PUBLIC SERVICE OBLIGATIONS AND COMPETITION Summary of presentations and discussions, CERRE Expert Workshop 15 May 2013, Brussels Speakers: Prof. Catherine Waddams (CERRE & CCP-UEA), Dr Michael Harker (CCP-UEA), Antje Kreutzmann (CCP-UEA), Prof. Pierre Bauby (University Paris 8 & Sciences Politiques), Dirk Segers (Director, Regulatory Affairs, Mobistar), François Degorge (Manager, Regulatory Affairs, SNCF) A recent CERRE report on Public Service Obligations and Competition outlines the current provision made for public service obligations across telecoms, postal services, electricity, gas and railways at the European level and as implemented in four EU countries (Belgium, France, Germany and the UK). Antje Kreutzmann, Doctoral Researcher at the Centre for Competition Policy of the University of East Anglia and co-author of the CERRE report, presents a summary of the legal arrangements which are applicable in the different member states. She explains that a minimum set of requirements is present in all member states and all sectors regarding universal service, service continuity and quality, affordability and consumer protection. Furthermore, all analysed member states impose a number of sector-specific obligations on operators, such as security of supply in the energy sector, safety and security requirements in the rail sector and interconnectivity in telecommunications. Antje Kreutzmann shows that, in general, legal provisions regarding PSOs serve as a mediator between the single market and liberalisation policies pursued by the European Commission and the social and cohesion policies being implemented at national level. However, as these provisions often conflict with competition law, they are sometimes not made explicit in legislation and carried out implicitly by the incumbent operator, which is frequently still (partly) state-owned. Furthermore, Antje Kreutzmann points out that many sectors (with postal services and telecommunications as notable exceptions) display worrying regulatory and legislative gaps in the legal framework applicable to PSOs and USO. Dr Michael Harker, Senior Lecturer at the Centre for Competition Policy of the University of East Anglia and co-author of the report, discusses the study s findings regarding the compensation mechanisms put in place to finance universal service obligations. He points out that Art. 106 of the European Treaty provides member states with ample discretion in determining whether USOs fall within the definition of Services of General Economic Interest and to choose appropriate compensation methods. However, the ample freedom that is left to member states is kept in check by the fact that over-compensation of USOs would be considered as an infringement on state aid rules. Possible over-compensation will be dete rmined by the application of the Altmark criteria, i.e. the compensation cannot exceed the costs of provision by an efficient undertaking. Centre on Regulation in Europe (CERRE) asbl Rue de l Industrie 42 Box 16 - B-1040 Brussels - Belgium Ph: +32 (0)2 230 83 60 - Fax: +32 (0)2 23 0 83 70 info@cerre.eu www.cerre.eu 1/5
Furthermore, Michael Hanker points out that the potential compensation mechanisms that may be used by national authorities have been set out in the European Commission s Green Paper on Services of General Interest. 1 These include direct public subsidies, special or exclusive rights, tariff averaging and contributions by market participants to sectoral funds. The European Commission furthermore expresses a clear preference for direct public subsidies, because they are the most transparent and least distortionary compensation mechanism and because they do not create barriers to entry. In the telecommunications sector, Michael Harker points out that the Universal Service Directive s Recital 4 explicitly outlines how compensation mechanisms should be designed. The compensation should be limited to the net cost of providing the USO, taking into account the possible intangible benefits (e.g. enhanced brand recognition, access to telephone directory information) that the operator may derive from providing the USO. Furthermore, compensation schemes are only required if the net cost of providing the USO represents an unfair burden for the operator, i.e. if the cost is excessive in view of the undertaking s financial situation and market share. Therefore, the cost of the USO might be found, by the regulatory authority, to be an unfair burden for some operators but not for others. As Michael Harker explains, these stringent limits on the development of compensation mechanisms imply that they have only been put in place in 4 European member states. In the railway sector, the situation is very different. Public service contracts are established for all services which operators would not provide if they were only considering their own commercial interest. These public service contracts are awarded by auctions and guarantee the exclusive exploitation rights for a given railway route. The railway directives contain detailed guidance on the compensation methodology and if compensation schemes comply with the directives, they do not require prior notification to the European Commission under state aid rules. To conclude, Michael Harker points to the fact that even when the general regime is relatively prescriptive, such key concepts as unfair burden and intangible benefit were left undefined and had to be filled in by the Courts. This has the advantage of providing ample flexibility to the re gulatory framework, but is also raises the level of legal uncertainty and instability of compensation schemes. Furthermore, Dr Harker points to the fact that there has been very little competition for the market of USOs, with incumbents mostly in charge of providing universal services. In this regards, sectoral funds and competitive tendering are recent developments which may increase the efficiency of providing USOs and raise the level of transparency about their true costs. Prof. Catherine Waddams, Joint Academic Director of CERRE, Professor at the Centre for Competition Policy of the University of East Anglia and Project Director for this research project, presents the results of a survey which has been administered to CERRE member organisations regarding their experience with USOs. The survey collected respondents views regarding, on the one hand, what USOs should ideally include (e.g. geographical coverage, income inequalities, effect on innovation), and, on the other hand, what the effect of existing USOs has been on the sector s performance. 1 EUROPEAN COMMISSION (2003), «Green Paper on Services of General Interest», COM(2003) 270. 130515_CEW_PSOComp 2/5
