Telekomunikacije - STRUČNO-NAUČNI ČASOPIS REPUBLIČKE AGENCIJE ZA ELEKTRONSKE KOMUNIKACIJE | dr S. KÖHLER: The Market Analysis Process under the Old and Current EU Framework

The Market Analysis Process under the Old and Current EU Framework

Stefan Köhler

1. INTRODUCTION

The following article is based upon my presentation within the workshop on the “European Union (EU) Regulatory Framework in the electronic communications area (market analysis procedures)” which took place in Belgrade in October 2007. It was kindly hosted by the Serbian regulatory authority, RATEL. All details, including the agenda, speakers and presentations can be found under (http://www.ratel.org.yu/index.php?page=novosti&item=68&id=1879&get_treerot=54&lang=eng).

The aim of my presentation and this article is to give a survey of the development of the legal framework, especially concerning the market analysis process in the European Union (EU). Comparison between the two regulatory regimes applied during the past 10 years within the EU is intended to raise issues with special relevance for the countries that are planning to implement EU standards in the telecommunication sector in the future. Therefore the article starts with a brief legal-overview. Then the sector specific provisions for the market analysis process are discussed under the old and new regulatory framework. The following chapter deals with the implementation process in Austria and shows one possible approach of how to implement the EU market analysing process, thus providing a practical example. Finally, some specific implementation issues are discussed in order to give a couple of insights for countries planning to implement the EU standards.

2. OVERVIEW OF THE LIBERATIZATION OF TELECOMMUNICATIONS MARKETS

The goals of the European integration are:

a. to establish an internal market,

b. to create a system preventing distortion of competition and

c. to harmonise the different legal frameworks in the Member States of the EU.

In order to achieve this internal market, the ambition of the European Commission is to “open up” markets with monopolistic structures and to enable competition by creating a single European legal framework and by monitoring its implementation in the National Member States. One of these monopolistic sectors was the sector of telecommunications.

A step-by-step process that lasted for several years was intended to achieve market liberalization in telecommunications. The challenging question was: “How can a legal framework in compliance with the enormous technical changes and developments in this market sector be formed?” Especially the period during the internet hype, with its partly unrealistic expectations caused discussions between the governments (responsible for the legislation) and the regulatory authorities (responsible for the decisions) whose very different views contradicted each other.

The first legal sector-specific basis for telecommunications within the European Union was the Open Network Provisions Package (ONP-Package) of 1997, which needed to be transformed into national legal frameworks (Telecom Act, regulations etc.) by the EU Member States. As regards the legal approaches, they differed from one Member State to another due to national particularities and legal histories.

In 2002, following the ONP-Package, the New Regulatory Framework was established in order to further streamline the legal provisions. Its focus was clearly put on the regulatory interventions. It was called the “Review 1999” and represented the second main step in a process towards achieving sustainable competition in the telecommunications sector of the EU.

Currently, the “Review 2006” with the “Package of 2009/2010” is under discussion. There will not be a complete change in the legal structure of the sector specific regulations as it was the case in the “Review 1999”. For example, the European Commission proposes to transfer further regulatory powers from the national regulatory authorities (NRA) of the Member States to the European Commission as the relevant European institution. This third, new regulatory framework is planned to come into force only by 2009/2010 and therefore will not be further discussed in this article.

The main idea of the sector specific regulations is:

It creates the possibility of asymmetric regulation and the imposition of ex-ante obligations for dominant operators (contrary to general competition law).

2.1. In Detail: The Open Network Provisions Package (ONP-Package) of 1997

The main legal starting point of the liberalization process in the telecommunication sector was the Open Network Provisions Package (ONP-Package) that evolved in 1997. Its main goal was to open up the existing monopolistic market structure and to enable a European harmonization process by creating sector specific provisions. They should exist alongside with the existing general competition law principles that focus on ex-post control. According to the competition law, “ex-post” means that in case of proof that operators misuse their market power, adequate obligations could be imposed. Contrary to that, the system of sector specific regulation enables the imposition of remedies “ex-ante” solely in case that a dominant position exists.

The ONP-Package was composed of two kinds of directives: the liberalization and harmonisation directives.

The liberalization directives were intended to end specific and exclusive rights previously granted to public undertakings and to enable that any operator can provide telecommunication services. The institutions which supervise the sector should be created as national independent regulatory authorities (NRAs) with the task to establish objective, non-discriminating and transparent conditions for all operators. The areas covered are e.g. licences, network access and interconnection.

