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The European Commission



The EU approach on demonopolisation

Claude Rakovsky




As you are all aware European Competition Policy is based on four main pillars :

- two of these relate to the obligations imposed upon undertakings, namely the antitrust rules (Art 85-86) (it should be noted that these rules apply in the same way to private and publicly owned undertakings, including monopolies) and the merger regulation;

- the other two sets of rules apply to the Member States themselves, and relate to state aid (you are familiar with these provisions) and to monopolies and public undertakings.

These last rules are a peculiarity of our competition system.

Indeed, in other countries governmental authorities may decide to protect certain activities against foreign competition through customs duties, or alternatively, for similar reasons, by providing for specific regulations applying to some sectors or, even, by setting up monopolies.

The European model is substantially different inasmuch as competition rules have a constitutional value which override all Member States' legal provisions. Furthermore, by setting up a Common Market, the Member States have surrendered most of their powers to enforce protection measures against other Member States. It is therefore quite consistent that the power of Member States to create or maintain those monopolies the normal effect of which is to hinder free circulation of goods or services has been also limited by the rules of the treaties, namely Articles 37 and 90 EEC.

Article 37

In the first decades of the then EC, Article 37 has played a major part in that respect.

Let me remind you that this provision imposes on the Member States the obligation to progressively adjust any State monopolies of a commercial character so as to ensure that when the transitional period has ended no discrimination regarding the conditions under which goods are procured and marketed exists between nationals of Member States. Article 37 refers, in particular, explicitly (consistent with the fundamental principles of the Treaty) to monopolies that determine or influence imports or exports between Member States.

Let me add a couple of remarks on this important provision :

i) Article 37 applies to the trade of goods only; this means that monopolies in services (such as telecoms services) are excluded from its scope. On the other hand gas and electricity are fully covered, as are many other "traditional" monopolies (alcohol, tobaccos ..)

ii) it is not obvious from the wording of article 37 that the Member States are under an obligation to abolish monopolies, but only to adjust them; however, the Court of Justice found 20 years ago (cf Manghera case 59/75) that import monopolies are, in all cases, prohibited under Article 37, and the Commission, with an eye on Article 34 (which prohibits "quantitative restrictions on exports, and all measures having equivalent effect") has considered that such prohibition extends to export monopolies as well.

In a decision on telecommunications' terminal equipment (19.3.1991 C 202/88) the Court has found, on the basis of Article 30, that monopolies on wholesale distribution are incompatible with the treaty. All the monopolies referred to above have been eliminated .

On the other hand, it is not considered, as yet, that production monopolies as such are inconsistent with Article 37 (1), whereas monopolies on retail distribution (for example in alcohol and tobacco sectors) have been deemed compatible under some conditions, guaranteeing that any possibility of discrimination is eliminated. The Commission is currently assessing on this basis the position of the retail monopolies still in force in Austria, Finland and Sweden in order to make sure that these new Members States fully comply with their obligations.

Article 90

Let me now turn for a few minutes to Article 90, the history of which has been rather lively and controversial during the last few years. As time is short, I will focus on the first two paragraphs of this Article, leaving aside at this stage the procedural aspects covered by Article 90(3). I will be happy to answer any questions you may also wish to ask on this last aspect later.

Paragraph 1 reads :

"In the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States shall neither enact nor maintain in force any measure contrary to the rules contained in this Treaty, in particular to those rules provided for in Article 6 and Articles 85 to 94."

It should be noted that Article 90(1) refers to all the rules contained in the treaty and not only to competition rules.

Basically, under Article 90(1) Member States are under an obligation to refrain:

- from using state monopolies (2) and public undertakings to pursue objectives they could not legally pursue by themselves : for example, as Article 30 of the treaty prohibits any Member States' measures from hindering free circulation of goods, under Article 90(1) in conjunction with Article 30, Member States must also refrain from encouraging (or compelling) a monopoly or a publicly owned company to deal exclusively with national suppliers;

- from encouraging such companies to behave in a way that would contravene Article 85-86.

Furthermore, going a step further, the Court of Justice has firmly established that creating or maintaining a state monopoly may be, as such, an infringement of Article 90(1) when it leads necessarily to the infringement of another rule of this Treaty. This is the case where such a measure results, for example, in hindering the free circulation of goods as we saw earlier in the case of telecoms terminal equipment.

On a similar basis it has been found by the Court that the granting of a monopoly on the provision of, say, telecommunications services, may thwart the general principles of free provision of services enshrined in Article 59, resulting, therefore, in an infringement of Article 90(1).

It should be noted, however, for the sake of completeness, that the Treaty and the case law of the Court provide for some exceptions to the obligations stemming from Article 30 and 59. I am referring here to Article 36, which allows certain restrictions to the free circulation of goods, in instances where public health/safety are threatened, and to the so-called "essential requirements" identified by the Court (for example, security of an electric grid). As with all exceptions, these are narrowly construed.

