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Competition

EU Perspective on Telecommunications Liberalisation

Herbert Ungerer

IBEC / B&F Conference

Dublin

20/09/1996

Introduction

Ireland is faced with critical decisions to be taken on its future course towards telecom liberalisation and its timing. In order to put the question in its proper context, let me first introduce the broader framework and principles of the EU telecoms liberalisation programme. We should seek to understand the particular position of Ireland from within this perspective.

As most of you will know, EU competition law has played a central role in establishing full liberalisation of telecom markets across the EU.

On the whole it has now been accepted that competition, far from threatening the general economic interest in the sector, will in fact enhance it. However, certain Member States may find themselves in exceptional circumstances (of less developed or very small telecom networks) so that they should be allowed more time to make the transition to this state of affairs. Ireland is one of these countries and has consequently been granted the right to request special derogations. The granting of the exemption to competition rules is, however, not automatic. As I will go on to explain the assessment of the balance of risks and disadvantage vis a vis public service and the distortions and restrictions of competition and trade is a particularly complex and dynamic one. For a derogation to be legally granted, the circumstances must be such that its negative effect on trade is clearly outweighed by the risk to the general economic interest.

According to the procedures set by the EU's Full Competition Directive in this context, last May the Irish government filed a request with the European Commission for a derogation from the provisions of this directive. The request related to voice telephony and the underlying infrastructure for this service, as well as alternative infrastructure for liberalised services. The letter also requested a derogation from the provision in the EU mobile directive which directed member states to allow for direct interconnection of mobile telecoms networks.

Timing

Before I go on to discuss the issues raised here, let me just clarify the actual timing which is in the balance. According to the Full Competition Directive adopted earlier this year under EU competition law Article (90), voice telephony and all underlying infrastructure should be liberalised by January 1st, 1998. The Irish government requested a derogation until January 1st of the year 2000. This same directive obliged Member States to lift restrictions on use of alternative infrastructure for liberalised services by 1st July 1996. The Irish request is for 1st July 1999. According to the mobile directive of February this year, direct interconnection of mobile networks should have been allowed immediately, whereas the derogation requested is until 1st January 2000.

Similar requests have now been filed by Greece, Luxembourg and Portugal. Like Ireland, these countries were listed as eligible to apply for derogations on the basis of having less developed or very small networks relative to the EU norm.

After receipt of such a request the Commission is then obliged to weigh up the facts and arguments presented by all interested parties and consequently to come to a decision about the right exemption periods to apply. To this end the Irish request was published as a Commission Notice for consultation on June 13 in the EU Official Journal. We received a total of 14 written responses including all major Irish market actors in the field, nearly all of which opposed the requested derogations. The Commission's final decision is to be published before the end of October.

Principles

Before going into some of the most important arguments for and against Ireland's request, let me just go back a moment to explain the fundamental principles upon which the decision will be based. Article 90 directs EU competition policy at Member State governments. It will only allow certain undertakings or activities to be exempted from competition rules to the extent that this is absolutely necessary in order to provide "services of general economic interest". In the case of telecoms the latter generally means provision of a stable national network and universal service at reasonable rates. Since 1990, we have made progressive use of Article 90 to narrow the exempted areas as it became clear that shelter from competition was not only unnecessary but in fact detrimental to the general economic interest. This culminates in 1998 when all exclusive rights related to telecom networks and services should be lifted.

The Request

The Irish government claims special circumstances for Telecom Eireann which make it necessary to hang on to its exclusive rights for a longer period of time in order not to jeopardise the public service it is obliged to provide. What are these special circumstances?

The main argument was that Ireland has recently carried out major network development requiring very high levels of investment and consequent high levels of debt. The debt consequently makes it difficult for TE to make swift enough structural adjustments and the whole problem is further exacerbated by the peculiarly high cost of delivering telecom services in Ireland. Thus, for TE to ultimately function in a fully competitive market in a way which can also ensure universal service, significant development and transformation is necessary which cannot be achieved by the deadlines set down by the directives. This transformation concerns particularly: further network development, tariff rebalancing and product and organisational restructuring suitable for a market-driven, customer focused company.

The main conclusion of the request was that, even with the assistance of its soon to be strategic partner KPN/Telia, Telecom Eireann can not achieve all this before the year 2000. Thus the public voice service must be reserved for the national operator until then, and infrastructure liberalisation significantly in advance of this would allow competitors to seriously erode TEs customer base before it is in a position to cope with such competition.