The results of the survey were in this respect not very surprising, with most regulators answering that they thought USOs were working well (i.e. bringing sizeable benefits to targeted social groups and not altering innovation incentives and the level playing field), and operators more critical of the actual impact of USOs. Also not surprisingly, incumbent operators and new entrants disagreed about the impact of USOs on the level playing field, with incumbents seeing USOs as a burden on their ability to compete and new entrants as a generous subsidy to the incumbent, distorting competition. Prof. Pierre Bauby, Professor of Political Sciences at the University-Paris 8 and Sciences Politiques, explains that the development of a European approach to Services of General Economic Interest is a quite recent phenomenon, which has been gradually introduced after the adoption of the Single European Act of 1986 and the first waves of liberalisation. Since then, the liberalisation process has deepened (through the adoption of successive sectoral legislation packages) and extended to new sectors. This increased liberalisation has been accompanied by European initiatives aimed at rebalancing competition with a renewed attention f or general interest objectives. In Prof. Bauby s view, in the field of Services of General Economic Interest we could even speak about a European Acquis Communautaire based on Art. 106 TFEU. The latter gives, in application of the subsidiarity principle, the general competence to provide and finance SGEI to national, regional and local authorities. Furthermore, as long as these authorities respect the fundamental principles of the EU (i.e. transparency, non-discrimination, equal treatment and proportionality), these SGEI are not subject to competition policy and state aid rules. Prof. Bauby presents an analytical grid which shows that SGEI are at the intersection of 4 conflicting but complementary policy objectives. These objectives are 1) long-term public policies; 2) economic, social and territorial cohesion; 3) subsidiarity between the different levels of government; and 4) the deepening of the single market and the promotion of competition. He points out that, within each sector, the relative importance of the various policy objectives widely differs, due to particular national traditions, diverse European policies and sectoral idiosyncrasies. Finally, Prof. Bauby stresses that analysing how PSOs distort competition, already reflects an a priori judgement the prevalence of competition and that one could also frame the debate as analysing how competition distorts the provision of PSOs Dirk Segers, Director of Regulatory Affairs at Mobistar, explains that USOs have a long history in the Belgian telecommunications sector and that they urgently need to be updated to reflect changing social lifestyles and technological developments. For example, the universal geographical provision of fixed-line telephony and the necessity of pay phones have been rendered obsolete by the ubiquity of mobile telephony. Other obligations could be satisfactorily carried out by competitive providers, such as the provision of telephone directory information. Regarding the existence of social tariffs, Dirk Segers shows the complexity of the system currently in place in Belgium, which in the end only yields limited benefits to disadvantaged customers (max. 11/month). Furthermore, the system is rendered inoperable by the existence of multi -play bundles (which do not allow attributi ng costs to the bundle s 130515_CEW_PSOComp 3/5
components) and the changing nature of the beneficiaries status (unemployment, age, disability, etc.). To illustrate this, he explains that Belgacom cleaned out its database of social tariff recipients in 2005 and that this led to the removal of 17,000 people who, although they had not been eligible for social tariffs for years, were still benefiting from them. Furthermore, Dirk Segers regrets the high level of legal uncertainty that exists around the USO fund that has been set up in the Belgian telecoms sector. Due to annulments by the European Court of Justice and the Belgian Constitutional Court, no compensation mechanism is yet in place, but operators are obliged to keep provisions on their books for these funds. This is non negligible and represents for Mobistar around 1.5% of total profits. Finally, Dirk Segers also points out that USOs (e.g. social tariffs, emergency services) are only supported by telecoms operators. This introduces increasing distortions to competition with the emergence of over-the-top providers (such as Skype) which are not included in the scope of USO regulations, although they directly compete with telecoms operators. François Degorge, Regulatory Manager at SNCF, points out that the tension between PSOs and competition derives from an inherent tension between citizens (who benefit from PSOs) and customers (who benefit from competitive offerings). Historically, public sector companies used to address citizens needs, and through the liberalisation process, these companies are more and more subject to tensions between their new-found obligation to cater to customers in a competitive environment and their traditional role as providers of public services to all citizens. Therefore, before defining PSOs in a competitive market, a number of questions need to be explicitly addressed by public authorities. First, governments need to define the exact scope of what will be covered by the PSO (in terms of beneficiaries, extent of services, etc.). They also need to explicit which provider will be in charge of delivering the service and at which price. François Degorge explains that many problems with PSOs and USOs derive from the fact that even these simple questions are not always clearly answered by public authorities. Furthermore, François Degorge points to a number of specificities from the railway sector which make the provision of PSOs particularly difficult. For example, he explains that, contrary to other sectors, the customer is an integral part of the service provided by railway undertakings. Therefore, he wonders how the concept of provider of last resort will be implemented. Will incumbent operators be requested to assist new entrants in case of incidents? If so, at what cost and how will the incumbent be compensated? François Degorge also explains that liberalisation can be implemented through different modes of competition (i.e. open access competition and franchises), and that these different modes of competition have strongly different impacts on PSO provision. Therefore, the existence and extent of PSO needs to be taken carefully into account when choosing how to open up markets to competition. Finally, François Degorge shows that a number of PSOs in the railway sector, such as national defence and continuity of service obligations, are not explicitly defined in legislation. The absence of a clear definition leads to a miscalculation of their true costs, through the 130515_CEW_PSOComp 4/5
existence of extensive cross-subsidies, which will become problematic with the development of competition. During the discussions, some participants point to the fact that tendering might be hard to implement in practice due to the high level of information asymmetry between incumbents and potential new entrants. For example, in the telecoms sector, it will be difficult for newcomers to bid for the provision of social tariffs in an auction, because the incumbent operator has much more information about the marketing profile of these customers than the new entrants. 130515_CEW_PSOComp 5/5