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Luxembourg, 19th June 1998.
The arrival of competition in European telecommunications
1 January 1998
We are now looking forward to the rapid issuing of a number of key decrees to make the date of 1st July fully operational in the Grand Duchy, in particular the decrees on the granting of licences on universal service and on fees, as well as the outstanding interconnection offer of the Luxembourg P&T. Rapid progress on all of this will help to rapidly close the on-going EU-infringement procedures which had to be opened.
We acknowledge however the many efforts made by the ILT and the Ministry to fill in the gaps in the Luxembourg regulatory framework. The ILT has sought means to propose that provisional licences are granted for the establishment of networks and the provision of voice telephony until such time when the regulatory framework is complete.
Luxembourg joins with these steps and the date of 1st July the broad European telecom liberalisation movement, even if - as mentioned - sometimes with hesitation and delays. Across the EU, the 1st January 1998 with its full liberalisation, has brought Europe the lifting of all remaining legal monopolies - with the exception of a few Member States which have been granted short additional transition periods - one of them being Luxembourg.
Let me therefore concentrate
We are seeing dramatic change through the liberalisation of the EU telecom market. It may be best to recall some facts. According to the Commissions Implementation Report of February ("Third Report on the implementation of the telecommunications regulatory package", COM(98)80 final), in all of the ten Member States of the EU who had to liberalise their market by 1st January 1998, new licences for network and full voice telephony operations have now been allocated.
In total, more than 500 local loop licences had been allocated by end February in the European Union, the time of publication of the Implementation Report - and the figure has increased in the meantime.
The Commission has made it clear that it will initiate infringement procedures wherever we see delays in implementation. In total, the Commission has launched during recent months 60 infringement procedures on the basis of the work of the Commissions Joint Team (DG IV/DG XIII), a number of them being successfully closed in the meantime.
Attention will therefore have to focus now on the behaviour of the dominant market incumbents, which characterise the sector, and their use of their market power. Given the overwhelming market power which has been accumulated by them during the long times of legal monopoly, the sector is likely to become a source of lead competition cases for dealing with the problem of market power as such - and we see clear indications of this during these very months, with current spectacular cases. An ending of legal monopolies does not mean an end to dominant positions and market power.
The cases tend to concentrate on the areas where the incumbents "meet" the new competitors and where they must learn to measure their use of their market power - which must not turn into abuse.
The main areas
More generally, what has now come to be called convergence : telecoms / media, where the major cases are of course on all of our minds during these weeks and where a general debate has been launched by the Commission with the Convergence Green Paper. But also mobile / fixed and their combined offerings - which may become the hottest topic in European telecoms later this year - and, of course, the Internet which has the potential to "net" all these actors.
The Access Notice ("Notice on the Application of Competition Rules to Access Agreements in the Telecommunications Sector - Framework, Relevant Markets, and Principles") which has been finally adopted by the Commission on 31st March 1998, and which will be published after its final linguistic review within the next few weeks in the Official Journal is addressing many of these issues in substantial detail.
The main areas concerned will be the development of an essential facilities doctrine under Community law, as well as the doctrines concerning bundling and excessive and predatory pricing. You have had yesterday quite extensive discussion on the issue of access and interconnection. I would like to give you our own view on the more strategic aspects of the issue.
The issue of access
The access cases in the telecom / media field are likely to lead to major steps forward in the development of the legal doctrines concerning Art 86, as the liberalisation Directives have led to a substantial development of the doctrines concerning Art. 90.
The Access Notice lists as main issues of potential abuse under Article 86 :
In fact, we have seen during recent months important cases along all these lines, particularly in the field of pricing of access.
The Access Notice also sets a clear doctrine concerning the balance between application of sector specific regulation - in telecoms mainly the ONP Directives - and the general application of Competition Law.
I believe that one can see the Access Notice as the first attempt by the Commission to
define the relationship of sector-specific regulation and general competition law more
You have heard about this yesterday. Let me emphasise some points :
Competition Law and sector specific regulation
The Access Notice defines the balance between application of sector specific regulation - the ONP Directives - and the general application of Competition Law, both of which set the framework within the market power in the sector has to be exerted.
