The New European Regulatory Framework from a Regulator

1
The New European RegulatoryFramework from a
Regulators Perspective

• Dr. Annegret Groebel, RegTPHead of Section
  European Co-ordination
• ITS-14th European Regional Conference
• Helsinki 24 August 2003
• http//www.regtp.de/

2
Telecommunications Regulation

• Liberalisation guided by regulation to guarantee
  a gradual and permanent transition from monopoly
  to competition in the telecommunications market
  Sector-specific competition law
• Remove all barriers and prevent the establishment
  of new ones in order to create self-sustaining
  competition no or low barriers to
  entry
• Competition will not evolve automatically,
  therefore the legal regulatory instruments must
  go beyond general competition law
• Regulation is the economic accompaniment of
  liberalisation
• Regulation is technology-neutral and asymmetric
• Competition offers a wider variety of choice to
  customers lower the barriers to
  change the operator for users
• A strong legal basis should provide the stable
  and cohesive framework necessary for consistent
  incentive regulation

3
Regulation and Competition I

• Close link to general competition law that will
  replace sector-specific regulation once market
  forces start to work and competition is
  self-sustaining, but until then regulatory
  instruments must go beyond general competition
  law by imposing special obligations on the
  dominant operator such as
• the obligation to grant access to essential
  facilities at non-discriminatory conditions in
  order to create a level playing field(special
  control of abuse of market power and equal
  access)
• ex-ante price control (cost-orientation
  criterion) in order tocounterbalance the market
  power of the dominant operator
• Keep market entry open by removing all legal
  barriers to entry and prevent the establishment
  of new economic/strategic ones
• Prevent price squeezing with regulation on the
  access and wholesale level, while applying
  competition law on the retail lev.
• Prevent foreclosure and leverage with ex-post
  price control (to stop short anti-competitive
  practices)
• Competition in the former monopoly telecom
  markets not yet self-sustaining but still reliant
  on regulation, which must contin.

4
Regulation and Competition II

• All of these special obligations are necessary to
  balance the structurally imbalanced situation
  (potential for abuse of market power) in the
  fixed network market due to the fact that the
  incumbent is a vertically integrated operator-
  owns the essential facilities, on which the new
  entrants rely (vertical relationship on the
  wholesale level) and - faces the new entrants
  as a competitor on the retail market for
  telecoms services (horizontal relationship)
• Regulation defined as the power to impose special
  obligations on the dominant operator and enforce
  compliance is therefore necessary to
  counterbalance the market power of the dominant
  operator (generally the incumbent) and his
  willingness to use it structure conductive to
  abusive behavior
• Special control of abuse of market power
  (anti-competitive behavior by the dominant
  operator) by the regulator as behaviourial
  aspects become more important in riper markets
  competition law instruments incorporated in
  sector-specific law

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Regulatory Rationale of LRICS

• The regulator is placing himself in the same
  situation as a new operator having to make the
  investment decisions related to market entry now
  current costs instead of the incumbents incurred
  costs (historical costs) are to be used (actual
  prices) as otherwise the make-or-buy decision
  would be distorted
• By setting prices equivalent to the costs of
  efficient service provision the regulator
  anticipates future prices prevailing on a fully
  competitive market reflecting the forward looking
  investment costs which are the costs of efficient
  service provision (defined as LRICS)
• Cost-orientation is especially important as it
  allows to steer the market forces in the right
  direction by ensuring the optimal allocation of
  resources at the same time
• Concept of LRICS and CCA ensures a balanced
  approach to promote infrastructure as well as
  service competition, is applied consistently for
  all services (IC as well as LLU)

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Where do we go?

