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The New European Regulatory Framework from a Regulator‘s Perspective

The New European Regulatory Framework from a Regulator‘s Perspective. Dr. Annegret Groebel, RegTP Head of Section: European Co-ordination ITS-14th European Regional Conference Helsinki – 24 August 2003 http://www.regtp.de/. Telecommunications Regulation.

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The New European Regulatory Framework from a Regulator‘s Perspective

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  1. The New European RegulatoryFramework from a Regulator‘s Perspective Dr. Annegret Groebel, RegTPHead of Section: European Co-ordination ITS-14th European Regional Conference Helsinki – 24 August 2003 http://www.regtp.de/

  2. Telecommunications Regulation • Liberalisation guided by regulation to guarantee a gradual and permanent transition from monopoly to competition in the telecommunications market: Sector-specific competition law • Remove all barriers and prevent the establishment of new ones in order to create self-sustaining competitionno or low barriers to entry • Competition will not evolve automatically, therefore the legal regulatory instruments must go beyond general competition law • Regulation is the economic accompaniment of liberalisation • Regulation is technology-neutral and asymmetric • Competition offers a wider variety of choice to customers: lower the barriers to change the operator for users • A strong legal basis should provide the stable and cohesive framework necessary for consistent incentive regulation

  3. Regulation and Competition I • Close link to general competition law that will replace sector-specific regulation once market forces start to work and competition is self-sustaining, but until then regulatory instruments must go beyond general competition law by imposing special obligations on the dominant operator such as: • the obligation to grant access to essential facilities at non-discriminatory conditions in order to create a level playing field(special control of abuse of market power and equal access); • ex-ante price control (cost-orientation criterion) in order tocounterbalance the market power of the dominant operator • Keep market entry open by removing all legal barriers to entry and prevent the establishment of new economic/strategic ones • Prevent price squeezing with regulation on the access and wholesale level, while applying competition law on the retail lev. • Prevent foreclosure and leverage with ex-post price control (to stop short anti-competitive practices) • Competition in the former monopoly telecom markets not yet self-sustaining but still reliant on regulation, which must contin.

  4. Regulation and Competition II • All of these special obligations are necessary to balance the structurally imbalanced situation (potential for abuse of market power) in the fixed network market due to the fact that the incumbent is a vertically integrated operator:- owns the essential facilities, on which the new entrants rely (vertical relationship on the wholesale level) and - faces the new entrants as a competitor on the retail market for telecoms services (horizontal relationship) • Regulation defined as the power to impose special obligations on the dominant operator and enforce compliance is therefore necessary to counterbalance the market power of the dominant operator (generally the incumbent) and his willingness to use it: structure conductive to abusive behavior • Special control of abuse of market power (anti-competitive behavior by the dominant operator) by the regulator as behaviourial aspects become more important in riper markets: competition law instruments incorporated in sector-specific law

  5. Regulatory Rationale of LRICS • The regulator is placing himself in the same situation as a new operator having to make the investment decisions related to market entry now: current costs instead of the incumbent‘s incurred costs (historical costs) are to be used (actual prices) as otherwise the make-or-buy decision would be distorted • By setting prices equivalent to the costs of efficient service provision the regulator anticipates future prices prevailing on a fully competitive market reflecting the forward looking investment costs which are the costs of efficient service provision (defined as LRICS) • Cost-orientation is especially important as it allows to steer the market forces in the right direction by ensuring the optimal allocation of resources at the same time • Concept of LRICS and CCA ensures a balanced approach to promote infrastructure as well as service competition, is applied consistently for all services (IC as well as LLU)

  6. Where do we go? • With the rapidly changing market structure and the emergence of new markets a need was felt to review the existing European framework and adapt it to the new technological and commercial conditions where necessary • The discussion was started by the Commission in 1999 (Review ’99) and ended with the adoption of the new legislation by the European Parliament on Dec. 12th ‘02 • Regulators should have more flexibility and the new legislation should reflect the evolution of the telecoms markets since liberalization in 1998, the state of competition should be analysed and evaluated to assess where a greater reliance on general competition law is possible and appropriate

  7. 99 Review of European TC Legislation: Key Issues • Streamlining the European legal framework:5 proposed directives • Technological neutrality and convergence: a single legal framework for all electronic communications markets • More flexibility to adapt regulation to the rapidly changing market conditions • More harmonisation in the application of European law by National Regulatory Authorities • More reliance on general competition law where sector-specific rules are no longer necessary taking into account market developments since liberalization, thus less sector-specific regulation

