1. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School L IBERALIZATION & R EGULATION IN THE E LECTRONIC C OMMUNICATIONS S ECTOR http://www.netmode.ntua.gr/ Courses/Graduate/Liberalization & Regulation in the Telecommunication Sector Vasilis Maglaris maglaris@mail.ntua.gr Vassilis Merekoulias merek@netmode.ntua.gr June 5, 2008 The European Regulatory Framework for the Telecommunication Sector: Main Issues and Current Trends

2. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 1 Regulatory aspects of EC policy. Main legislative measures in relation to: –Opening up of markets –Open Network Provision –Licensing Τhe New Regulatory Framework Case Study Overview of presentation

3. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 2 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.

4. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 3 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)

5. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 4 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)

6. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 5 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…

7. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 6 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

8. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 7 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)

9. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 8 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

10. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 9 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)

11. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 10 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

12. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 11 EC Recommendation C(97) 3148 - Part I Proposes the use of Best 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. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 12 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

14. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 13 Τhe New Regulatory Framework New Regulatory Framework for Electronic Communications Infrastructure & 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 & Users' rights relating to electronic communication networks & services

15. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 14 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

16. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 15 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

17. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 16 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_inform ation/library/legislation/index_en.htm

18. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 17 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: 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. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 18 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 “3G” The definition of a new Market

20. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 19 Market Review Definition of the relevant market or markets Assessment of competition in each market. Is there any company with an SMP? Assessment of the options for regulation and proposal or obligations.

21. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 20 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

22. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 21 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

23. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 22 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

24. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 23 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

25. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 24 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

26. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 25 Hazards 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.

27. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 26 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

28. N ATIONAL T ECHNICAL U NIVERSITY OF A THENS Electrical & Computer Engineering School June 5, 2008 27 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.