EU Telecoms: Article 7 procedure, role of Commission and impact of the EU Telecoms Reform – guide

The European Court of Auditors’ 2006 Annual Report, punlished on 13 November 2007, identified some improvements, particularly in agricultural spending, although errors of legality and regularity still persist in the majority of EU expenditure due to weaknesses in internal control systems both at the European Commission and in EU Member States.

The term “electronic communications” covers all forms of communications via electronic means, via telephone (fixed line or mobile), facsimile, internet, cable, satellite etc. In the age of converged technologies, it is important to allow any definition of such communications to be as broad as possible, without limitation to particular technologies. It should thus be able to embrace future technological developments. The open definition of this term reflects the principle of technology neutrality which is one of the fundamental features of the EU Telecoms Rules. As part of the notification mechanism, the Commission has established a list of 18 “markets” for electronic communications (e.g. local and national calls), that it considers should be the starting point for analysis on a national level by national regulators. These markets are set out in the Commission Recommendation “on relevant product and service markets susceptible to ex ante regulation” (which was revised today and now includes only seven markets). Article 7 Procedures

The legal basis is Article 7 of the Electronic Communications Framework Directive (2002/21/EC), the principal instrument for EU regulation of electronic communications. Under the procedures set out under this article, the national regulatory authorities (“NRAs”) are required, in consultation with industry, to analyse their national markets for electronic communications and propose appropriate regulatory measures to address market failures. They should then notify their findings and proposed measures to the Commission and other national authorities. More precisely, the NRA, in accordance with competition law principles, must define the boundaries of the relevant market, assess whether any one or more players is dominant (or has significant market power, “SMP”) in this market and where operators are found to be dominant, propose appropriate regulatory remedies to ensure effective competition.

The Commission assesses the majority of cases within a one-month “phase one” procedure, after which it may choose to approve and/or comment on the proposed measures. However, if the Commission considers that the proposed measure would create a barrier to the single market, or has serious doubts as to its compatibility with Community law, the Commission opens a “second phase” investigation and the procedure’s deadline is extended for a further two months.

Following this in-depth investigation, the Commission may, if its concerns are confirmed, require a regulator to withdraw a proposed measure, (a possibility known as power of veto). This power can only be exercised in relation to the proposed market definition or SMP analysis. As regards proposed remedies, the Commission may only make comments.

So far, the Commission has issued five veto decisions covering seven cases.

• the Commission issued a decision requiring the Polish telecom regulator, Urzad Regulacji Elektronicznej (UKE), to withdraw its draft measures for regulating retail access services.The Commission felt UKE has failed to justify why it intends to regulate broadband access services in addition to regulating retail narrowband access. Therefore, it requested UKE to withdraw its draft measures.
• the Commission challenged the German regulator’s findings that only the incumbent operator, Deutsche Telekom, was found to be dominant on its individual network in this market. The NRA did not consider any of the other operators in respect of their individual networks to be dominant, despite each having a market share of 100%. The German regulator felt that any power on the part of these alternative operators was curtailed by the purchasing power of Deutsche Telekom. On the basis of legal and economic considerations, the Commission considered that Deutsche Telekom could not exercise such power.
• the Austrian Regulator stipulated that a transit market includes the services provided by a network operator to other operators (or itself) to convey calls across the network, The Commission disagreed with the Austrian regulator’s view that operators who were supplying such services only to themselves (in particular, mobile operators) could also supply them to others on a commercial basis. The NRA’s approach leads to a significant unjustified reduction of the dominant market player’s market share (Telekom Austria). Furthermore, the regulator failed to assess the impact of deregulation on small operators.
• Ficora, the Finnish regulator, concluded that one operator had SMP mainly on the basis of high market share (>60%). However, according to competition law practice, market shares alone are not necessarily sufficient to establish dominance and Ficora failed to consider sufficiently market developments that would have rebutted the presumption of dominance.
• Ficora, considered on the basis of its analysis that this market was characterised by effective competition since it did not identify any market players with significant market power. The Commission, however, found that Ficora not only arrived at this conclusion by taking into account regulation already in place to tackle potential competition problems, but also did not provide sufficient evidence underpinning its findings to enable the Commission to endorse the NRA’s conclusions.

