EU Electronic Communications Regulation Revisited

A few days ago I came across the work of Alexandre de Streel on EU telecommunications regulation, published in the latest issue of the Journal of Telecommunications Policy. In light of the contemporary review of EU regulatory framework, the author attempts a review of the EU policy in electronic communications and provides some powerful insight. What follows are my views and a few personal remarks on the matter, based on the affordementioned study.

First off, the EU telecommunications regulation is composed of the Significant Market Player (SMP) regime and the interconnection clause altogether. Certainly, in the 2003 Recommendation primary attention was focused on the SMP regime as interconnection issues should (and in most of the cases did have) resolve smoothly by market dynamics. SMP regime stems from competition laws principles and i) facilitates competition entry at the first stages of the liberalization, and ii) ensures progressive removal of obligations as competition develops.

Identifying which markets require regulation and what type of remedies are necessary to alleviate entry barriers is a four stage process:

First, European Commission (EC) initiates the regulation process by screening the industry for markets qualifying to regulatory intervention. The 2003 Recommendation identified 18 national markets (11 wholesale and interconnection markets and 7 retail fixed markets). Recent Recommendation (in 2007) reduced addressable markets to 7 (6 wholesale and interconnection markets and 1 retail fixed market). To reach its initial conclusion, EC is using competition law principles (three-criteria-test – TCT , and tests derived from anti-trust policy, e.g. SSNIP)

After EC’s initial screening is complete, National Regulation Authorities (NRAs) are required to use their own experiences and available data from local (national/regional) markets and concur or not on EC’s initial market resolution, accounting for other emerging markets as well. NRAs are also using the same set of tools as EC; Evidently, however, NRAs decision should be more informed since they can consult their National Competition Authorities. However, most of the NRAs did not apply the TCT on the identified markets by EC assuming that EC has already applied the test.

Then, NRAs conduct a market analysis (on the previously identified markets) and conclude whether there exists non effective competition. If so, these markets are selected to excercise regulatory measures on SMP operators, given that non-effective competition is considered to originate from the presense of SMP (allthough this is certainly not always true).

Finally, NRAs have to impose at least one (the least disruptive) remedy to the SMP operators choosing from transparency, non-discrimination, compulsory access, price control, cost accounting or accounting separation. If wholesale remedies are not expected to be sufficient, NRAs are allowed to intervene in retail markets as well.

Outside the liberalization of the telecommunications markets of the member states, EC’s biggest challenge is the harmonization of the regulatory culture within EU. For this EC holds the power to veto the definition of markets (if different from EC’s recommendation) and the market analysis conducted by NRAs. However, EC can only comment on the selection of remedies. EC can also excerise general European law in the form of infringement procedures and anti-trust cases . Finally European Regulators Group (ERG) is established to give the opportunity to NRAs to exchange ideas and best practices.

However, these mechanisms do not enable a common regulatory approach within EU. Regulatory measures differ in member states and intra-market issues remain largely unsolved (e.g. roaming prices). Intra-market issues are of growing importance for the attempted unification of the telecommunications markets within EU, especially when national decisions have network effects to other member states. Another important issue of the current regulatory framework is that even if retail regulation is decreasing, wholesale regulation is expanding substantially and is becoming more complex (fixed bitstream access in 2004, wholesale line rental in 2005, naked DSL access in 2006, international voice roaming in 2007, international SMS roaming in 2008). Consequently, the industry will be very difficult to deregulate eventually. Deregulation is (or should be) within the scope of regulatory processes. Finally, regulatory certainty is a serious issue. In certain cases, NRAs are drifting around 1) protecting the customers, 2) promoting entry and 3) prohibiting the abuse of market power. NRAs also have not yet shaped a firm and clear stance over new emerging markets (e.g. Voice over IP, 3G networks, FTTx networks) as they should.

Four main reasons are identified for the insufficiency of 2003 regulatory framework:

Absense of conceptual allignment: No clear directions on regulation concepts is provided by EC therefore, allowing NRAs to choose independently from the most hads-off to the most hands-on approach (harming harmonization) or even worse, reconsider the approach taken in a later phase (harming market conditions).

Unfortunate allignment of regulation and anti-trust methodologies: Regulation scope and efficiency is reduced because anti-trust methodologies, primarily designed for mature, stable markets are applied to dynamic, changing electronic markets.

Questionable selection of remedies: Most of the remedies applied by NRAs or proposed by EC are behavioural measures used to address structural problems. This is probably what leads to ever complexing regulation.

Inefficient evaluation of NRAs: NRAs incentives were not clearly understood. Over-regulation can be considered a reaction by NRAs to increase their role and activities. Also, NRA are evaluated on static (i.e. prices, level of market concentration) and not on more dynamic criteria (i.e. innovation, investment, consumer benefits, social welfare).

To overcome this series of issues there is a set of improvements to be made in the next EU regulatory framework:

1. Provide insight and attempt to clarify on the regulation concepts (protect innovation possibly by allowing creative monopoly – eg. BT Openreach, protect price competition – most NRA follow this path, promote specific business model entry, promote specific operator or directly offer services – eg. government investment in the emerging market of fiber access)
2. Request from NRA to lay their plans, means and time frame beforehand in order to make evaluation more efficient and allow effective action taking when needed.
3. Change the sequence of the market analysis. Analyze the retail market and if found with problems then evaluate wholesale market and decide on remedies based on the easiness of replicability and inclusivity of the asset
4. Indicate different types of remedies other than the “atomic bomb” of structural separation (e.g. wholesale bill and keep , attempt settlements between operators to increase incentives compatibility)
5. The evaluation of NRA should not only be based on static indicators but on dynamic indicators as well.
6. Establish an increased role for a central european authority. A centralized entity for telecom regulation certainly comes with a series of benefits (harmonization, scale economies, removal of political pressure, reduce NRA work load) and drawbakcs (beraucracy: additional adminstrative layer, distant from the market, national market conditions are very different).
7. Improve coordination between NRAs, EC and national courts