMP
conditions’, 7 September 2005.

(52) In their submissions, GVA Grimley indicated that the VOA was of the
view that a pair of unbundled copper wires was worth circa GBP 50
rateable value. In fact, at the time, and at a very preliminary stage in
the analysis, the VOA suggested that this rateable value could be in
the range of GBP 12 to GBP 50.

(53) See recital 36.

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following the

(158) More importantly, it should be recalled that BT's general
purpose buildings, such as offices, or warehouses, which
are not related or linked to the network, are valued locally
and separately, on the basis of the rental method. In 2000,
their rateable value was GBP180 million. Operational and
specialised buildings, such as telephone exchanges are
considered to form part of BT's network and are centrally
valued by the VOA using the R&E method. The rent paid by
BT to Telereal
transaction was GBP
280 million. The total rateable value of BT's buildings
includes both the rateable value of BT's separately assessed
buildings, which was approximately GBP 180 million in
2000, and the rateable value of the buildings included in
the overall valuation of its network, which it is not possible
to specifically identify but which represents a significant
share of
the GBP 560 million rateable value of BT's
network in the United Kingdom. These figures do not show
that there is a significant discrepancy between the actual
market value of BT's buildings, reflected by the Telereal
transaction (54), and their rateable value as calculated by the
VOA (55). Therefore,
these figures do not provide any
evidence that this rateable value is undervalued.

(159) Vtesse put forward a secondary argument on the basis of
the Telereal argument. Vtesse suggests that the rent paid by
BT to Telereal for its buildings represents roughly 50 % of
its rateable value in 2001, despite the fact that most of the
rateable value should be mainly attributable to its network
and not its buildings. From that, Vtesse seems to derive the
conclusion that BT's network is obviously undervalued.
This argument, however, is based on incorrect premises,
since part of the property included in the Telereal deal are
those that were separately valued at GBP 180 million. BT's
overall rateable value for the whole of United Kingdom at
the time of the transaction was therefore equal to GBP
560 million for the network and linked properties plus
GBP 180 million for the separately valued buildings, which
gives GBP 740 million. The rent of GBP 280 million paid
by BT to Telereal amounts to 38 % of its overall rateable
value. No useful conclusion can be drawn on the basis of
this figure.

the hereditaments of

(160) In any case, a methodology that consists in separating parts
of BT's hereditament and valuing them in isolation seems
questionable. As confirmed by British case-law, the VOA
must value
telecommunication
rule is applied without
operators as a whole. This
discrimination to all operators. It is an inherent feature in
any type of property valuation that the market rent of a
whole property is usually different from the sum of the
market rents of parts of that property: it is often lower (56),
is
it may also be higher in certain circumstances.
the market rent of BT's property
therefore likely that

It

portfolio in isolation will be different from its value when
included in BT's hereditament.

(161) There is thus no clear evidence that the R&E method would
generally result in a lower rateable value than the rental
method, or that the VOA, when applying the R&E method
to BT and Kingston, erred and undervalued the rateable
value of their hereditaments.

6.2.2. D o e s t h e R & E m e t h o d c o n f e r a n

a d v a n t a g e a t

t h e m a r g i n ?

(162) It should be noted as a preliminary point that the question
of marginal taxation, i.e. taxation on newly lit fibres,
is
relevant only as regards the rating assessment of BT but not
as regards Kingston. As stated in recital 22, Kingston owns
a subsidiary, Torch Communications Ltd, which operates a
fibre backbone network outside Kingston's local access
network and which is valued on the basis of the rental
method. As a result, Torch Communications Ltd is fully
taxed on newly lit fibre. The R&E method is applied only to
that part of Kingston's network which is essentially a local
access network. As already explained (57), its hereditament
is not subject to a revision mechanism. That reflects the fact
that, according to the UK authorities, no competitor has
built networks in the Kingston upon Hull conurbation area
and Kingston already had network coverage of almost
100 % in the area, so it did not extend its network. There
was therefore no claim of material changes of circum-
stances which could have significantly altered the rateable
value of Kingston's network. The Commission accepts this
argument and notes that no third party has claimed that
Kingston was benefiting from any advantage at
the
marginal level.

