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Competition

A European view on opening up networked industries to competition: the telecommunications example


Karel Van Miert

VIIIth International Antitrust Conference

27/10/1997

Berlin


I. Introduction

Ladies and Gentlemen,

I was happy to accept the invitation of the President of the Federal Cartels Office to discuss here today some of the problems associated with opening up markets with network structures from a European standpoint.

We all live in an increasingly "networked" environment. The economic significance of networks has risen considerably in recent years and will grow still more in future. This is particularly evident in the case of information and communications networks, which are in the process of forming the "nervous system" of our economies. Their central importance is expressed in the concept of the "information society", nowadays often used to characterise our societies. The phenomenon of forming networks is, however, not confined to the communications sector: in other sectors of the economy, too, e.g. in energy and transport, networks are becoming increasingly important. After the pause, Professor von Weizsäcker will, I am sure, explain the economic implications of this in greater detail.

Let me, therefore, refer here to the specific relevance of network infrastructures in the context of European integration. The very creation of a European single market presupposed the construction of efficient, crossborder network infrastructures. The support provided by pan-European networks for the singlemarket objective was taken into account in the Maastricht Treaty, which provided for a special section on "transEuropean networks" in the transport, energy and telecommunications sectors. Despite their mainly industrialpolicy emphasis, the Treaty provisions on transEuropean networks are not an obstacle to network competition in Europe. On the contrary, Article 129 B of the EC Treaty specifically lays down that Community action to promote transEuropean networks is only admissible within the framework of a system of open and competitive markets.

Network-type infrastructures are of crucial importance not only for the single market. They are also essential to the successful handling of the two major challenges facing the European Union: the creation of monetary union and enlargement.

The introduction of monetary union requires further integration of financial markets, which is only possible with the support of highperformance communications networks. The progressive interlinking of capital markets, within the European Union and worldwide, will force economic policies generally to become more competitionoriented.

The second major challenge for the European Union lies in the forthcoming enlargement. The Commission has proposed opening accession negotiations with five of the ten "associated" central and eastern European applicant countries and with Cyprus. The five central and eastern European countries are: Poland, Hungary, the Czech Republic, Slovenia and Estonia. The other eastern European countries will have to make further efforts before they can be considered for accession. The Commission has made it clear, however, that the European Union will continue to support these efforts and that later accession by these countries is not ruled out. In the context of enlargement, pan-European network infrastructures are an important prerequisite for the cohesion of the enlarged Union. The economic integration of the new Member States will be considerably accelerated by the liberalisation of networked industries as the "acquis communautaire" is adopted in those countries.

It is against this background of the central economic importance of network industries in general and of their specific function in the context of European integration that I would like to address today's subject: the openingup of networktype markets and the effects of globalisation on the regulation of those markets. For reasons of topicality, I will examine these questions taking communications networks as an example.

From an economic viewpoint, all networked industries have certain features in common, such as economies of scale and scope for example, which mean that the liberalisation of different networked industries raises problems that are similar in many ways. Yet it should not be forgotten that the markets concerned are also different, e.g. with regard to the pressure of innovation in them. Not all of the solutions adopted in the telecommunications field, therefore, can necessarily be applied direct to other network sectors.

II. Creating competition in the European telecommunications sector

The telecommunications and information sector has experienced extraordinarily dynamic growth in the last decade. At the same time, the telecommunications policy of the European Community has developed really dramatically in the course of a few years. The specific measures at the beginning of the 1980s quickly evolved into a sectoral policy covering the whole range of the Union's competences under Community law.

At the centre of the Union's telecommunications policy, however, has always stood the openingup of the telecommunications sector to competition. In a few weeks' time, on 1 January 1998, this must become reality in the Member States. We expect that a complete liberalisation will give a further powerful boost to growth in the telecommunications sector.

Let me examine in more detail some of the peculiarities and current problems of the liberalisation of the telecommunications market.

1. Special and exclusive rights

The telecommunications sector is so far the only networktype market whose complete liberalisation throughout the Community has been required on the basis of the competition rules in the EC Treaty. In accordance with the differentiated approach required by Article 90(2) of the EC Treaty, the openingup of the market did not take place in one but in several stages. The initial liberalisation steps, undertaken from 1988, led first to the openingup to competition of terminal equipment and telecommunications services markets with the exception of voice telephony. Subsequently, in November 1994, the telecommunications ministers of the Member States gave their political agreement to the full liberalisation of the telecommunications sector by 1 January 1998, as advocated by the European Commission. The political decision to liberalise the telecommunications sector completely was converted into law in three Commission Directives based on Article 90(3) of the Treaty. These were:

Directive 95/51/EC of 18 October 1995 on the use of cable television networks for the provision of already liberalised telecommunications services;

Directive 96/2/EC of 16 January 1996 on mobile and personal communications, and

Directive 96/19/EC of 13 March 1996 on the implementation of full competition in telecommunications markets.

