Latham & Watkins Communications Group. The New Regulatory Package: More Competition in the European Telecom Markets

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1 Number 311 July 18, 2003 Client Alert Latham & Watkins Communications Group... the new package will offer both ease of entry for new entrants and greater opportunities for the current alternative operators in the European communications markets. The New Regulatory Package: More Competition in the European Telecom Markets I. Introduction As of July 25, 2003, new entrants will, in principle, find it easier to access the majority of European communications markets. July 25 is the date of implementation throughout the EU of the New Electronic Communications Package (the new package), adopted by the European Commission in February In theory this means that Member States are supposed to have adopted or amended national legislation implementing the new package by then. The key theme to the new package, as a result of convergence, is its unified approach to all electronic communications (as opposed to telecommunications under the old framework) networks and services independent of the technology used and the type of information conveyed (with the exception of content). The package will continue to harmonize electronic communications rules, by means of set objectives and regulatory tools, throughout the EU Member States. As of May 2004, this includes the 10 new Member States. The other principal theme is gradual phasing out of ex ante regulation. In fact the new package foresees greater ex ante regulation in the short term, so as to foster competition, leading up to the phasing out of such regulatory instruments. As under the previous framework, the ex ante regulation is imposed by the National Regulatory Authority (NRA, the independent body charged with sector regulation). The intention of the new package is that where markets or sub-markets are considered to have become sufficiently competitive, regulation will occur, if at all, ex post instigated either by the NRA and/or the national Competition Authority. With the introduction of an independent approach and a competition-based assessment of the relevant markets, the main changes introduced by the new package relate to: a general authorization system: the requirement to obtain licences before running a new public service/network is eliminated; interconnection and access: these have been further clarified and defined (especially in respect of the definition of access ) so that in principle it should be easier under the new framework for operators to interconnect or be granted access to networks and services; and market definitions: through the use of various instruments issued at European level NRAs will be able to better regulate pre-defined markets, through ex ante regulation depending on the level of competition therein. Latham & Watkins operates as a limited liability partnership worldwide with an affiliate in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership. Copyright 2003 Latham & Watkins. All Rights Reserved.

2 Other changes include additional powers granted to the NRAs and the extended scope of universal service obligations. It should be noted that only the United Kingdom is expected to be ready by July 25. The other Member States are at varying stages of implementation. Interestingly, although the 10 new EU Member States do not have to implement the new package until May 2004, the majority are in the process of applying it. Notwithstanding these delays in most of the current Member States and the possible difference which might result from national implementation, the new package will offer both ease of entry for new entrants and greater opportunities for the current alternative operators in the European communications markets. II. Application of a single regime to all transmission infrastructures and services: authorizations, access/interconnection, and the move toward competition principles As mentioned, in principle, the same rules will apply throughout the EU to all transmission infrastructures and any type of information conveyed independent of the technology used. As noted, content, such as information society services 2 and broadcasting content, 3 is not covered by this new package. 1. Authorizations: The new Authorization Directive replaces the Licensing Directive, further harmonizing and simplifying the rules and conditions applicable to market access of communications service and network providers. Public communications service and network providers, such as voice telephony providers may only be subject to a general authorization and to a limited list of conditions set out in an annex to the Authorization Directive (e.g., universal service, minimum quality). Moreover, the conditions applied must be objectively justified in respect of the network or service provided, non-discriminatory, proportionate and transparent. Compliance with such conditions must be monitored. There are a minimum set of rights derived form a general authorization that relate to: (i) the provision of electronic communications networks and services; (ii) any application for the necessary rights to install facilities should be considered following the principles of transparency and nondiscrimination; (iii) negotiation of access and/or interconnection; and (iv) the opportunity to be designated as a provider of all or part of the universal service. Thus, any new market entrant (for voice telephony networks and services) will only need to submit a notification to the NRA. The notification should not be more than a declaration stating the intention to commence services, an identification of the provider, a short description of the network or service, and an estimated starting date, so as to allow the NRA to keep a register/list of providers. Moreover, there is no longer the need to await an explicit decision prior to commencing services. However, there are two kinds of exceptions to the general authorization principle. These are referred to as individual rights of use and are foreseen in respect of: (i) spectrum, where the risk of harmful interference is not negligible; and (ii) numbering. 2. Access and interconnection: These have been further developed and defined to ensure that the previous competition-oriented approach is better implemented. 2 Number 311 July 18, 2003