Let me emphasise at this point that one should not confuse in this context, protection of the actual public service (which is a clear priority written into Article 90-2) and protection of the incumbent telecom operator (which may, to a certain extent, and for a certain period of time be inherently related to the former). Particular employment and trade union interests, for example, are naturally key political priorities. And there should be appropriate government instruments to protect them. Competition law is not, however, one of the those instruments. There are more efficient and more sustainable ways of looking after employee interests than simply propping up a monopoly - and these should be as least distortive of competition as possible.

The Comments Received

Almost all the comments received after publication of the request refuted the claims and conclusions drawn concerning the factual position of TE and the need for derogations of such a duration. They stress, for example, that Ireland's telecom networks are not so undeveloped. They have actually benefitted from very significant development recently partly thanks to EU funding to the tune of 70m ECU. Between 1994-95 new line connections increased by 22% and traffic increased by 7.4%. Over the past ten years call tariffs have been reduced by 34% in real terms.. Furthermore, Ireland already has a relatively modern network including ISDN capabilities which is certainly as developed as the networks of most other TOs in Europe. It is claimed that most of the operator's investments are actually aiming, inter alia, at the establishment of nationwide, fibre optic SDH (Synchronous Digital Hierarchy) networks. Developments which actually surpass networks in the other member states.

The comments also argue that the derogations requested, particularly as concerns infrastructure, increase the danger of abuse of Telecom Eireann's dominance and could cause irreparable harm to new entrants to the market. They claim that TE could and would discriminate against providers of liberalised services, for example, as regards volume discounts granted to other customers with comparable traffic volumes. On the other hand, earlier establishment of a liberalised market where operators are able to use and construct alternative networks for value added and data transmission services would create a more stable environment, which would also give TE the right incentives to reform and restructure in the most quick and effective way, while voice telephony is still reserved. Then, when eventually voice telephony is opened up the new players will be able to respond rapidly to consumer needs as competing infrastructure will already have been developed.

The context

To put this whole debate in context, lets now go back for a moment to briefly outline the overall EU liberalisation programme: The concept we have implemented here is one of progressive evolution of competitive infrastructure. In particular breaking the local bottleneck with increasing introduction of alternative facilities with a direct link to the customer.

Satellite Liberalisation

First we went for satellite communications with a directive adopted in Autumn of 1994. This means full effective liberalisation of satellite systems, earth and space segment, across all of the EU. It breaks the grip of the incumbents on access to the space resource, particularly as concerns their privileged position as signatories of the International Satellite Organisations. Deep reform of the ISOs is part and parcel of the logic of this directive. In this context we are encouraging, but also tracking closely the reforms of Intelsat, Inmarsat and Eutelsat. We are currently witnessing some major moves towards progress, but the competitive implications of the restructuring and separation of commercial and non commercial operations must be watched very carefully. Likewise the formation of private international satellite consortia are also screened by our competition rules. Systems such as Iridium have already been notified and we have published our findings recently in the Official Journal according to the procedures of Regulation 17. We are keeping an eye on new developments such as Teledesic.

As far as EU signatories, and operations in the EU area are concerned, EU competition rules apply fully to these organisations. The directive makes clear that we will use this instrument wherever necessary, not only as concerns access to space capacity but also as concerns downstream distribution arrangements and agreements.

The deadline for notification of national measures implementing the satellite directive was August 1995. We have still not received this from 6 Member States, including Ireland. We are told that Ireland has difficulties fully implementing the Directive due to lack of manpower and the current ongoing regulatory reform. We cannot accept such delays at this late point.

For this reason we started legal proceedings against Ireland and the other Member States concerned last October (1995). Since we have still not had an adequate response these legal proceedings are now moving on to the second stage.

Mobile/GSM Liberalisation

The next link we tackled in the liberalisation process was the mobile connection to the customer, to build mobile networks into a full scale competitive infrastructure. Adopted in January this year, the mobile directive enters fully into force on November 15 1996. It abolishes all remaining exclusive and special rights in the mobile communications market, for both service provision and use of own and third party infrastructure. Competition law is applied not only to licensing of new GSM operators, but also, to DCS1800 licenses. Clearly, the most economic and flexible provision of mobile services, achieving reliable EU wide roaming capability, will entail the combination of GSM, DCS1800 and DECT technologies. This entails dual mode equipment and roaming agreements which in principle we fully encourage. On the other hand, it is important that the new DCS1800 markets are not foreclosed by incumbent mobile operations simply extending their dominant positions and keeping others out. The directive thus allows for the combination of mobile digital technologies where this supports a pro-competitive evolution.