The second form of directives – the harmonisation directives – were to secure that the goals and principles of the liberalization directives were achieved in all Member States of the European Union in a harmonized way. Main principles were “open network access” (ONP), the concept of significant market power and the differentiation of the regulation level between mobile and fixed networks. The concept of significant market power covered the essential question of market power and possible related consequences. Finally, the ONP-terms wanted to achieve an open and efficient access to public telecom networks and services, as well as their efficient use.

Main idea of ONP significant market power concept is:

To set up provisions that regulate the way of how to define market power (the main question is: Which markets are relevant?) and possible related remedies as their consequence. In case a dominant operator could be defined, ex-ante obligations needed to be imposed as a regulatory intervention.

2.2. In Detail: The New Regulatory Framework (NRF) of 2002

By introducing the New Regulatory Framework (NRF) of 2002, the European Commission first of all wanted to restructure the whole legal basis by bringing the existing directives down to only five directives. The four relevant directives for electronic communication services were:

·Framework directive

·Access directive

·Universal service directive

·Authorisation directive

Beside these directives, the Regulation on unbundled access to the local loop laid down the provision for unbundling.

The NRF package for sector specific regulation for electronic communications was characterised by simplification and harmonisation of the legal framework, the principle of technological neutrality (i.e. no technology should be treated in another way than any other technology), flexibility in regulatory interventions and an increase of rights of the European Commission vis-à-vis the independent NRAs. Beside the four directives, substantial legal provisions e.g. those concerning market definition or market analysis were laid down in recommendations or guidelines at the European level, which has legal implications in the Member States.

The main idea of the NRF package is:

Introducing a first step of bringing the sector specific legal framework closer to general competition law principles, with a focus on the market power concept.

3. THE DEVELOPMENT OF THE MARKET ANALYSIS PROCESSES

The market analysis process is an essential pillar for enabling competition. Therefore, a more detailed description could be helpful.

Looking at the market analysis process, the substantial question is how to define the relevant product market and relevant geographic market. This implies exploring how and in what way the markets are analysed and to find out what the appropriate remedies for operators with significant market power (SMP) are. The approach of the ONP- and NRF-Package differs substantially in that aspect. The following two chapters will describe the goals behind the two systems:

3.1. The market analysis process under the ONP-Package of 1997

In order to achieve the opening of the monopolistic telecom markets and to enable competition in these markets, specific obligations for undertakings with significant market powers (SMP) needed to be implemented.

The basis of the market analysis process was a two-step approach:

In compliance with the EC directive 97/33, the first step was to clarify market definition and SMP designation by asking the question: “Which operator has more than 25% in the relevant product market?” The area for which the licence (e.g. fixed, mobile) was granted defined the relevant geographic market. In case the operators with less than 25% market share were designated as operators with SMP – the NRAs needed to prove further criteria. These are e.g.: the possibility to influence market conditions, the control of access to consumers and access to financial resources.

The predefined relevant product market according to the EU-directives were

·Fixed voice telephony market (& infrastructure)

·Mobile market (wholesale)

·Interconnection market

·Leased line market

In a second step, according to directive 97/33/EC and its Annex I, the regulatory measures were imposed. In fact all possible regulatory remedies – according to the EU-directives – needed to be imposed. The remedies were

·Network access,

·The principle of non-discrimination,

·The publication of a reference interconnection offer (RIO),

·The principles of transparency and cost orientation,

·Separated accounts,

Service obligation.

Figure 1. The practical ONP-market analysis process in Austria

In Austria, for example, the starting point for the whole market analysis process was an operator request for a regulatory decision (operators can request such decision only if they have failed to reach a private agreement with another operator through negotiation). On the legal basis, necessary data was collected for the 4 relevant markets, providing the foundation for defining an SMP position. In case the 25% market share threshold was reached, all regulatory remedies (as described above) were imposed by the regulatory authority. In case the market share was below the 25% no remedies were imposed.

The main idea of the ONP market power concept is:

A “4 market dogma” and a two-step “Black and White approach”: In case the 25% market share threshold was reached, all listed remedies were imposed together (no selection of specific ones).