3 The new package has attempted to remove any restrictions that prevented any party, under the previous legal framework, in the same or different Member States from negotiating among themselves access and/or interconnection agreements. Access relates to accessing facilities and/or services, such as connection equipment, access to physical infrastructures, functionality systems, roaming access, etc; whereas interconnection is the physical and logical linking of public communications networks. In this respect the previously ambiguous definition of access has been further developed although it remains still a somewhat ill-defined concept. The new framework improves the right of the party seeking redress (either for non-granting of interconnection/access or for failing to do so on objective, transparent, proportionate and non-discriminatory terms) before the NRA. It should be noted that more onerous obligations may still apply to operators with significant market power (SMP) as detailed below. The main focus of the access concept of the new Access Directive relates to conditional access systems and access to TV networks and infrastructures since for telecom operators, access to the local loop was dealt with in the Local Loop Unbundling Regulation. However, it should be noted that the Regulation has not been a total success, and in the two years since adoption the predicted explosion of CLECs (competitive local exchange carriers) did not happen. 3. Reinforced requirements on dominant telecommunications operators on the basis of competition law principles: As under the previous framework, one of the main aspects of communications regulation is the system of ex ante obligations imposed on operators having SMP. These obligations are intended to force the SMP operator in a specific market to make facilities and/or services available to another party (e.g., a new entrant) who needs it for operating a service or a network. Under the previous framework operators were designated as having SMP where they had a 25 percent or more market share on any one of the four pre-defined markets (fixed telephony, mobile telephony, leased lines and interconnection). Under the new package, SMP will be equivalent to the EC competition law principle of dominance, and as a result, the ex ante obligations will be imposed on dominant operators. The purpose of this change is to limit regulation to markets that are not competitive. The new package has a three-step approach: (i) identification of markets which are non-level playing fields on the basis of the pre-defined markets; (ii) determination of operators considered to be SMP dominant ; and (iii) the possibility of imposing ex ante obligations on specific operators considered SMP dominant within the pre-defined markets. The identification of non-competitive markets is carried out by the NRAs pursuant to the Commission s Recommendation on relevant product and service markets. 4 The NRAs also have the authority to examine markets not listed, on the basis of competition principles. In any event, the geographic scope of markets has to be defined by the NRAs. It should be noted that the Commission s Recommendation identifies 18 markets which can potentially be regulated, as opposed to the previous four, (see Appendix for the list of the 18 pre-defined markets). 3 Number 311 July 18, 2003

