1. 1 Outline Of Regulation In The Telecommunication Sector

2. 2 Need For A Telecommunications Policy  Until the 1980s – provision of telecommunication services was entrusted to National Telecommunications Operators (TOs) often twinned with national postal services –state owned and constitute as legal monopolies –non-existent competition between TOs  Few and limited incentives to –promote the interconnection and inter-operability of networks –innovate and invest  The primary driver of change has been –the dramatic increase in the use of information technologies; and –key importance in enhancing „information society“

3. 3 1984 Action Programme  EU policy has evolved with the sector supporting common development, promoting competition and harmonisation  Commission introduced the Action programme to liberalise and harmonise European Telecommunication market  Aimed to create Community-wide market –establish standards and steps towards mutual recognition of type- approval for terminals equipment –develop advanced telecommunication technologies –access of modern telecommunication for the less favoured areas –co-ordinate technical plans and strategies for new services

4. 4 Second Phase - 1987 Green Paper  EU Commission set out a policy framework for action in the telecommunication sector –liberalising market –introducing competition for services –separating regulation and operations –defining harmonised access conditions  The liberalisation of all telecommunications services and networks by 1 January 1998  The main policy theme has been the move towards a single market for telecommunications services that removes barriers to pan- European operation

5. 5 Terminal Equipment Directive  Terminal Equipment Directive (Dir. 88/301) –established a modern form of directives for abolishing special and exclusive rights to import, market, connect, bring into service and maintain terminal equipment –ensured that alternative operators could obtain sufficient rights from Member States to start compete  However –Withdrawing the exclusive and special rights was not sufficient to promote competition –TOs ceased to be de jure monopoly but remain to be de facto monopoly

6. 6 The 1990s –Open Network Provision  Set out framework and timetable for the introduction of series of measures to harmonisation and to access to the public telephone network  Implementation 1992 - 1998  Condition for access must be –based on objective criteria (i.e. cost-oriented) –transparent and non discriminatory  The ‘1998 package’ of legislation established the basis for the full opening of EU telecoms markets (transition form monopoly to competition)  The market areas were laid down in the relevant directives, but were not defined in accordance with the principles of competition law

7. 7 2003 EC Directives  Directive (2002/21/EC) on a Common Regulatory Framework  4 specific Directives –Directive (2002/19/EC) on Access and interconnection –Directive (2002/20/EC) on Authorization –Directive (2002/22/EC) on Universal service and users' rights –Directive (2002/58/EC) on privacy and electronic communications  In order to take into account the convergence between the telecommunications, media, and information technology sectors, this covers all forms of electronic communications

8. 8 Competition Law-ization  Substantive competition law-ization of the Telecommunication regulation –telecoms regulation is essentially a-symmetric regulation, i.e. the imposition of special obligations on incumbents –trigger for a-symmetric regulation in the past was significant market power (SMP), i.e. holding of 25% in certain market areas –under the New Regulatory Framework the concept of SMP will be based on the concept of dominant position, calculated in a manner consistent with competition law practice  Procedural competition law-ization –The Commission will play a strong role in ensuring coordination and uniformity of obligations

9. 9 2003 Regulatory Framework  Definition of relevant markets and the assessment of SMP is done in line with competition law principles -- defined in Article 14(2) FD as a ‘position equivalent to dominance’ under article 102 TFEU as defined by the European Courts  Commission identifies three criteria that have to be taken into account for a market to be selected and analyzed by the NRAs, i.e. three criteria test: –the presence of high and non-transitory entry barriers, i.e. structural, legal or regulatory; –the market does not tend towards effective competition within the relevant time frame horizon; and –the application of competition law alone would not adequately address the market failure concerned

10. 10 How It Works  Cooperation between the Commission and NRAs is strongly proceduralized  The Commission identifies markets susceptible to ex ante regulation in a recommendation (issued in 2003 and reviewed in 2007)  NRAs define the relevant markets (based on the Commission’s recommendation and the guidelines) and then proceed to identify if these markets are competitive or not  Markets are not competitive if the NRAs find that there is one undertaking that occupies a position of SMP (dominance or collective dominance)  If markets are not competitive, NRAs will impose obligations or remedies on the SMP undertaking, choosing from a list of standard behavioral remedies, i.e. transparency obligations, non- discrimination, cost accounting separation and price control

11. 11 How It Works (II)  Definition of the relevant market, finding of SMP, and remedies are notified to the Commission before implementation  Upon receipt of a notification the Commission will issue comments, which must be taken into the utmost account by the NRA.  The Commission enjoys veto power concerning market definition and SMP for cases in which it cannot agree with an NRA’s decision (does not cover remedies)  Prospective analysis required to ascertain whether the market is prospectively competitive and thus whether any lack of effective competition is durable  The analytical techniques developed under the EC Merger Control Regulation

