an INTUG submission to the European Regulators Group, July 2003
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Remedies under the
European Union legislation an INTUG submission to the European Regulators Group, July 2003 |
| introduction |
INTUG welcomes the new European Union
legislation for the electronic communications sector. We are disappointed
that despite the clear political agreement reached in December 2001 some
member states have not been able to meet the agreed deadline for transposition.
As a consequence implementation and market analyses will look less like
a big bang and more like a catherine wheel. We set out in our submission to the European Regulators Group (ERG) in December 2002, our view that harmonisation was extremely important. We believe that expeditious completion of the internal market is vital in order to achieve rapid adoption of ICTs and accelerated economic growth. The very national nature of telecommunication markets, with ever more entrenched incumbent operators, remains a significant obstacle to the internal market in all other sectors of the economy. The new legislation contains the potential to reduce harmonisation, allowing regulators to go off in different directions. For many market players there are strong incentives to encourage divergence and to work against harmonisation. Market conditions must be harmonised in order to complete the internal market. We support the views of the OECD set out in Seizing the benefits of ICT in a digital economy and After the telecommunications bubble arguing for a further strengthening of competition in the ICT sector, in particular in telecommunications. Competition can best be strengthened by the careful analysis of the failings of markets in order to identify suitable remedies to be imposed on market players. The analyses will have to be thorough and appropriately detailed in order to determine the problems, failures and abuses in the markets. |
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| independence |
A prerequisite for the proper implementation
of the legislation is that each country has an effective National Regulatory
Authority (NRA). Each NRA must be given the full range of powers as
set out in the directives and left to implement them. These powers must
not be curtailed or distorted. The NRA must have sufficient funds and appropriately skilled staff to undertake all of the roles assigned to it. The NRAs must be independent from the commercial concerns of the operators. While NRAs can hardly fail to be aware of the enormous debts run up by certain operators or the sharp reductions in share prices, these must not be a factor in making decisions. Market exit is a feature of liberalised and competitive markets, even if commentators like to concentrate on market entry. There is a special risk related to the significant number of governments retaining shareholdings in network operators. The financial considerations that might arise from this must not be factors in the decisions or in the avoidance of decisions by regulators. |
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| hamonisation |
Harmonisation means that in similar circumstances
different national regulatory authorities should impose similar remedies,
the most effective available. Undoubtedly a case can be made for a market in ideas, for innovation in regulation. However, the search for novel solutions can easily degenerate into novelty solutions that in retrospect would make an NRA look like a fashion victim. The lengthy debates in the United Kingdom, in the consultations by the Office of Telecommunications and the Competition Commission, showed that many clever, not to say cunning, schemes emerged which their proponents claimed would lead to the reduction of fixed-to-mobile rates. In the harsh light of our experience of operator behaviour almost all of these can be shown to be self-serving, disingenuous or simply ineffective. Given the staggered start of market analyses and obligations, there is a risk of regulators too closely following the leader. We do not consider this to be a serious problem. We would encourage any NRA which genuinely believes that it has an innovative and workable approach to put that forward. Efforts must be made to bring market conditions into alignment, in order to complete the internal market. NRAs must also comply with Article 7 of the Framework Directive. Where necessary, they can use the powers in Article 15(4) to reinforce this. |
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| old obligations |
The existing obligations on SMP operators
must be carried forward until the relevant market analysis has been
completed. They must be observed by the operators and enforced by the
NRAs. Many operators will try to get out of such obligations, but must
not be allowed to do so ahead of an analysis that shows the remedies no
longer serve a useful purpose. This requires continued vigilance by NRAs. Once the analyses and consultations have been completed then the existing obligations can and should be replaced by the new style of remedies, those designed to correct market failures. There is a risk here that the business models of certain operators will be adversely affected by such changes. This should be taken into account insofar as it would reduce competition in the market. It will be appropriate to consider time periods for transition to new regulatory remedies where the removal of old obligations would endanger the objectives set out in Article 8 of the Framework Directive. Either the new remedies or the old remedies must remain in place until the completion of any appeals. The European Union has made commitments to the World Trade Organisation (WTO), these are unaffected by the new legislation. In particular, in the Section 2.2 of the Reference Paper, to ensure interconnection with major suppliers at any technically feasible point in the network. The provision must be under non-discriminatory conditions (including technical standards and specifications) and at rates and of a quality no less favourable than that provided for its own services or for similar services of non-affiliated service suppliers or for its subsidiaries. |
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| new obligations |
Obligations are to be imposed on operators
with Significant Market Power (SMP) on a specific market, identified as
the result of an analysis using the Commission Guidelines.
(The ERG has usefully supplemented this with a working
paper.) The obligations must be commensurate with the problems identified in the analysis of that market and they must be proportionate. They must also be justified in the terms of the basic objectives set out in Article 8 of the Framework Directive (2002/21/EC), that is:
Remedies for wholesale markets are set out in the Access Directive (2002/19/EC) and for retail markets in the Universal Service Directive (2002/22/EC). The markets have been specified in the Commission Recommendation on relevant product and service markets within the electronic communications sector (C(2003)497).