4 Once the relevant market has been defined, the NRA will determine whether an operator is SMP dominant on that market. As mentioned, this assessment is based on the competition law concept of dominance, for which there is no absolute threshold (although, the European Court of Justice has considered a 40 percent share of the market to be a reasonable benchmark for dominance). If the NRA finds that a dominant position is held by an operator or several operators jointly (collective dominance) 5 within the examined market, then it can impose ex ante obligations on this/these operator(s). These obligations are provided for in the Access Directive (and are similar to those imposed under the previous framework). In the new package, NRAs should select one or more ex ante obligations that are considered the most suitable remedies (whereas the NRAs had no choice under the previous framework). The ex ante obligations imposed on SMP dominant operators have to be proportionate and justified, and are: (i) transparency and nondiscrimination; (ii) accounting separation and price control (including cost-oriented prices); and (iii) access to specific network facilities (e.g., unbundling of local loops). The extension to 18 markets from the previous four markets means potentially more markets to be regulated, especially markets where entry may be impeded by SMP dominant operator(s). New entrants will therefore be in a better position to enter these markets, and in some cases, they will do so at an interesting price (e.g., when SMP dominant operators will be required to provide access and/or interconnection at a cost-oriented price). III. Conclusion The new package provides more simplicity for new entrants, as well as more opportunities for current alternative operators to develop, with the use of general authorisations, the further clarifications regarding access and interconnection, and the general application of competition law principles. At present, there already is a degree of ex ante regulation in parallel to the application of general competition rules. As of July 25, we will see more comprehensive and detailed ex ante regulation. The aim is that this greater regulation, in future, will be reduced as the playing field is leveled. Endnotes 1 Directive 2002/21/EC on a Common Regulatory Framework for Electronic Communications Networks and Services (Framework Directive); Directive 2002/20/EC on the Authorization of Electronic Communications Networks and Services (Authorization Directive); Directive 2002/19/EC on Access to, and Interconnection of, Electronic Communications Networks and Associated Facilities (Access Directive); Directive 2002/22/EC on Universal Services and Users Rights Relating to Electronic Communications Networks and Services (Universal Service Directive); Decision 676/2002/EC on a Regulatory Framework for Radio Spectrum Policy (Radio Spectrum Decision); and Regulation 2887/2000 on the Unbundling of the Local Loop (Local Loop Unbundling Regulation). 2 E-Commerce Directive 2000/31/EC and Transparency Directive 98/48/EC. 3 TV Without Frontiers Directive 89/552/EEC. 4 Recommendation C(2003) 497 on relevant product and service markets susceptible to ex ante regulation. 5 The concept of collective dominance was clarified by the Court of First Instance in the Airtours case, T-342/99 of June 6, Number 311 July 18, 2003

5 Appendix: Potentially Regulated Markets Under the New Framework Fixed Telephony 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 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 Broadband 11. Wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services 12. Wholesale broadband access Leased Lines 7. The minimum set of leased lines (which comprises the specified types of leased lines up to and including 2Mb/sec) 13. Wholesale terminating segments of leased lines 14. Wholesale trunk segments of leased lines Mobile 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. * N.B.: The European Commission considers that in the electronic communications sector there are at least two main market levels: retail and wholesale. Within these two levels further distinctions are possible, these are listed are distinctions found at retail level and 8-18 are found at wholesale level. However, for ease of reference we have categorised them under the headings: Fixed Telephony, Broadband, Leased Lines and Mobile. 5 Number 311 July 18, 2003

6 Office locations: Boston Brussels Chicago Frankfurt Hamburg Hong Kong London Los Angeles Milan Moscow New Jersey New York Northern Virginia Orange County Paris San Diego San Francisco Silicon Valley Singapore Tokyo Washington, D.C. Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorneys listed below or the attorney whom you normally consult. A complete list of our Client Alerts can be found on our Web site at If you have any questions about this Client Alert, please contact Christophe Clarenc or Sandrine Delarue in our Paris office at +33(0) , Matteo Bay or Melissa Cacciotti in our Brussels office at +32(0) or any of the following attorneys. Boston David A. Gordon Brussels Matteo Bay Melissa Cacciotti +32 (0) Chicago Mark D. Gerstein Christopher D. Lueking Frankfurt John D. Watson Hamburg Marco Núñez Müller Hong Kong Michael W. Sturrock London John Colahan Omar S. Shah Los Angeles Thomas W. Dobson Thomas C. Sadler Milan David Miles Moscow Anya Goldin New Jersey James E. Tyrrell, Jr New York Kirk A. Davenport Marc D. Jaffe Orange County Patrick T. Seaver Paris Christophe Clarenc Sandrine Delarue +33 (0) San Diego Scott N. Wolfe San Francisco Tracy K. Edmonson Silicon Valley Robert A. Koenig Singapore Mark A. Nelson Tokyo Michael J. Yoshii Washington, D.C. Karen Brinkmann Gary M. Epstein Number 311 July 18, 2003