The regulation of competition under the Austrian Telecommunications Act 2003 („TKG 2003“) by Stephan Polster 6 th AIJA Winter Seminar January 2005

2 Content  Principles  Market definition  Assessment of dominance (“SMP”)  Imposition of remedies  Case study: Mobile voice call termination market

3 I. Principles

4 Principles Market analysis (sec 35 to 37 TKG 2003) The NRA analysis communications markets in three stages:

5 Principles Market definition Which markets are eligible for regulation? Analysing the competitive structure of the defined markets. Effective competition versus operator(s) with significant market power.  Identifying possible competition constraints on the relevant markets;  Defining, evaluating and imposing proportionate and justified remedies. Assessment of significant market power (SMP) Imposition of remedies

6 Principles Harmonisation with methodoligies under general competition law  Gradual adjustment of telecoms regulation to general competition law (for instance: definition of SMP)  But: Parallel applicability of sector specific regulation and competition law remains –ex ante versus ex post assessment –different authorities (NRAs and competition authorities) –different (contradicting) decisions possible (for instance Commission Decision COMP/C-1/ et al, “Deutsche Telekom AG”)

7 Principles Principle of proportionality (sec 34 TKG 2003, Art 8 para 1 Framework Directive)  Regulatory measures should be the minimum necessary to meet the policy objectives (“restore effective competition”)  Consequences –Regulation only if policy objectives can not be achieved by market forces and competition law –Removal of existing obligations, if they are no longer necessary

8 Principles Supremacy of regulatory intervention on wholesale markets  Regulation of the retail level is only admissible, if the competition problem can not be solved through regulatory measures on the wholesale level

9 Principles Consultation and co-operation  Relationship between National Regulatory Authority (“NRA”) and European Commission –Consultation procedure (Art 6, 7 Framework Directive; sec 129 TKG 2003)  Veto powers of European Commission –For Market definitions outside those listed in the Commission‘s Recommendation or wrong assessment of SMP-status  Effect upon trade between Member States, and  Barrier to the single market or serious doubts as to the compatibility with Community law

10 II. Market definition

11 Market definition Legal Sources  Commission Recommendation of 11 February 2003  Austria: Telecommunication Markets Regulation 2003 of Regulator (TKMVO 2003)  In case of deviations: Veto power of the Commission

12 Market definition Criteria for defining the relevant markets  Competition law approach –Demand-side substitution –Supply-side substitution  But: ex ante-Assessment

13 Market definition Retail levelWholesale level Fixed 1.Access for residential customers 2.Access for non-residential customers 3.Local and/or national services for residential customers 4.International services for residential customers 5.Local and/or national services for non-residential customers 6.International services for non- residential customers Fixed 8.Call orgination 9.Call termination 10.Transit services 11.Unbundled access 12.Broadband access Leased Lines 13.Terminating segments 14.Trunk segments Mobile 15.Access and call orgination 16.Voice call termination 17.International roaming Broadcasting 18.Transmission services Leased Lines 7.Minimum sets

14 Market definition Example: Voice call termination on individual mobile networks  EC Commission and TKK: Every individual mobile network constitutes a separate market for voice call termination  Reason for narrow market definition: –Lack of alternatives (substitutes) to terminate calls to subscribers of other networks  Consequences: 100% market share of every network operator  strong indication for SMP

15 II. Assessing significant market power (SMP)

16 Assessing significant market power Objectives  Determination whether a defined market is characterised by effective competition or whether one or more undertaking(s) have significant market power, either individually or jointly with others.  If at least one undertaking has significant market power, a lack of effective competition is assumed.

17 Assessing significant market power Concept of signficant market power under section 35 TKG 2003 (Art 14 Framework Directive)  Competition law approach: „An undertaking shall be deemed to have significant market power if, either individually or jointly with others, it enjoys a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers.“

18 Assessing significant market power Forms of dominance  Single dominance  Joint dominance  Leveraging

19 Assessing significant market power Criteria for assessing dominance Single dominance  Market shares  Overall size of the undertaking  Control of infrastructure not easily duplicated  Technological advantages  Absence of or low countervailing buying power  Easy or privileged access to capital markets / financial resources  Economies of scale / scope  Vertical integration  Absence of potential competition Joint dominance  Criteria as listed under single dominance  Maturity of market  Stagnant or moderate growth on the demand side  Low elasticity of demand  Homogenous product  Similar cost structure  Absence of excess capacity  Retaliatory mechanisms  Lack of technical innovation

20 Assessing significant market power Example: Assessment of SMP on the mobile voice call termination market  Austrian Telekom-Control-Kommission (TKK): Each mobile network operator holds a SMP position for terminating calls in its own network.  Main reasons –Monopoly position on the basis of the defined market (absolute entry barriers) –Calling-Party-Pays-Principle (CPP) –Lack of countervailing market power

21 Assessing significant market power Criticism of the NRA´s decision  Insufficient consideration of market structure on retail level –Commission Recommendation on market definition: Narrow market definition does not necessarily result in SMP; distinguishes between market power of large and small operators („...a small network operator may have very little market power relative to a larger one in respect of call termination“)  Wrong assessment of countervailing market power –Commission Recommendation: „...whether every operator then has market power still depends on whether there is any countervailing market power, which would render any non-transitory price increase unprofitable.“ –Countervailing market power on the wholesale and retail level

22 IV. Remedies

23 Remedies Potential results of market analysis (sec 37 TKG 2003) Market analysis demonstrates that there is effective competition on the relevant market (no SMP undertaking)  TKK is not entitled to impose specific obligations (remedies)  Closing of proceedings Market analysis demonstrates lack of effective competition (existence of undertaking(s) with SMP)  Imposition of (at least one) proportionate and justified remedie(s) as specified under sections TKG 2003

24 Remedies Available remedies under the TKG 2003 („tool box“)  Wholesale markets -Obligation of non-discrimination -Obligation of transparency -Accounting separation -Access to network facilities and network function -Price control and cost accounting for access

25 Remedies  Retail markets –Price caps –Control of tarifs –Cost-oriented tarifs, benchmarks, etc –Provision of leased lines –Carrier selection and carrier pre- selection

26 Remedies Example: Regulatory measures imposed in the market for voice call termination on individual mobile networks  Main competition problems identified by TKK 1.Excessive pricing for termination of calls from fixed to mobile networks („F 2 M“) 2.Excessive pricing for termination of calls between mobile networks („M 2 M“) 3.Potential foreclosure-strategies against small network operators 4.Potential foreclosure-strategies against fixed operators in the case of overlapping business segments

27 Remedies Imposed remedies:  Obligation of non-discrimination (sec 38 TKG 2003)  Obligation of transparency (sec 39 TKG 2003)  Obligation for access to network facilities and network function (sec 41 TKG 2003)

28 Remedies  Price control (sec 42 TKG 2003) –Cost-orientation based on Long Run Average Incremental Costs (LRAIC) of a hypothetical efficient operator – Adjustment of so far different termination rates in „glide-path“ –Eventually reciprocal fees irrespective of market position on retail level

29 Remedies Criticism of NRA´s decision:  Infringement of principle of proportionality: Less burdensome measures available to ensure policy objectives Identical obligations for all operators, irrespective of market position on retail level (no consideration of late comer disadvantages for smaller operators) Reciprocal termination rates only if similar market positions

30 Remedies Criticism of NRA´s decision:  Failure to consider actual termination costs as opposed to costs of hypothetical provider  Differentiation between operators in decision on call termination in fixed networks  International comparisons

31 Thank you! DORDA BRUGGER JORDIS Rechtsanwälte GmbH Tel: