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Brussels, 7 December 2009

EU Telecoms: the Article 7 procedure, the role of the European Commission and the impact of the EU Telecoms Reform: Frequently Asked Questions

What is meant by electronic communications?

The term “electronic communications” covers all forms of communications via electronic means, via telephone (fixed line or mobile), fax, internet, cable, satellite etc. In the age of converged technologies, it is important to allow any definition of such communications to be as broad as possible, without limitation to particular technologies. It should thus be able to embrace future technological developments. The open definition of this term reflects the principle of technology neutrality which is one of the fundamental features of the EU Telecoms Rules. As part of the notification mechanism, the Commission has established a list of 7 “markets” for electronic communications (e.g. wholesale broadband access), that it considers should be the starting point for analysis on a national level by national regulators. These markets are set out in the Commission Recommendation “ on relevant product and service markets susceptible to ex ante regulation ”:

What is the cooperation and notification mechanism, and what is its legal basis?

The legal basis is Article 7 of the Electronic Communications Framework Directive (2002/21/EC), the principal instrument for EU regulation of electronic communications. Since 2002, under the procedures set out under this article, the national telecoms regulators are required, in consultation with industry, to analyse their national markets for electronic communications and propose appropriate regulatory measures to address market failures. They should then notify their findings and proposed measures to the Commission and other national regulators. More precisely, national telecoms regulators, in accordance with competition law principles, must define the boundaries of the relevant market, assess whether any one or more players is dominant (or has significant market power, “SMP”) in this market and where operators are found to be dominant, propose appropriate regulatory remedies to ensure effective competition.

The Commission assesses the majority of cases within a one-month “phase one” procedure, after which it may choose to approve and/or comment on the proposed measures. However, if the Commission considers that the proposed measure would create a barrier to the single market, or has serious doubts as to its compatibility with Community law, the Commission opens a “second phase” investigation and the procedure’s deadline is extended for a further two months.

Following this in-depth investigation, the Commission may, if its concerns are confirmed, require a regulator to withdraw a proposed measure, (a possibility known as power of veto). This power can only be exercised in relation to the proposed market definition or SMP analysis. As regards proposed remedies, the Commission may only make comments.

Has the European Commission used its veto on any remedies proposed by national telecoms regulators?

Since 2002, the Commission has issued five veto decisions covering seven cases.

  • Veto decision in case PO/2006/518, 524 concerning its analysis of retail access markets (Poland): the Commission issued a decision requiring the Polish telecom regulator, Urząd Regulacji Elektronicznej (UKE), to withdraw its draft measures for regulating retail access services. The Commission felt UKE has failed to justify why it intends to regulate broadband access services in addition to regulating retail narrowband access. Therefore, it requested UKE to withdraw its draft measures.

  • Veto decision in case DE/2005/0144 concerning wholesale call termination on fixed networks (Germany): the Commission challenged the German regulator’s findings that only the incumbent operator, Deutsche Telekom, was found to be dominant on its individual network in this market. The regulator did not consider any of the other operators in respect of their individual networks to be dominant, despite each having a market share of 100%. The German regulator felt that any power on the part of these alternative operators was curtailed by the purchasing power of Deutsche Telekom. On the basis of legal and economic considerations, the Commission considered that Deutsche Telekom could not exercise such power.

  • Veto decision in case AT/2004/0090 concerning transit services (Austria): the Austrian Regulator stipulated that a transit market includes the services provided by a network operator to other operators (or itself) to convey calls across the network, The Commission disagreed with the Austrian regulator’s view that operators who were supplying such services only to themselves (in particular, mobile operators) could also supply them to others on a commercial basis. The national regulator's approach leads to a significant unjustified reduction of the dominant market player’s market share (Telekom Austria). Furthermore, the regulator failed to assess the impact of deregulation on small operators.

  • Veto decision in case FI/2004/0082 concerning the mobile access market (Finland): Ficora, the Finnish regulator, concluded that one operator had SMP mainly on the basis of high market share (>60%). However, according to competition law practice, market shares alone are not necessarily sufficient to establish dominance and Ficora failed to consider sufficiently market developments that would have rebutted the presumption of dominance.

  • Veto decision in case FI/2003/0024, 0027 concerning international calls (Finland): Ficora, considered on the basis of its analysis that this market was characterised by effective competition since it did not identify any market players with significant market power. The Commission, however, found that Ficora not only arrived at this conclusion by taking into account regulation already in place to tackle potential competition problems, but also did not provide sufficient evidence underpinning its findings to enable the Commission to endorse the regulator’s conclusions.

In addition, there have been 40 cases where National Regulatory Authorities have decided to withdraw their proposed measures to avoid a veto decision.