• With the rapidly changing market structure and
  the emergence of new markets a need was felt to
  review the existing European framework and adapt
  it to the new technological and commercial
  conditions where necessary
• The discussion was started by the Commission in
  1999 (Review 99) and ended with the adoption of
  the new legislation by the European Parliament on
  Dec. 12th 02
• Regulators should have more flexibility and the
  new legislation should reflect the evolution of
  the telecoms markets since liberalization in
  1998, the state of competition should be analysed
  and evaluated to assess where a greater reliance
  on general competition law is possible and
  appropriate

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99 Review of European TC Legislation Key Issues

• Streamlining the European legal framework5
  proposed directives
• Technological neutrality and convergence a
  single legal framework for all electronic
  communications markets
• More flexibility to adapt regulation to the
  rapidly changing market conditions
• More harmonisation in the application of European
  law by National Regulatory Authorities
• More reliance on general competition law where
  sector-specific rules are no longer necessary
  taking into account market developments since
  liberalization, thus less sector-specific
  regulation

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EU Regulatory Package I

• With the much broader concept of electronic
  communications networks the new package comprises
  the whole industry and takes account of
  convergence and new technological developments
• Changes only where these encourage greater
  competition and are necessary to ensure
  neutrality of regulation for convergent
  technologies (technological neutrality Art. 8 FD)
• With the closer link to the dominance concept of
  EU competition law sector-specific regulatory
  legislation is embedded in general competition
  law and thus is a logical consequence of the
  market development since liberalization started
  in 1998
• With the New Group (ERG) the veto power of the
  Cion (Art. 7 FD) the last aim of the reform
  package to reach a more harmonized approach of
  regulatory practices across Europe is taken care
  of ensuring a consistent application of the new
  directives

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EU Regulatory Package II

• Package comprising the new European regulatory
  legislation adopted by the EP on Dec. 12th 2001,
  publ. on April 24th 02, transposition into
  national law within 15 months (July 25th 03)
• 4 directives and the frequency decision
• Framework, Authorisation, AccessInterconnection,
  Universal ServiceUsers Rights Directive
• Commission given a veto right in Art. 7 FD
• Frequency Decision (allows spectrum trading, but
  not mandatory)
• Guidelines on Market Analysis published on July
  9th 2002
• Draft Recommendation on Market Definition publ.
  for consultation on June 17th 02, hearing held
  on July 3rd 02,2nd hearing (NRA/NCAs only) held
  on Oct. 9th 2002, finally adopted and published
  on Febr. 11th 2003 (revised list of markets
  Annex I FD, 18 markets to be regulated)
• ERG decision Spectrum Policy Group decision
  publ. July 02
• LLU Regulation publ. Dec. 2000, in force since
  Jan. 2001

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EU Regulatory Package III

• Art. 14-16, Annex I II FD, Recommendation on
  relevant markets susceptible to ex ante
  regulation, Guidelines on market analysis and the
  assessment of SMP
• Introduction of the concept of dominance by
  linking the definition of market power to EU
  competition law, which also introduces joint
  dominance of 2 operators, which is particularly
  relevant for the mobile market
• The strict 25 SMP threshold of the current ONP
  directive is replaced by a dominance threshold
  and criteria taken from EU competition case law
  analysis jurisdiction
• Qualitative criteria such as financial power,
  links to upward and downward markets, barriers to
  market entry and structural links to other
  companies must be taken into account when
  assessing the market power
• If an operator is found to be dominant (either
  individually or jointly), at least one special
  obligation must be imposed, which must be
  appropriate and proportionate to remedy the
  problem to be chosen from the list in the AID/USD

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Market Analysis I
Market analysisrelevant market definition
Results can be vetoed
Remedies cannot be vetoed
Important role of NRAs to choose the
appropriate remedy Remedy should be effective
solve the lack of competition
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Market Analysis II

• A market analysis consists of 2 steps-
  definition of the relevant market- determination
  of a dominant (SMP) operator
• Definition of the relevant market- product
  concept of effective substitutability-
  geographical international / national / regional
  / local
• Dominant position is defined as an uncontrolled
  room for action of an operator allowing him
  strategic behavior
• Criteria for dominance- quantitative -- market
  share -- difference in
  market share- qualitative -- financial power
  -- links to upward/downward
  markets -- structural
  relations to other companies
  -- barriers to market entry (legal / factual)
  -- actual or potential
  competition