  8. EU Regulatory Package I • With the much broader concept of electronic communications networks the new package comprises the whole industry and takes account of convergence and new technological developments • Changes only where these encourage greater competition and are necessary to ensure neutrality of regulation for convergent technologies (technological neutrality Art. 8 FD) • With the closer link to the dominance concept of EU competition law sector-specific regulatory legislation is embedded in general competition law and thus is a logical consequence of the market development since liberalization started in 1998 • With the New Group (ERG) + the veto power of the Cion (Art. 7 FD) the last aim of the reform package to reach a more harmonized approach of regulatory practices across Europe is taken care of ensuring a consistent application of the new directives

  9. EU Regulatory Package II • Package comprising the new European regulatory legislation adopted by the EP on Dec. 12th 2001, publ. on April 24th ’02, transposition into national law within 15 months (July 25th ’03) • 4 directives and the frequency decision: • Framework, Authorisation, Access+Interconnection, Universal Service+Users‘ Rights Directive • Commission given a veto right in Art. 7 FD • Frequency Decision (allows spectrum trading, but not mandatory) • Guidelines on Market Analysis published on July 9th 2002 • Draft Recommendation on Market Definition publ. for consultation on June 17th ‘02, hearing held on July 3rd ’02,2nd hearing (NRA/NCAs only) held on Oct. 9th 2002, finally adopted and published on Febr. 11th 2003 (revised list of markets – Annex I FD, 18 markets to be regulated) • ERG decision + Spectrum Policy Group decision publ. July ’02 • LLU Regulation publ. Dec. 2000, in force since Jan. 2001

  10. EU Regulatory Package III • Art. 14-16, Annex I + II FD, Recommendation on relevant markets susceptible to ex ante regulation, Guidelines on market analysis and the assessment of SMP • Introduction of the concept of dominance by linking the definition of market power to EU competition law, which also introduces joint dominance of 2 operators, which is particularly relevant for the mobile market • The strict 25% SMP threshold of the current ONP directive is replaced by a dominance threshold and criteria taken from EU competition case law analysis + jurisdiction • Qualitative criteria such as financial power, links to upward and downward markets, barriers to market entry and structural links to other companies must be taken into account when assessing the market power • If an operator is found to be dominant (either individually or jointly), at least one special obligation must be imposed, which must be appropriate and proportionate to remedy the problem to be chosen from the list in the AID/USD

  11. Guidelines on market analysis and assessment of significant market power Recommendation on Relevant markets EC level National level Assessment of effective competitionor significant market power Cancellation, confirmation or imposition of obligations Market Analysis I Market analysisrelevant market definition Results can be vetoed Remedies cannot be vetoed Important role of NRAs to choose the appropriate remedy Remedy should be effective solve the lack of competition

  12. Market Analysis II • A market analysis consists of 2 steps:- definition of the relevant market- determination of a dominant (SMP) operator • Definition of the relevant market:- product: concept of effective substitutability- geographical: international / national / regional / local • Dominant position is defined as an uncontrolled room for action of an operator allowing him strategic behavior • Criteria for dominance:- quantitative: -- market share -- difference in market share- qualitative: -- financial power -- links to upward/downward markets -- structural relations to other companies -- barriers to market entry (legal / factual) -- actual or potential competition

  13. Framework Directive • Art. 3: National Regulatory Authority: independence from market parties • Art. 6: National consultation on draft measures (market definition + SMP determination, remedies) • Art. 7: Consultation with other NRAs and Notification of draft measures to the Commission: so-called consolidation procedure Veto power on market definition + SMP if internal trade is affected + draft measure considered not to be in line with Art. 8 objectives, to achieve a greater harmonisation and the internal market, but no veto power on remedies, only comments, which have to be taken into utmost account by NRAs

  14. Access and Interconnection Directive I • AID provides in Art. 5, para 4 for NRAs the power to intervene at own initiative to enforce access and interconnection in dispute resolution proceduresimportant for disputes on SLAs, which become more and more important with market evolutiongreater reliance on competition law to enforce contractual penalties and stop discriminatory and anti-competitive behaviour with behaviourial aspects becoming more important than structural problems • Choice between imposing different regulatory obligations acc. to Art. 8 – 13, acc. to Art. 8, para 4 measures must be proportionate and based on the nature of the problem (appropriate to solve it)greater flexibility to act acc. to market needs, but having regulatory instruments still available: new mixture allows NRAs to intervene when necessary and thus to prevent remonopolisation

  15. Access and Interconnection Directive II • Art. 9 – Transparency obligation • Art. 10 – Non-discrimination obligation • Art. 11 – Accounting separation • Art. 12 – Access obligation • Art. 13 – Price control (cost-orientation) cost of efficient service provision • In case wholesale remedies do not work: • Art. 17 – US-Dir.: Regulatory controls of retail services • Art. 18 – USD: Regulatory controls of minimum set of LL • instead of the former automatism, the remedy must be proportionate and appropriate to solve the problem: increased role for the NRA

