The current EU commissioner in charge of Information Society, Viviane Reding, has been vocal recently about the need for more harmonisation to ensure consistency in the implementation of EU directives and frameworks at a national level. Not surprisingly, Reding is a strong proponent of increased powers for the EU and favours the creation of an EU-wide telecoms regulator to ensure the development of a single market.
Existing National Regulatory Authorities (NRAs) have been reluctant to see their domestic prerogatives curtailed despite a general acceptance that more could be done in terms of harmonisation. Their European association, the European Regulatory Group (ERG), seems very keen to ensure that the EU does not make the role of national regulators redundant. Indeed, the ERG recently established a permanent presence in
But to what extent a new regulatory body would provide the much needed regulatory visibility required by operators and investors is still unclear, especially if new drastic remedies such as mandated functional separation are added to the mix.
National regulators and the EC
The current regulatory framework — the so-called 2003 New Regulatory Framework (NRF) — is already quite prescriptive. The European Commission (EC) defines the process and methodology that the NRAs in all member states need to follow for their market analysis.
This involves a domestic review of the 18 markets defined by the EC, as well as the application of economic tests to establish which operators, if any, have significant market power and the selection of relevant remedies.
While NRAs are allowed to present their case if they believe their national circumstances require them to deviate from the framework, this option has only been parsimoniously used and not always successfully. Indeed, in a number of cases the EC disagreed with the NRA analysis and asked for the case to be re-examined. Since 2003, the EC has opened proceedings under Article 226 of the EC Treaty against all 25 EU member states in some 90 cases due to failures to implement correctly the regulatory framework.
The countries that have been deemed in breach of the framework have also attracted the wrath of the EU. Recently, the German Government’s stance on the granting of ‘regulatory holidays’ for Deutsche Telekom’s new investment in the local loop was considered by Reding as a clear violation of the NRF leading to a formal complaint from the EU.
On 3 May, the EC sent a reasoned opinion, the second stage of infringement proceedings, to the German Government and made it clear that the matter could be brought to the European Court of Justice, as early as June, if the law was not amended.
As we will see, this is an important precedent as the arguments deployed by Deutsche Telekom to secure a relaxation of the regulation are at the core of the tension that exists between the need for new investments and the current regulatory framework.
Up to now, the choice of the remedies to be applied to operators with significant market power was left to the NRA and only the designation could be challenged by the EU. If this was to change, and irrespective of the shape, legal basis, and prerogatives of any new EU-wide regulator, it would represent a significant shift in power to the EU and leave very little latitude to NRAs.
The separation issue
The combination of new powers and such drastic new remedies would, if accepted, allow the EC to force the separation of telecoms operators in member states. The EC believes that separated operators would have fewer incentives and means to margin-squeeze other competitors. While such a scenario would clearly be considered as a last resort, mandating functional separation would no doubt raise many regulatory, financial and legal issues. The separation process would impact the very organisational structure of firms and would be difficult and costly to implement, or indeed to reverse.
Such intrusive regulatory remedies would require enhanced information gathering and processing capabilities for the EC that would lead to the development of a pan-European regulator. In that sense the two proposals, for an EU regulator and for the addition of functional separation as a remedy, are interrelated. Some industry observers have even suggested that this would provide more powers to the EC over national telecoms matters than even the Federal Communications EC in the
It is also unclear how these changes would impact the two strategic regulatory questions that operators are trying to answer in order to inform their business plans:
- How will existing assets and infrastructures be regulated?
- How will any new investment/new generation network be regulated?
The above questions are critical for both investment levels and the long-term profitability of most operators. The quality of the management, its ability to control costs and the pertinence of the marketing programmes of many firms have a role to play, but the rules of the game are still more important for profitability in the sector than how well the game is played. Many operators are keen to shape the regulatory debate in order to gain some regulatory visibility to inform their investment decisions.
Competition versus regulatory visibility
The German proposition of ‘regulatory holidays’ alluded to earlier was designed to provide Deutsche Telekom with regulatory visibility regarding its new access network investments. This case, irrespective of its merits, highlighted the need for the EC to balance the need for competition and the regulatory visibility required to ensure that investment is not stifled.
For example, it is now clear that the
After all, the long-term objective that all market participants seem to agree on is the rolling back of regulation and the roll out of new networks and services, not the opposite.
Benoit Reillier is a consultant at global economic consultancy LECG.