In exceptional circumstances, Article 8 (3) of the Access Directive permits NRAs to propose remedies not listed. Their application is subject to approval by the European Commission. We would expect these to be very infrequent. In addition to the text of Articles 9 to 13, Recitals 14 to 23 in the Access Directive give clear indications of the circumstances in which the different remedies should be employed. Diverging significantly from these will doubtless be considered grounds for appeal by operators with SMP which would create uncertainty until that process was finished. In considering which remedies to apply, the NRAs will begin with their market analysis. Where market failures and abuses have been long-running or have a more substantial economic effect, then NRAs should impose harder and more immediate remedies. NRAs will also be able to draw on their considerable experiences of market dynamics and operator behaviour. This is not to suggest that they should carry forward all existing obligations. Rather, they will have developed measures they know, individually and collectively, to be effective. In the case of markets relating to local loop unbundling, it is important to note the enormous difficulties faced by new entrants. It will be important to continue to impose highly detailed regulations, based on the experience from this exercise. INTUG has already set out its position to the ERG on possible remedies for the national market for international mobile roaming in some detail. We continue to believe that remedying all the failures of the mobile markets should be a priority for NRAs. We place considerable importance on the imposition of effective remedies on fixed-to-mobile call termination and on ensuring that call origination is effectively competitive. In these cases we expect to see significant reductions in wholesale prices. These savings must be rapidly passed to the customers and NRAs should take measures to ensure this happens.
Articles 18 and 19 of the Universal Service Directive apply in specific circumstances. Whereas, the more general application of Article 17, to control retail prices, requires a positive conclusion that the remedies under the Access Directive and also carrier selection under Article 19 will not be effective. This considerably increases the importance of the remedies imposed in the wholesale markets and there being made to work. It implies that the remedies in a retail market should not be determined until the market analyses on the relevant wholesale markets have been completed. Alternatively, that the application of obligations in related wholesale and retail markets be considered simultaneously. The directives and recommendations do not indicate how to combine the various possible obligations. An obligation that does not reduce the effect of the market failure would clearly be superfluous. Specific obligations will not be considered and imposed in isolation, rather they need to taken as a whole. The application of each remedy will be based on market abuses and failures, plus the need to achieve the objectives of Article 8 of the Framework Directive. NRAs will need to consider interactions between market failures and interactions between obligations. Past experience indicates that the NRAs will need to be especially careful when considering issues of horizontal and vertical integration. |
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| null |
A number of operators have raised the
possibility that no obligation could be imposed. While this is not theoretically impossible, it would leave an NRA in the position of having identified at least one market failure and at least one operator as having SMP but then doing nothing. To reach such a conclusion would appear to be very strange, if not an outright dereliction of duty. It would require very strong evidence that the market failure was vanishingly small in terms of its economic effects on customers and competitors. The NRA would also have to be quite certain that the failure would disappear within the time frame, typically the next two years. Consequently, it seems a very unlikely turn of events. Peer review amongst NRAs appears to be an appropriate check on such a proposal. Since it is not a listed remedy, a null obligation would be subject to approval by the European Commission under Article 8(3) of the Access Directive. |
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| time frames |
The obligation on NRAs is to impose effective
remedies within the period up to the next review, typically two years.
Thereafter a new market analysis will be conducted and the remedies
amended or deleted. In some cases, the market definition might be altered
or the market not subjected to analysis. It is important to recognise that this is a short period for an existing competitor or new entrant to recover investments, thus constraining the effectiveness of some remedies. A remedy may open the market, but if it is expected to last only for two years, it may not be effective, especially since it would be unreasonable for the market player to assume reimposition of the same obligation. In looking to the future an NRA must make a realistic assessment of operator behaviour. While competition can suddenly flare up, NRAs will require to err on the side of caution if competition has been absent or flawed. Capital for market entry continues to be very limited and this is not expected to change in the near future. In considering the applicability of competition law, it has to be recognised that it is extremely unlikely that anything can be achieved within two years. A time frame of five to ten years would be necessary to complete such a case under competition law. |
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| consultations |
NRAs are obliged to consult market players
and the public on the results of market analyses and on possible obligations.
Some NRAs have, very commendably, already begun this process. It is
important that the documents be presented in terms that allow all parties
to contribute to the debate. It should not be necessary to have advanced
degrees in law and economics merely to understand them. The financial markets will wish to know what NRAs are considering in order to factor this into their advice to investors. |
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| conclusions |
INTUG believes that a successful implementation
of the legislation requires the active cooperation of independent regulatory
authorities across Europe; telecommunications regulators and competition
authorities. It will be important to draw on all available expertise,
in member states and in accession countries, including that of the European
Commission. The selection of remedies is a highly complicated matter and one likely to be challenged on appeal. NRAs will have to consider such dangers in their selection of remedies. Sadly, appeals will often be made in order to delay the implementation with a view to disadvantaging competitors. Incumbent fixed and mobile operators have considerable incentives to create regulatory uncertainty and doubt for their competitors and, in turn, for their financial backers. Protracted and sequential appeals are an effective means of doing so, until the capital of the new entrant is eaten up. There are significant risks when NRAs select the wrong remedies and these must be taken into account. On one level there is reduced economic growth within the European Union, making it more difficult to achieve the political and social goals. This is likely to be associated with reinforcing existing dominant positions. On another level, there would be a perception of the failure of the NRAs. Without an improvement in harmonisation there may well be pressure for more appropriate mechanisms, perhaps through a single regulator. It is clear that Europe is not leading in broadband or in wireless telecommunications. It is certainly not going to gain global leadership by pandering to incumbent monopolies or oligopolies. Instead, the ERG must achieve global best practice in regulation by identifying and stamping out market abuses and eliminating market failures. |
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| INTUG |
INTUG, the International Telecommunications
Users Group (INTUG), is an association of national telecommunications
users associations and international users. INTUG was founded in 1974 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 30 years INTUG has argued for the introduction of competition in telecommunications and that all users must have access to the benefits of such competition. |
| copyright © INTUG, 2003. |
http://www.intug.net/submissions/ERG_remedies.html |