1. 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

2. 14/06/2005Β. Merekoylias2 Overview of presentation Regulatory aspects of EC policy. Main legislative measures in relation to: yOpening up of markets yOpen Network Provision yLicensing zΤhe New Regulatory Framework zCase Study

3. 14/06/2005Β. Merekoylias3 Opening up of markets zLegislative measures are introduced after consultation with interested parties and the publication of Green Papers zOpening up of markets in yTerminal Equipment (Directive 88/301/EEC) yServices other than voice telephony (Directive 90/388/EEC) ySatellite services and equipment (94/46/EEC) yCable 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.

4. 14/06/2005Β. Merekoylias4 Opening up of markets (contd) zMobile communications (Directive 96/2/EC). Required yearly liberalisation in infrastructure building, ythe right for interconnection, and ylicenses for DCS 1800 issued from 1/1/1998. zPublic Voice Telephony and Infrastructure (Directive 96/2/EC) yTelecom markets should fully open by 1/1/1998 (transition periods allocated to certain M-S) yRestriction on use of alternative infrastructure for services other than voice telephony lifted by 1/7/1996 yProvisions for interconnection agreements and for safeguarding universal service ySpecial case: Voice over Internet (Notice of 1/1/1998)

5. 14/06/2005Β. Merekoylias5 Open Network Provision (ONP) zONP Framework Directive (90/387/EEC): stressed the need for harmonisation measures. zRevised ONP Directive (97/51/EC) called for structural separation between the regulator and the Tos zSpecific ONP Directives on yLeased Lines (92/44/EEC) revised in 1997 (97/51/EC) yVoice Telephony (95/62/EC) revised by Dir 98/10/EC yInterconnection (Directive 97/33/EC) yAlso Recommendations for ISDN and PSDS (Public Switched Digital Service)

6. 14/06/2005Β. Merekoylias6 Application of ONP principles to Leased lines zPurpose: yTo ensure a minimum set of analogue and digital leased lines up to 2 Mbps with harmonised technical characteristics yAlso availability of info on technical characteristics, tariffs, supply, and usage conditions yestablishment of common ordering and billing procedures yCost orientation of tariffs yDispute resolution procedures in place zRevised Directive called for a mandatory set of leased lines to be provided by Operators with Siginificant Market Power (SMP) yThe first use of SMP…

7. 14/06/2005Β. Merekoylias7 Application of ONP principles to Voice Telephony zIt addresses detailed service issues: ydefinition of targets for supply time and quality of service at national level yprovision of advanced facilities ydiscounts, low-user schemes, and other tariff provisions yavailability of itemised billing ydirectory services ypublic payphones yprovisions for the disabled and people with special needs

8. 14/06/2005Β. Merekoylias8 ONP principles to Voice Telephony (contd) zThe revised Directive 98/10 further defines: yA common set of parametres and measurement methods for monitoring quality of service yDefinition of affordability by Member States yRegular reports on tariff evolution throughout the Union (Reports on the Implementation of the EU Electronic Communications Regulatory Package)

9. 14/06/2005Β. Merekoylias9 Application of ONP principles to Interconnection zInterconnection Directive yIt describes a framework for action not specific rules yOrganisations specified in Annex I and have SMP should provide interconnection upon demand yDefinition of the term SMP – Significant Market Power yRequirement to define which Public Network Operator(s) PNOs are responsible for Universal Service

10. 14/06/2005Β. Merekoylias10 Interconnection Directive (contd) zObligations of PNOs with SMP yTariffs should be reasonable, non-discrimant, and transparent yTimely provision of information to new comers, so that they are in a position to negotiate yTimely information regarding changes in network architecture yPublicise interconnection agreements (except parts related to commercial policy practices) yCost-based interconnection tariffs (not applicable to mobile operators)

11. 14/06/2005Β. Merekoylias11 Interconnection Directive (contd) yPublication of a Reference Interconnection Offer (RIO) yTransparency in accounting systems yAccounting separation between activities and adoption of appropriate costing methodology, Recommendation of 8/4/1998 recommends disaggregation into the following business lines: xNon telecom-related activities xTelecom-related activities Retail Core network Local access network Value-added services Other activities

12. 14/06/2005Β. Merekoylias12 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.