According to the Notice, the Commission recognises that the newly set up sector specific National Regulatory Authorities "have different tasks and operate in a different legal framework from the Commission when the latter is applying the competition rules". First the NRAs operate under national law, albeit harmonised according to Community Law - specifically ONP -and therefore often implementing European Law. "Secondly, that law, as it is based on considerations of telecommunications policy may have objectives different to, but consistent with, the objectives of Competition policy". The Commission co-operates as far as possible with the National Regulatory Authorities, and National Regulatory Authorities have also to co-operate between themselves in particular when dealing with cross-border issues". But the Notice clearly states that "under Community Law, national authorities, including regulatory authorities and competition authorities, have a duty not to approve any practice or agreement contrary to Community Competition Law".
The ONP Directives impose on telecommunications operators having significant market power certain obligations of transparency and non-discrimination that go substantially beyond those that would normally be imposed under Article 86. ONP Directives lay down obligations relating to transparency, obligations to supply and make those operators, in a number of instances, subject to price regulation. These obligations are ensured by the National Regulatory Authorities.
The Notice recalls that "the Commission could be seized of an interconnection dispute either pursuant to the competition rules, or pursuant to an ONP Conciliation Procedure. Multiple proceedings might lead to unnecessary duplication of investigative efforts by the Commission and the national authorities". The Notice states therefore that where complaints are lodged with the Commission under Article 3 of Regulation 17 while there are related actions before a relevant national or European authority or court, the Directorate-General for Competition will generally not initially pursue investigations as to the existence of an infringement under articles 85 or 86 of the EC Treaty.
This is however subject to three important caveats.
Firstly : an efficient procedure must be in place. According to the Notice an access dispute before a National Regulatory Authority should be resolved within 6 months of the matter first being drawn to the attention of that authority. This Resolution should take the form of either a final determination of the action or another form of relief which would safeguard the rights of the complainant.
Secondly, there must be availability of and criteria for interim injunctive relief through the existence or possibilities of national proceedings.
The Notice states that "if interim injunctive relief were not available, or if such relief was not likely adequately to protect the complainants right under Community Law, the Commission could consider that the national proceedings did not remove the risk of harm, and could therefore commence its examination of the case.
Thirdly, the Commission may nevertheless intervene if, for example, the issue is of sufficient pan-European interest to justify immediate action.
More generally, if it appears necessary, the Commission will also open own-initiative investigations or launch sector inquiries where it considers this necessary.
A final word on fines which as is well known, can reach up to 10% of total turnover of an undertaking in breach of Articles 85(1) or 86. Here the Notice stipulates that where an agreement has been notified to a National Regulatory Authority but has not been notified to the Commission the "Commission does not consider it would be generally appropriate as a matter of policy to impose a fine in respect of the agreement, even if the agreement ultimately proves to contain conditions in breach of Article 85.
A fine would however be appropriate in particular if :
As is well known, the Commission has recent published guidelines on how fines will be calculated.
Refusal to grant access.
The refusal to grant access to an essential facility or to apply unfavourable terms is dealt with to some detail in the Notice.
As I have mentioned, under the EC ONP Directives there now exist extensive obligations to supply, in particular for market operators with significant market power, as defined by the National Regulatory Authority. Under Competition Law, in this case Article 86, obligations to supply resulting from a dominant position need very careful examination given the ramifications on the use of companys own investments for its own purposes and on its incentive to invest. At the same time, the principles concerning access under Competition Law have a cross-sector impact, because they also cover areas not covered by ONP, such as access issues in the media field, such as access to set-top boxes.
The Notice addresses the balance to be drawn between the rights of those requesting access and those who have to give access, according to the framework set by Community Competition Law and a number of Court Rulings, interpreting Competition Law in this respect.
Main principles are, (taken cumulatively) :
The issue of pricing - pricing of access, as well as pricing to final customers - has been a main issue in recent cases which have been dealt with under Competition Law in the sector and on which Press Releases have been published. I believe it is a safe assumption that developments in the sector will bring us substantial development of doctrines as regards abuse in the pricing area in both of its two basics forms - excessive and predatory pricing.