  16. Bitstream Access I Definition acc. to document ONPCOM01-18rev1: Incumbent installs a high speed access link to the customer’s premises and makes it available to third parties, to enable them to provide high speed services to customers Incumbent may also provide ‘backhaul’ to carry traffic to a ‘higher’ level in the network hierarchy where new entrants may already have a point of presence Bitstream access allows new entrants to differentiate the service offered to customers as they can alter certain technical parameters. ► Various possible handover points for xDSL traffic between incumbent and OLO/ISP

  17. Bitstream Access II • Economically bitstream access is a wholesale product, which is neither unbundled or shared access nor pure resale, but lies in between those extremes on the value chain; bitstream access requires less investment (“low-cost entry option“) • Technically it‘s the provision of transmission capacity (in most of the cases ADSL, but not exclusively) between an end-user and the PoI of the new entrant (e.g. ATM-IC) • Legally under the current framework the obligation to provide bitstream access can be derived from the non-discrimination principle acc. to Art. 16 (para 7) of the Voice Telephony Directive (98/10/EC) and SMP operators must meet reasonable requests, but it‘s not an obligation mandated by the ULL Regulation 2887/2000; under the new regulatory framework, bitstream access is mentioned in the Recommendation (2003/497) as part of the wholesale broadband access market susceptible to ex-ante regulation and can be mandated as an access obligation according to the AID (cf. doc. COCOM03-04rev1) legal basis clearly strengthened

  18. Institutional Set up in Germany I • Umbrella approach, which means: • The Federal Cartel Office (BKartA), which was established in 1958 when the Restraints against Competition Act (GWB) entered into force, has a co-ordinating function regarding the definition of the relevant market by NRAs (RegTP being the only NRA), merger control remains in the responsibility of BKartA • RegTP must acc. to section 82 TKG get agreement for its definition of the relevant market as well as the determination of a dominant operator • The same threshold for dominance holds in all sectors of the economy as the TKG refers explicitly to a dominant position acc. to section 19 GWB, to guarentee a close link between regulation and general competition law

  19. Institutional Set up in Germany II • In Germany competition law applies for market definition, market analysis and thresholds:SMP tresholds for the communications sector identical to those in the rest of the economy • Highest possible degree of coherence of sector specific law with competition law already achieved in Germany • This close link between sector-specific regulatory legislation and general competition law will now be introduced in EU regulatory legislation too via the concept of dominance

  20. Institutional Set-up in Germany III • Section 7 – 13 of the draft law (published April 30th ’03) transpose the relevant articles of the FD, Recom, Guidelin. • Recommendation on relevant markets as a basis,18 markets recommended to be analysed • Review of the List of Recommendations (if applicable, to be extended or reduced – based on COM review criteria/ workable competition, veto right of the EU Commission) • Market dominance: Section 19 of the Act Against Restraints of Competition + guidelines to be considered/ Art 14(3) of the Framework Directive • Extensive, time-consuming consultation and consolidation procedure (acc. to Art. 6 + 7 of the FD) • Participation of the Federal Cartel Office (as now)

  21. Cooperation between National Regulators • Independent Regulators Group (IRG) • Informal Group of Telecoms NRAs founded 1997 in Paris • to share experience and information • to develop common approaches • to discuss national implementation measures • with the aim of harmonising regulatory practice across Europe and to ensure a consistent application of the European legislation by issuing so called Principles of Implementation and Best Practice (PIBs) • as horizontal coordination on a voluntary basis • Since Jan 2003 IRG has 29 members who meet regularly • OPTA chairs IRG since Jan 2003 for one year • With the ERG where the EU-Commission will participate, IRG will have an official role to play, IRG continues to exist

  22. ERG / New Group (1) • IRG favours the establishment of a so-called NEW GROUP or ERG – European Regulators Group – proposed by the Commission at the NARA meeting in Brussels on Nov. 8th ‘01 • The NEW GROUP/ERG • would encompass NRAs and Commission delegates to discuss problems of a harmonised implementation of the European legislation and to adopt common positions for a uniform application of the directives. • would discuss implementation measures only • would have advisory functions (no commitology committee) • would not take decisions that are legally binding • IRG favours a joint secretariat

  23. ERG / New Group (2) • The NEW GROUP/ERG would organize the consultation process foreseen in Art. 7 FD among NRAs and the consolidation procedure with the Commission • It would build on the existing regulators group (IRG), although the group would continue in parallel • The work of IRG would thus become more ‘official‘ • Transparent working structure with consultation procedures for market parties + annual report to Cion/EP • The chairperson would always be a NRA president • The chairperson would be responsible for the agenda • The NEW GROUP/ERG would set up its rules of procedure • The decision to establish ERG was adopted by the Commission on July 29th ’02 (2002/627/EC, publ. in the OJ on July 30th ‘02) • Secretariat of the group to be provided by the Commission