3.2. The Market Analysis Process under the NRF-Package of 2002

The market analysis process under the NRF-Package was the next step to follow in 2002. Three main regulatory goals – as laid down in the framework directive – should be achieved. They include principles like enhancing competition, the development of the internal market and fostering the interests of the European citizens. A description of these three regulatory goals as well as possible remedies is defined in the framework directive.

The NRF-Package 2002 and the new concept of market power can be summarised as “dependant on the needs”. In case of the need for eliminating a deficit in competition, the relevant market regulatory intervention is to have a precise and focused approach. Contrary to the ONP-Package – which was characterized by the “4 market dogma” and the “Black and White approach” – the NRF-Package enables the regulatory authority to choose the appropriate remedy out of a toolbox. The NRA may selectively choose the remedies, which could be imposed on SMP operators according to determined competition problems or according to the level of competition in the specific markets. The framework also introduced a substantial extension of rights (veto rights) for the European Commission. With its new veto rights the European Commission is able to intervene into regulatory decisions of the independent NRAs. Furthermore, a National and European-wide consultation process was created to consider all comments of interested parties and other NRAs in order to increase the transparency of the market analysis process.

The 2002 concept of any regulatory intervention bases on a three-step enquiry. The first step is to define the relevant product and geographic market by asking the question: “Which markets are relevant and how are these markets defined?” The European Commission gives an answer in its market recommendation. Although recommendations from the European Commission are not legally binding formally, they are – more or less –transformed into national law (e.g. in Austria it is the market regulation). The main innovation of the framework was that the relevant markets according to the NRF-Package 2002 were defined on the basis of competition law principles. This was the first step in bringing the sector specific framework further in compliance with general competition law.

Figure 2. ONP- & NRF relevant product markets

In the second step the relevant markets needed to be analysed by asking: “In which markets does effective competition exist?” In case that the NRA comes to the conclusion that no effective competition exists at least one operator has to be designated as having SMP. The framework directive and SMP guidelines of the European Commission served as the legal basis for that step and they define relevant SMP criteria. The criteria need to be taken into account when analysing the relevant market.

Figure 3. SMP criteria

Finally, in the third step at least one appropriate regulatory remedy has to be imposed on SMP operators. The challenging question that needs to be answered is: “What are the appropriate measures for eliminating competition problems effectively?”

Figure 4. Possible remedies

Figure 5. The practical NRF-market analysis process in Austria

Figure 5 describes the market analysis process in Austria and gives an illustrative example of how complex, time- and resource consuming the whole process became. As set down in the Telecom Act, the process starts automatically every second year (other EU Member States do not have a comparable obligation to start their market analysis processes). Usually the NRA in Austria follows the market recommendation of the European Commission (without defining additional markets) with its predefined relevant product markets (Figure 2) and therefore does not need to collect data before analysing the markets. By using market analysis, the NRA is able to prove if effective competition does or does not exist in the relevant market. In case that competition already exists in the market, the pre-notification process with the European Commission can start. In case there is no competition, the determination of SMP operator/s follows as the next step. Appropriate measures from the “tool-box” need to be identified in order to enable competition in the future. The National and EU consultation process follows before the final decision can be drafted. In case substantial comments occur, they need to be taken into account by the regulatory authority when finalising the decision.

The main idea of the NRF-Package is:

To set up a limitation on regulatory interventions to markets characterised by ineffective competition. The implementation of the new market power concept consists of a three-step approach: 1. Defining the relevant markets, 2. analysing them and defining SMP and 3. finally imposing appropriate measures to achieve effective competition.
A veto right of the European Commission was newly introduced in regard to the market definition and market analysis.

4. THE IMPLEMENTATION OF THE NRF MARKET POWER CONCEPT IN AUSTRIA

The following example of Austria describes the process. It is intended to give an idea of how the NRF market power concept could be transposed into national law and into regulatory practice. Nevertheless it is only one example and many other approaches are possible.

Figure 6. The implementation process of the NRF market power concept demonstrated by the example of Austria

The figure described above outlines the whole process starting from the NRF-Package to the final regulatory decision in the Member States. In Austria, several steps of implementation were needed.

The process started with the requirement to transpose the national legal basis of the EU market analysis process. The four relevant European directives (Framework-, Access-, Universal service- and Authorisation-Directive) were implemented into the national law. The directives arranged for the regulatory authority RTR to be entitled to define the relevant product and geographic markets. This was legally done by regulation in compliance with the Austrian Telecom Act. The Austrian Telecom Act also empowered the regulatory authority Telecom-Control-Commission (TKK) to decide upon an SMP position and to impose appropriate remedies. Legal transposition from the New EU Framework into the amended new national Telecom Act (TKG 2003) required 16 months.