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Framework Directive

• Art. 3 National Regulatory Authority
  independence from market parties
• Art. 6 National consultation on draft measures
  (market definition SMP determination,
  remedies)
• Art. 7 Consultation with other NRAs and
  Notification of draft measures to the
  Commission so-called consolidation procedure
  Veto power on market definition SMP
  if internal trade is affected draft
  measure considered not to be in line
  with Art. 8 objectives, to achieve a
  greater harmonisation and the internal
  market, but no veto power on remedies, only
  comments, which have to be taken into
  utmost account by NRAs

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Access and Interconnection Directive I

• AID provides in Art. 5, para 4 for NRAs the power
  to intervene at own initiative to enforce access
  and interconnection in dispute resolution
  proceduresimportant for disputes on SLAs, which
  become more and more important with market
  evolutiongreater reliance on competition law to
  enforce contractual penalties and stop
  discriminatory and anti-competitive behaviour
  with behaviourial aspects becoming more important
  than structural problems
• Choice between imposing different regulatory
  obligations acc. to Art. 8 13, acc. to Art. 8,
  para 4 measures must be proportionate and based
  on the nature of the problem (appropriate to
  solve it)greater flexibility to act acc. to
  market needs, but having regulatory instruments
  still available new mixture allows NRAs to
  intervene when necessary and thus to prevent
  remonopolisation

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Access and Interconnection Directive II

• Art. 9 Transparency obligation
• Art. 10 Non-discrimination obligation
• Art. 11 Accounting separation
• Art. 12 Access obligation
• Art. 13 Price control (cost-orientation)
  cost of efficient
  service provision
• In case wholesale remedies do not work
• Art. 17 US-Dir. Regulatory controls of retail
  services
• Art. 18 USD Regulatory controls of minimum set
  of LL
• instead of the former automatism,
  the remedy must be proportionate
  and appropriate to solve the
  problem increased role for the NRA

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Bitstream Access I

• Definition acc. to document ONPCOM01-18rev1
• Incumbent installs a high speed access link to
  the customers premises and makes it available
  to third parties, to enable them to provide high
  speed services to customers
• Incumbent may also provide backhaul to carry
  traffic to a higher level in the network
  hierarchy where new entrants may already have a
  point of presence
• Bitstream access allows new entrants to
  differentiate the service offered to customers as
  they can alter certain technical parameters.

? Various possible handover points for xDSL
traffic between incumbent and OLO/ISP
17
Bitstream Access II

• Economically bitstream access is a wholesale
  product, which is neither unbundled or shared
  access nor pure resale, but lies in between those
  extremes on the value chain bitstream access
  requires less investment (low-cost entry
  option)
• Technically its the provision of transmission
  capacity (in most of the cases ADSL, but not
  exclusively) between an end-user and the PoI of
  the new entrant (e.g. ATM-IC)
• Legally under the current framework the
  obligation to provide bitstream access can be
  derived from the non-discrimination principle
  acc. to Art. 16 (para 7) of the Voice Telephony
  Directive (98/10/EC) and SMP operators must meet
  reasonable requests, but its not an obligation
  mandated by the ULL Regulation 2887/2000 under
  the new regulatory framework, bitstream access is
  mentioned in the Recommendation (2003/497) as
  part of the wholesale broadband access market
  susceptible to ex-ante regulation and can be
  mandated as an access obligation according to the
  AID (cf. doc. COCOM03-04rev1)
  legal basis clearly strengthened

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Institutional Set up in Germany I

• Umbrella approach, which means
• The Federal Cartel Office (BKartA), which was
  established in 1958 when the Restraints against
  Competition Act (GWB) entered into force, has a
  co-ordinating function regarding the definition
  of the relevant market by NRAs (RegTP being the
  only NRA), merger control remains in the
  responsibility of BKartA
• RegTP must acc. to section 82 TKG get agreement
  for its definition of the relevant market as
  well as the determination of a dominant operator
• The same threshold for dominance holds in all
  sectors of the economy as the TKG refers
  explicitly to a dominant position acc. to section
  19 GWB, to guarentee a close link between
  regulation and general competition law

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Institutional Set up in Germany II

• In Germany competition law applies for market
  definition, market analysis and thresholdsSMP
  tresholds for the communications sector identical
  to those in the rest of the economy
• Highest possible degree of coherence of sector
  specific law with competition law already
  achieved in Germany
• This close link between sector-specific
  regulatory legislation and general competition
  law will now be introduced in EU regulatory
  legislation too via the concept of dominance

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Institutional Set-up in Germany III

• Section 7 13 of the draft law (published April
  30th 03) transpose the relevant articles of
  the FD, Recom, Guidelin.

