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
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 Framework
Case 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
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•
•
•
•
•
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_infor
mation/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 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: Competition Law. Definition, Analysis and
Remedies of Markets by NRAs, ex-ante regulation of SMP
(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
subscribers of “3”
Wholesale voice call
Wholesale voice call
Wholesale voice call
Wholesale voice call
Mobile
Wholesale voice call
Vodafone
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termination provided to the
termination provided by
termination provided by
termination provided by
termination provided by
Inquam
O2
Orange
T
termination provided by
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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

Director Initial View

Charge Control
 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
 MNOs 3G in Option A
 MNOs 2G in Option C






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.
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