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Member of the European Commission responsible for Information Society and
8th Annual ECTA Regulatory Conference
Ladies and Gentlemen,
The last two weeks Commissioners and Commission officials have been giving several speeches on the EU Telecoms Reform. I usually start these interventions by emphasising how important the electronic communications sector is for the whole European economy, and how important competition is to drive investment and innovation and to deliver tangible benefits for all the users.
Today, I know that I am in front of an audience that does not need to be convinced of these facts – or the importance of the Commission's aim to ensure that the Reform will really enhance competition in telecommunications so that the benefits of the Single Market of 500 million European consumers can be released.
Indeed, ECTA, as representative of new market entrants, has been a most active protagonist in developing the culture and tools – notably this annual Regulatory Conference and the Regulatory Scorecard – to explore the relationship between regulation and competition. Evaluating achievement of regulation and performance of the sector is something that all the stakeholders – regulators, industry and consumers – must be constantly engaged in so that we can strive for continuous improvement.
The EU Telecoms Reform provides us the perfect opportunity to take stock and reflect upon what has been achieved so far and what should we do better.
New regulatory tools to ensure effective competition
The Commission's main conclusion for the Reform is that effective competition is the key for current and future success. We have achieved a lot in the last decade through liberalisation and pro-competitive EU regulation. Europe is now a world leader in telecommunications and increasingly also in broadband – but a lot still needs to be done.
With the EU Telecoms Reform, the Commission's goal is to ensure that all companies doing business in this sector have a level-playing field – fair rules for competition, being able to offer cross-border and pan-European services and to make substantial investment in new technologies and services across the EU.
We must accelerate our regulatory efforts in areas where competition has been slow and where persistent bottlenecks remain. If we just have a look at direct access competition in Europe – an area which is, to some extent, also crucial for the development of broadband – only 10,5% on average of the market is today in the hands of alternative providers which provide their services via their own network, via cable lines, unbundled lines or wireless access. 89.5% on average of direct access is however still dominated by legacy providers, the former incumbents.
This means that ex-ante regulation continues to play a crucial role in maintaining competition and protecting consumers by setting conditions for access to the incumbent's infrastructure.
Assuring such equivalence of access can prove difficult where network operators are vertically integrated service providers, especially as regards non-price discrimination. In cases where such discrimination is persistent and cannot be resolved by behavioural remedies, functional separation would remove incentives to discriminate between service providers. That is why the Commission proposes to provide the national regulators with the power to impose functional separation as a new remedy tackling persistent discrimination.
Functional separation entails changes to an incumbent operator's organisation and incentive structure, including setting up information barriers between the access and services part of the business, but it does not force the operator to sell off assets.
This is a proportionate and flexible approach tailored to the circumstances of the telecom sector. It is not superimposed where it is not needed and other remedies would be sufficient. But, where the opposite is the case, where the existing remedies are insufficient, how can we be satisfied with that situation? That is why independent regulators need this extra tool of functional separation where there are persistent structural competition problems.
So, where the national regulator concludes that this remedy is needed, all market operators can be confident that the unit responsible for the network is not giving the service unit of its own mother company a more favourable treatment than other operators. Functional separation gives new entrants a fair chance to build out services – using the existing infrastructure where there is no real prospect for sustainable infrastructure competition to evolve.
This has clearly happened in the United Kingdom where there has been a substantial increase in the volume of orders for access from alternative providers. Prior to the functional separation of British Telecom in September 2005, there were just 105,000 unbundled lines. In October 2007, this had grown to over 3.3 million unbundled lines. At the same time, the increased confidence in British Telecom as a whole has lifted its stock market valuation substantially.
The British precedent is not a "one-off" case. Frustrated by the failure of existing regulation to deliver the desired results, national regulators in Sweden and Italy are also now turning to functional separation as the answer.
The costs and benefits of functional separation, and therefore the desirability of imposing such a solution, depend on national circumstances. Before implementing functional separation, the national regulator should therefore undertake a detailed impact and cost-benefit analysis of the proposed measure – and that includes the impact on investments by the company concerned and by new entrants. The "green light" from the Commission will be necessary before the measures will be imposed.
Incentives for investment in new infrastructures
The Commission's proposal on functional separation is consistent with the Commission's long-held position that a 'regulatory holiday' on fibre is definitely not the right way to boost investments in new infrastructures, as a few stakeholders have been claiming. This is not the way the EU Telecoms Rules work: our EU Framework is based on networks and services competing with each other in a technologically neutral way. If telephony and broadband are the basic products sought by consumers, then whether they are delivered over metallic or fibre loops is largely irrelevant to the analysis. What is relevant is the state of competition on that market.