Technically, the three Directives are amendments to the Services Directive of 1990. They can largely be read independently, however, since they each govern separate sets of issues.

The Directives oblige the Member States to progressively abolish all existing exclusive and special rights and, hence, to completely open up the market in the telecommunications field. Some Member States (Spain, Portugal, Greece, Ireland and Luxembourg) were granted in the Directives the possibility of applying for additional transitional periods of up to five years in which to abolish certain exclusive rights. All five Member States made use of this right. The Commission has in the meantime examined the applications and granted certain additional transitional periods, which however are well below the maximum possible transition periods in all cases. The longest such period was granted to Greece, which must have completely opened up its market by the end of the year 2000. This ensures that in the five countries mentioned, too, the complete openingup of the market will not be excessively delayed.

The full liberalisation of the market by 1 January 1998 means that on that date market access must be allowed in all segments of the telecommunications sector, i.e. in equipment, services and networks. Competitionpolicy models which are based on a separation of network and services levels and which allow competition only on the services level or on the services level and parts of the network level were thus rejected. Accordingly, no a priori restrictions of their activity, in the sense of lineofbusiness restrictions, are in principle being laid on the former monopoly operators. The computerisation of telecommunications networks means that many functions can be carried out at both network and services level and that the divide between the two levels is largely becoming blurred. We are therefore convinced that a competitionpolicy approach under which the network and services levels in telecommunications were separated would in the longer term lead to a considerable restraint of innovation.

Quite different from this issue, however, is the question whether certain structures which have evolved historically under conditions of statutory monopoly and which may threaten or even prevent the effective openingup of telecommunications markets can be tolerated. Directive 95/51/EC on the use of cable television networks for telecommunications services therefore provides for the examination of those cases in which a dominant telecommunications organisation operates both a public telecommunications network and a cable television network in the same geographic market.

In such a situation, there is, firstly, no sufficient incentive for the operator to develop one of these networks into a full multimedia communications network for the transmission of speech, data and images and to thus fully exploit the innovation potential of such networks. Secondly, the introduction of competition in the local loop is made substantially more difficult, if not virtually impossible in the longer term, if the only two points of local access are in the hands of one operator. Given the key function of local access for the entire sector, the frustration of competition in the local loop has negative consequences for the competitive situation of the telecommunications sector as a whole.

In the light of our examination of the situation, which is based on two comprehensive reports, I believe that full divestiture, i.e. obliging telecommunications organisations to dispose of such cable networks, would be the optimum solution for dynamic growth in the telecommunications and media sector. Indeed, this ties in with the evaluation made by the Monopolies Commission in Germany.

This does not mean, however, that we are striving to introduce a general obligation to divest. I am assuming, though, that at the present time structural separation of the operation of cable television networks and telecommunications networks, i.e. the transfer of the operation of the cable TV network to a legally independent unit, will generally be necessary in order to create a minimum innovation dynamic and ensure effective supervision of abuses. Furthermore, it will be necessary to examine in individual cases whether more farreaching measures may possibly be required under the competition rules.

In making these comments, I do not wish to anticipate a detailed statement by the Commission on the cable review. Directives 95/51/EC on cable television networks and 96/19/EC on the implementation of full competition provide that the Commission will complete this review by the end of the year. The Commission will therefore give its detailed views on this question in the coming weeks and at the same time make the reports which I mentioned available.

2. General regulatory framework

The Commission Directives are not limited to abolishing monopoly rights in the telecommunications field: they also lay down certain minimum requirements deriving from the EU's competition rules, which the telecommunications laws of the Member States must satisfy in order to make market entry effectively possible. The Directives give practical shape to such minimum requirements, in particular with regard to the licensing of telecommunications services and networks, the financing of a universal service, rules on numbering and rights of way and the arrangements for interconnection with the voice telephony service and the publicly switched telecommunications network of the telecommunications organisations.

The Commission Directives are being supplemented by a number of rules on open network provision (ONP), aiming at creating a harmonised regulatory framework for open telecommunication markets. With a view to liberalisation the most important supplementary harmonisation measures are:

the ONP Directive on interconnection and universal service;

the Directive on general authorisations and individual licences in the field of telecommunications services;

the ONP Directive on voice telephony, and

the Directive on the adaptation of the ONP framework Directive and the ONP leased line Directive.

These Directives promote the further approximation of the telecommunications law of the Member States with a view to completing the single market in telecommunications.

The sectorspecific regulation established by the ONP provisions, which supplements the application of the competition rules, is indispensable in the transitional phase from a monopoly environment to a competitive market. However, whether comprehensive, sectorspecific rules will be necessary in the long term is very doubtful and will have to be examined in detail at a later stage.