How does the Article 7 procedure work in practice?

Once a Member State regulator notifies the Commission of its proposed measure for a particular market, the case is registered, and an ad hoc case team comprising officials from both the Information Society and Media and Competition Directorates-General is appointed. The case team analyses the notification and may ask the regulator concerned to provide some further information or clarification for the purpose of conducting the assessment. The regulator has three working days to respond to such a request. The team must carry out its assessment, and comply with the necessary internal checks and balances, within the legally binding deadline of one month. At the end of this period, and provided that the notified measure does not raise “serious doubts” as to its compatibility with EU law, the Commission may decide to comment. Regulators should take utmost account of comments issued by the Commission before adopting the draft measure in question.

In the event the Commission expresses serious doubts, the Commission's investigation period is extended by a further two months ("phase two" investigation) during which the regulator may not adopt its proposed measure. During these two months, the case team resumes an in-depth examination of the case and invites third parties to make known their views. What follows thereafter is an intense exchange of information between all interested parties (including the NRAs and industry players) and all data provided and views expressed are carefully considered by the Commission.

At the end of the investigation period, the Commission may withdraw its serious doubts (in which case the regulator may adopt the draft measure), comment (of which the regulator must take utmost account when implementing the draft measure) or require the regulator to withdraw its proposed measure. In both phases the regulator may withdraw its draft measure.

What kind of market failures need to be tackled?

The general aim of ex ante regulation is to ensure effective competition on the market to the ultimate benefit of consumers. Market failures which the regulators and the Commission endeavour to tackle include excessive pricing, denial of access to networks, barriers to market entry and discriminatory treatment.

What are the regulatory measures that can be imposed, and on whom?

Generally regulatory measures can be imposed only if competition is not functioning in the market analysed. This is the case when a regulator finds that an operator has SMP and thus decides to impose appropriate remedies. The notion of SMP is equivalent to the competition law concept of “dominance”, as defined in the case law of the Court of Justice and the Court of First instance of the European Communities.

The Telecoms Rules provide regulators with a ‘tool kit’ of remedies which leaves them with the flexibility to design appropriate remedies to tackle any market failures observed, and so achieve their regulatory objectives. Obligations imposed should be based on the nature of the problem identified, and be proportionate and justified.

For wholesale markets, the following categories of remedies are available: transparency, non-discrimination, accounting separation (separation of accounts between various levels of business), access obligations (requirements to provide access to the SMP operator’s network) and price control. In retail markets, the obligations may include requirements not to charge excessive prices, inhibit market entry or restrict competition by setting unsustainably low prices, or discriminate between consumers.

How has regulating the telecoms market favoured the development of competition in the EU?

The European Commission and national telecoms regulators have together acted to bring cheaper mobile phone calls and text messages through regulating the cost of mobile termination rates.

Termination rates are the wholesale tariffs charged by the operator of a customer receiving a phone call, to a fixed or mobile phone, to the operator of the caller's network for connecting, or "terminating", the call. These charges are therefore part of the cost of a call between customers of different network operators and included in the phone bill of the calling customer. European telecoms regulators have acted to remove inconsistencies in mobile termination rates and to oblige mobile phone operators to adjust their rates to costs. The Commission has been notified of and commented on almost 100 regulatory measures in this field within the Article 7 procedure. These price savings have been passed on to EU consumers and is part of the reason why today European consumers are paying 34.5% less for their mobile phone calls and text messages than in 2004.

As a result of regulation in the telecoms market, more Europeans can have access to a broadband internet connection at an affordable price. Under the Article 7 procedure, the Commission has commented on more than 100 proposed measures from national telecoms regulators for wholesale broadband and local loop unbundling. The local loop is the wires or radio links carrying the main fixed public telephone network from the local telephone central office into the subscriber's home or office. These local loops are usually owned by incumbent operators and are enormously expensive for new entrants to replicate, therefore giving incumbent operators a huge advantage. Local loop unbundling means that other phone operators can access this telephone network and can develop their own phone services including high speed broadband.

Thanks to EU rules which oblige European countries to liberalise their telecoms sectors and unbundle the local loops, the Commission enabled competition to develop in broadband markets so that consumers can benefit from the new technologies and services provided at more attractive price. As a result, the broadband markets developed at the remarkable annual growth rate of 24.6% in 2007 and 14.3% in 2008. .

More details on the current state of play can be found in the 14 th  Implementation Report adopted by the Commission in March 2009, which provides more market data and information on economic developments in the telecoms markets per Member State ( IP/09/473/)

Does the Commission have sole power to define e-communications markets, or can Member States do it, too?

