Liberalisation and regulation in the telecommunication sector: Theory and empirical evidence

Week 4

The European Regulatory Framework for the Telecommunication Sector: Main Issues and Current Trends

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Overview of presentation

Regulatory aspects of EC policy. Main legislative measures in relation to: Opening up of markets Open Network Provision Licensing

Τhe New Regulatory FrameworkCase Study

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Opening up of markets Legislative measures are introduced after

consultation with interested parties and the publication of Green Papers

Opening up of markets in Terminal Equipment (Directive 88/301/EEC) Services other than voice telephony (Directive

90/388/EEC) Satellite services and equipment (94/46/EEC) Cable TV networks carrying liberalised telecom services

(other than voice telephony) (Directive 95/51/EEC). Led also to Dir. 99/64/EC addressing the problem of cross-ownership of telecom and Cable TV networks by an incumbent in the same market.

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Opening up of markets (cont’d) Mobile communications (Directive 96/2/EC).

Required early liberalisation in infrastructure building, the right for interconnection, and licenses for DCS 1800 issued from 1/1/1998.

Public Voice Telephony and Infrastructure (Directive 96/2/EC) Telecom markets should fully open by 1/1/1998 (transition

periods allocated to certain M-S) Restriction on use of alternative infrastructure for services

other than voice telephony lifted by 1/7/1996 Provisions for interconnection agreements and for

safeguarding universal service Special case: Voice over Internet (Notice of 1/1/1998)

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Open Network Provision (ONP)ONP Framework Directive (90/387/EEC):

stressed the need for harmonisation measures.

Revised ONP Directive (97/51/EC) called for structural separation between the regulator and the Tos

Specific ONP Directives on Leased Lines (92/44/EEC) revised in 1997

(97/51/EC) Voice Telephony (95/62/EC) revised by Dir 98/10/EC Interconnection (Directive 97/33/EC) Also Recommendations for ISDN and PSDS (Public

Switched Digital Service)

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Application of ONP principles to Leased lines

Purpose: To ensure a minimum set of analogue and digital leased

lines up to 2 Mbps with harmonised technical characteristics

Also availability of info on technical characteristics, tariffs, supply, and usage conditions

establishment of common ordering and billing procedures Cost orientation of tariffs Dispute resolution procedures in place

Revised Directive called for a mandatory set of leased lines to be provided by Operators with Siginificant Market Power (SMP) The first use of SMP…

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Application of ONP principles to Voice Telephony

It addresses detailed service issues: definition of targets for supply time and quality

of service at national level provision of advanced facilities discounts, low-user schemes, and other tariff

provisions availability of itemised billing directory services public payphones provisions for the disabled and people with

special needs

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ONP principles to Voice Telephony (cont’d)

The revised Directive 98/10 further defines: A common set of parametres and

measurement methods for monitoring quality of service

Definition of affordability by Member States Regular reports on tariff evolution throughout

the Union (Reports on the Implementation of the EU Electronic Communications Regulatory Package)

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Application of ONP principles to Interconnection

Interconnection Directive It describes a framework for action not specific

rules Organisations specified in Annex I and have

SMP should provide interconnection upon demand

Definition of the term ‘SMP’ – Significant Market Power

Requirement to define which Public Network Operator(s) PNOs are responsible for Universal Service

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Interconnection Directive (cont’d)

Obligations of PNOs with SMP Tariffs should be reasonable, non-discrimant, and

transparent Timely provision of information to new comers, so that

they are in a position to negotiate Timely information regarding changes in network

architecture Publicise interconnection agreements (except parts

related to commercial policy practices) Cost-based interconnection tariffs (not applicable to

mobile operators)

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Interconnection Directive (cont’d)

Publication of a Reference Interconnection Offer (RIO)

Transparency in accounting systems Accounting separation between activities and

adoption of appropriate costing methodology, Recommendation of 8/4/1998 recommends disaggregation into the following business lines:

Non telecom-related activities Telecom-related activities

• Retail• Core network• Local access network• Value-added services• Other activities

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EC Recommendation C(97) 3148 - Part I

Proposes the use of Βest Current Practices

Ιn order to simplify comparisons, the approach taken in the Recommendation is to examine the interconnection charges to the incumbent's fixed public network under three different scenarios: 1.'Local' level interconnection A call handed over for termination at the local level represents interconnection at (or nearest to) the local exchange to which the destination user is connected and represent the lowest level of interconnection charge which is available in a given country. 2."Single transit' interconnection, (metropolitan level) Single transit interconnection allows access to all customers in a metropolitan region, such as a large city. This is likely to be the level of interconnection most often demanded by new entrants in a national market. 3.'Double transit' interconnection ( 'national' level) Double transit interconnection allows access to all customers on the incumbent's network ('national' level' interconnection). A call handed over at this level normally incurs the highest level of interconnection charge.

