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Competition

Commission Practice concerning excessive pricing in Telecommunications

By Marcel HAAG and Robert KLOTZ, DG IV-C-1

Competition Policy Newsletter 1998 - number 2 - June

Some of the main recent controversial issues in the telecommunications sector are related to prices for access to services, networks and other facilities of the incumbent telecommunications operators. Already in the run-up to the full liberalisation of the European telecommunications sector as from 1 January 1998 (cf. Article 2 of Commission Directive 90/388/EEC, OJ No L 192, 24.7.1990, p. 10, as amended by Commission Directive 96/19/EC, OJ No L 74, 22.3.1996, p. 13), network access pricing and, more specifically, interconnection tariffs have proven to be of crucial importance for the market entry of competitors. After the full liberalisation, access pricing by the incumbent operators has become even more important, as competitors try to gain market share in the core markets of the traditional carriers, i.e. voice telephony and

the underlying network infrastructure.

The General Framework

As the central problem of opening up telecommunications markets, certain aspects of access to facilities of the former monopoly undertakings have been specifically addressed in secondary Community legislation. For interconnection to the telephone network, the most important examples of access in telecommunications, a set of sector-specific rules were created in the framework of the directives on Open Network Provision (ONP), especially by the one concerning interconnection (Directive 97/33/EC, OJ No L 199, 26.7.1997, p. 32). These provisions, which have to be transposed by the Member States into domestic law and applied by the national telecommunications 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, including Article 86 EC-Treaty, continue to be applicable alongside the ONP rules. However, Article 86 EC-Treaty empowers the Commission only to carry out an a posteriori control of abuse. This means that, in general, the Commission is entitled to intervene, be it at its own initiative or upon a complaint, only once the prices are effectively charged by the telecommunications operator concerned.

To take account of the importance of the competition related problems of access in telecommunications, the Commission adopted on 31 March 1998 a notice on the application of the competition rules to access agreements in the telecommunications sector (cf. the contribution by K. Coates in this issue), which inter alia explains how the Commission intends to apply Article 86 EC-Treaty to these issues.

According to Article 86 EC-Treaty, the abuse of a dominant position within the common market shall be prohibited. This provision explicitly mentions in its paragraph 2 lit. a that such an abuse may in particular consist in "directly or indirectly imposing unfair purchasing or selling prices to other companies". In case that such an abuse is found, the Commission is empowered, pursuant to Council Regulation 17/62 implementing Articles 85 and 86 EC-Treaty (OJ No. 13, 21.2.1962, p. 204/62), to oblige the companies concerned to terminate the abuse and to impose fines.

Although price abuses are explicitly mentioned in Article 86 EC-Treaty, formal Commission decisions concerning price abuse are rare. One of the main reasons for the absence of a more extensive case law can be found in the practical difficulties of establishing price abuse. In particular as regards excessive pricing, little case law has developed so far.

According to the European Court of Justice, a price is excessive if it is "excessive in relation to the economic value of the service provided" (Case 26/75, General Motors Continental, ECR 1975, p. 1367, para. 12). The Court held that one method of establishing a price excess is by comparing the price and the production cost of a product. In United Brands, the Court stated that an "excess could, inter alia, be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production" (Case 27/76, United Brands, ECR 1978, p. 207, para. 251). However, given the practical difficulties in many cases to determine the production cost of a product or service, the Court also admitted other methods of calculation. In Ahmed Saeed, the Court indicated that Community legislation setting out pricing principles may be taken into account (Case 66/86, Ahmed Saeed, ECR 1989, p. 838, para. 43). Furthermore, such an assessment may be made by comparing the prices charged for the same product or service on other geographic markets (cf. Case 395/87, Tournier, ECR 1988, p. 2521, para. 38; and Joint Cases 110/88, 241/88 and 242/88, Lucazeau, ECR 1988, p. 2811, para. 25). In these cases, the Court stated that "when an undertaking holding a dominant position imposes scales of fees for its services which are appreciably higher than those charged in other Member States and where a comparison of the fee levels has been made on a consistent basis, that difference must be regarded as indicative of an abuse of a dominant position. In such a case, it is for the undertaking in question to justify the difference by reference to objective dissimilarities between the situation in the Member States concerned and the situation prevailing in all the other Member States." In particular, a comparison between the prices charged by a dominant undertaking and those charged on comparable competitive markets could, according to the Court, provide a basis for assessing whether or not the prices charged by the dominant undertaking are fair (cf. Case 30/87, Bodson, ECR 1988, p. 2507, para. 31).

The assessment of the cost of a service is particularly difficult in the telecommunications sector, as many of the dominant operators in the EU have until recently been operated as government departments under public budget rules. Appropriate cost allocation is therefore currently in many cases impossible. In the future, however, it can be expected that cost allocation will be facilitated by the cost accounting requirements set out in the ONP framework (cf. Article 7 of European Parliament and Council Directive 97/33/EC, OJ No L 199, 26.7.1997, p. 32).

