Another Turn of the Wheel For EU Communications Regulation

01 November 2006

From digital switchover to mobile roaming and access to next generation networks, from television without frontiers to online content, European commission staff have probed every corner of the EU communications market over the last year or so. Documents updating policies and describing new approaches, with even newer abbreviations, were published, charting shifts in regulatory fashion and, in some cases, the manifestation of old prophecies. Convergence, long predicted, seems finally to have arrived.

Colin Long and Natasha Hobday, Olswang

The overall message could be: there is still no perfect competition (a subject that could form an article by itself) so regulation of the communications market is still needed. And that market is expanding, attracting investment (measured in terms of capital expenditure) of more than e45 billion in 2005 based on the commission’s figures. 

This article focuses on the review of the regulatory framework for electronic communications networks and services (the Framework Review). Almost all current regulatory debates and issues are contained within the voluminous consultation documents that to date form the Framework Review, even if they do not make it into the commission’s proposals for updating the regulatory framework. 

 

Some Background 

In Europe, the open network provision (ONP) regulatory regime for telecommunications established up to and around 1998 and the parallel liberalisation measures that gradually opened up the European telecommunications markets, were replaced during 2002 and 2003 with a New Regulatory Framework (NRF) for e-Communications. After three years, two implementation reports, a number of infringement proceedings and over 400 significant market power (SMP) filings, the so-called article 7 procedures (see below), the regime is no longer really ‘new’ but the abbreviation stuck. 

 

The New Regulatory Framework 

The NRF consists of five directives, a recommendation and a set of guidelines dealing with the regulation of electronic communications networks and services. One of the NRF’s aims was more closely to align behavioural or regulatory rules with after-the-event competition law. The principal differences from the previous ONP regulatory framework include: 

  • platform and technology neutrality; 
  • abolishing the individual licensing regime, except for scarce resources such as radio spectrum and numbers; 
  • enabling national regulatory authorities (NRAs) to adopt general conditions in the public interest applying to specified categories of operator on, for example, numbers and consumer protection; 
  • use of competition law discipline in regulatory rules by adopting the market review procedure, where NRAs review the markets defined in a commission recommendation to determine whether any operator, or operators collectively, are dominant in that market and if so, to determine that they have SMP and impose appropriate remedies;
  • consultation with the commission and other NRAs on the outcome of the market reviews and on the proposed remedies and, in certain circumstances, a ‘veto decision’ by the commission on any proposed measures that are not in line with EC law (the article 7 procedure); and 
  • a more harmonised regulatory apparatus for dealing with spectrum at a European level. 

 

The Framework Review 

The Framework Review was announced with a ‘call for input’ some two years after the NRF came into effect and despite implementation of the NRF across the EU being incomplete. Following substantial public consultation, the European Commission published three documents setting out the options for amending the NRF and their initial views on which changes to make. 

Subsequently, the commission published a draft Recommendation on Markets and a number of background reports on investment, on the regulatory framework itself and on the market definition process. 

 

An Overview of Some of The Proposed Changes

Overall, the NRF came out of the initial public consultation phase well. The commission is not proposing fundamental change although it is opening up for debate options for the framework. Some radical alternatives are explored but, in most cases, not actually taken up in the proposals. Consultation ran to 27 October 2006. It is more likely than not that the regulatory model contained in the NRF will survive the review. We focus now on some of the specific proposals made by the commission. This is not a complete list and does not consider all the options set out in the commission’s impact assessment.

 

The market review process 

In terms of money, time and effort, the market review process has made considerable demands on all stakeholders. The commission has proposed, in line with the majority of comments received by them, that the process be simplified. Perhaps inevitably, their proposals are not particularly radical. They suggest streamlining the process where (1) the first market review found the market to be competitive and where market conditions have not changed and (2) the NRA notifies only small changes to SMP obligations imposed on the dominant operator or operators. 

Other marginal procedural changes are proposed but the major cause of industry disquiet – the enormous time and effort needed to fully participate in a market review from start to finish and the incredible detail required by the process itself – will remain for those markets deemed not to be competitive the first time round. 

The proposed Recommendation on Relevant Markets, which underpins the market review process, includes fewer markets than the version adopted alongside the NRF in 2002. The main changes concern retail markets: only access to the public network from a fixed location remains a retail market. The calls-based markets for national and for international calls have been removed. The rationale is that focusing regulation on bottlenecks at the wholesale level enables regulation in downstream markets to be peeled away. The market itself can be left to control operators’ behaviour. 

 

What to do about newly emerging markets 

The commission’s proposals clear away some of the smoke around the question of emerging markets but little of what they have actually said is new. Much ink has been spilled and positions taken concerning the need either to regulate a new market from day one or to refrain from intervening and let the market decide. 