13. 14/06/2005Β. Merekoylias13 Licensing zDirective 97/13/EC ygeneral and individual licences yprohibition of any limitation in the number of new entrants yharmonisation licensing procedures and requirements ySet up of one-stop-shopping procedures

14. 14/06/2005Β. Merekoylias14 Τhe New Regulatory Framework zNew Regulatory Framework for electronic communications infrastructure and associated services yRegulation 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) yDirective of the European Parliament and of the Council on common regulatory framework for electronic communications networks and services yDirective of the European Parliament and of the Council on universal service and users' rights relating to electronic communications networks and services

15. 14/06/2005Β. Merekoylias15 Contd yDirective of the European Parliament and of the Council on access to, and interconnection of, electronic communications networks and associated facilities yDirective of the European Parliament and of the Council concerning the processing of personal data and the protection of privacy in the electronic communications sector yDirective of the European Parliament and of the Council on the authorisation of electronic communications networks and services

16. 14/06/2005Β. Merekoylias16 Contd zBasic directives and decisions yDirective (2002/21/EC) on a common regulatory framework yDirective (2002/19/EC) on access and interconnection yDirective (2002/20/EC) on the authorisation of electronic communications networks and services yDirective (2002/22/EC) on universal service and users' rights relating to electronic communications networks and services yDirective (97/66/EC) on the processing of personal data and protection of privacy (up to 30/10/2003) yDirective (2002/58/EC) on privacy and electronic communications (from 31/10/2003) yDirective (2002/77/EC) on competition in the markets for electronic communications services yDecision (2004/641/EC) amending decision (2002/627/EC) establishing the European Regulators Group for Electronic Communications Networks and Services yDecision (676/2002/EC) on a regulatory framework for radio spectrum policy in the European Community (Radio Spectrum Decision) yDecision (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

17. 14/06/2005Β. Merekoylias17 Contd zOther legal instruments yDecision (2002/627/EC) establishing the European Regulators Group for Electronic Communications Networks and Services yDecision (2002/622/EC) establishing a Radio Spectrum Policy Group yRegulation (2887/2000/EC) on unbundled access to the local loop yDirective (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 yDirective (90/544/EEC) on the frequency bands designated for the coordinated introduction of pan-European land-based public radio paging in the Community yDirective (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 zhttp://europa.eu.int/information_society/topics/ecomm/useful_infor mation/library/legislation/index_en.htm

18. 14/06/2005Β. Merekoylias18 Principles zMajor principles underlying EC liberalisation measures: yremoval of special or exclusive rights yobjective, non-discriminatory and transparent conditions for granting of licences and access to networks ybreaking of monopoly bottlenecks e.g. local loops, obligation for fairness in wholesale services market. yuniversal service provisioning The old Regulatory Framework: ex-post regulation of incumbent operators 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 regulation of incumbent operators. The new Regulatory Regime: ex-ante regulation of SMP (Significant Market Power) holders. The new Regulatory Regime: Competition Law. Definition, Analysis and Remedies of Markets by NRAs, ex-ante regulation of SMP (Significant Market Power) holders.

19. 14/06/2005Β. Merekoylias19 Case Study: Call termination zCall origination and termination yOn net yOff net zNew regulatory framework on 25/7/2003 yNRAs carry reviews of competition in communication markets zThe case of Mobile Operators yServices sold and purchased by communications providers in order to complete end-to-end calls. yWholesale voice calls terminated on individual mobile networks. yWholesale 2G voice call termination provided to the subscribers of 3 zThe definition of a new Market

20. 14/06/2005Β. Merekoylias20 Market Review zDefinition of the relevant market or markets zAssessment of competition in each market. Is there any company with a SMP? zAssessment of the options for regulation and proposal or obligations.

