INTUG - submission to the ERG on remedies

INTUG - International Telecommunications Users Group

European Regulators Group

Remedies under the EU regulatory framework

a [final draft] submission by INTUG

introduction	INTUG welcomes the opportunity to comment on the work by the European Regulators Group (ERG) and the European Commission (EC) on remedies to be imposed under the current European Union electronic communications legislation. There are difficult issues where the directives leave considerable freedom in implementation and a risk of divergence, rather than harmonisation. We recognise the importance of the process of assigning the remedies and the need for this to be thorough and fully harmonised. The regulatory package is no longer new, the political agreements were made over two years ago, even though transposition has been significantly delayed in a number of member states. It is important to assess the cost of these delays in implementation to current and potential users, to new entrants and to the European economy, since it will be necessary to take this into account in applying remedies. INTUG previously submitted comments on the consultation in 2003 on the principles to be used in the application of remedies. We do not expect the present document to be the last consultation and hope to see further work in the near future. Where we can we will comment on subsequent consultations. It is not clear to us whether it is necessary or possible to take a principled position on the question of a preference for infrastructure-based competition or service-based competition. Such discussion have gone on for many years with conflicting evidence. Decisions are likely to have to be taken on a case-by-case basis, using the policy objectives in the Framework Directive. While we welcome the consultation and the transparency it provides, we cannot fail to note its length and complexity nor the extent to which this excludes individual citizens and many groups which lack professional legal and economic expertise. It raises the barrier to entry for comments to a very high level. It is a problem that is increasingly common in ever more complex consultations. The consequence of this is that the ERG, the individual National Regulatory Authorities (NRAs) and the EC must ensure that the process is more than one of market players "jockeying" for position. Regulators must have a higher regard for the overall policy aims than they would otherwise have, given the necessary silence of the majority. They may well require additional resources to do this and it may be necessary to benchmark their capabilities against those of the operators being regulated. The questions given below are taken directly from ERG(03)43. However, these do not always allow a detailed or direct consideration of the very lengthy text, with many interesting or potentially contentious issues left untouched.

typology	Do you agree that the description of the competition problems provides the requisite level of detail? If not, please highlight areas where you would like more detail to be included in the final document. The categorization of competition problems appears to us to be comprehensive and to have sufficient detail: vertical leveraging refusal to deal/denial of access discriminatory use or withholding of information delaying tactics bundling/tying undue requirements quality discrimination strategic design of product undue use of information about competitors price discrimination cross-subsidisation predatory pricing horizontal leveraging bundling/tying cross-subsidisation single market dominance strategic design of product to raise consumers’ switching costs contract terms to raise consumers’ switching costs exclusive dealing over investment predatory pricing excessive pricing price discrimination lack of investment excessive costs/inefficiency low quality termination tacit collusion excessive pricing price discrimination refusal to deal/denial to interconnect Are there relevant examples of competition problems that are not covered by this framework? If you believe that there are, please provide details. It is possible that by the initial distinction between mobile and fixed telecommunications may distort the understanding of competition problems and therefore their resolution. It would appear to be more thorough and systematic to resolve the extent to which mobile and fixed are in the same markets and contestable at the earliest possible stage and then proceed to analyse the problems.

remedies	Do you agree with the description of remedies provided, in particular, does it provide the requisite level of detail? A list of obligations or remedies that NRAs may impose on operators with SMP is provided in: Access and Interconnection Directive (2002/19/EC) a transparency obligation (Article 9) a non-discrimination obligation (Article 10) an accounting separation obligation (Article 11) an access obligation (Article 12) a price control and cost accounting obligation (Article 13) Universal Service Directive (2002/22/EC) prohibition of (Article 17(2)): excessive pricing inhibition of market entry predatory pricing undue price discrimination unreasonable bundling of services by means of: price caps individual price controls cost-orientation comparability of prices provision of a minimum set of leased lines (Article 18) carrier selection and carrier pre-selection (Article 19) The ERG/EC document supplements these with a level of detail that we consider to be adequate. However, we note that some of the options under the Universal Service Directive do not appear in the ERG/EC document. INTUG welcomes further innovations in remedies. Obligations not explicitly listed in the directives can be introduced, subject to prior agreement with the European Commission, under Article 8 (4) of the Access Directive. It is important that NRAs be encouraged to think systematically about how innovation in regulation can be encouraged and, if successful, how it can be adopted more widely.