The Framework Directive, at recital 27, does not say that emerging markets cannot be regulated: it says that although a market leader is likely to have a large market share, it should not be subject to ‘inappropriate regulation’. The current recommendation does go further, saying that in principle such markets should not be regulated. At heart is the question: what is an emerging market? A mere new technology does not make a market and that has been the subject of much debate on both the minimalist side and ‘open access’ side of the regulatory divide. 

What the revised Recommendation makes clear, at paragraph 3.4, is that if the three criteria for considering regulation are met, such new markets, volatile or not, could in principle, be regulated. This approach will also apply to those markets not included in the revised recommendation. If premature deregulation has occurred, for example, in a retail market, NRAs can consider those markets where they meet the three criteria. 

 

Widening the commission’s veto power 

At present, the commission may only veto an NRA decision in certain circumstances, for example, where the NRA has defined a relevant market that is not one of the 18 markets listed in the recommendation and this would affect trade between member states. By May 2006, it had only exercised this veto power five times out of over 400 SMP filings. 

This limited veto power was contentious enough the first time round. Now, the commission is putting out for consultation the extension of its veto power to NRAs’ proposals for SMP remedies. This will not be popular with NRAs, although some stakeholders may see this proposal as adding an additional procedural hurdle over which a proposed remedy they dislike could possibly not survive. 

In addition, for non-SMP obligations, eg, to ensure so-called end-to-end connectivity, the commission is proposing that NRAs might only impose these conditions on operators after following a procedure similar to that which applies to imposing non-listed SMP remedies. This is intended to ensure greater consistency across the European Community. 

Harmonisation of spectrum use A number of options for the harmonisation of spectrum regulation at Community level are considered, including drawing all regulation up this level. In fact, the proposals most likely to receive endorsement are adjustments to the regulatory regime mandating greater service and technology neutrality at national or licensing level for spectrum. This can be backed up by specifying at the Community level spectrum bands within which trading in usage rights may occur in accordance with common conditions applying across the Community. 

Creating a European spectrum authority is one of the options canvassed in the commission’s impact assessment. This is the lesser proposal to the briefly-considered alternative of a European Regulatory Agency. The commission recognises that a spectrum regulatory body at EU level is a contentious proposal but wants it to be considered as part of the public debate. 

 

Net neutrality 

In the EU, net neutrality has not yet attracted the level of comment that is seen in the US. The commission seems to be using the term to cover requirements on operators not to draw distinctions between the quality of service of different content services carried over their networks. Pointing out, blandly but correctly, that the SMP regime enables NRAs to control discriminatory behaviour by operators with market power, the commission is also proposing to enable NRAs to impose minimum quality of service requirements for ‘network transmission services in an NGN [next generation network] environment’ where technical standards have been identified at an EU level. 

This proposal will presumably not satisfy those seeking a guarantee of net neutrality and indeed it does not appear itself to be neutrality in the US sense – although there are of course differences between the American and the European regimes and markets that mean that there is not always an exact translation of a concept from one market to the other. Conversely, it will cause concern to those operators proposing to invest in NGNs, although the level of concern may diminish if the next round of market review processes lifts some of the SMP obligations from key wholesale markets. 

The issue is also raised in the consultation on online content. This is sensible as transmission operators and content providers are not likely to have the same views on this question, unless they are vertically integrated.

 

Some Observations

During the public consultation, operators subject to SMP regulation tended to argue for its removal (or the focusing of regulation only where there are competitive bottlenecks, removing regulation further up the value chain). Those relying upon regulation for access to others’ networks tended to require it. This is referred to by the commission as the ‘open access’ model. It is in this context that the commission considers the impact of structural separation during 2005 and 2006 particularly pertinent. The commission concludes that structural separation is not the most efficient way forward but opens the question up for public debate. 

In this regard, it is interesting to note that communications provider BT maintained its NGN plans, even though access rules were layered on top of their existing SMP obligations under national competition legislation. These access rules were accompanied by detailed requirements for operational and business unit reorganisation and separation. 

Some former incumbents also argue that regulating access to their networks and services and, in extreme cases, economic regulation itself acts as a disincentive to network investment. The commission is clearly not convinced that this is the case. In a somewhat pointed speech to an audience of German ICT companies by EU Commissioner for Information Society and Media Viviane Reding just before the commission’s proposals were published, the commissioner pointed out that Estonia, a new entrant country, had overtaken Germany in terms of broadband penetration owing to its pro-competitive, early-adoption policies regarding e-Communications. The German government were considering giving Deutsche Telekom a ‘regulatory holiday’ for its proposed VDSL network at the time. 

There is a lot to consider in the Framework Review and much to play for. The outcome will be legislative change, brought forward in draft form at the end of the year for implementation in 2009 to 2010. This is the irony of regulation in a fast-moving market: the review may resolve today’s regulatory debates but any resolution will have taken four years to have any real effect.