As I mentioned before, the Irish government has requested a derogation until January 2000 from the provision in the mobile directive which allows for direct interconnection of mobile networks. The government's claim is that such freedom to interconnect by mobile operators would enable them to bypass the PSTN for trunk and international traffic and actually enable them to capture a significant share of Telecom Eireann's international call traffic. The argument is that such a reduction in revenues could prematurely disrupt the important structural adjustment programme preparing the national operator for competition.

However, the comments on this derogation argue against such a strong claim. They emphasise, for example, that the mobile telephone market is a new and growing market. Restrictions on international interconnect only affect additional mobile traffic, generated in the first place by the mobile operators, and from which TE actually derives additional revenues for call completion. Commission studies have, in fact, found that the level of substitutability between fixed and mobile telephone services is still not substantial since they tend to respond to different categories of demand. Although it is fair to say that some risk of bypass/substitution cannot be ruled out given TE's rather high trunk rates, the comments we have received urge us to consider that the transition period of almost four years is exaggerated.

Furthermore, it has been emphasised that any derogation to the interconnection provision must be balanced by strict adherence to obligation to grant DCS-1800 licences in 1997, and the insurance that TE does not discriminate against mobile operations vis a vis offering volume discounts in neighbouring countries in proportion to traffic generated.

Cable TV Networks and "joint provision"

The third application of the EU competition rules to the customer access bottleneck was the Cable Directive. This was adopted at the end of last year and enters into force from the first of October. This means unlimited use of all cable network licences for liberalised telecoms services, freedom to arrange interconnection of cable TV networks and clear accounting separation in the case of joint provision by dominant operators of cable and telecoms services.

On the one hand the directive is clearly about establishing an alternative platform for fixed link local access. The UK model was the prototype for this, where we are now witnessing the growing success of the cable operators to gain telecom customers from the incumbent.

On the other hand the directive is about encouraging multimedia applications and services : the convergence of audiovisual broadband service and customer interactivity. To the extent that this entails the joint provision of telecoms and TV service we have a dual challenge for competition policy here. How do we deal with the entry, or prior existence, of the incumbent telecoms operator in the cable market? The synergies involved may appear beneficial to customers, but how can this be weighed against the risk of foreclosing not one, but two major markets with the potential creation of a double strength cable/telecom bottleneck? For the moment the directive sets down accounting separation requirements and does not address the question of restrictions on TOs from providing broadcasting services.

However, these key questions on the whole question of joint provision of telecoms and cable TV networks by dominant operators is being addressed from by the twin reviews announced in the Cable Directive and the Full Competition Directive for 1st January 1998 at the latest.

This "review 1998" will play a major role in the next stage which we have to face, once a pro-competitive market structure is put in place in all Member States : creating truly pro-competitive market structures. The major task will be to break the local bottleneck. Cable - together with wireless - are called upon to play the major role in pursuing this central objective.

We have recently announced a study which will form the research and analysis base for this review. The study will assess different policy options based on results of an intensive analysis of the market itself and of actual and potential policy impact on the developing multi-media market structure. In particular we are going to be focusing on the following policy options:

* maintenance of the status quo

* lifting of existing constraints on telecom operators to provide cable TV capacity to their customers

* divestiture of cable operations of dominant telecom operators.

The main underlying issue in all this is the need to leave open the potential for development of a viable infrastructure platform for real competition at the customer access level. On the other hand we must not stand blindly in the way of the realisation of real competitive synergies from the perspective of either of the converging sectors.

The results of this policy review will be issued for consultation in 1997.

The Irish situation in this context is strongly effected by the fact that Telecom Eireann is the major shareholder of the main cable TV operator in this country. This means that the only alternative infrastructure which would allow new entrants to provide voice telephony services to residential users, once this market is opened, is also under the control of Telecom Eireann. Naturally the Commission will have to take this into account in considering derogations from the EU timetable for market opening. It may be questionable whether TE's majority shareholding in the cable operator should be allowed to continue alongside a derogation until 2000 for voice telephony and public infrastructure.