The starting point is the Commission Recommendation on relevant markets, which has been revised once (see IP/07/1678). National regulators are expected to analyse all seven markets listed in this Recommendation, taking into account their national circumstances. However, if a national regulator considers that a market not listed in this Recommendation is relevant for regulation because it is characterised by persistent market failure, it may impose regulatory measures but has to justify on the basis of predefined criteria (the so-called "three criteria" test) why regulation is warranted in that specific situation.

What happens when a new technology or service is launched – do you (or Member States) define a new market?

Regulation under the EU Telecoms Rules is based on competition law principles. In practice, this means that whenever a new technology is introduced, the regulator has to analyse whether this technology is used to provide services comparable to existing services or whether this technology provides a totally new service. Only in the second case, that is when the service is clearly distinguishable from existing services or products, may it become justifiable to define a new market.

What are the benefits for telecoms operators?

Article 7 procedure contributes to:

  • giving market players legal certainty as to how and under what circumstances operators will be regulated. EU-wide rules, and cooperation among national regulators, help to ensure that regulatory practice is consistent across the EU;

  • giving market players the confidence that they need to plan their investments in a consistent and predictable EU market;

  • supporting the emergence of truly European operators providing their services in more than one Member State;

  • enabling new players to enter the market and compete fairly;

  • increasing transparency.

What are the benefits for the consumers?

Article 7 procedure contributes to:

  • stimulating competition, which results in cheaper products and services;

  • stimulating investment, which leads to a better choice of products and services;

  • increasing transparency.

What are the results achieved so far?

As of December 2009, a little over 1000 regulatory measures had been notified to the Commission, which means that all national telecoms regulators have completed the first round of market reviews, with the exception of the regulators in Bulgaria and Romania that joined the EU only on 1 January 2007.

The result of the first round of market reviews show that Article 7 procedure has been instrumental for the promotion of competition, investment and innovation as well as for the consolidation of the internal market for electronic communications. It has ensured i) a consistent approach regarding market definitions and SMP analysis across Europe, ii) brought sound economic analysis to the market review process and iii) resulted in increased transparency.

However, the existing rules have not proved sufficient to ensure that remedies chosen by regulators are always appropriate to resolve the competition problems identified. Sometimes the choice of remedy for similar market situations differs significantly from one Member State's regulator to another.

Overall, the existing rules have led to better regulation based on competition principles and contributed to the development of a common European regulatory culture.

Do you have a target date for fully effective competition in the 7 markets listed in the Commission Recommendation on relevant markets susceptible to ex ante regulation?

Effective competition is not achieved by setting deadlines. By means of appropriate regulation we create preconditions for competition to develop. The revised Recommendation on relevant markets indicates that some markets have already been found to be effectively competitive or tend towards effective competition. For example, technical developments and efficient enforcement of appropriate wholesale regulation has enhanced competition in the retail fixed telephony markets and leased lines markets. Furthermore, the market for mobile access and call origination services has been found effectively competitive in most Member States.

What happens once all 7 markets still listed in the revised Recommendation on relevant markets are deemed “effectively competitive”?

One of the main objectives of the rules is to limit regulation to those markets which, due to for example, their structural characteristics, offer no perspective of becoming effectively competitive without regulatory intervention. Successful regulation means that this sector-specific regulation can gradually be dismantled as and when the EU electronic communications market becomes competitive. At that time, commercial behaviour in the marketplace will be constrained by competition law, just as in other sectors.

How many cases has the Commission assessed?

By the beginning of December 2009, the Commission received 1021 notifications from 27 Member States. In all cases, the Commission assessed the notifications within the tight Article 7 deadlines of one month and required an extra two months when it had serious doubts as to the compatibility of the proposed measures with Community law.

How will the EU Telecoms Reform, as adopted by the Council and Parliament on 13 November 2009, change the Article 7 procedure?

The new EU telecoms rules will give the Commission the power to oversee remedies proposed by national regulators e.g. on the conditions of access to the network of a dominant operator; or on fixed or mobile termination rates). The objective is to ensure a more consistent, efficient application of those remedies across the EU in a single telecoms market

When the Commission, in close cooperation with the newly established European Telecoms Authority "BEREC" (Body of European Regulators for Electronic Communications) considers that a draft remedy notified by a national regulator would create a barrier to the single market, the Commission may issue a recommendation that requires the national regulator to amend or withdraw its planned remedy. The new rules also enable the Commission to adopt further harmonisation measures in the form of recommendations or (binding) decisions if divergences in the regulatory approaches of national regulators, including to remedies, persist across the EU in the longer term, e.g. on broadband access conditions or on mobile termination rates.

Figures and graphics available in PDF and WORD PROCESSED
Outcome of the notifications closed before December 2009

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