Having moved away from the monopoly provision of telephony in all Member States, 'regulatory holidays' would risk moving back towards the monopoly provision of voice, internet and media services.
I would like to emphasise that the possibility to impose ex ante regulation does not create uncertainty on returns. On the contrary: the EU rules require that only "appropriate" remedies should be imposed and that those remedies must be differentiated in such a manner that they will allow investors a sufficient return on its investment in new infrastructure.
As announced in the Review Communication of 13 November, the Commission services will work in the coming months so that by summer 2008, we can issue guidelines on the application of the EU rules to aspects of new fibre investment in the local access network.
The need for regulatory consistency
So, good "appropriate" ex ante regulation will safeguard both competition and the incentive to invest. Good regulation will also create certainty especially given the scale of investments involved. But here lies the rub, the existence of 27 regulators each with its own idea of what is good regulation, is not an incentive for either incumbents or new entrants when it comes to carrying out new investments. And then, there's the absence of any real say by the Commission over the remedies chosen. Let me explain.
Since the current EU rules introduced the so-called Article 7 notification procedure, more than 700 national ex ante regulatory measures have been notified to the Commission. The mechanism has greatly increased transparency and consistency in regulatory decisions, particularly in identifying in the first place where regulation is needed and then who is to be regulated.
However, on the crucial question of "how" to regulate, the mechanism has proved considerably less satisfactory, with the result that we are faced today with a fragmented approach to regulation by 27 national telecoms authorities. Operators often face inefficient, delayed and inconsistent remedies. This can lead to distortions of competition and makes it hard for companies to operate seamlessly across borders and offer their customers – whether consumers or businesses – pan-European or cross-border services (such as Voice over IP).
Let me just give you three examples of the problems we face:
A European Telecoms Market Authority: a necessary tool to achieve a true Single Market in Telecoms
To put it simply, we cannot create a level playing field in Europe – which is critical for achieving the Single Market – if there is no consistency in regulation across the EU.
Inconsistency means additional cost for operators. Inconsistency means that competition cannot unfold as it should. Inconsistency may even hide regulation for protectionist reasons in some countries. And, most of all, inconsistency means that communication services offered to the consumer are less innovative and more expensive than they could be.
It would be an illusion to think that these single market shortcomings will just go away by themselves. They are embedded in the regulatory structure we have today.
We need a means to break away from a national mindset, so that the full potential of a market of 500 million consumers can be realised.
What the Commission has therefore proposed is the creation of a European Telecoms Market Authority. The name is no accident. The sector needs a body that is close to the market, that exercises real authority and that is equipped to provide useful and clear answers to the challenging regulatory issues we face across Europe. It needs to bring out the best of the national regulators, but it needs – and this is crucial – it needs to be more than just a sum of all its national parts. It needs to be able to think beyond the national frontiers of each Member State, to have a European approach, a European vision.
That is why when the Commission proposed the creation of a European Telecom Market Authority it took a deliberate step to depart from a consensus based approach that produces take-it-or-leave-it answers.
The European Telecom Market Authority will have the necessary status for the important tasks it is called upon to perform. It will be visible. It will be transparent. It will be accountable and it will operate within a clear Community framework with a mandate to deliver authoritative advice.
What does this mean for the telecoms sector, for Europe's consumers and businesses? Well, let me tell you. The new European Telecom Market Authority is the key that unlocks the door to a true Single Market for telecoms. There is much scope for cost savings and efficiency gains through the economies of scale brought about by the creation of a real Single Market. In terms of investment decisions, the gains can be enormous. Just the legal certainty of having consistent, clear and quick decisions will lower the cost of capital for service providers yielding hundreds of millions of savings in euros every year. A real Single Market would also answer the expectations of consumers wanting to get the most out of communications services whose availability is not limited exclusively to the territory of a particular country. After all, radio waves or the internet do not know borders or national boundaries.
In short, the new European Telecom Market Authority will deliver a Single Market on three separate fronts:
Recommendation on Relevant Markets: sending a strong signal for better, more focused regulation
The EU Telecom Reform also sends a strong deregulatory signal, particularly through the changes made to the Commission's Recommendation on Relevant Markets. The list of markets that the Commission considers are suitable for ex ante regulation is reduced by more than 50% so that only 7 out of 18 markets remain.
With the reduction in the list of markets, the Commission is signalling its belief that in many areas competition has developed significantly under this regulatory framework and that a shift towards competition law oversight can be made where appropriate.