principles	Are there any further principles, in addition to those set out in Chapter 3, that you wish to propose? If so, please justify them on the basis of the Directives. The "policy objectives and regulatory principles" of the legislation are set out in Article 8 of the Framework Directive, including a reference to the desirability of technology neutrality. The ERG/EC document identifies a further set of "principles" on page 58 to be used in identifying appropriate remedies: that the remedy selected must be based on the nature of the problem identified where infrastructure competition is not likely to be feasible NRAs will need to ensure that there is sufficient access to wholesale inputs where replication of the incumbent’s infrastructure is feasible, the available remedies should assist in the transition to a sustainable competitive market. NRAs should produce reasoned decisions in a transparent manner that respect the principle of proportionality and are in line with the objectives set out in the Framework Directive that remedies should be designed, wherever possible, so that the advantages to the regulated party of compliance outweigh the benefits of evasion. This terminology, with principles at two quite different levels, is potentially confusing and can hardly fail to be misleading. To complicate matters further, some of the principles here are procedural while others relate to the contentious question of a potential preference for service-based or infrastructure-based competition. It would be very much better to separate out the procedural issues (1, 4 and 5), about which there is little, if any, disagreement, to explain how NRAs should behave in identifying and assigning remedies. The ERG could then separately explain how the assignment of remedies should be matched to the achievement of the policy objectives set out in the Framework Directive. The other important issues are, largely, covered in the questions below concerning short-term versus long-term benefits and service-based versus infrastructure-based competition. One area of concern is the lack of progress on the completion of the single market. Under Article 8 of the Access Directive, NRAs must impose remedies the "contribute to the development of the internal market". As the document observes: This can be achieved inter-alia by removing obstacles to pan European networks and services and ensuring a consistent regulatory practice across the community; Much greater progress on pan-European and trans-national markets needs to be achieved and the ERG should give this a higher priority with more proactive policies. Looking at the objectives in Article 8(2) of the Framework Directive, what are your views about how NRAs can balance short term and long term objectives? Article 8 (2) of the Framework Directive states: The national regulatory authorities shall promote competition in the provision of electronic communications networks, electronic communications services and associated facilities and services by inter alia: (a) ensuring that users, including disabled users, derive maximum benefit in terms of choice, price, and quality; (b) ensuring that there is no distortion or restriction of competition in the electronic communications sector; (c) encouraging efficient investment in infrastructure, and promoting innovation; and (d) encouraging efficient use and ensuring the effective management of radio frequencies and numbering resources. This makes no mention of the time frame over which competition should be expected to be achieved. Timing has proved difficult to predict in the past because of changes in: technology business models availability of finance (including bursts of irrational exuberance) In terms of selecting remedies, NRAs are constrained to look at short periods of time, up to the next assessment, typically 18 to 24 months. Consequently, they are obliged to implement remedies that will have significant effects within relatively short periods of time. Do you think that there are any trade-offs between short-run service competition and long-run infrastructure competition? If yes, please highlight potential areas and provide relevant examples. In this context, what are your views on the approach that NRAs should take in relation to (short term) business failures? This question appears to assume that service-based competition is only or primarily for the short-run. This is not necessarily the case, with Mobile Virtual Network Operators (MVNOs) being an example of an operator that is likely to be present for the medium to long term. Equally, a fixed carrier may offer international telephony without any intention of constructing infrastructure. Both types of operator can usefully co-exist. The hope has been that service-based competition would progress to infrastructure-based competition. This was first developed for narrowband, but the switch to broadband, changed the target and stages of development. It may well change again. It is not clear that a principle can be applied here, rather NRAs will be obliged to consider the application of Article 8(2) to markets on a case-by-case basis with inevitable trade-offs. Failures of telecommunications operators are now much better understood by users than they were two years ago. Business users have taken measures necessary to ensure continuity in the event of failures. Nonetheless, NRAs need to take measures to ensure the continued operation of a carrier that has failed until such time as customers can transfer to another operator or another operator can take over the business of the failed operator. This may also be addressed under the Authorisation Directive. It is important to note that the failed operator may be based in another member state, so that cooperation with other NRAs will be highly beneficial. Do you agree with the proposed treatment of emerging markets? If not, please provide details. Recital 27 of the Framework Directive states that the guidelines will: ... address the issue of newly emerging markets, where de facto the market leader is likely to have a substantial market share but should not be subjected to inappropriate obligations. The EC/ERG document states (page 69) that: As a general principal [sic], emerging markets should be allowed to develop according to the normal dynamics of market forces. Thus, emerging markets should in almost all circumstances be governed only by the application of general competition law. This appears largely or entirely to ignore the history of the application of competition law to the high technology sector over the last fifty years. It has proved hopelessly inadequate in the provision of redress or even survival to new entrants in the face of the activities of IBM, Microsoft and incumbent telephone companies. A significant problem with competition law is the slowness with which it acts. For example, the competition law case on international mobile roaming has been open for nearly five years without any resolution. The Directive contains two options for emerging markets of which one, as indicated, is to leave it to the slow actions of competition law, but the other is to forbear from ex ante regulation until it is seen to be appropriate to intervene. What is needed is careful observation of developments in the market and timely interventions while problems can still be contained. In particular, the issue of leverage of market power from related markets must be taken into account. Are there any special considerations which should be taken into account in designing appropriate and proportionate remedies for the markets in accession countries? The new member states tend to have less well developed networks and competition is less well established, factors which need to be taken into account.