(163) In the case of BT, however, the fact that there is no evidence
of the existence of an advantage at the level of the overall
valuation of its hereditament does not necessarily exclude
the possibility that marginal taxation, i.e. on the rating of
newly lit fibres, does grant an advantage to this firm. In fact,
the comments provided by several third parties indicate
that
rating BT and the other
telecommunication operators when they light a new fibre
may result in distortions of competition when these firms
compete for the same contract. This problem raises the
more general question of the revisions of rateable values
that are conducted annually by the VOA.

the different way of

(54) The Telereal transaction covered almost the entirety of BT's portfolio:
only 220 out of 6 700 properties remained in BT's ownership.
(55) Account should also be taken of the fact that the actual rental value
of a property should not necessarily be equated with its hypothetical
rateable value.

(56) Market evidence usually reflects the fact that the larger the property,
the smaller the unit price. This principle is taken into account by the
it grants a 10 %
VOA, since, on basis of the market evidence,
discount to networks over 3 000 fibre kilometres in length.

(164) As explained above, when a telecoms operator to which the
rental method is applied connects and lights a new fibre, its
rateable value is increased by the rateable value of this new
fibre. The opposite takes place when it switches off and
disconnects a fibre:
rateable value is then
deducted. Telecommunication operators that are assessed

the fibres'

(57) See recital 98.

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under the R&E method are not subject to this type of
precise adjustment. In the case of BT, the annual revisions
are based on a market adjustment mechanism: changes in
BT's market shares are supposed to reflect changes in the
value of its network. The question is therefore whether the
taking into account changes in the
different way of
networks, such as the lighting of new fibres, is likely to
confer an advantage on BT.

(167) It is also alleged by Vtesse that, in a typical bid such as the
one for the provision of backbone and access telecommu-
nication links to Kent MAN (60), its rate liability represented
16 % of expected recurring revenues. On the same bid, it
claims that BT was, at most, rated at 2 %, which is BT's
alleged average rates/receipts ratio. Vtesse concludes that BT
is much less taxed on a comparable and in this case
identical transaction and therefore that it receives a clear
advantage.

(165) It is the understanding of the Commission that, on the basis
of the business plans provided by BT, the VOA assesses the
hypothetical rent that can be expected from BT's heredita-
ment on the basis of
the anticipated receipts and
expenditure deriving from the occupation of that heredita-
ment. The valuation will therefore include any extension of
the network,
including the lighting of new optic fibres,
which will be required to meet the anticipated demand. The
lighting of new optic fibres, whether leased or actually
owned by BT (58), is therefore anticipated and taken into
account by the VOA. In fact, because of this valuation
method, and unlike the telecommunications operators that
are assessed under the rental method, BT is rated on dark
fibres as well, on the assumption that some of these dark
fibres will be lit in the course of the following five year
valuation period. Finally, the annual reassessment based on
the evaluation of BT's market shares is meant to capture the
material changes to BT's network (59).

(166) Therefore, it is not correct to say that BT does not face any
incremental tax liability, as suggested by the complainant or
third parties such as Altnet. Certainly, with a network
hereditament in England currently with a rateable value of
GBP 530 000 000 which is valued as a whole, a small
incremental change such as the additional lighting of a fibre
is less likely to have a discernible impact on BT than on a
small operator such as Vtesse. Furthermore, increases in
value of BT's network are offset by factors resulting in a
decrease of that value, such as the rolling out of competing
capacity. This makes the impact of the lighting of new
fibres by BT even less visible. That does not mean however,
that these newly lit fibres are not rated.

(58) Vtesse raised the point that BT has allegedly rented some 2 000 km
of optic fibres from GEO, one of Vtesse's suppliers and inquired
whether this extension of its network had been properly assessed.
The VOA has obtained confirmation from GEO that it had rented
1 717 route km of fibres to BT. It is not clear at this stage whether
the fibres leased by BT have been lit, if they are replacement fibres for
obsolete BT fibres or if they are new route. Concerning the way these
fibres will be taken into account in the review of BT's rateable value,
the VOA explained that the existing R&E valuation is based on a
model which anticipates future income streams and it will, as part of
the review, take into account the income stream expected from the
fibres which BT has leased from GEO. This review will be carried out
on the basis on the new revision mechanism, which is still being
finalised.