Alternative Infrastructure for liberalised services

July 1st this year was the deadline for liberalisation of alternative infrastructure. Under the provisions of the Full Competition Directive adopted in March, the Member States had to notify by this date the implementing measures lifting restrictions on use of all existing alternative telecoms networks for liberalised services. Overall, the response has been positive. Apart from the four countries eligible and applying for derogations, the Member States are generally on track and many are already in advance of our timetable to lift restrictions on all services and infrastructure.

As I mentioned before, Ireland has requested a derogation until July 1999 for abolition of TE's exclusive rights on use of infrastructure for provision of liberalised services. The main argument is that this could result in effective competition for voice telephony before its liberalisation. This is because speech calls over alternative infrastructure, breaking out at both ends would become practically possible. Comments received, as well as previous Commission statements rebut this assertion.

The main point is that unofficial by-pass of the voice telephony monopoly cannot occur to any significant extent without being noticed by the authorities. A service which is offered to the public must be, "ipso facto", public knowledge. Not only would any commercial offer normally have to involve a degree of advertising and marketing to be successful, but in general new service providers do not want to take the risk of having their authorizations revoked and letting down their clients by being unable to fulfil contractual obligations.

The other argument vis a vis alternative infrastructure liberalisation is that TE would suffer from severe revenue losses from leased line provision. Not simply because some customers would switch providers, but also because those remaining would expect lower prices. Again the comments received in public consultation refute this. They say that service providers would be seriously affected if they are not allowed to benefit from lower leased line costs on alternative networks. Furthermore, the second GSM operator in Ireland argues that the inability to offer services to third parties effectively prevents it from establishing its own separate backbone network. If excess capacity cannot be leased to others they cannot tolerate the high sunk costs and risks of such an investment.

Moreover, with regard to leased lines, it should also be noted that the ONP leased line directive adopted in 1992 already requires that leased lines be offered on a cost-oriented basis. So, given that cost-orientation is already required, opening of alternative supply of networks, per se, should not alter the market position of TE in this area.

The conclusions of the public consultation were clearer and more vehement on this point than any other: the alternative infrastructure market must be opened as soon as possible, if not 1996 at least by 1997.

Voice Telephony and Underlying Infrastructure

Lastly, of course, we come to liberalisation of voice telephony for the public and the underlying public infrastructure. As you all know, the EU deadline is 1st of January 1998. The request for a derogation for Ireland is, as I already mentioned, 1st of January 2000. The arguments of the request were perhaps strongest on this point. The comments tend to emphasise that, although earlier liberalisation would be preferable, the detrimental effect of the derogation would be significantly reduced if certain conditions are ensured. For example, that:

* cross-subsidisation of operations in foreign markets with profits from the reserved national service should be ruled out. Any involvement of TE, alongside KPN, Telia or Unisource, in investments outside Ireland should be transparent and achieved at market conditions. This should be independently audited

* licensing and interconnection conditions are published a full year in advance of full liberalisation

* the derogation for alternative infrastructure is significantly shorter than that requested

* Telecom Eireann is prevented from using the derogation to extend its dominant position into related markets such as payphones or cable TV

and lastly

* DCS 1800 licenses are granted early in 1997.

Conclusion

As regards the EU perspective on liberalisation in this country, one should bear in mind that the Commission's decision on the request will not be finalised until next month. Since there are still important consultation procedures to go through, a full nor final picture of the Commission's perspective can still not be given.

Let me however end on a general note. Ireland is currently holding the presidency of the European Union . In telecommunications, it has made a substantial effort to drive developments at Union level forward . It has shown its commitment to EU wide liberalisation and has given substantial impetus to the adoption of the pending harmonisation measures such as the reform of the ONP framework.

We expect further progress from the Telecommunications Council under Irish Presidency next week.

The Irish market needs rapid liberalisation to allow the TE's strategic alliance to go forward in the right market environment and to reap the benefits of the efforts to date. A country which has acquired a remarkable position in Europe's software industry needs a dynamic telecommunications base giving all of its economic and social actors new opportunities; and this country should remain in step in this vital market with its European partners. We hope that all this will be taken fully into account in the final positions.

  
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