Telecoms regulation faces overhaul

Agreeing on a common European Union (EU) regulatory framework for the telecommunications industry has proved a long, bargain-intensive process. Hammering out an acceptable compromise required so many changes to the proposal that even lawyers admit to having difficulties keeping up with this complex legislation.


Opinion: Edward Pitt, Theodore Goddard

Basic competition law is insufficient to control all anti-competitive behaviour in the telecoms market, says Edward Pitt, partner in Theodore Goddard's competition practice. He argues that specific rules will always be needed because of the very structure of the market.

  • Telecoms networks have a natural tendency to becoming oligopolies (dominated by a small number of players) because the cost of building new networks is very high. But the concept of oligopoly is still developing under normal competition rules and the threshold at which a market is deemed oligopolistic is vague and unclear. The most effective way to clarify this is in telecoms-specific rules.
  • Because telecommunications is a networked industry that requires operators to depend on each other for the delivery of customers' traffic, there has to be a mechanism in place to ensure agreement between interconnecting operators. Regulation is needed to set out effective dispute resolution procedures.
  • Normal competition rules cannot provide the detailed and fair price control required in the telecoms market. It is rare for high prices to be prohibited under normal competition rules – mainly because the price needs to be very high for dominant players to be prosecuted. Many of the recent price issues surrounding call costs and interconnection (how call charges are divided between the various carriers) had to be resolved by telecoms-specific regulation because there are no relevant tools provided under competition law.
  • Many of the very specific decisions taken in the telecoms sector, such as agreement on common standards such as interconnection interfaces, require very detailed investigation and public consultation, which are not adequately provided for under competition law.
  • Eliminating the unpredictability of NRA and government decisions within the telecoms sector is also crucial to fostering competition and fairness. Only telecoms-specific regulation can safeguard against arbitrary decisions by NRAs in different EU countries."


Nevertheless, the resulting European electronic communications regulatory package, passed by the European Parliament in December 2001, represents a “massive reform of the entire legal framework for telecommunications in Europe” says Per Haugaard of the European Commission’s directorate for enterprise and information society. Spokesmen for the European Commission (EC) are prone to hyberbole, but legal experts agree that the package heralds significant changes to the existing regulatory framework.

The aims of this regulatory overhaul, initiated in 1999, are to harmonise conditions across the EU and to simplify and codify market rules. This, so the thinking goes, will ensure consistent regulation and uniform conditions for the industry which, in turn, will drive competition and investment in the sector. But, say lawyers, there are still uncertainties over how regulators will interpret and implement the new measures.

Underpinning this package is a policy espoused by the EC and member states to peel back telecom-specific regulations and let the sector loose under competition law. But, says Edward Pitt, partner in Theodore Goddard’s competition practice: “A lot of people, ministers included, have exaggerated expectations as to what competition law can do.” [see box]

Nonetheless, the four directives in the package – framework, authorisation, access and users rights – are aimed at managing this transition. [see box]

Significantly, moving toward competition law will raise the threshold at which the regulatory burden on operators increases. Under existing rules, operators are subject to tougher regulation and obligations when they are designated as having significant market power (SMP). The criteria for determining SMP differ widely across Europe, because of the various ways that member states interpreted, implemented and added to the principle. But they are invariably complex, taking into account many factors, none of which has decisive weight. Market share, revenues, subscriber numbers and regulators’ subjectivity are all part of the unpredictable equation.

The threshold at which SMP status and obligations come into play is expected to rise as members of the EU finalise guidelines over the next few months. These will be more in line with the less burdensome competition law concept of dominance as the EU moves toward a lighter regulatory ‘touch’.


The European electronic communications regulatory package

The European electronic communications regulatory package currently consists of four directives, a regulation and a decision. Drawing these distinctions is important as each is granted a different legal status at the European and member-state level.

The framework directive clarifies the relationship between the Commission and the national regulators. In particular, it defines the regulators' obligations and sets out the right to appeal against their decisions. It will later include guidelines on how the various telecoms markets should be defined.

The authorisation directive sets parameters for how member states should charge for the use of radio frequencies. The access and interconnection directive aims to ensure that operators make facilities, such as masts, and their networks available to each other. The users' rights directive requires operators to provide universal services, such as free calls to the emergency services and pay phones.

The package also includes a decision on the use of radio spectrum. This calls for governments to co-ordinate their approach to allocating radio spectrum. It is seen as a direct response to the 3G auction debacle, which saw each member state adopt radically different ways of allocating the spectrum.

A regulation on unbundling the local loop, requiring member states and the incumbent telecoms operators to open up their networks to new Internet providers, came into immediate effect when it was passed in January 2001. And the Commission is already showing that it will not tolerate complacency. Erkki Liikanen, the telecoms commissioner, has given Germany, Portugal and Greece formal notice that if they do not comply with this local loop legislation, he will take them to the European Court of Justice.

A fifth directive, on data protection, has proved to be the most contentious to date. It is still being shuffled between the various European institutions, although a final agreement is expected in the first half of 2002.



Balancing this is the fact that some network operators could face more regulation under the ‘collective dominance’ or oligopoly concept within competition law. This is of particular concern to mobile operators. Under the current regime, mobile operators enjoyed little regulation and even some carriers with huge client bases have not been designated as having SMP. But this could all change if they are deemed to be part of an oligopoly.

The EC’s recommendation, which was expected at the end of January 2002, on how to define a market under competition law will be critical in determining whether mobile operators have to grapple with tougher regulation. This has tempered operators’ enthusiasm for the package.

Another important requirement of the package is that member states, which will have a further 15 months to transpose the directives to national law, must ensure that national legal systems allow operators to appeal against regulatory decisions. And the EC now has veto powers – considerably watered down by the lobbying and bargaining process – over regulators’ decisions on pan-European and internal market issues.

The EU regulatory package does accord greater powers to the regulators and gives them greater discretion as to which they use, the most powerful tool being price control. But, says David Dillon, communications lawyer at Brussels firm Squire, Sanders and Dempsey, while the powers of the regulators have been broadened, “there is currently no guidance [from the EU] over when to apply them.”

There are even questions over whether regulators have the experience to apply competition law. Consulting with national competition authorities, experts in implementing European competition law, would seem the most sensible way to cope with this new dimension. But in some countries, notably Italy, the regulator and national competition authority simply do not get on – and power struggles are inevitable.

Telecoms operators have, by and large, welcomed the move toward a harmonised framework based on less onerous competition law, particularly as many harbour pan-European ambitions. But whether these measures stimulate competition and encourage investment, as the EC claims, is still uncertain.

Pitt of Theodore Goddard warns: “It’s not the package alone that will affect investment levels, it is also the way the principles set out in the package are applied by the national regulatory authorities.” And, given the current market turbulence, it will take much more than legislative clarity to make the telecoms market attractive to investors and new entrants.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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