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Licensing

Directive 97/13/EC general and individual licences prohibition of any limitation in the

number of new entrants harmonisation licensing procedures and

requirements Set up of one-stop-shopping procedures

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Τhe New Regulatory Framework New Regulatory Framework for electronic

communications infrastructure and associated services

Regulation of the European Parliament and of the Council on Unbundled Access to the Local Loop (final text, adopted by Council 5 December 2000, incorporating EP amendments)

Directive of the European Parliament and of the Council on common regulatory framework for electronic communications networks and services

Directive of the European Parliament and of the Council on universal service and users' rights relating to electronic communications networks and services

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Cont’d

Directive of the European Parliament and of the Council on access to, and interconnection of, electronic communications networks and associated facilities

Directive of the European Parliament and of the Council concerning the processing of personal data and the protection of privacy in the electronic communications sector

Directive of the European Parliament and of the Council on the authorisation of electronic communications networks and services

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Cont’d Basic directives and decisions

Directive (2002/21/EC) on a common regulatory framework Directive (2002/19/EC) on access and interconnection Directive (2002/20/EC) on the authorisation of electronic

communications networks and services Directive (2002/22/EC) on universal service and users' rights relating

to electronic communications networks and services Directive (97/66/EC) on the processing of personal data and protection

of privacy (up to 30/10/2003) Directive (2002/58/EC) on privacy and electronic communications

(from 31/10/2003) Directive (2002/77/EC) on competition in the markets for electronic

communications services Decision (2004/641/EC) amending decision (2002/627/EC) establishing

the European Regulators Group for Electronic Communications Networks and Services

Decision (676/2002/EC) on a regulatory framework for radio spectrum policy in the European Community (Radio Spectrum Decision)

Decision (2003/548/EC) on the minimum set of leased lines with harmonised characteristics and associated standards referred to in Article 18 of the Universal Service Directive

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Cont’d

Other legal instruments Decision (2002/627/EC) establishing the European Regulators Group

for Electronic Communications Networks and Services Decision (2002/622/EC) establishing a Radio Spectrum Policy Group Regulation (2887/2000/EC) on unbundled access to the local loop Directive (91/287/EEC) on the frequency bands to be reserved for the

coordinated introduction of public pan-European cellular digital land-based mobile communications in the Community

Directive (90/544/EEC) on the frequency bands designated for the coordinated introduction of pan-European land-based public radio paging in the Community

Directive (87/372/EEC) on the frequency bands to be reserved for the coordinated introduction of public pan-European cellular digital land-based mobile communications in the Community

http://europa.eu.int/information_society/topics/ecomm/useful_information/library/legislation/index_en.htm

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Principles

Major principles underlying EC liberalisation measures: removal of special or exclusive rights objective, non-discriminatory and transparent conditions for granting of

licences and access to networks breaking of “monopoly bottlenecks” e.g. local loops, obligation for

fairness in wholesale services market. universal service provisioning

The old Regulatory Framework:The old Regulatory Framework: The ONP Principle (OPEN NETWORK PROVISION), access and interconnection rights for licenced operators at wholesale, cost-based tariffs imposed by NRAs to ex-post ex-post regulation of incumbent operatorsregulation of incumbent operators.

The new Regulatory Regime:The new Regulatory Regime: Competition Law. Definition, Analysis and Remedies of Markets by NRAs, ex-ante regulation of SMP ex-ante regulation of SMP (Significant Market Power) holders.(Significant Market Power) holders.

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Case Study: Call termination

Call origination and termination On net Off net

New regulatory framework on 25/7/2003 NRAs carry reviews of competition in communication

markets The case of Mobile Operators

Services sold and purchased by communications providers in order to complete end-to-end calls.

Wholesale voice calls terminated on individual mobile networks.

Wholesale 2G voice call termination provided to the subscribers of “3”

The definition of a new Market

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Market Review

Definition of the relevant market or markets

Assessment of competition in each market. Is there any company with a SMP?