• Recommendation on relevant markets as a basis,
  18 markets recommended to be analysed

• Review of the List of Recommendations (if
  applicable, to be extended or reduced based on
  COM review criteria/ workable competition, veto
  right of the EU Commission)

• Market dominance Section 19 of the Act Against
  Restraints of Competition guidelines to be
  considered/ Art 14(3) of the Framework Directive

• Extensive, time-consuming consultation and
  consolidation procedure (acc. to Art. 6 7 of
  the FD)

• Participation of the Federal Cartel Office (as
  now)

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Cooperation between National Regulators

• Independent Regulators Group (IRG)
• Informal Group of Telecoms NRAs founded 1997 in
  Paris
• to share experience and information
• to develop common approaches
• to discuss national implementation measures
• with the aim of harmonising regulatory practice
  across Europe and to ensure a consistent
  application of the European legislation by
  issuing so called Principles of Implementation
  and Best Practice (PIBs)
• as horizontal coordination on a voluntary basis
• Since Jan 2003 IRG has 29 members who meet
  regularly
• OPTA chairs IRG since Jan 2003 for one year
• With the ERG where the EU-Commission will
  participate, IRG will have an official role to
  play, IRG continues to exist

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ERG / New Group (1)

• IRG favours the establishment of a so-called NEW
  GROUP or ERG European Regulators Group
  proposed by the Commission at the NARA meeting
  in Brussels on Nov. 8th 01
• The NEW GROUP/ERG
• would encompass NRAs and Commission delegates to
  discuss problems of a harmonised implementation
  of the European legislation and to adopt common
  positions for a uniform application of the
  directives.
• would discuss implementation measures only
• would have advisory functions (no commitology
  committee)
• would not take decisions that are legally binding
• IRG favours a joint secretariat

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ERG / New Group (2)

• The NEW GROUP/ERG would organize the consultation
  process foreseen in Art. 7 FD among NRAs and the
  consolidation procedure with the Commission
• It would build on the existing regulators group
  (IRG), although the group would continue in
  parallel
• The work of IRG would thus become more official
• Transparent working structure with consultation
  procedures for market parties annual report to
  Cion/EP
• The chairperson would always be a NRA president
• The chairperson would be responsible for the
  agenda
• The NEW GROUP/ERG would set up its rules of
  procedure
• The decision to establish ERG was adopted by the
  Commission on July 29th 02 (2002/627/EC, publ.
  in the OJ on July 30th 02)
• Secretariat of the group to be provided by the
  Commission

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ERG / New Group (3)

• The inaugural meeting of ERG was held in Brussels
  on Oct. 25th 2002 to which the 19 IRG members
  were invited for the Commission DG INFOSOC and
  DG COMP took part
• The meeting was opened by Com. Liikanen pointing
  out the importance of co-operation both
  vertically between the Commission and the NRAs as
  well as horizontally among NRAs for a harmonised
  approach to regulation
• The Chairman of the Dutch NRA OPTA, Prof. Jens
  Arnbak was elected chairman for the year 2003
• IRG provided a draft of the rules of procedure
  which is checked by the Commissions legal
  services
• The Commission provided a draft paper on how to
  organize the Art. 7 procedure efficiently which
  was checked by IRG
• Regular ERG meetings every 2 months
• A call for proposals for the ERG workprogramme
  was published with the press release
• 2nd meetg. (23/01/03 /Amsterdam) 3rd meetg.
  (20/05/03 /Athens)

