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.

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’.

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.