It is not unexpected that in a transition from a monopoly environment to a competitive environment excessive pricing by the incumbent will be a major issue. In the past, it has been notoriously difficult to establish, under the conditions of Article 86, when a price is unfairly high. In cases brought before the Commission, like the DT business tariff case (known as "dial and benefit case") the issue had to be dealt with in the context of access charges charged to competitors.
Determination of actual costs of a relevant product is difficult when the cost accounting systems of the incumbents are still insufficient, and when costing principles have still not generally stabilised. In such cases, the Commission can however use comparative market analysis.
The Notice states that "comparison with other geographic areas can also be used as an indicator of an excessive price : the Court held that if possible a comparison could be made between the prices charged by a dominant company, and those charged on markets which are open to competition (Pompes Funèbres, Case 30/87). Such a comparison could provide a basis for assessing whether or not the prices charged by the dominant company were fair. "In certain circumstances, where comparative data are not available, regulatory authorities have sought to determine what would have been the competitive price were a competitive market to exist. In an appropriate case, such an analysis may be taken into account by the commission in its determination of an excessive price".
The Court has said (Société des auteurs, compositeurs, éditeurs de musique (SACEM) ; joined cases 110/88 ; 241/88 and 242/88) : "when an undertaking holding a dominant position imposes scales of fees for its services which are appreciably higher than those charged by 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 dominant undertaking in question to justify the difference by reference to objective dissimilarities between the Member States in question and the situations prevailing in all the other Member States".
It is this method of comparative analysis which has been principally used to date in the cases dealt with under Competition Law as regards excessive pricing in the sector, and which has been extended into a general "best practice" approach for access pricing with the adoption by the Commission, within the ONP framework, of the EC Recommendation on Interconnection on accounting separation. The Recommendation was instrumental in giving Europe some of the lowest interconnection rates for local interconnection in the world, in the range of 1 Eurocent per minute. In the context of competition cases, in particular the DT case, it was considered that any interconnection price should be examined very carefully under competition rules with regard to abuse under Article 86, as soon as it exceeds 100% above best practice because of a substantial likelihood of an abuse. However this range is indicative only. One will always have to look at the circumstances of the case to decide if sufficient likelihood of an abuse exists to warrant an in-depth investigation which then would have to compare also the price charged with the cost base.
A short word on predatory pricing, even if predatory pricing is likely to be in the long run an even more important problem for the functioning of a competitive market in the sector than excessive pricing is.
The predatory pricing issue is now a common denominator of a number of cases in front of the Commission. You will understand that it is inappropriate to talk about cases still in process.
Let it suffice to refer to the Access Notice. The Notice makes reference to the AKZO doctrine that " a price is abusive if it is below the dominant companys average variable costs or if its below average total costs and part of an anti-competitive plan".
However, it also states that "in network industries a simple application of the above rule would not reflect the economic reality of network industries".
As the Notice sets out, in the case of the provision of telecommunications services, a price which equates to the variable cost of a service may be substantially lower than the price the operator needs in order to cover the cost of providing the service. The Notice states that "to apply the AKZO test to prices which are to be applied over time by an operator, and which will form the basis of that operators decisions to invest, the costs considered should include the total costs which are incremental to the provision of the service. In analysing the situation, consideration will have to be given to the appropriate time frame over which costs should be analysed".
It therefore will often be necessary to examine the average incremental costs of providing a service, and to examine average incremental costs of a longer time period than one year.
The Notice also refers to the ONP context : "if a case arises, the ONP rules and Commission recommendations concerning accounting requirements and transparency will help to ensure the effective application of Article 86 in this context".
Having dealt with three issues of major current importance in the application of competition rules to the sector, let me conclude on some more general points.
Let me also include some aspects beyond telecoms in the narrow sense and reaching out to the media sector and the new Internet / electronic commerce related services which will the main topics of todays conference session.