The operational implementation of the market analysis process formally started with the relevant market regulation (TKMVO 2003), which defined 17 relevant telecommunications product and geographic markets. Furthermore, it provided legal basis for data collection which required around 300 companies to contribute. Depending on the complexity of the relevant product market, this single process took several months.

In the next step, the draft decisions on SMP status as well as on proposed remedies were consulted on both national and international level. Although criticised by the European Commission, the national and international consultations ran in parallel in Austria, in order to avoid further delays in the whole process. In case no veto of the European Commission on the market definition and SMP designation was raised, all comments were evaluated. Finally, the decisions were drafted and adopted by the regulatory authority TKK. Although Austria was one of the most efficient countries in the European Union, the operational process lasted approximately 30 months for all 17 markets.

Summing up, it can be stated that the market analysis is an ongoing learning process for the NRA and contributing operators. The first round under the NRF was a complete change compared with the preceding ONP framework. It takes time to gain the expertise to manage this new process. Due to the practical experiences already gained, the duration of the next market analysis can be reduced.

5. SUMMARY

The ONP-Package created a sector specific market power concept characterised by asymmetric and ex-ante obligations for operators with SMP. With its “4 market dogma” and the “Black and White approach” in terms of market definition and regulatory interventions it was simpler and more efficient for the NRA to open the monopolistic markets.

The NRF (after five years of regulation and market development) aims to focus on regulatory interventions for markets with ineffective competition only. Therefore, the market power concept has been developed into an extended three-step approach. Finally, in order to achieve effective competition appropriate remedies are imposed on SMP operators. As a consequence, the whole market analysis process has become more complex and resource-intensive.

One essential question that remains is “Which of the two frameworks should be transposed into the national law to enable competition in monopoly characterised markets?”

Both approaches can be found in the European Union. Romania, for example, has already implemented the NRF, whilst Bulgaria has transposed the ONP framework first. Both ways can be argued.

The approach of implementation has to be carefully scrutinised before deciding, and national circumstances (e.g. market status, efficiency of enforcing regulatory decisions) need to be taken into account. A mixed approach, which includes ONP provisions as well as NRF provisions, could generate advantages.

As regards the market power concept, the implementation of the ONP framework provisions could easily achieve the initial goal of opening monopolistic market structures. The ONP framework already provides the NRA with the necessary regulatory tools for creating objective, non-discriminating and transparent conditions for all operators. Due to the reduced market analysis process – with its four relevant markets and the predefined remedies – the NRA would first gain experiences in data collection, market analysis and imposing remedies. The whole process would be shorter and less complex than according to the NRF.

In parallel, provisions from the NRF can be transposed into the national law. For example the concept of general authorisation, which enables the operators to access telecom market without any entry barriers.

Although the selection of the implementation approach and the implementation itself are challenging, various experiences and benchmarks already exist in the EU. Countries that are willing to implement the EU standards for the telecommunication sector could use the existing basis.

Useful links

The ONP framework documents,
http://ec.europa.eu/archives/ISPO/infosoc/telecompolicy/en/harmony.htm
The NRF framework documents,
http://ec.europa.eu/information_society/topics/telecoms/regulatory/new_rf/text_en.htm
Implementations reports of the European Commission
http://ec.europa.eu/information_society/topics/telecoms/implementation/annual_report/text_en.htm
http://ec.europa.eu/information_society/policy/ecomm/implementation_enforcement/index_en.htm
Austrian Regulatory Authority RTR, www.rtr.at

Author

Dr Stefan Köhler has gained in-depth telecom expertise by working in telecommunications for 8 years. Besides his telecom expertise, he is skilled in project- and process-management with a certificate from IPMA (Level-C).

Currently, he works as consultant and trainer for the European Commission, ITU and National Regulatory Authorities in telecommunication and project- and process-management.

Prior to working for the Austrian Regulatory Authority (RTR) in the CEO´s office as Director of the International Relations and Project Management Office,

Dr Köhler served as expert for the Technical Regulatory Department of Telekom Austria. For UPC Telekabel/Priority Telecom Austria he led the Regulatory Affairs & Carrier Relations Department.

mailto: s_kl@gmx.at

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