12. 12 A Merger-like Review Process  Before adoption, national regulatory measures must be made accessible to the Commission and other NRAs  One-month period for comments (phase one period)  At the end of phase one, the Commission may –send a letter with comments on how the measures could be improved/ with no comments; or –open a ‘phase two’ procedure if the Commission considers that the proposed measures would create a barrier to the single market or if it has serious doubts as to their compatibility with Community law  The phase two procedure lasts an additional 2 months  If its concerns persist, the Commission may require the NRA to withdraw the draft measures (“veto” decision)

13. 13 Focus On Wholesale Regulation  Regulation requires that the obligations imposed on operators with SMP are based on the nature of the problem identified and are proportionate  A measure is proportionate where it represents –a minimum necessary intervention required to achieve a particular aim –where there is a choice of several appropriate means to achieve a desired result, the Regulators are bound to apply the least burdensome remedy which would solve the identified problem  Most of the problems observed on retail markets may be remedied by appropriate remedies imposed at wholesale level  The Commission considers that effective wholesale regulation has significantly reduced the barriers to entry in the market and leaded to price reductions in retail markets

14. 14 2009 - Telekom Reform Package  BEREC (Body of European Regulators for Electronic Communications) –Key objective -- a stronger body to better support the Commission in reviewing national regulatory measures –BEREC’s opinions to the Commission be adopted by majority (contr. ERG by unanimity) -- improve the decision-making process -- and the Commission is required to take them into the utmost account  “Quasi-veto” power over remedies –the Commission can require the NRA to defer adopting remedies until completion of a conciliation procedure –if no agreement, the Commission will issue a formal recommendation to the NRA – not binding, however, the NRA is subject to a reinforced duty to state reasons

15. 15 2009 - Telekom Reform Package (II)  New Commission instrument for long-term harmonization –the Commission may take binding decisions on market definition and remedies -- only in exceptional cases to address EU-wide systemic regulatory failures, e.g. national approach creates barriers to the internal market –a tool of last resort used after a waiting period of two years after issuing a non-binding recommendation  Structural remedy –Functional separation, i.e., separation within a vertically integrated operator between its network infrastructure and other parts of its business  Limiting user’s access to Internet, e.g. copyright infringement

16. 16 Final Remarks  The design of new regulatory framework shows the intellectual power of competition law: enforcement logic has been colonized  Interactions between regulation and competition law more complex  What is the practical impact? Does the presence of competition-law oriented regulation make a difference?

17. 17 US vs. EU approach in Margin Squeeze

18. 18 Margin Squeeze U D1 D2 A vertically integrated firm holding a dominant position in the upstream market prevents its non-vertically integrated downstream competitors from achieving an economically viable price-cost margin End Consumers Upstream market Downstream market p1p1 W The margin between the retail price (p 1 ) and wholesale price (w) is too small to allow downstream rivals to compete

19. 19 What Is Margin Squeeze Predatory pricing in the retail market? Excessive wholesale pricing? A type of a refusal to deal? A stand-alone abuse?

20. 20 Article 102 Guidance – EU Approach Refusal to supply  Abuse if the margin does not cover downstream long-run average incremental costs (LRAIC)  Higher cost threshold than average avoidable cost (AAC) used for predatory pricing Cost test  there is a regulatory obligation to supply - balancing of incentives to invest/innovate has already been carried out by the regulator; and/or  the upstream market position has been achieved through state resources or under special/ exclusive rights; Exception (¶82): ‘Oscar Bronner’ conditions must apply  refusal/ margin squeeze relates to the input that is objectively necessary to compete effectively on a downstream market  refusal is likely to eliminate the effective competition on the downstream market;  refusal is likely to lead to consumer harm

21. 21 Some Key Cases BSkyB Deutsche Telekom Telefonica Genzyme Brown Sugar Regulated industries Slovak Telekom Wanadoo (predation) Number of national cases Telekomunikacja Polska Unregulated industries

22. 22 if the difference between the retail prices charged by a dominant undertaking and the wholesale prices it charges its competitors for comparable services is negative, or insufficient to cover its product ‐ specific retail costs Definition no obligation to establish that the wholesale prices or retail prices for end ‐ user were in themselves abusive on account of their excessive or predatory nature Other form of abuse? „as ‐ efficient ‐ competitor“ test, whether the pricing practices of a dominant undertaking could drive an equally efficient economic operator from the market, relying solely on the dominant undertaking’s charges and costs Methodology Applying Margin Squeeze Test Avoidable cost or LRAIC? Cost standard Need to establish dominance in the retail market and prove the anticompetitive effect in the market? Double dominance and effect Individual products or a bundle of services? Level of aggregation How long a period is reasonable? Customer life time? Time period