Behind the issue of access in telecoms loom the major questions concerning the development of real competition in the local loop. We have changed regulations, but we have not taken radical steps for changing market structures. The fact remains that fixed network and voice competition starts in Europe from a very different basis than the one which we have experienced in the mobile sector.
While in the mobile sector both the incumbents and the new entrants had to build up a new infrastructure resulting in an overall competitive - though largely oligopolistic - market situation - which we are currently investigating in a number of parallel procedures -, in the fixed network field the new entrants are faced with a situation where the incumbents hold fixed network assets built over one hundred years of monopoly. None of the new entrants can, in the short term, build parallel networks in the local loop which could rival these assets worth 200- 300 billions of EUROs of investment.
We risk therefore a scenario which would see the essential economics of the sector determined on a permanent basis by the interaction between the regulator and the incumbent, with the new entrants nearly entirely dependent on the capability and willingness of the regulator to force the incumbents local network open and ensuring effective implementation of measures, reaching from fair interconnection to full scale unbundling of the dark wire in the local loop.
This can create substantial friction between the regulator and the incumbent, with resulting legal confrontations and uncertainties, as we are currently see evolving in some markets, such as Germany.
The alternative is to throw the door wide open
Divesting cable from telecoms will be one necessary route towards this goal in most European countries. Luxembourg has here an advantage which we hope will be used by operators here for covering the country rapidly with a modern Internet based broadband structure.
But looking across Europe, in more than half of EU Member States both telecom and cable networks are owned and controlled by the same incumbent, with a resulting sharp reduction of incentives for the development of either of the two local infrastructures. The issue is addressed by the Cable Review we have undertaken - and we are witnessing within these very days major progress in this area, as dominant players begin to understand that they will have to create the right pro-competitive structures for the expansion into the multi-media field by relaxing their control on cable. BT has announced that it will divest its cable interests and not expand them further, in order to meet one of the necessary commitments for a green light on its proposed Joint Venture with BSkyB - BiB, British Interactive Broadcasting. Deutsche Telekom has stated that it will structurally separate and regionalise its cable network, with the intention to take in other investors.
Also smaller Member States, such as Ireland, have taken the step of divestiture, in order to open the way to carry true multi-media services on cable, including Internet and telephony.
Cable is a first step.
Creating the new framework for e-commerce on the Internet is another example. I believe we will hear more about this during todays sessions.
The other major immediate question
Finally, the Internet puts all concepts for the telecoms / media sectors into question.
But I believe that we will see emerging out of current lead cases a clearer definition of general principles, particularly in situations of convergence and extension into new markets.
While the Commission will in general take a favourable attitude in order to promote innovation and market development - the very basic objective of Competition Policy, it will also have to apply stringent conditions. This has again been made clear in the Decision on Kirch/Bertelsmann.
Looking at recent cases, a number of principles seem to emerge which will shape the formation of the converging telecom / media markets :
In essence, conditions must be met that guarantee that markets are kept open and can evolve on a competitive basis, as the Commission has said in the Press Release on Kirch / Bertelsmann.
The avant garde nature of the telecom / media sectors puts them at the forefront of the innovation of European Competition Law via its lead cases and via its requirements for new types of regulation - reaching from traditional telecoms to e-commerce and issues such as encryption. In competition law, the Access Notice breaks new ground in the interpretation of Community competition law concerning essential facilities, and excessive and predatory pricing. The cases which will result, will consolidate the doctrines in these areas.
At the same time, the sectors lead in the application of the new procedures - particularly in the field of alliances where the aspects of concentration and co-ordinative behaviour touch on each other. It is not by chance that the first application of the new Article 2(4) test concerning coordination of competitive behaviour according to the revised Merger Regulation has concerned one of these sectors, as announced by the Commissions Press Release on the approval of the Telia/Telenor/Schipsted Joint Venture - and that it has concerned an Internet case.
It just underlines that the telecom / media sectors will continue to test national regulators, the competition authorities, EU competition law and the legal profession in a broader sense - and our ability to deal with the challenge. At stake is the entry of Europe into the information age.