INTUG
Transposition of the European Union directives; a user perspective
The Changing European Regulatory Framework, WiK, Berlin, 28 October 2003
Ewan Sutherland
INTUG > talks > WiK Berlin


Introduction

Where the regulation of European telecommunications markets stands today is the result of processes going many several years. The principal milestones being:
The process will continue with reviews scheduled for:
There was, understandably, no grand ball in Brussels on the night of the 24th July 2003 to mark the legislation taking effect. Instead, there was the preparation by the European Commission to issue an unprecedented (at least for telecommunications) number of notices of infringement proceedings under Article 225 of the Treaty, since ten of the fifteen member states had failed to transpose the legislation by the required date. None of the original six members of the European Economic Community had transposed the legislation. At best this can be considered disappointing, at worst it suggests that the process has been misdirected or has become irrelevant, though it may be nothing more than telecommunications becoming more like other policy areas of the European Union.

The supposition was and remains that Europe is on a "glide path" to full liberalisation. That at some date in the future, there will be full competition, at which time sector regulation will have been minimised or, perhaps, eliminated. At this magical time problems of dominance will have been removed or fully controlled. The reality is that this process is proving very much slower and much more difficult than had been anticipated. So much so that it is impossible to predict when true competition might be achieved.

The problem is largely the result of the politico-regulatory games played by the incumbent fixed and mobile operators. They have gone to extraordinary lengths and expended enormous energies and monies to control the introduction and level of competition. Not entirely frivolously, this is known as the 3D strategy; Deny, Delay and Degrade. It has proved vastly more successful for the incumbent operators than their efforts to develop trans-national business models. They formed joint ventures such as Concert and Unisource which quickly felt apart in absolute failure. They tried to become new entrants in the markets of their rivals, to discover that this required schizophrenia in the all important politico-regulatory games; incumbent at home, incumbent basher abroad. Operators seem only to know how to become bigger and sometimes more efficient incumbents.

The crisis of confidence in the financial markets concerning telecommunications has also been a significant factor in holding back competition. It has killed off or stunted the growth of many of the new entrants, leaving the national fields clear for the incumbent operators. The financial markets continue to believe in incumbent operators and in their capacity to generate revenues. In mobile telecommunications they seem to be seeking consolidation having shifted from supporting n+1 operators to n-1 operators. They appear to believe that three is the magic number of operators, even if or perhaps because they are very hesitant about third generation services.

The confidence with which governments and market players continue to believe in and actively pursue competitive markets is unclear and uncertain. While it remains in the political rhetoric, it seems to be much less prominent. Equally the established market players seem much less inclined to view it as a beneficial outcome, neither wishing nor expecting to face true competition in the immediate future. Moreover, many governments prefer to rely on tried and tested incumbent operators to achieve their goals of rolling out broadband and mobile telephony.


What do customers want?

The primary demand of users is for world class telecommunication markets that will provide them with a choice amongst a range of services that are:
In Europe, this will only ever be possible with a competitive internal market, one that encompasses all the member states, including the accession countries. National markets are too small and too subject to the domination of national incumbent operators. They have offers of services that are constrained by the geography of eighteenth and nineteenth century nation states, rather than by contemporary patterns of the economics of demand. The absence of pan-European services is very evident, especially in mobile telecommunications. The markets are fractured and fragmented in order to ensure incumbent operators can exercise their political influence.

Europe has not achieved a single market and will not achieve one in the immediate future. It is possible it will never be achieved.

Europe is lagging and not leading in electronic communication services:
One reason for the loss of leadership in Europe is that governments and regulators took far too long to remedy well established abuses. These are mainly excessive and even outrageous prices for:
There are also problems of discrimination in the supply of wholesale services.

There had been a misguided belief that mobile telecommunication was competitive, this was aggravated by the combination with old-fashioned industrial policy that pushed mobile networks. The hope that competition in mobile telecommunications would spread to fixed telecommunications has been proved absurd, since the mobile markets are riddled with abuses. These include the most pernicious of all abuses in the long history of telecommunications, the international mobile roaming cartel. An abuse which has been extended to new data services at such high prices as to render them unsupportable for business users, let alone individual consumers. An important advance was the recognition that mobile telecommunications was not one market, but several, with mobile origination overlapping with fixed origination.

The study by Bomsel, Cave, Le Blanc and Neumann on fixed-to-mobile, albeit financed by COLT and Cable & Wireless, indicated the massive extent of another abuse:
We estimate that the scale of the transfer as a result of high mobile termination charges for fixed to mobile calls from fixed networks and their customers has, over the five years 1998-2002, amounted to €19 billion. The figure is calculated as the excess of termination charges paid over costs, including a normal return on capital employed, in France, Germany and the UK alone. The precise estimate depends on assumptions about costs, but it is clearly substantial..
http://www.cerna.ensmp.fr/Documents/OB-GLB-F2M-FinalReport.pdf
Perhaps the most disturbing factor is that harmonisation in all other sectors of the economy is being held back by the absence of harmonisation in telecommunications. There is no reason to expect this to change in the near future. The barriers that the operators have created to achieve this outcome, cause business in Europe to forego substantial productivity gains, year on year, even in the telecommunications sector.