Recent Practice in the assessment of price abuse

In spite of the practical difficulties entailed in the application of Article 86 EC-Treaty to excessive pricing, the Commission assessed a number of such cases in the telecommunications sector. The Commission’s recent practice in this field can be illustrated by the following examples:

1. Upon a complaint by ITT Promedia, the Belgian directory-publishing subsidiary of the US ITT World Directories company, the Commission investigated into Belgacom’s prices for access to subscriber data for the publication of telephone directories. The complainant alleged that the prices charged by the Belgian incumbent telecommunications operator were excessive and discriminatory in the sense of Article 86 EC-Treaty. The Commission carried out an assessment of the prices charged, with the support of an expert auditing firm, and insisted in fully implementing the cost-orientation principle. After the Commission had sent out a formal statement of objections at the end of 1995, Belgacom finally agreed, in a settlement with the Commission, to a substantial reduction (by more than 90%) of these prices by dropping any variable component in relation to the turnover or profit of directory publishers. Following the complainant withdrawing its complaint, this procedure was terminated by the Commission in April 1997 (cf. Press Release IP/97/292 of 11.4.1997).

2. In another case, the Commission dealt with the problem of access to the network of Deutsche Telekom (DT) on the basis of a complaint against DT’s business customer tariffs, which was lodged by certain providers of corporate network services in Germany. The Commission found in this case that the introduction of such tariffs lead to an abusive price-cost squeeze on competitors. To get rid of this effect, the Commission 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. In this study, it was assumed that, in the absence of special circumstances, a price is highly likely to be abusive if it exceeds by more than 100% the ones found on comparable competitive markets and that under those circumstances, the continuation of the procedure would normally be warranted. As a result, DT declared itself willing to substantially reduce its tariffs and presented an appropriate draft contract to the complainants. The tariff reductions conceded by DT were considerable, as they range from 38% in the case of local network access to 78% for access to the long-distance network (cf. Press Release IP/96/975 of 4.11.1996; and K. Van Miert, Wirtschaft und Wettbewerb, 1/1998, p. 7).

3. In an own-initiative procedure regarding access pricing, which was opened in the early days of January 1998, the Commission proceeded against DT’s high fees concerning the provision of carrier-preselection and number portability. In order to determine whether these fees were excessive in the sense of Article 86 EC-Treaty, the Commission used its powers under Article 11 of Regulation 17/62 to request information from undertakings and industry associations in all EU Member States. With the help of the replies provided, the Commission established a comparative market analysis, on the basis of which an abuse assessment could be carried out. In the course of the procedure, DT considerably reduced the amounts of the fees concerned, notably for carrier preselection by almost 50%. As Community interest and the rights of third parties did not require that the Commission continued its examination pending a parallel procedure before the national regulatory authority, the own-initiative procedure was terminated and the analysis of the information received was communicated to the competent national authorities in order to support them in their investigation of the case (cf. Press Release IP 98/430 of 13.5.1998).

CONCLUSION

The preceding examples show that in recent cases of alleged excessive pricing in the telecommunications sector, the Commission used a cost-price analysis (see case 1, supra) or, where necessary, a comparative market analysis (see cases 2 and 3, supra), in order to assess a possible abuse. Given that an extensive body of sector-specific legislation, including pricing principles, is now in place, the Commission might in the future, where appropriate, also take those principles into account in an assessment of a possible price abuse.

In some of the above mentioned cases, it appears that the Commission had to use a comparative approach, because the necessary cost information was not available. To carry out a comparative analysis, the Commission either used expert studies, in particular where complex accounting information was required (see case 2, supra) or information gathered on the basis of requests for information in accordance with Regulation 17/62 (see case 3, supra). It is clear that a market comparison can only provide an indication of an abuse, if the difference between the prices charged on the various markets is significant. On the contrary, in cases were the prices charged deviate only slightly from the price level on comparative markets, this disparity could not be considered as giving a prima facie indication for abuse. Depending on the merits of each individual case, the benchmark for Commission intervention may vary considerably. In the second case mentioned above, a difference of more then 100% between the price examined and the price levels in comparative markets was found to be unacceptable. In other cases, however, the Commission might have to intervene even if this difference is significantly smaller. In any event, even where a significant difference exists, the undertaking concerned always has the possibility of demonstrating that higher prices are objectively justified.

The Commission itself never aspired to use Article 86 EC-Treaty in order to act as a price setting authority (cf. already the Fifth Report on Competition Policy, 1975, point 76). Recent Commission practice in cases concerning the telecommuni-cations sector is fully in line with this general policy. Price regulation has been left to the national regulatory authorities, acting on the basis of sector-specific telecommunications regulations, which are harmonised under the EC rules on ONP. However, it has also become clear that the Commission will make full use of its powers under Article 86 EC-Treaty wherever this is necessary to prevent abusive pricing strategies and in particular excessive pricing obstructing effective market entry on the liberalised telecommunications markets.

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