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ERG Workprogramme I

• After consulting with market parties, ERG adopted
  its 2003 workprogramme on its 2nd meeting
• Implementation of the new framework is a top
  priority, especially the Art.7 FD procedure
• No examples as Art.7 FD is a novelty in European
  law
• Process should not go any further than the FD,
  especially it should not prolong the 12 months
  period through the backdoor
• Draft discussed within the IRG Implementation WG
  and with the Cions services on the working
  level before it was transferred to the COCOM
• Final Draft cleared in the COCOM (advisory
  procedure 11/06), adopted by the Cion on 23 July
  03, publ. in OJ L 190/13
• Currently ERG is drafting a working paper on
  remedies with input from the Cions experts, IRG
  working groups and comments received in the
  public consultation

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ERG - Remedies call for input

• General Idea find principles for choosing the
  appropriate remedy to a competition problem
  (mapping)
• The Call for Input on Remedies was published on
  ERG and IRG website - Consultation period until
  4th of July
• Two layers for which input was requested
• General level
• Views on principles and guidelines to take into
  account when designing appropriate and
  proportionate remedies for market failures
• Detailed level
• On individual competition problems and remedies
  (including effects on the market and practical
  issues relating to implementation)

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ERG Workprogramme II

• As in the IRG Workprogramme broadband, LLU,
  mobile termination rates etc. are of top
  regulatory priority
• Other issues proposed by the Cion are 3G network
  sharing and spectrum trading
• An ERG only point is advice to the Cion on
  transnational markets (Art. 15, IV FD)
• Also important is how to ensure transparency
  transparency rules adopted in the January meeting
• A vacancy notice for the temporary post of the
  General Secretary for the ERG Secretariat was
  published
• Applicants must have 5 years of experience in a
  regulatory body and a good knowledge of the rules
  governing the sector
• As 1st ERG-General Secretary Prof. Otruba (former
  President of RTR) was appointed. He will take up
  his post on August 1st 2003

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Conclusion I

• Since liberalization started in 1998 markets have
  developed dynamically and show signs of emerging
  competitive structures
• To achieve this a strong framework of
  sector-specific regulatory rules was necessary
  as competition would not evolve automatically
• Especially important were the obligation of SMP
  operators to grant new entrants access at
  cost-oriented prices
• With the initial phase accomplished and new
  technologies leading to convergent markets with
  new players and strategies, the regulatory
  framework too had to be adjusted in order to
  tackle the problems of the new situation
  adequately, but without risking a backlash by
  relaxing regulation too early as lightening the
  regulation too soon would result in strengthening
  the incumbent again with the danger of
  remonopolization
• This was done with the new European regulatory
  framework,currently transposed into national law
  by Member States

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Conclusion II

• On 25 July 2003 the new regulatory framework
  replaced the ONP regime, the new framework was
  transposed into national legislation in 5 Member
  States Dk, SF, Ire, Swe, UK a number of
  regulatory issues are now imposing themselves on
  NRAs
• IRG is preparing itself for the implementation by
  developing a common understanding of the new
  principles in order to adjust regulatory
  activities to new market situations
• The passing over from the old to the new regime
  requires careful analyses of the impact that the
  application of regulatory and competition law
  instruments will have on the telecommunication
  markets
• The new framework allows a differentiated
  approach to address different market stages
  adaquately, less intrusive intervention in more
  advanced markets, continue regulation where
  necessary such as in bottleneck type markets
• With the veto power of the Cion and the ERG, a
  closer co-operation among NRAs takes place

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Conclusion III

• Market analysis must take into account different
  national circumstances, but the same regulatory
  consequences should be triggered by dominance
• If the same regulatory consequences follow the
  determination of market power, a level playing
  field is created as operators are aware that they
  face the same consequences as dominant operators
  by all regulators
• Currently RegTP is preparing internally to run
  the market analysis as soon as the new regime
  provides data collection powers, all 18 markets
  will be analysed
• The aim of regulation to create an effectively
  competitive market should guide the regulatory
  reactions, which should be proportionate and
  appropriate to remedy the problem