By allowing national regulators to target ex ante regulation on core problems, regulators' ability to deal with issues of greatest priority will be strengthened.
Now, I know that the reduction in the number of markets has raised concerns in certain quarters, particularly about the removal of some of the wholesale markets from the list. But you know that the Commission has to remain true to the underlying rationale of the EU's Regulatory Framework, which is to dispense with ex ante regulation when there is effective competition on a market. With the benefit of several years of experience of applying the three-criteria test and many hundreds of notifications under our belt, the Commission is well-placed to form a general position on which markets are in principle suited to ex ante regulation, and which are not.
Furthermore, the withdrawal of a market from the Recommendation does not indicate that the Commission believes that there are no problems on that market anywhere in the EU. The exercise that the Commission has just carried out was conducted by looking across all 27 Member States and does not attempt to capture the specifics of those Member States where factors facilitating effective competition are inhibited. While in general we expect the three criteria not to be met on the markets that we have removed, the EU rules require individual national regulators to take account of national circumstances. So, it remains open to national regulators to justify interventions in markets that have been removed where they can make a convincing case that ex ante regulation is still needed.
New spectrum rules for the wireless economy
With the EU Telecoms Reform, the Commission also wants to tackle the inefficiencies in spectrum management. Spectrum based services represent € 250 billion in the EU economy and are growing. Yet, the amount of radio spectrum is limited and current allocation systems are rigid and discourage innovation. The European wireless industry has clearly outgrown the current command-and-control system.
The Commission's proposals in spectrum management aim to make binding the principles of technology neutrality and service neutrality, with certain well-defined exceptions. In our view the users, such as yourselves, are much better placed than regulators – or the European Commission – to find the most efficient use of radio spectrum. This is a strong argument for substantially increasing the flexibility of spectrum use.
Technology neutrality does not mean anarchy as some commentators have suggested. We still of course need rules. But those rules should be kept to a minimum. They should be what are necessary to safeguard public health, or to manage interference so that the various technologies can coexist. But that should be the extent of the restrictions we put on technologies.
Service neutrality is even more important. The effect of designating a specific service in a specific band has in the past been to limit competition. The introduction of service neutrality is not an attempt to constrain the role of broadcasting in Europe.
The present lack of service neutrality has led to a situation where we are faced with de facto oligopolies or even monopolies, where the players view a share of the customers as theirs by right. Such a complacent attitude has, contrary to what some commentators would make us believe, often had the effect to limit rather than promote media plurality.
We are of course not dogmatic. There can be a need for some exceptions to service neutrality, for example a requirement on a user to provide a specific service. But restrictions on the freedom of choice of the user should be justified and regularly reviewed by the regulator. They should be lifted, if no longer warranted. Besides, such restrictions should not limit the users' right to provide additional services in the spectrum band in question, through more efficient use of the spectrum or additional infrastructure investments.
Service and technology neutrality form the core of the spectrum reform. Where possible this approach should lead to the conclusion that individual licences are no longer needed and that access to a spectrum band should be included in a general authorisation, or "licence-free".
Where the issue of individual licenses can be justified, the issue of trading in spectrum usage rights is an efficient and quite natural complement to greater flexibility, contrary to much of the negative excitement this proposal has triggered.
Even though service and technology neutrality will release enormous potential benefits, it is not enough. The radio spectrum is full, and unless new entrants or innovative technologies can access spectrum, and existing users can contract or expand their usage, we will not achieve the desired competition effects.
The option, and I stress that it is an option and not an obligation, for a license holder to transfer the spectrum usage rights to another user will provide this effect. This option will apply in the bands that have been agreed with the Member States, not imposed by the Commission.
An influential study from 2004 calculated that establishing common rules at European level regarding trading and flexibility added 30% to the benefits of spectrum reform. Now is the time to put it into practice.
Of course, I do not believe that the new regulatory framework on its own will increase competition from one day to the other. But I am convinced that by starting now and persevering, the effects will become real. Market players, such as you, will have a key role to play in exploiting the new opportunities and making the necessary investments.
Ladies and gentlemen,
Let me end my intervention by thanking ECTA for the support it has already expressed for the Telecom Reform package the Commission has put forward for better, more consistent rules for effective competition and sustainable investment.
You know as well as I do that we shall have to fight hard in the coming months to ensure that this vision of a competitive single market for the telecoms sector becomes a reality. I count on your continuing support. It will be needed. Because we have to keep on explaining, keep on reminding of the benefits that competition brings, and that includes new investment. Competition often does not have a strong lobby. But I am convinced that our good arguments will be heard in the end. This is in the interests of Europe's economy. And of Europe's citizens.