In addition, there have been 31 cases where National Regulatory Authorities have decided to withdraw their proposed measures to avoid a veto decision.

Once a Member State regulator notifies the Commission of its proposed measure for a particular market, the case is registered, and an case team comprising officials from both the Information Society and Media and Competition Directorates-General is appointed. The case team analyses the notification and may ask the regulator concerned to provide some further information or clarification for the purpose of conducting the assessment. The regulator has three working days to respond to such a request. The team must carry out its assessment, and comply with the necessary internal checks and balances, within the legally binding deadline of one month. At the end of this period, and provided that the notified measure does not raise “serious doubts” as to its compatibility with Community law, the Commission may decide to comment. Regulators should take utmost account of comments issued by the Commission before adopting the draft measure in question.

In the event the Commission expresses serious doubts, the Commission’s investigation period is extended by a further two months (“phase two” investigation) during which the regulator may not adopt its proposed measure. During these two months, the case team resumes an in-depth examination of the case and invites third parties to make known their views. What follows thereafter is an intense exchange of information between all interested parties (including the NRAs and industry players) and all data provided and views expressed are carefully considered by the Commission.

At the end of the investigation period, the Commission may withdraw its serious doubts (in which case the regulator may adopt the draft measure), comment (of which the regulator must take utmost account when implementing the draft measure) or require the regulator to withdraw its proposed measure. In both phases the regulator may withdraw its draft measure.

The general aim of ex ante regulation is to ensure effective competition on the market to the ultimate benefit of end-users. Market failures which the regulators and the Commission endeavour to tackle include excessive pricing, denial of access to networks, barriers to market entry and discriminatory treatment.

Generally regulatory measures can be imposed only if competition is not functioning in the market analysed. This is the case when a regulator finds that an operator has SMP and thus decides to impose appropriate remedies. The notion of SMP is equivalent to the competition law concept of “dominance”, as defined in the case law of the Court of Justice and the Court of First instance of the European Communities.

The Telecoms Rules provide regulators with a ‘tool kit’ of remedies which leaves them with the flexibility to design appropriate remedies to tackle any market failures observed, and so achieve their regulatory objectives. Obligations imposed should be based on the nature of the problem identified, and be proportionate and justified.

For markets, the following categories of remedies are available: transparency, non-discrimination, accounting separation (separation of accounts between various levels of business), access obligations (requirements to provide access to the SMP operator’s network) and price control. In markets, the obligations may include requirements not to charge excessive prices, inhibit market entry or restrict competition by setting unsustainably low prices, or discriminate between end-users.

Some regulators were late in notifying the Commission of their market analyses. In October 2005 the Commission launched infringement procedures against seven EU Member States (BE, CZ, EST, CY, LV, LUX, and POL), for failing to notify it of their market analyses. Reasoned opinions, the second stage of infringement proceedings, were subsequently sent to Belgium, Estonia, Latvia and Poland. Meanwhile, the Commission has closed the case against the Czech Republic since it completed the review of all 18 relevant markets.

In October 2006, the Commission sent a letter of formal notice to Denmark, Germany, Malta and Portugal for failure to carry out all market analyses on time.

In the 1980s traditional telecoms monopolies controlled all forms of telecommunications – voice and data. Starting with handsets in 1988 and progressively adding services until 1998, the EU liberalised all telecoms services. The number of fixed-line operators doubled between 1998 and 2003. Big operators began entering each others’ markets, new entrants invested in services and infrastructure, and consumers got a better deal all round. On average, for the same telecoms services, consumers spent about 30% less of their income in 2002 than they did in 1996. The affordability index for average income users in all Member States sank to a record low in 2002.

As to the current state of play, the Commission has adopted in March 2007 its 12^th Implementation Report providing market data and economic developments in the telecoms markets per Member State.

The starting point is the Commission Recommendation on relevant markets, which has been presented today in its second edition. National regulators are expected to analyse all markets listed in this Recommendation, taking into account their national circumstances. However, if a national regulator considers that a market not listed in this Recommendation is relevant for regulation because it is characterised by persistent market failure, it may impose regulatory measures but has to justify on the basis of predefined criteria (the so-called “three criteria” test) why regulation is warranted in that specific situation.