  24. ERG / New Group (3) • The inaugural meeting of ERG was held in Brussels on Oct. 25th 2002 to which the 19 IRG members were invited; for the Commission DG INFOSOC and DG COMP took part • The meeting was opened by Com. Liikanen pointing out the importance of co-operation both vertically between the Commission and the NRAs as well as horizontally among NRAs for a harmonised approach to regulation • The Chairman of the Dutch NRA OPTA, Prof. Jens Arnbak was elected chairman for the year 2003 • IRG provided a draft of the rules of procedure which is checked by the Commission‘s legal services • The Commission provided a draft paper on how to organize the Art. 7 procedure efficiently which was checked by IRG • Regular ERG meetings every 2 months • A call for proposals for the ERG workprogramme was published with the press release • 2nd meetg. (23/01/03 /Amsterdam) + 3rd meetg. (20/05/03 /Athens)

  25. ERG Workprogramme I • After consulting with market parties, ERG adopted its 2003 workprogramme on its 2nd meeting • Implementation of the new framework is a top priority, especially the Art.7 FD procedure • No examples as Art.7 FD is a novelty in European law • Process should not go any further than the FD, especially it should not prolong the 1+2 months period through the backdoor • Draft discussed within the IRG Implementation WG and with the Cion‘s services on the working level before it was transferred to the COCOM • Final Draft cleared in the COCOM (advisory procedure 11/06), adopted by the Cion on 23 July ’03, publ. in OJ L 190/13 • Currently ERG is drafting a working paper on remedies with input from the Cion‘s experts, IRG working groups and comments received in the public consultation

  26. ERG - Remedies call for input • General Idea: find principles for choosing the appropriate remedy to a competition problem (“mapping”) • The Call for Input on Remedies was published on ERG and IRG website - Consultation period until 4th of July Two layers for which input was requested: • General level Views on principles and guidelines to take into account when designing appropriate and proportionate remedies for market failures • Detailed level On individual competition problems and remedies (including effects on the market and practical issues relating to implementation)

  27. ERG Workprogramme II • As in the IRG Workprogramme broadband, LLU, mobile termination rates etc. are of top regulatory priority • Other issues proposed by the Cion are 3G network sharing and spectrum trading • An ERG only point is advice to the Cion on transnational markets (Art. 15, IV FD) • Also important is how to ensure transparency: transparency rules adopted in the January meeting • A vacancy notice for the temporary post of the General Secretary for the ERG Secretariat was published • Applicants must have 5 years of experience in a regulatory body and a good knowledge of the rules governing the sector • As 1st ERG-General Secretary Prof. Otruba (former President of RTR) was appointed. He will take up his post on August 1st 2003

  28. Conclusion I • Since liberalization started in 1998 markets have developed dynamically and show signs of emerging competitive structures • To achieve this a strong framework of sector-specific regulatory rules was necessary as competition would not evolve automatically • Especially important were the obligation of SMP operators to grant new entrants access at cost-oriented prices • With the initial phase accomplished and new technologies leading to convergent markets with new players and strategies, the regulatory framework too had to be adjusted in order to tackle the problems of the new situation adequately, but without risking a backlash by relaxing regulation too early as lightening the regulation too soon would result in strengthening the incumbent again with the danger of remonopolization • This was done with the new European regulatory framework,currently transposed into national law by Member States

  29. Conclusion II • On 25 July 2003 the new regulatory framework replaced the ONP regime, the new framework was transposed into national legislation in 5 Member States: Dk, SF, Ire, Swe, UK; a number of regulatory issues are now imposing themselves on NRAs: • IRG is preparing itself for the implementation by developing a common understanding of the new principles in order to adjust regulatory activities to new market situations • The passing over from the old to the new regime requires careful analyses of the impact that the application of regulatory and competition law instruments will have on the telecommunication markets • The new framework allows a differentiated approach to address different market stages adaquately, less intrusive intervention in more advanced markets, continue regulation where necessary such as in bottleneck type markets • With the veto power of the Cion and the ERG, a closer co-operation among NRAs takes place

  30. Conclusion III • Market analysis must take into account different national circumstances, but the same regulatory consequences should be triggered by dominance • If the same regulatory consequences follow the determination of market power, a level playing field is created as operators are aware that they face the same consequences as dominant operators by all regulators • Currently RegTP is preparing internally to run the market analysis as soon as the new regime provides data collection powers, all 18 markets will be analysed • The aim of regulationto create an effectively competitive market should guide the regulatory reactions, which should be proportionate and appropriate to remedy the problem

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