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The task ahead; ensuring the new regulatory regime delivers effective competition

By Andy Tarrant, Director of Regulatory Affairs, European Competitive Telecommunications Association (ECTA)

In order to be compliant with the new Framework Directive, all Member States should be regulating communications markets on the basis of the new regime on 25 July 2003. This means that as well as having transposed the new Directives into national law, they also need to have undertaken the substantive task of conducting the market review process – analysing markets, making findings of significant market power where relevant, and, imposing regulatory obligations (often termed “remedies”) to deal with market dominance. Unfortunately, it now appears that less than half of the Member States will have adopted new communications laws on time and that only two or three will be ready to actually implement the substantive requirements of the new regime on or near the required date. As a neutral third party observer remarked, the new EU regime was theoretically elegant, but whether it actually worked would depend on the cooperation of the Member States ¹ .

In theory, some argue, one could take the view that each Member State should be allowed to regulate well or poorly. In the long term, so the argument runs, consumers (ie voters) will force governments to adopt the level of regulation that maximises consumer welfare. However, the grave weakness of this argument is that it ignores the fact that in order to compete with the domestic incumbents in each of the Member States, even those that are comparatively well-regulated, many new entrants must seek pan-European economies of scale and scope. Failures to regulate properly in individual large European countries have a spillback effect that ultimately affects us all.

Germany stands out as being particularly poorly prepared for implementation. The draft Telecommunications Bill is still under discussion and is unlikely to be adopted before Spring 2004, with the market review process coming even later. It should also be noted that the draft Bill contains a number of flaws that render it, from our analysis, in breach of EU law. ECTA recently wrote to the Ministry to make this point, stating, inter alia, that the limitations in the draft on the discretions made available by the Access and Interconnection Directive to the independent regulator were invalid. Similarly, we also pointed out the invalidity of the requirement in the draft that ex ante wholesale price regulation be disapplied where there is retail competition. The draft does not make it clear that this would be inappropriate where retail competition on a relevant market only exists because of pre-existing wholesale regulation! Clarity on this point is vital, particularly where the incumbent has a reflex to litigate. ECTA is organising a conference in Berlin in September in order to facilitate discussion of these issues between ECTA members and German parliamentarians.

The Framework Directive does contain a grandfathering clause: until the market review process has been undertaken, pre-existing regulation based on the 1998 set of Directives must remain in force. However, as any reader of the European Commission’s Annual Implementation Reports knows, implementation in the spirit of the 1998 Directives, while improving, is patchy. A particularly bad example of poor implementation of the old regime lies in the field of accounting separation. Reports on failures in this area were noteworthy features of the 7th and 8th Implementation Reports. The Commission is still investigating Member State non-compliance in this area and ECTA is encouraging the Commission to pursue these cases. These remain extremely significant because the remedy of accounting separation will be just as crucial to delivering effective competition under the new regime as it was under the old ² . The new regime should in theory require only a slight modification of the coverage of the old accounting separation systems. In practice, many countries will only be beginning to introduce truly effective systems. Since this cannot happen overnight, enforcement of the old regime will be a useful precursor to a functioning new system. (It should be noted that in ECTA’s view, based on an offer a member has received from a large accounting firm, introducing such a system would take about 6 months, not the years that recalcitrant incumbents predict). Surveillance and enforcement by the Community Institutions of the old regime is clearly vital with respect to countries, including Germany, which will be late in implementing the new regime. There is clearly no justification for such countries receiving a year’s holiday from supervision because of the transition between the two regimes. ECTA are currently drafting a submission to the MEP Nick Clegg with respect to his forthcoming report into the success of implementation of EU rules in this sector.

The European Regulators’ Group has launched a consultation process on remedies that should be applied in order to achieve the objectives of the new Directives. Both IRG working groups and the Commission will be working on the production of a recommendation on remedies. ECTA is working on a submission to these bodies. It will cover not only a statement of general principles but also apply that to a number of particular products (bitstream, leased lines, mobile call termination, and FRIACO) to show the range of remedies that actually need to be applied to prevent the significant market power operators from thwarting effective competition. The choice of remedies is ultimately the critical area at play under the new regime, they are now discretionary, subject to meeting the objectives of the Directives, whereas under the old regime they automatically flowed from a finding of significant market power. Being found to have a significant market power under the new regime will not achieve anything if all that attaches is a general requirement for transparency or to avoid discrimination when selling wholesale products. For such requirements to work, they need a range of detailed underpinnings, which will vary depending on the market in question.

It may be that the IRG/ERG co-operation procedure will serve as a vital network for the spread of regulatory best practice and ECTA already cooperates with these bodies. However, there may also be a temptation for some Member States to put pressure on the ERG to produce lowest common denominator recommendations or, alternatively, prevent the independent NRAs from implementing recommendations where they go beyond the current level of national regulation. For the new regime to work, the Commission will have to be prepared to use its powers to ensure that the level of regulation that is considered appropriate to meet the objectives of the Directives effectively does represent best practice. This ultimately means tackling not only poor market analysis, incorrect findings with respect to the existence or absence of significant market power, but also assessing the remedies that are imposed at national level and undertaking infringement actions where necessary. The Commission has an enhanced opportunity to encourage best practice, since all these measures must be notified to the Commission as required by Article 7 of the Framework Directive. A joint Article 7 Task Force between DG Information Society and DG Competition has been set up to undertake this work. It is part of ECTA’s brief to assist this Taskforce by flagging to the Commission where our members believe that Member States are departing from best practice.

Between now and Christmas, we can expect there to have been a great deal of development; much positive, some highly controversial. The 4th ECTA Annual Regulatory Conference in Brussels (10-12 December) will provide a fantastic opportunity to quiz all the stakeholders on whether the new regime is proving to be elegant in practice as well as theory.

About ECTA
The European Competitive Telecommunications Association (ECTA) is the leading pan-European trade association serving the telecommunications industry. Through its activities, ECTA facilitates business development opportunities and a pro-competitive market. ECTA objectives are to:

  • Assist and encourage market liberalisation and competition
  • Represent the telecommunications industry to key government and regulatory bodies
  • Maintain a forum for networking and business development throughout Europe
  • Assist new market entrants through pro-competitive policies
  • Continually reflect the dynamic nature of the telecommunications industry

ECTA's membership includes around 200 key decision makers and executives from a wide range of companies across the telecommunications industry.

Andy Tarrant
Andy Tarrant is Director of Regulatory Affairs at ECTA and is based in the Brussels office. Previously he was a senior competition and regulatory lawyer with BT Ignite. From 1995 to 1997, he was European Policy Advisor and then Head of the International Section at the UK telecommunications regulator, OFTEL. He qualified as a solicitor with Herbert Smith solicitors and has a degree in Modern History and Masters in European Law and in European Politics. Publications include articles in ECLR on significant market power and dominance in telecommunications and on accounting separation.

For more information, please contact:
Andy Tarrant: atarrant@ectaportal.com

¹ J.Scott Marcus “The Potential Relevance to the US of the European Union’s Newly Adopted Regulatory Framework for Telecommunications”, FCC, July 2002.

² For further information on this issue, see Tarrant, A., “Accounting separation; the hole in the heart of the EU Telecommunications regime”, European Competition Law Review, June 2003.

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