Of particular interest are the recent developments which relate to Article 90(1) in conjunction with Article 86. Basically the rationale of the case law is that, although Article 86 on abuse of dominant position does not create as such obligations upon the member State, the latter may not undermine the effectiveness of this provision, through measures concerning public undertakings or monopolies.

For example, the Court of Justice had found that by extending, without objective justification, a dominant position from one market to another distinct from the former, a company would infringe Article 86.

Based on the same approach, the Commission found that by granting the telecommunications networks operators an exclusive right for the provision of telecommunications services, the Member States effected an extension of dominant position from one market (i.e. the operation of telecoms networks) to another (i.e. the provision of telecoms services); and had therefore infringed Article 90(1) in conjunction with Article 86. This position , which was one of the legal bases for full liberalization of telecommunications in the E.U (3) was eventually upheld by the Court.

Another example where the very existence of a legal monopoly results inevitably in hindering the effectiveness of article 86 is when a Member State grants a monopoly (and therefore a dominant position) to a company which is manifestly unable to meet the demand.

This measure will indeed result in a limitation of production, markets or technical developments, Such a limitation by a dominant undertaking would infringe Article 86 and, therefore, is incompatible with Article 90(1) in conjunction with Article 86 when it results from a State measure(decision of 23.4.1991, C-41/90) The scope of this approach upheld by the Court of Justice is of particular relevance, as it implies that a monopoly cannot be legitimate if it does not meet the social needs expressed by the consumers which justified the granting of the exclusive rights.

In such a case, the abuse is the direct and inevitable result of the creation of the monopoly.

But, as the Court of Justice found, it is even sufficient that the granting of a monopoly makes an abuse highly probable for it to be incompatible with Article 90(1). This is the case, for example, if a dominant TV broadcasting company is granted a monopoly for the import of foreign programmes, because such a situation would almost inevitably lead this company to discriminate in favour of its own programmes(decision of 18.6.1991,C-260/89).

This is also the case, where, as was frequent in the past, a telecommunications operator is granted the right to enact the standards relating to telephone equipment and to verify that the economic operators are respecting these standards, while it is a competitor of these operators(decision of 19.3.1991 C-202/88). In fact, in such a situation the temptation for this operator to favour its own products would be almost irresistible.

More generally Article 90(1) prohibits the Member States from giving a monopoly regulatory powers over its competitors. Such a measure would be an infringement even if there was no evidence that the monopoly had misused such powers.

However, as the Court recalled recently(decision of 5.10.1994,C-323/93), the creation of a monopoly (and therefore of a dominant position) does not always lead the incumbent to abuse its dominance. There must therefore be some link (as in the examples mentioned above) between the State measure and the abuse, or a high probability of abuse resulting from this State measure.

Article 90(2)

These developments of the Court's case law and the measures adopted consistently by the Commission in order to restrict the scope of State monopolies have, however, raised concerns and criticism in some circles in the EU. In many countries, the creation of State monopolies have often been seen as quite legitimate measures to deal with excessive private concentration of economic power, post-war reconstruction, sectorial crises, provision of goods or services deemed essential for the national welfare, etc... This is especially the case when the monopoly in question has not necessarily failed to fulfil its function, even though the real costs of its operations remains unclear, and the recent evolution of the economy (globalisation and development of new technologies) lead us to consider that adequate solutions to the problems of the past are not necessarily the best responses to the challenges of the future.

We are all aware that there are circumstances where some regulatory intervention is necessary to correct the shortcomings of the market. However, in an integrated market based on the concept of a level playing field, it is crucial to clarify the conditions under which public intervention is implemented.

In the last few years Article 90(2) EEC has been at the core of the developments that have occurred in the EU in that regard.

Let me remind you of the wording of this provision :

"2. Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in this Treaty, in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Community."

Two short preliminary observations if you allow me :

- as interpreted by the Court, Article 90(2) is an exception to all the rules of the Treaty, those which create obligations for companies (Article 85-86) and those which create obligations for Member States, such as Article 90(1) referred to above;

- being an exception to the rule, Article 90(2) must be narrowly construed, as the Court has stated in several circumstances.

This being said, it appears at once that Article 90(2) needs further clarification on two points:

- What are these services of general interest which may justify an exception to the rules of the Treaty?

- To what extent may this exception, as provided by article 90(2), be justified?

The services of general interest

Although it may come as a surprise, the first point has not been very controversial so far.

In fact it is generally admitted that some activities are to be carried out for the sake of general welfare even if they are not profit making.

For instance the Court of Justice and /or the Commission have found that airlines may be compelled, for reasons of general interest, to operate unprofitable routes; that postal services must be provided "universally", i.e. throughout the territory (including rural areas) on a regular basis and under affordable rates; that electricity distribution companies must ensure the uninterrupted provision of electricity throughout the territory in question to all local distributors and final consumers, in whatever quantity is demanded, and under uniform rates and conditions, except where the variation thereof is applied under objective criteria to all clients.