23. 23 linkLine – US Perspective Satellite Cable xDSL US Supreme Court rejected case against AT&T as:  no antitrust duty to deal as competition from cable, satellite etc  no predatory pricing In the US - more general debate about whether the antitrust laws should protect  competition (no margin squeeze as an independent claim) or  competitors (margin squeeze as an independent claim)

24. 24 Telefónica 1 National interconnection point 109 Regional interconnection points >6,000 endpoints of copper distribution networks (LLU) internet End customer Telefónica offered three wholesale broadband products: –No margin squeeze on LLU –Spanish regulator said no margin squeeze for regional prices European Commission: –Margin squeeze in national and regional broadband –LLU not considered as viable alternative –Cable considered too weak competitor despite accounting for over 20% subscribers Cable

25. 25 Avarage Customer Life  Upfront costs are recovered by revenues over subscription period  Customer lifetime assumption matters  Inter-temporal allocation of start up costs - Infrastructure costs - Customer acquisition costs - Advertising costs Time Costs Monthly revenues

26. 26 Competition Law vs. Regulation Application of competition rules also if the sector is ex ante regulated - the objectives of regulation and competition law are not the same  regulatory authorities often impose access obligations in situations where competition law cannot  the price set by the regulator may be different to that set under competition law criteria  Regulation and competition policy do not necessarily carry out the same balancing of incentives  If Oscar Bronner criteria are not met  efficient company would bear losses in the upstream market  downstream increase in price would artificially benefit inefficient competitors

27. 27 Case study

28. 28 Czech Broadband Market

29. 29 Slovak Broadband Market

30. 30 Back up

31. 31 2003 – Recommendation On Relevant Markets (II)  Commission requires NRAs to analyse the relevant markets as proposed in the recommendation –7 retails markets; and –11 wholesales markets  EC Commission identifies three criteria that have to be taken into account for a market to be selected to be analyzed by the NRAs, i.e. three criteria test: –the presence of high and non-transitory entry barriers whether of structural, legal or regulatory nature; –the presence of a market structure such that the market does not tend towards effective competition within the relevant time frame horizon; and –the application of competition law alone would not adequately address the market failure concerned

32. 32 2003 -- Recommendation On Relevant Markets  The Commission’s recommendation C(2003)497 on relevant product and services market within the communication sector: –provides list of relevant markets that are potentially susceptible to ex ante regulation –differentiates between wholesale and retail markets according to the competition law principles  Recommendation is not binding BUT the NRA are required to take the utmost account of it  If the NRA whishes to defined the relevant market which differs from those defined in the Recommendation and would affect trade between the Member States it is required to notify the Commission in advance

33. 33 Relevant Markets – Retail Level 1.Access to the public telephone network at a fixed location for residential customers 2.Access to the public telephone network at a fixed location for non-residential customers 3.Publicly available local and/or national telephone services provided at a fixed location for residential customers 4.Publicly available international telephone services provided at a fixed location for residential customers 5.Publicly available local and/or national telephone services provided at a fixed location for non-residential customers 6.Publicly available international telephone services provided at a fixed location for non-residential customers 7.The minimum set of leased lines

34. 34 Relevant Markets – Wholesale Level 8.Call origination on the public telephone network provided at a fixed location 9.Call termination on individual public telephone networks provided at a fixed location 10.Transit services in the fixed public telephone network 11.Wholesale unbundled access (including shared access) to metallic loops and subloops for the purpose of providing broadband and voice services 12.Wholesale broadband access 13.Wholesale terminating segments of leased lines 14.Wholesale trunk segments of leased lines 15.Access and call origination on public mobile telephone networks 16.Voice call termination on individual mobile networks 17.The wholesale national market for international roaming on public mobile networks 18.Broadcasting transmission services, to deliver broadcast content to end users

35. 35 2007 -- Recommendation On Relevant Markets  The EC Commission proposed in June 2006 a review of the 2003 Framework –encourages further deregulation of the sector –leaving large parts of the industry to be governed by competition law only (downstream markets)  Regulation requires that the obligations imposed on operators with SMP are based on the nature of the problem identified and are proportionate

36. 36 2007 Recommendation -- Markets Retail level 1.Access to the public telephone network at a fixed location for residential and non-residential customers Wholesale level 2.Call origination on the public telephone network provided at a fixed location 3.Call termination on individual public telephone networks provided at a fixed location 4.Wholesale (physical) network infrastructure access (including shared or fully unbundled access) at a fixed location 5.Wholesale broadband access 6.Wholesale terminating segments of leased lines, irrespective of the technology used to provide leased or dedicated capacity 7.Voice call termination on individual mobile networks