The long delays

The legislation for "full liberalisation" took effect at the end of 1998, requiring the European Commission to undertake a subsequent review of the market developments and regulation. The result was the so-called "1999 Review" which comprised a series of detailed reports by consultants with associated public hearings. This was used by the Commission as the basis for non-binding draft directives and later true drafts of the directives that were presented to the European Parliament on 12 July 2000. The texts had been arrived at by a very open process. Although the publication of the pre-drafts of the directives was frowned upon at the time, it was later adopted as good practice.

During the 1999 Review there was pressure on the European Commission to accelerate the process and to deliver the directives. This pressure for quick decision-making was to continue throughout the subsequent legislative processes of the Council and Parliament. It was claimed that the operators needed regulatory "certainty", by which many of them meant a significantly lightened regulatory load.

The first delay in the "new" legislative package was attributable to the translators. They took about two months more than expected to make the eleven language versions of the directives consistent. Even today there remain questions about the true consistency of the different versions.

The second delay is attributable to Erkki Liikanen, the Information Society Commissioner, who did not want to include mobile telecommunications markets in the Recommendation on relevant markets. The consultation document for the relevant markets was issued in June 2002, with a closing date for comments of 15 July, later delayed to 31 July. However, it was only adopted by the College of Commissioners, as a Recommendation, in February 2003, many months after it was scheduled. The final version did include three mobile markets: mobile call origination and access, mobile termination and international roaming. Despite the concerns of Erkki Liikanen and those of the mobile operators, the inclusion of the mobile markets, by then fully expected, did not cause the share prices of the operators to collapse nor did their capital expenditures have to be reduced further. The mobile equipment manufacturers were not significantly worse off. The Commissioner's decisions may have been influenced by his return to Finland, due in late 2004, where his political aspirations are linked to Nokia, some twenty per cent of the economy.

The incumbent operators had also fought against different forms of access to the local loop, both full unbundling and bitstream access, though they eventually lost these arguments. Similar arguments to roll-back unbundling of the local loop where much more successful in the USA where the Triennial Review gave incumbent operators significantly better terms.

Later in the process, the European Commission indicated that it would not open the procedure under Article 7 of the Framework Directive to consider and to approve decisions by National Regulatory Authorities (NRAs) until 25 July 2003. The procedure was not published until very close to that deadline. This had the effect that any NRA which might have been on schedule was delayed by the European Commission.

A series of delays was caused by the member states who, despite the political agreement to have completed transposition by 25 July 2003, failed to live up to their undertakings. The result has been a staggered start across the internal market. Austria and the Netherlands, then later Belgium, had delays caused by the absence of governments, elections and the long processes of government formation. Germany and France were especially slow in transposing the legislation, perhaps related to the enormous debt of their incumbent operators and their slowly improving financial conditions. Alternatively, it may be related to the overwhelming political problems of the Germany economy and of the French pension system.

Member states may:
At the time of writing, only seven member states have fully transposed the legislation and only one National Regulatory Authority (NRA) has had market assessments cleared by the European Commission. Additionally, two EFTA members, Iceland and Norway, have transposed the legislation.
(see the CIRCA web site)


The transpositions

The member states ought to have approached the transposition of the legislation in a straightforward manner, since they had agreed to the texts in Council and Parliament in December 2001. Nonetheless, either because of the time interval or because the political processes are poorly coupled, there are serious problems in transposition.

In several countries there seems to be a lack of willingness to give the NRAs all of the powers set out in the directives, especially the power to select from among the various remedies. This seems to reflect a lack of trust in their own NRAs. Member states have been tempted to select some but not all remedies from the list or to link specific remedies to particular market failures. These changes also reflect the enormous efforts of incumbent fixed and mobile network operators to try to tilt the supposedly level playing field in their direction.

The process of commencing market analyses was badly delayed. Once visualised as a rapid and synchronised process it now looks more like Napoleon's retreat from Moscow, with pockets of activity scattered across Europe.

For reasons that were less than clear, whether delaying tactics or bureaucratic obscurantism, the Regulierungsbehörde für Telekommunikation und Post (RegTP) declined to commence even the gathering of data until the new law has been formally adopted. It has recently recanted this view and is now collecting data, though without any clear explanation of how its position was reversed.

An obvious side-effect of this is that those NRAs to publish and circulate their decisions first may have an undue influence on those that follow. While any attempt to draw systematic lessons for the second round of markets assessments, due to take place twenty-four months after the first, will be very difficult. It is hard to describe the result as anything other than a shambles.