Assessment of the options for regulation and proposal or obligations.

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Existing Regulation 1998 Competition Commission

Vodafone & Cellnet (now O2) 11.7 pence per minute ceiling (Retail Price Index) RPI-9% reduction for two years until March 2002

Oftel 2002 Termination charge reduction by RPI-12% each year for four years until March 2006

for all four mobile operators, Vodafone, O2, Orange and One 2 One (now T-Mobile). The operators rejected the proposed licence modification.

February 2002 the director modified the licences of Vodafone and O2 to extend the existing controls of RPI-9% on termination charges for one year to March 2003.

December 2002, Competition Commission Report Termination charges of the four mobile operators operate against public interest 30%-40% above a fair charge Fixed to mobile and off net mobile too expensive High termination charges deters people from calling mobiles High off net usage customers unfairly subsidise customers who mainly receive or

make on net calls Recommended

15% reduction O2 and Vodafone should further reduce RPI-15% and for each of the subsequent years to

March 2006 Orange and T-Mobile should reduce charges by RPI-14% and for each of the subsequent years

to March 2006

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Consultation Procedure

Relevant market definition Market analysis, assessment of SMP Detrimental effects arising from SMP Regulation Options Proposed charge controls Consultation Final plan of the Regulation documents

Defining the market Analysis of the market Regulatory obligations for the players

Basic principles of LRIC for the market and the services

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Defining a Market

All the services that can be substitutes based on Characteristics Price Usage Competition Existence of Demand and Supply

SSNIP Test Critical loss analysis test Supply Substitution Demand Substitution Common pricing 3G Region Market

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Conclusions

Six Separate Market Wholesale voice call termination provided to the

subscribers of “3” Wholesale voice call termination provided by

Inquam Wholesale voice call termination provided by O2 Wholesale voice call termination provided by

Orange Wholesale voice call termination provided by T

Mobile Wholesale voice call termination provided by

Vodafone

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Market Analysis, Assessment of SMP

SMP, Significant Market Power Potential Competition. Even in a 100% monopolistic market.

Low entry barriers Alternative technological solutions Structural changes can effect the negotiation position.

Countervailing customer power The end customers The fixed operators Shares:

BT 26,4% Other fixed 14,8% Off net 18,6% On net 40,2%

Evidence of Operators behavior Price trends Excessive pricing, discriminatory pricing, price squeeze Actual price Benchmarking Excessive profits

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Detrimental effects arising from SMP

Is Ex-ante Regulation a solution? Entry barriers The market over time is not competitive Is competition effective?

Negative impact of high prices Distortion of the customers choices The fixed operators can not compete with the mobile operators equally for voice

services The fixed operators can not compete with the mobile operators equally for

corporate networks The mobile operators offer lower prices for end to end on-net call service than

the call termination service The mobile operators points

Competition in the end customer level. The prices are getting lower. Redistribution of cost. (“Swings and roundabouts” or “Waterbed effect”) Customers welfare increases as more people use mobile phones.

The Cost for non efficiency of the market being paid from the non customers of the mobile operators.

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Regulation Options - Proposed charge controls (1) Alternative solutions

Receiving Party Pays Call Back Call divert Mobile Virtual network operators with multiple roaming

agreements Multiple SIMs GSM Gateways Trying termination charges to competitively supplied services Delivering a call further into the terminating network

Obligations the Director can impose: The provision of network access No undue discrimination Transparence Cost Orientation Cost recovery, charge controls Cost accounting and accounting separation

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Regulation Options - Proposed charge controls (2) Options

A. No ex ante regulation B. Requirement to secure transparency through publication of prices and prior notification of price

changes C. B + transparent the charges, terms and conditions through publication of a reference offer, a

requirement to provide mobile voice call termination on far and reasonable terms, not to unduly discriminate in the provision of the service and imposition of charge controls.

D C + requirement to maintain cost – accounting systems, to set prices on the basis of Forward looking LRIC, separate account systems

Director Initial View MNOs 3G in Option A MNOs 2G in Option C

Charge Control Final target level How the charges should be brought down to this fair target charge. Ramsey prices Network externalities ….Resulting to a cost based pricing LRIC + EPMU

What may be the results? Mobile operators. The medium-term nature permits a time for restructure. Mobile customers. A higher price may occur based on the level of competition Fixed operators and customers. Lower costs for both. A better positioning for the corporate networks

market.