21. 14/06/2005Β. Merekoylias21 Existing Regulation z1998 Competition Commission yVodafone & Cellnet (now O2) y11.7 pence per minute ceiling y(Retail Price Index) RPI-9% reduction for two years until March 2002 zOftel 2002 yTermination 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). yThe operators rejected the proposed licence modification. zFebruary 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. zDecember 2002, Competition Commission Report yTermination charges of the four mobile operators operate against public interest y30%-40% above a fair charge yFixed to mobile and off net mobile too expensive yHigh termination charges deters people from calling mobiles yHigh off net usage customers unfairly subsidise customers who mainly receive or make on net calls yRecommended x15% reduction xO2 and Vodafone should further reduce RPI-15% and for each of the subsequent years to March 2006 xOrange and T-Mobile should reduce charges by RPI-14% and for each of the subsequent years to March 2006

22. 14/06/2005Β. Merekoylias22 Consultation Procedure zRelevant market definition zMarket analysis, assessment of SMP zDetrimental effects arising from SMP zRegulation Options zProposed charge controls zConsultation zFinal plan of the Regulation documents yDefining the market yAnalysis of the market yRegulatory obligations for the players zBasic principles of LRIC for the market and the services

23. 14/06/2005Β. Merekoylias23 Defining a Market zAll the services that can be substitutes based on yCharacteristics yPrice yUsage yCompetition yExistence of Demand and Supply zSSNIP Test zCritical loss analysis test zSupply Substitution zDemand Substitution zCommon pricing z3G zRegion Market

24. 14/06/2005Β. Merekoylias24 Conclusions zSix Separate Market yWholesale voice call termination provided to the subscribers of 3 yWholesale voice call termination provided by Inquam yWholesale voice call termination provided by O2 yWholesale voice call termination provided by Orange yWholesale voice call termination provided by T Mobile yWholesale voice call termination provided by Vodafone

25. 14/06/2005Β. Merekoylias25 Market Analysis, Assessment of SMP zSMP, Significant Market Power zPotential Competition. Even in a 100% monopolistic market. yLow entry barriers yAlternative technological solutions yStructural changes can effect the negotiation position. zCountervailing customer power yThe end customers yThe fixed operators yShares: xBT 26,4% xOther fixed 14,8% xOff net 18,6% xOn net 40,2% zEvidence of Operators behavior yPrice trends yExcessive pricing, discriminatory pricing, price squeeze yActual price yBenchmarking yExcessive profits

26. 14/06/2005Β. Merekoylias26 Detrimental effects arising from SMP zIs Ex-ante Regulation a solution? yEntry barriers yThe market over time is not competitive yIs competition effective? zNegative impact of high prices yDistortion of the customers choices yThe fixed operators can not compete with the mobile operators equally for voice services yThe fixed operators can not compete with the mobile operators equally for corporate networks yThe mobile operators offer lower prices for end to end on-net call service than the call termination service zThe mobile operators points yCompetition in the end customer level. The prices are getting lower. yRedistribution of cost. (Swings and roundabouts or Waterbed effect) yCustomers welfare increases as more people use mobile phones. zThe Cost for non efficiency of the market being paid from the non customers of the mobile operators.

27. 14/06/2005Β. Merekoylias27 Regulation Options - Proposed charge controls (1) zAlternative solutions yReceiving Party Pays yCall Back yCall divert yMobile Virtual network operators with multiple roaming agreements yMultiple SIMs yGSM Gateways yTrying termination charges to competitively supplied services yDelivering a call further into the terminating network zObligations the Director can impose: yThe provision of network access yNo undue discrimination yTransparence yCost Orientation yCost recovery, charge controls yCost accounting and accounting separation

28. 14/06/2005Β. Merekoylias28 Regulation Options - Proposed charge controls (2) zOptions yA. No ex ante regulation yB. Requirement to secure transparency through publication of prices and prior notification of price changes yC. 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. yD C + requirement to maintain cost – accounting systems, to set prices on the basis of Forward looking LRIC, separate account systems zDirector Initial View yMNOs 3G in Option A yMNOs 2G in Option C zCharge Control yFinal target level yHow the charges should be brought down to this fair target charge. yRamsey prices yNetwork externalities y….Resulting to a cost based pricing LRIC + EPMU zWhat may be the results? yMobile operators. The medium-term nature permits a time for restructure. yMobile customers. A higher price may occur based on the level of competition yFixed operators and customers. Lower costs for both. A better positioning for the corporate networks market.