One market in particular, international mobile roaming, gives considerable problems. The previous regulations did not give the NRAs the power to act, a problem that was remedied in the new legislation, by means of the legal doctrine of "joint dominance". There is relatively scant jurisprudence on this, leaving any decision by an NRA open to challenge up to the level of the European Court of Justice (ECJ). The prospect of a delay of four years creates a significant disincentive to NRAs. Moreover, the Competition Directorate-General has yet to publish a statement of objections on its inquiry into international mobile roaming. Some regulators appear to be waiting for an outcome of that inquiry before proceeding to the market analysis. The result could be the continued existence of the cartel for several years.


Lengthening, Lobbying and Litigating

For all that the European institutions came under pressure to produce the legislation expeditiously in 2000 and in 2001, the efforts of the operators have shifted to delaying tactics. They have increasingly sought to draw out consultation periods, to question transpositions and to seek further study of issues. They have deployed their considerable lobbying skills to slow down the processes and to bend them to their interests. The incumbent operators see liberalisation as a process to be used to their benefit, rather than seeing the end-point of unencumbered competition.

The operators have also made abundantly clear their willingness to litigate and to so at great length. The case of mobile termination markets in the United Kingdom is an obvious example, where the operators have taken every legal action available to them to prop up their massive revenue flows, about one quarter of their income. There are many opportunities in the market analyses, the designations of SMP and in the selection of remedies that open the way to an appeal to the European Court of Justice (ECJ), which could be expected to take four years to complete a case.

A significant barrier to entry is the need to battle the fixed and mobile incumbents through long court cases.

The contrast with Japan is remarkable. There, local loop unbundling has not been subject to any appeals or court cases. The result has been the deployment of 450,000 new lines in the peak months, typically at 8 or 12 Mbit/s. It may only be a coincidence, but Japan has the lowest ratio of lawyers to population of any OECD country.

During the debates on the legislation enormous attention was paid to the powers of the European Commission to veto certain measures by the member states. In retrospect this seems to have been badly misguided. The real problems are the almost total absence of incentives for NRAs to harmonise their decision making and that harmonisation will not achieve a single market.

There is a formal mechanism for cooperation between member states through the Communications Committee (Cocom). The European Commission can issue recommendations, after consulting Cocom, and also publishes its annual implementation reports. The stronger powers of the Commission lie in infringement proceedings, which are already piling up on some member states and in the Article 7 procedure, allowing reviews of certain decisions by N RAs. The Commission is struggling to make effective use of the few sticks available to it in order to limit the more extreme divergences.

There are also the parallel and somewhat mysterious workings of the Independent Regulators Group (IRG) and European Regulators Group (ERG). These appear designed to ensure sufficient cohesion between regulators to enable them to avoid being picked off one at a time by operators, or, by the "real enemy", the European Commission. At present, they are struggling to deliver even a modest amount of harmonisation.


Conclusions

The creation of an internal market for telecommunications has failed. Yet, there is no reason to imagine that this goal is either irrelevant or misguided, rather it remains essential for the achievement of the agreed political, economic and social  goals.

It is clear that there is demand but no supply for services that cross national borders. It is clear that a wider European market would force operators to compete in the territories of their rival incumbents. Europe has, at best, a patchwork quilt of markets for electronic communication services that is significantly inefficient and lacks the economies of scale of other economic groupings. The present policies will not achieve an internal market for electronic communications in the foreseeable future.

Europe has now fallen behind Japan and the Republic of Korea in the field of telecommunications. There is the very real prospect of being overtaken by some of the most economically developed parts of China. The approach being taken in North-East Asia is one of initial competitive market entry followed by sanctioned market consolidation. It appears to deliver results very much faster than the European drift into full liberalisation.

Europe is better off than the United States of America where the primary legislation, the 1996 Telecommunications Act, is flawed and ambiguous yet cannot be replaced. The bickering lobbyists have achieved a stand-off in both the legislature and the regulator. On one side there are the Bell Operating Companies (BOCs) and on the other the cable television companies. The FCC decision on local loop unbundling took six months to emerge and only six days to be challenged in the courts where it will be twisted out of all recognition. The courts cannot resolve the discrepancies in the 1996 Act nor is there any prospect of primary legislation passing the Congress in 2004 or 2005. That said, the operators have recognised they cannot win by tilting the regulatory playing field, they have now begun to engage in competition in the market place.

The European Commission will expend considerable energies in forcing member states to drag the "new" legislation past reluctant, indifferent and recalcitrant legislators. Eventually, in the middle of 2004 the legislation will be in place, doubtless imperfectly transposed, requiring further rounds of enforcement measures by the Commission to ensure improvements and corrections. In parallel the market assessments, which are barely begun, will be pursued with differing degrees of enthusiasm and effectiveness by the NRAs. By the middle of 2005 the first round of market assessments should be completed, though some will be tied up un appeals, delaying the process considerably. By then, it will time for the review of the legislation. The whole thing begins again.


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