Member state cooperation the key to telecoms market overhaul

Date: 03/10/02

By Peter Alexiadis

THE current regulatory framework for the telecoms sector is about to undergo a sea change.

The European Commission's legislative package adopted in February must be turned into national law by 25 July 2003.

To date, sector-specific regulation has largely ignored market analysis. Moreover, regulatory measures have been driven by the perception that a surrogate for competition is required.

This has been achieved by and large in one of two ways: ensuring the availability of key competitive inputs such as interconnection; subjecting historical monopolies to price regulation to promote efficiency.

There are a handful of key principles at the heart of the new regulatory framework.

Firstly, market intervention should be justified by a thorough market analysis, subject to the protection of consumers through mandated universal service obligations and the preservation of the principle of any-to-any connectivity.

Secondly, competition rules should apply unless they are shown to be inappropriate or inadequate.

Thirdly, technology neutrality should characterise all regulatory action.

Fourthly, regulatory intervention should be minimised and remedies should be proportional to the perceived competitive mischief.

Fifthly, an institutional framework of cooperation between the Commission and the national regulatory authorities (NRAs) should ensure that national conditions are taken into account, while maintaining the goal of harmonisation.

The relative importance of this new approach can be felt well outside the EU. For example, the attitude of the United States' sector-specific regulator, the Federal

Communications Commission, has begun to adopt a line of reasoning in its decision-making which reflects the market analysis approach under the new Community regime (and especially the principle of technology neutrality).

The focus of the new regulatory package will be to address structural market issues through the application of a four-pronged process.

• Define the relevant product and geographic markets for electronic communications networks and services (rather than the narrower concept of 'telecommunications' networks and services) in accordance with the principles of competition law. NRAs must take 'utmost account' of the principles and markets set forth in the Commission's recommendation and guidelines.
• They must also, at least initially, take into account the grandfathered pseudo-'markets' from the existing regulatory regime annexed to the framework directive.
• Identify whether the market in question is effectively competitive (i.e. not characterised by a market player with significant market power, which is in effect the legal standard of 'dominance', including 'collective dominance').
• On concluding that a market is not competitive, NRAs have the power to impose one or more of a number of obligations: transparency requirements, non-discrimination, accounting separation, access obligations, price control/cost accounting obligations.

Other remedies might be imposed if they are authorised by the Commission. Remedies will only be imposed where the lack of effective competition is also characterised or reinforced by the existence of entry barriers, so that the situation will persist indefinitely, and where the ex post application of competition rules is unlikely to be effective.

Remedies affecting access obligations must be objective, transparent, proportionate and non-discriminatory.

So far so good. However, the amount of effort needed to successfully migrate from the current regime should not be underestimated. Some of the teething troubles to which the new regime will be subject include:

Where services have been shaped for many years by existing obligations, market definition is likely to be a rather inexact science, as market signals tend to become skewed.

It is still uncertain whether the Commission will opt for a more aggregated approach to market analysis (within which NRAs can narrow markets to reflect national conditions) or a narrower set of markets reflecting individual competition case analyses (which will arguably result in a rise in the number of relevant markets to something approaching 30, up from the existing ten).

The adoption of either approach will have a pronounced effect on the manner in which the

Commission's veto power over NRA proposals will operate in practice, and will give clear political signals as to the extent to which the new approach reflects a commitment to less regulatory intervention.

The assessment of 'effective competition' is not something upon which there is universal consensus.

It also represents a radical analytical departure from the practice relied upon to date.

Smaller member states are likely to exhibit patterns of supply and demand which might differ significantly from larger ones.

Consequently, the harmonisation goal may need to accommodate the realities of national markets more often than was originally anticipated.

The application of regulation to situations of 'collective dominance' is fraught with evidentiary difficulties, given the high standard of proof required by the European Court.

The words 'smooth sailing' are unlikely to characterise the introduction of the new regime, with many member states still in the embryonic stages of their transition.

A degree of cooperation to make the process work will be required.

The other element, not anticipated during the 1999 review, is the current financial state of the sector.

Without cooperation, this could push us into a doomsday scenario; namely, an acknowledgement that liberalisation was an experiment with no future and a return to a system of regulated monopolies. Surely that scenario can be to no one's benefit, especially the consumer.

• Peter Alexiadis is a partner in the Brussels office of Squire, Sanders & Dempsey, an international law firm specialising in competition rules and the communications sector.

Feature on the new regulatory framework for the telecoms sector, adopted by the European Commission in February 2002 and due to be turned into national law by 25 July 2003.