Comparable parameters have been determined for the telecommunications sector, along similar lines as the different technical features for postal services which must be provided on a "universal basis" regardless of the economic profitability of any individual provision of services.

It should also be noted that the content of requirements based on the general public interest may vary over time. For example, some thirty or forty years ago telephone service was still seen in many Western European countries as a luxury service, whereas nowadays some advanced telecommunications services are about to be subsumed under the concept of the "general public interest".

Conversely, some decades ago the provision of wheat to the population was one of the major tasks of the public authorities and would have then been deemed essential to the general public interest.

The rule of proportionality

Much more controversial is the application of the principle of proportionality enshrined in Article 90(2). In short, the idea here is that any restriction of competition which might be justified by the fulfilment of the general public interest must be strictly limited to what is necessary to achieve this goal. In most cases some degree of regulation imposed on the market may be enough and the elimination of all competition through the creation (or maintaining) of a monopoly is disproportionate.

However, the Commission has accepted that, in some circumstances, the maintenance of a monopoly may be temporarily necessary to the general public interest. For example, it has been admitted in the past that in order to cover the costs of maintaining and operating a telecommunication network, the telecommunications operators needed the financial resources stemming from their monopoly.

Therefore, on the basis of Article 90(2), the Commission has recognized the right of the Member State to maintain such a monopoly. However, with the rapid pace of technological development in this sector it now clearly appears that alternatives (such as financial contributions collected from all the operators competing in the public voice services market) are available which reconcile the benefits of a market based sector and the fulfilment of public interest.

Therefore, the Commission has recently adopted a directive which will complete the liberalization process in the telecommunications sector initiated a decade ago.

To summarize, the approach which is followed consists of :

- identifying that the service involved is essential to the general interest; as I said before this aspect has not been very controversial so far;

- determining to what extent this service cannot be achieved by market forces. This is a more delicate exercise to be carried out on a case by case basis.

No doubt incumbent monopolies could demonstrate that several parts of their activities (like, for example, the interconnection of remote rural subscribers to a telecommunications network) are not profitable.

This does not necessarily mean that they would not be performed by competing operators : for instance, under market conditions the costs might be reduced as a result of better organization and faster technological innovation (for example, interconnection of rural areas might be completed on the basis of radiobased systems); or because, owing to economies of scope, companies operating in a competitive market may accept, as a part of their strategy, to operate some services even if prices do not cover their incremental costs;

- the next stage is to ensure that adequate instruments exist to limit public intervention to the minimum necessary, in order to make sure that the general public interest is maintained.

The Implications for the CEECs

By enhancing its efforts towards liberalization in the last decade or so the EU has aimed at:

- completing the Single Market through elimination or reduction of barriers resulting from the existence of monopolies;

- strengthening competitiveness both by inducing, through competition, previously protected sectors (particularly sectors involving networks) to upgrade their performance and, as a consequence, to make available for industrial users better services at lower costs.

I understand these objectives (integration with the Single Market and competitiveness) are shared by the CEECs which should, therefore, follow the same path, taking into account where necessary (on the basis of Article 90,2) their peculiarities.

That is why the Europe Agreements contain provisions modelled on Article 37 and provide that, after a three year transitional period the principles of Article 90 will have to be upheld.

The 1995 "White Paper on Preparation of the Associated Countries of Central and Eastern Europe for Integration into the Internal Market of the Union" gives useful guidance about the measures that should be adopted in thefirst instance, namely:

- abolition of discrimination on grounds of nationality (on the basis of Article 37 EEC principles);

- separation of public regulator and public enterprise functions, in particular by granting public undertakings a separate legal personality;

- unbundling of the various activities of vertically integrated undertakings;

- identification of the public-service tasks assigned to certain undertakings and the restrictions of competition they possibly justify;

- application of competition rules to the autonomous conduct of public undertakings.

We strongly believe that all these measures will benefit the CEECs' economies and constitute the basis for further progress in the demonopolization process in these countries.

In order to assist, the Commission will pursue, along with the CEECs' authorities, the ongoing fact-finding exercise, in particular on the basis of the questionnaires sent to the relevant authorities which are in the process of being complemented by new preaccession questionnaires.

This exercise will be crucial for the preparation of the opinion the Commission is supposed to deliver to the Council in the framework of the accession procedures.

Furthermore, this exercise will provide, no doubt, useful guidance for the next steps to be taken by the CEECs with regard to public undertakings and state monopolies.

(1) Their compatibility with Article 90(1) in conjunction with Article 52 (on freedom of establishment) has not been tested in the Court so far.

(2) For the sake of simplicity I am using here "monopoly" as a generic term for all companies granted exclusive rights.

(3) The Commission found also that legal monopoly on telecommunications services infringed the provisions of article 59(see above)

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