(59) The UK authorities have confirmed that

from
broadband services were taken into account in the annual revision
method applied to BT and based on market shares.

the revenues

(168) That approach cannot be retained. First of all,

it is not
correct to assume that, since BT has an average rates/
receipts ratio of 2 % (61), it was taxed at 2 % on that bid.
That ratio is calculated on the basis of BT's overall rateable
value, to which the value of the fibres lit by BT following
the Kent MAN contract were added, either in anticipation
the market share based revision
or on the basis of
mechanism. In order to make an appropriate and correct
comparison with Vtesse's tax liability on that bid, it would
be necessary to determine by how much the contract
concerned increased the rateable value of BT's network,
either in anticipation or via the annual revision mechanism.
The anticipated valuation makes an overall assessment from
which it is not possible to identify individual contracts.
Therefore, it is not possible to determine by how much the
Kent Man contract has increased the rateable value of BT's
network.
lead to definitive
conclusions concerning the possible existence of an
advantage and therefore the existence of State aid. Vtesse's
rate liability on this bid cannot be seen as a benchmark on
the basis of which it is possible to assess the existence of an
advantage to BT within the meaning of Article 87(1) EC.
The tax liability is in fact likely to change depending on the
technical solution chosen, the cost structure of the firms
presenting a bid and the length of the optic fibre network
operators will use to provide the services and, most
importantly, will depend on the extent to which they will
have to light new fibres (62). Thus, under the rental method,
a telecommunications operator who provided the service
by using an already lit fibre would not face any increase in
rates (63).

it would not

In any case,

(60) See recital 41.
(61) As already explained the precise ratio for BT varies according to the
assessments and varies from 1,28 % (OFCOM) and 2 % (Vtesse) and
3 % (UK authorities). The discrepancy between the figures provided
by Vtesse and the UK authorities has been explained at recital 107.
The lower figure obtained by OFCOM may be explained by the fact
that it used the total turnover of the BT group,
including the
turnover of its activities outside the UK.

(62) It is technically feasible to use already lit fibres to supply high
bandwidth services to corporate customers. In that case, under the
rental method of valuation, there will be no increase in the rateable
value of a telecommunications operator's network.

(63) The operator may have to pay rates only on the spurs linking the

fibre to the customer's premises.

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(169) The same reasoning can be applied to the argument Vtesse
based on a comparison between the prices of BT's
Wholesale Extension Services (‘WES’) and the rates that
an operator valued under the rental method would have to
pay if it were lighting optic fibres for the purpose of
providing the same service. Depending on the capacity and
distances of the WES, Vtesse claims that such an operator
could have to pay rates worth up to 87 % of the price
charged by BT and sees that as further evidence of the fact
that BT's optic network is undervalued or not properly
taxed at the margin. However, the argument is based on the
assumption that the hypothetical operator would have a
single pair of lit fibre on the same route as the one chosen
by BT. However, if this operator uses an already lit fibre in
order to provide its WES, the extra costs in rates under the
rental method will be nil. Furthermore, if he lights new
fibres on a route on which he already has several lit optic
fibres, than the marginal costs of the operation will be
much lower since the more optic fibres per route, the lower
the rates per fibre. Again, no conclusion can be drawn from
this argument.

(170) In the light of these facts, the allegation that BT is not rated
at the margin is not correct. Even if, as suggested by Vtesse,
the unit of analysis is the taxation of contracts on which
Vtesse and BT compete, it appears that there is no obvious
it is taxed on newly lit fibres, albeit
advantage to BT:
differently and less transparently. The Commission also
notes that, because the R&E method is based on anticipated
revenues, BT is rated on dark fibres on the assumption that
these fibres will have to be lit to meet the anticipated
telecommunications
demand. Therefore, unlike other
operators which are rated only once they light a fibre, BT
is also rated on dark fibres.

(171) The Commission can therefore concur with OFCOM when
it says that ‘the system [of revisions] would appear to
provide a materially symmetrical outcome in the long-term
in each case, albeit through different routes and with low
levels of transparency.’