matching problems and remedies	Do you agree with the description of problems and related remedies? If not please provide an alternative analysis. Yes. Do you agree that the document offers sufficient guidance concerning the approach on remedies to be taken by NRAs? If not, please highlight those areas where you would wish to see more guidance provided. Yes. Does the document provide sufficient guidance on which particular cost accounting methodology would be appropriate for those competition problems for which NRAs may consider price regulation? If not, please highlight those areas where you would wish to see more guidance provided. Yes. Is sufficient guidance provided in relation to mobile call termination in chapter 4? If not, please outline what issues would require further elaboration. Please express your views on the principles that should guide NRAs in dealing with new entrants and/or smaller players in mobile termination markets. Section 4.5 covers call termination and in particular mobile call termination, an issue that has been controversial in recent years and is destined to remain so. It has been the subject of extensive attention by NRAs, NCAs, appellate bodies and DG Competition. INTUG remains anxious to see domestic and cross-border fixed-to-mobile rates reduced substantially and quickly. In addition to the issue of excessive charges, there is a significant problem of the failure to achieve fixed mobile convergence. This is caused by the financial incentives for operators to keep mobile networks separate. Clearly, if the price limit set for termination is calculated on the basis of a large or very large network, then it is likely to be below the cost of a small or newly opened network using comparable technology. Consequently, it could cause that operator to incur a loss which it could not recover on other charges because of competitive pressures. Conceivably, this could result in discouraging market entry or hinder growth. One obvious solution is to permit initially higher but gradually descending prices. This creates a problem of avoiding distorting competition, of retaining incentives to become more efficient and to grow. For example, new entrants should not be allowed to use revenues for initially higher termination rates to drive down call origination prices unnecessarily. The key principle is to avoid the distortion of competition and in particular cross-subsidy. Does the document provide sufficient guidance with the text boxes on bitstream, re-selling access lines and international roaming in Chapter 4? Bitstream access The ERG conducted a consultation on bitstream access in 2003. INTUG did not comment on this because it was felt to be an issue where although the user benefits were clear, the complex technical and legal issues were matters for the operators. We remain of the opinion that the purpose for which bitstream access was launched, namely a service that an alternative operator can customise to the needs of its customers, is an essential wholesale service. However, the details, we leave to others. Reselling access lines Text box 2 describes Wholesale Line Rental (WLR) or the resale of access lines. It appears to be a very useful addition to and extension of mandated wholesale products, allowing an alternative operator to provide a genuine and complete alternative to the incumbent operator. INTUG supports in principle the introduction of WLR. Like bitstream access, we believe that the wholesale customer, rather than the end-user, can best describe the details required to make this measure a success. International mobile roaming Text box 3 attempts to describe the situation in international mobile roaming, without conducting a market analysis. It is a subject on which INTUG has expressed repeated concerns to the European Commission and to the ERG. We are somewhat surprised at the claims for the existence of the special terms for roaming available to "some groups of business customers in countries with fierce competition on the mobile retail market." There are some modest discounts but nothing we recognised as "fierce" competition in retail roaming markets, nothing that we have ever been able to detect. It is important to recall that at the retail level, whether for one individual or a large multi-national corporation, roaming is purchased as part of a package of mobile telecommunications services comprising access, origination, termination and roaming. There may be some discounting of origination prices or sometimes of termination, but very little of roaming. While we are aware of the GSM Association code of conduct on pricing information we are unaware of it having had any discernible effect. Obtaining information on roaming prices remains very difficult. It is somewhat surprising to have to address the issue of the prohibition of non-discrimination. Normally, non-discrimination would be imposed as a remedy, rather than removed! Nonetheless, it may be necessary to stop the current method of applying non-discrimination and to oblige operators to engage in proper discounting on a rational economic basis. It may also be possible to create some additional competition by means of requiring MNOs to offer roaming to foreign MVNOs and likewise to require MNOs to allow domestic MVNOs to offer roaming to foreign MNOs. This may require the forced unbundling of domestic services from international roaming, in order to permit an MVNO to purchase services domestically in several countries and to combine these into a trans-national service. On price controls for roaming: Additionally, one can argue that the imposition of price controls and cost accounting obligations could be disproportionate. In this case, and if technological developments are able to develop substantial competitive pressure, it might be sufficient to promote higher transparency of tariffs in the retail market. Proportionality would have to be weighed against effectiveness and against the gross and excessive monopoly rents accumulated on international mobile roaming over the past decade and the speed with which prices could be reduced to anything like cost. Price transparency could never be considered a proportionate remedy. INTUG is of the view any expectation of an outbreak of competition in international mobile roaming is wildly optimistic and cannot be substantiated by any evidence in the retail market. We remain strongly of the opinion that cost orientation is the only effective and expeditious solution to the roaming abuse. Do you agree that the principles developed also apply in cases of joint dominance? Do you have observations regarding specific remedies that may be appropriate in situations of joint dominance? Joint dominance is a doctrine with less legal certainty than would be desirable for ex ante regulation. Any attempt to use it under the directives would result in an appeal to the European Court of Justice (ECJ) which would extend beyond the next analysis of the market under consideration. Clearly, one way to resolve the problems associated with joint dominance is to engage in further opening of the market in question whether by service-based or infrastructure-based competition. Where market entry is not feasible, for example because of the absence of spectrum, then price controls would appear to be necessary. Do you think that the discussion in Chapter 4 will assist NRAs in achieving a consistent application of the framework? In particular, is it sufficient to focus on harmonisation of outcomes or should there also be harmonisation of regulatory approaches? The first question is whether the objective is some modest level of harmonisation or the creation of a single market with national barriers pulled down to force operators to compete in each other's market. INTUG has previously stated its preference for strong measures to achieve a true single market. It is very difficult to see how NRAs can be expected to achieve harmonised outcomes if the objectives, approaches and processes they employ are significantly different. The enormous variations in the effectiveness of the Regulation on unbundled access to the local loop (2887/2000) indicate how diverse outcomes are possible from a completely harmonised legal instrument.