The proper and timely transposition both of the Commission liberalisation Directives and of the ONP Directives is a highpriority task for us at present. We have therefore set up a special working party, the socalled Joint Team, which is exclusively concerned with the transposition of the Telecommunications Directives. On the basis of the working party's discussions, the Commission regularly reports on the status of the transposition of the liberalisation package. The most recent report was submitted on 1 October 1997. In this report we were able to establish that substantial progress was being made in the Member States on the transposition of the reform package. Thus, nearly all (i.e. nine out of ten) of the Member States which had to abolish special and exclusive rights for telephony by 1 January 1998 have issued the necessary provisions. The Member State which has not done so (Belgium) has prepared drafts of the measures required. Four Member States have already abolished their telephony monopolies before the target date of 1 January 1998.

Although the provisional assessment is generally positive, we have had to conclude that in some cases transposition has been incomplete. We have made clear to the Member States that we will not accept halfhearted implementation and that we intend in such cases to initiate infringement proceedings against the Member States concerned. The Commission has since opened an initial series of such proceedings.

In Germany, transposition was effected in the form of the Telecommunications Law of 1996 and the ordinances based on it. I have repeatedly emphasised that this statute is basically in line with the liberalisation Directives. We are currently examining whether the Telecommunications Law and the ordinances which were adopted to implement it are also compatible in detail with Community law.

With regard to two aspects, complaints have already been made to the Commission by companies concerned.

The first complaint concerns the regulation of licence fees. Here the impression has arisen that the level of licence fees can act as an effective barrier to entry. Moreover, the licence fee arrangements seem to be so unnecessarily complex and burdensome that the setting of fees leads to excessive delays in the issuing of licences.

The second complaint concerns the obligation on Member States to ensure the publication of standard conditions for interconnection with the telephone network of the former monopoly supplier. This obligation, which was to be met by 1 July 1997, has not been fulfilled by Germany within the time limit. The standard proposal for interconnection, which has since been submitted by Deutsche Telekom considerably behind schedule, is moreover incomplete and, in particular, contains no interconnection tariffs. This omission is to be regarded as particularly serious, since a proper standard proposal not only increases planning certainty for new entrants but could also substantially shorten any additional interconnection negotiations needed.

3. Supervising competition between firms guaranteeing access

The reform of telecommunications laws in the EU with a view to complete liberalisation of the telecommunications markets must be supported by rigorous supervision of competition between firms. This is the only way of meeting the threat that liberalisation will be largely nullified by the behaviour of firms. The central problem of opening up markets in telecommunications, as in other networktype markets, is access to services, networks and other facilities. In telecommunications, interconnection with the telephone network of the former monopoly undertakings constitutes the most important example of access.

For interconnection, therefore, sectorspecific rules were created in the framework of the ONP Directives, especially by the ONP Directive on interconnection. These provisions, which have to be transposed by the Member States into domestic law and applied by the national telecoms regulators, are more specific than the general competition rules of the EU and will make their application unnecessary in many cases. In principle, though, the competition provisions continue to be applicable alongside the ONP rules.

To take account of the great importance of access problems in the telecommunications sector, the Commission has drawn up a draft notice on the application of the competition rules to access agreements in the telecommunications sector, which was published in the Official Journal in March for consultation.

The communication has two main objectives: firstly, to clarify the relationship between general EU competition law and sectorspecific legislation, in particular the rules on open network provision (ONP), and secondly to explain the consequences of applying the EU competition rules to access issues in the telecommunications sector.

As regards the application of sectorspecific rules, the Commission intends to avoid unnecessary duplication of procedures, provided this is possible while safeguarding the existing rights of the parties under the competition rules. In principle, the application of sectorspecific ONP rules by the national regulatory authorities will be given preference over the implementation of competition procedures in the Commission. The Commission reserves the right, however, to take action itself if necessary in response to complaints or on its own initiative. This applies in particular where a procedure is not concluded by a national regulatory authority within an appropriate period. According to the communication, six months is usually regarded as such an appropriate period of time.

As regards the application of Article 86, the communication makes clear that the Commission intends to consider, under certain conditions, the refusal of access to essential facilities as an abuse. The communication lists five special conditions, which must apply cumulatively if refusal of access is to be regarded as an abuse:

1. Access to the facility in question is generally essential in order for companies to compete on the relevant market.

2. There is sufficient capacity available to provide access.

3. The facility owner fails to satisfy demand on an existing service or product market, blocks the emergence of a potential new service or product, or impedes competition on an existing or potential service or product market.

4. The company seeking access is prepared to pay a reasonable and nondiscriminatory price and will otherwise in all respects accept nondiscriminatory access terms and conditions.