(172) The absence of any obvious competition issue is further
confirmed when the market shares on the market for the
provision of high bandwidth services
to corporate
customers are considered, on which BT is in direct
competition with Vtesse (64). According to figures provided
by BT, BT's share on that market is 12 %, and it is only the
fourth largest player. According to figures provided by
OFCOM, BT has [10-15] % (*) of
in the
provision of traditional interface leased lines of 622 Mbit/
s and above (65). Despite being the incumbent
in the
telecommunications sector, it therefore appears that BT had
a relatively low market share in this specific market. It could
if BT was indeed enjoying such a
be assumed that,

the market

(64) Vtesse describes itself as a carrier providing innovative very high

capacity services (up to 66 Gigabits per second).

(*) Confidential information.
(65) For the lower bandwidth segment, it is also useful to point out that
OFCOM considers that BT does not have significant market power in
the retail market of leased lines of 8 Mbit/s and above. See http://
www.ofcom.org.uk/consult/condocs/llmr/

substantial advantage in the form of an exemption from
marginal taxation on new fibres, its market share would be
significantly higher. Therefore, data available to the
Commission do not confirm the allegation that BT benefits
from a competitive advantage which would make it very
difficult for other telecommunications operators to com-
pete with it on this specific market (66).

(173) As a final point on the question of

revisions,

In 2003 and 2004, however,

the
Commission also raised the concern in its decision to
initiate the procedure that ‘while BT does enjoy a down-
ward revision mechanism, there does not seem to be a
similar systematic review of market conditions faced by
competitors’. In view of the explanations provided by the
UK authorities and BT, the Commission is satisfied that this
concern is unfounded. BT is not subject to a downward
revision mechanism only: as already explained, the revision
mechanism applied to BT is based on the evolution of its
market shares. It is true that for a certain number of years,
its market shares, and therefore its rateable value, decreased,
which reflected a loss in value due to increased competi-
its rateable value
tion.
increased by GBP 4 million and GBP 7,1 million
respectively. As to competitors, they can, and have indeed,
benefited from downward revisions:
they
received a 15 % discount on the rateable value of their optic
fibre networks as of 1 April 2001 and a 25 % discount as of
1 April 2002 in order to reflect oversupply in that sector.
As a result, the rateable value of a fibre pair fell from GBP
1 000 per km outside the London area in 2000 to GBP 850
per km in 2001, and GBP 750 between 2002 and 2004.
Under the 2005-2010 list, the rateable value of km of fibre
pair has further fallen to GBP 500.
It means that an
operator whose optic fibre network remained stable over
that period would have enjoyed a 50 % reduction of its
rateable value.

for instance,

CONCLUSION

(174) In conclusion, it should be recalled that business rates are a
tax on the value of the property concerned. They are not a
tax on profits or revenues. They are normally applied on all
non-domestic properties, and consequently are applied to
all
telecommunications networks. According to British
case-law, all telecommunications networks are valued as a
whole. There are several methods for valuing such property.
When all methods can be applied, they should result in the
same valuation. The use of a specific valuation method
depends on the circumstances of the case.

(175) It now appears that

the VOA has applied to BT and
Kingston the general rules concerning business rates as laid

(66) Vtesse actually won a large contract against BT, in 2004, for the

provision of high bandwidth services to Lloyds TSB.

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L 383/95

down in the legislation and case-law. It is clear that the
valuation of BT's and Kingston's hereditaments as well as
the revisions of these rateable values, are carried out on the
basis of a different method than in the case of
their
competitors. However, the Commission can conclude that
there is no evidence that the use of this different method is
not justified by the objective differences between those
firms and their competitors and by the extent of
the
evidence available to the VOA.

(176) There is no evidence that the application of a different
valuation method to BT and to Kingston has resulted in an
advantage to these firms
in comparison with their
competitors. Since there is no evidence of an advantage,
the Commission can conclude that the non-domestic rates
system has not provided State aid to BT and/or Kingston
within the meaning of Article 87(1) EC during the period
considered by the Commission i.e. 1995-2005.

HAS ADOPTED THIS DECISION:

Article 1

The application by the United Kingdom of the tax on non-
domestic property to BT plc and Kingston Communications plc
from 1995 until the end of 2005 does not constitute aid within
the meaning of Article 87(1) of the Treaty.

Article 2

This Decision is addressed to the United Kingdom of Great
Britain and Northern Ireland.

Done at Brussels, 12 October 2006.

For the Commission
Neelie KROES
Member of the Commission