other comments	It is necessary to remember the important objectives set by the European Council in the Lisbon goals. There is also the work of the Competitiveness Council concerned with raising European economic performance. It is unlikely that complex regulatory procedures would, of themselves, contribute to achieving either set of goals, that is only going to be achieved through the rapid adoption of ICTs across the European economy, driving faster economic growth. It is important that these objectives are considered by the ERG and NRAs. It is important that the remedies imposed under the current directives do not result in a reduction of the access available to operators, unless there is clear evidence of sustainable competition. The rolling back of regulation should not have have the effect of reducing competition. While we welcome this consultation we note that the material is relatively complex. There is a distinction to be drawn between a consultation of the public and one held in public. Where the public cannot participate fully, it falls to the public authorities to ensure that their interests are fully considered. Without this, the process favours the bigger players with the resources to pay for research and to engage in sophisticated politico-regulatory games with a view to better controlling the direction and slowing the pace of liberalisation for their short term financial gain.

INTUG	INTUG, the International Telecommunications Users Group asbl, is an association of national telecommunications users associations, based in Brussels. INTUG was founded in 1974 in Den Haag at the suggestion of Vicomte Etienne Davignon, then a European Commissioner, to act as a single voice for users of telecommunications. The mission of INTUG is to ensure that users have access to affordable, interoperable telecommunications services and that their voice is heard wherever telecommunications policy is decided. For almost thirty years INTUG has argued for the introduction of competition in telecommunications and that all users must have access to the benefits of such competition.

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Last updated 19 January 2004.