5. There is no objective justification for refusing to provide access.

We are assuming that these principles are applicable not only in the telecommunications field but also in the area of electronic media. This concept of essential facilities has met with broad support in the consultations on the communication. Now that the consultations on the draft communication have been concluded, we intend to adopt and publish the communication in its definitive version in the coming weeks.

With regard to the application of the competition rules to access issues, allow me to mention three current developments in Germany:

It was with great satisfaction that we learned that interconnection tariffs in Germany were fixed by decision of the Federal Minister for Posts and Telecommunications in such a way that the Commission's involvement was not required. We are particularly pleased that the tariffs were set without including compensation for an access deficit. We had made clear in the preliminary stages of the decision, that in any event, we regard the inclusion of an access deficit as inadmissible, if such a deficit is not incurred as a result of legally binding regulatory provisions. In this case, the inclusion of a possible access deficit in the interconnection fee breaches the principle of costrelated prices established in Article 4 A of the amended Services Directive (90/388/EEC).

In another case, however, the Commission has already dealt with a problem of access to the network of Deutsche Telekom (DT). This was a complaint by certain providers of corporate network services about DT's business customer tariffs. The Commission had found in this case that the introduction of such tariffs was leading inter alia to an abusive pricecost squeeze on competitors. To get rid of this effect, the Commission had invited DT inter alia to conclude more favourable agreements on access to the public telephone network with competitors. DT subsequently put forward an agreement stipulating prices which were unacceptable to competitors. A comparative market study ordered by the Commission showed that the proposed prices were exorbitant. The study assumed that, in the absence of special circumstances, a price is abusive if it is more than 100% higher than that on comparable competitive markets. As a result, at the beginning of this month DT declared itself willing to reduce its tariffs to the level proposed in the comparative report and has presented an appropriate draft contract to the complainants, which is valid retroactively from November 1996. The tariff reductions conceded by DT are considerable: they range from 38% in the case of local network access to 78% for access to the longdistance network.

In addition, I would also point out that questions of access to different facilities (cable networks, encryption systems, etc.) will also play an essential role in the competitionlaw scrutiny of the digital TV project of Kirch, Bertelsmann and Deutsche Telekom. I will not say more at this juncture, however, since it is too soon to discuss this case in any further detail.

4. The effects of globalisation

I will now turn to the effects of globalisation on telecommunications markets.

Network infrastructures are not only subject to globalisation, they are themselves major causes of the globalisation process. The economic globalisation process presupposes global network infrastructures, and global networks contribute to the internationalisation of the economic process. We are therefore faced with a development where globalisation and the integration of our economies are mutually reinforcing.

The globalisation of our economies has given an important boost to the liberalisation of telecommunications markets in Europe: the many opportunities to circumvent national telecommunications monopolies resulting from technical development and the internationalisation of telecommunications markets made those monopolies seem untenable even to the monopolists.

Furthermore, the rigorous liberalisation policy within the European Union has favoured the telecommunications policy activities of the Union at international level. Thus, the clear, credible policy approach we have adopted has substantially helped the European Union, together with the United States, succeed, through the conclusion of the agreement on basic telecommunications services in the World Trade Organisation in February of this year, in extending the opening of markets to 95% of the world market for telecommunications services. This gave European operators, and not least the former monopoly suppliers, powerful new market opportunities.

Despite the already advanced internationalisation in telecommunications, however, it is probable that not all practices in international telecommunications traffic distorting competition will be abolished. Thus there is still doubt about whether European telecommunications operators in the telephony sector are charging each other and operators from third countries costoriented tariffs. We have therefore, with a view to the complete liberalisation of telephony services on 1 January 1998, initiated an inquiry into the existing and future charging practices of telecommunications organisations, known as "accounting rate systems", in which the operators in all fifteen Member States are involved. In so doing we are striving to ensure that the advantages of liberalisation benefit consumers with regard not only to domestic telephone traffic but also to international calls.

In the medium term, the high degree of internationalisation of the telecommunications markets will probably result in the need for closer international cooperation between regulatory authorities. Already in the context of the negotiations on basic telecommunications services, the parties to the agreement on basic telecommunications services have agreed on the principles governing the regulation of open telecommunications markets. Such a development could result in an impetus to the further internationalisation of general competition law.

III. Conclusion

This brings me to my conclusion: the dynamic of the telecommunications markets has become a key indicator of the competitiveness of economies. Our objective is to guarantee effective competition on the communications and media markets in Europe. It is not necessary to be a clairvoyant to predict that the successful, complete liberalisation of telecommunications networks is bound to affect the competitionpolicy approach to other networked industries.

The next six months will decide whether here in Germany and in the European Union dynamic competition will rapidly develop in telecommunications networks. If the regulatory and competition authorities of the various levels work together consistently towards opening up the market, I am convinced there is cause for optimism.

IV/1433/97EN


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