Regulation under the EU Telecoms Rules is based on competition law principles. In practice, this means that whenever a new technology is introduced, the regulator has to analyse whether this technology is used to provide services comparable to existing services or whether this technology provides a totally new service. Only in the second case, that is when the service is clearly distinguishable from existing services or products, may it become justifiable to define a new market.

Article 7 procedure contributes to:

• giving market players legal certainty as to how and under what circumstances operators will be regulated. EU-wide rules, and cooperation among national regulators, help to ensure that regulatory practice is consistent across the EU;
• giving market players the confidence that they need to plan their investments in a consistent and predictable EU market;
• supporting the emergence of truly European operators providing their services in more than one Member State;
• enabling new players to enter the market and compete fairly;
• increasing transparency.

Article 7 procedure contributes to:

• stimulating competition, which results in cheaper products and services;
• stimulating investment, which leads to a better choice of products and services;
• increasing transparency.

As of October 2007, more than 700 regulatory measures were notified to the Commission, which means that almost all NRAs have completed the first round of market reviews, with the exception of the regulators in Bulgaria and Romania that joined the EU only on 1 January 2007.

The result of the first round of market reviews show that Article 7 procedure has been instrumental for the promotion of competition, investment and innovation as well as for the consolidation of the internal market for electronic communications.It has ensured i) a consistent approach regarding market definitions and SMP analysis across Europe, ii) brought sound economic analysis to the market review process and iii) resulted in increased transparency.

However, the existing rules have not proved sufficient to ensure that remedies chosen by regulators are always appropriate to resolve the competition problems identified. Sometimes the choice of remedy for similar market situations differs significantly from one Member State’s regulator to another.

Overall, the existing rules have led to better regulation based on competition principles and contributed to the development of a common European regulatory culture.

Effective competition is not achieved by setting deadlines. By means of appropriate regulation we create preconditions for competition to develop. The new Recommendation in relevant markets adopted today indicates that some markets have already been found to be effectively competitive or tend towards effective competition. For example, technical developments and efficient enforcement of appropriate wholesale regulation has enhanced competition in the retail fixed telephony markets and leased lines markets. Furthermore, the market for mobile access and call origination services has been found effectively competitive in most Member States.

One of the main objectives of the rules is to limit regulation to those markets which, due to for example, their structural characteristics, offer no perspective of becoming effectively competitive without regulatory intervention. Successful regulation means that this sector-specific regulation can gradually be dismantled as and when the EU electronic communications market becomes competitive. At that time, commercial behaviour in the marketplace will be constrained by competition law, just as in other sectors.

There are two Commission Directorates-General concerned with the implementation of the Article 7 notification mechanism: DG Competition and DG Information Society and Media. While DG Information Society and Media has the responsibility for the Rules – including the review of the directives – the application of the Article 7 procedures is a joint responsibility with DG Competition. This secures a coherent and consistent application of competition law principles enshrined in the EU Telecoms Rules. The two DGs work hand in hand, pooling their sectoral, regulatory and competition law expertise, thereby reflecting the principles underpinning the rules. Close cooperation between the two DGs has ensured that the principles of the rules have been put successfully into practice. Despite the sheer number and magnitude of notifications so far received, both DGs have ensured that the tight legal deadlines for assessment and decision-making are always met.

By the end of October 2007, the Commission received 724 notifications from 26 Member States. In all cases, the Commission assessed the notifications within the tight Article 7 deadlines of one month and required an extra two months when it had serious doubts as to the compatibility of the proposed measures with Community law. The Commission had issued almost 448 decisions. Before the end of 2007 the Commission expects all National Regulatory Authorities to have finished the first round of their market analyses, except Bulgaria and Romania. Nine Member States have started their second round of market analyses.

The experience of the past year has demonstrated that there are major differences from country to country in “when” and “how” the current rules are enforced and implemented.

The new EU Telecoms Rules will therefore give the Commission the power to also oversee remedies proposed by national regulators to help ensure a more consistent, efficient application of those remedies across the EU. The Commission will in future validate the draft remedies in close cooperation with the new European Telecom Market Authority. In practice this means that the Authority will deliver an expert opinion to the Commission on the notified draft measures by a specific regulator and the Commission will be required to take careful account of this opinion.