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Access to facilities in the telecommunications sector: An overview of EU and national case law

Marco D’Ostuni, e-Competitions, 10 April 2012, N°45007.

See Marco D'Ostuni's resume

Introduction

Ensuring third-party access to communications facilities is a difficult challenge for EU competition law and regulation, which must continuously adapt in a fast-evolving environment.

To connect their customers, telephone operators need access to the public switched copper networks, which were built by national incumbents at a time when they enjoyed legal monopolies over the provision of telephone services. In principle, each operator should develop its own infrastructure when economically feasible (as is the case for backbones, other high network layers and operating equipment). However, the local infrastructure connecting each customer’s home or office - called local loop - is generally too costly to be duplicated. Therefore, to sell their retail services on the market, newcomers must normally purchase wholesale access services from the national incumbents which are their competitors. Basic wholesale services allowing operators to offer telephone services to the public include the unbundling of the local loop (i.e., direct access to the copper pairs reaching the customer premises) and the wholesale line rental (i.e., an alternative form of rental of the access line).

Many delicate appraisals must be carried out in order to determine the optimal conditions for third-party access down to the lowest layer of telephone copper networks. For instance, when determining the proper price and technical conditions for wholesale access, national competition or regulatory authorities (respectively, "NCAs" and "NRAs") must ensure that they do not reduce incentives for operators to develop their own networks as much as possible.

Furthermore, both when setting access tariffs and when vetting the incumbents’ wholesale and retail prices in order to detect price squeezes, the competent authorities must evaluate the incumbent’s production costs as well as those of a hypothetical efficient operator. Hypothetical efficient-operator cost models are used to ensure that access tariffs do not include inefficient costs and that the price-squeeze thresholds do not shield inefficient operators from competition by the incumbent. Quite obviously, these enforcement activities require in-depth analyses of the incumbent’s certified accounting data and the preparation of complex economic models.

NRAs and NCAs also have to ensure that the incumbent does not discriminate in favor of its own subsidiaries or affiliates when granting access, to the detriment of other wholesale customers and, ultimately, of competition. Moreover, NRAs must also regulate and ensure the right of final customers to freely migrate from one operator to another, with the synchronized passage of the underlying wholesale access services needed to connect them.

Mobile services were launched, in each EU Member State, through competitive assignment of national licences to multiple network operators. Therefore, at least initially, ensuring third-party access to existing mobile networks was less of a priority for competition purposes as compared to, for instance, the need to prevent collusion among market participants. Nevertheless, even in those markets, concerns eventually arose over the risk of abusive exercise of collective dominance by mobile network operators, aimed at hindering the emergence of mobile virtual phone operators or traffic resellers, who need access to competing operators’ networks in order to run their business.

In addition, all mobile and fixed-line operators - including incumbents - must interconnect their networks, i.e. they must create communication channels between their networks both at the national and international levels so as to enable all users to communicate with each other, regardless of their service provider. Each operator holds a natural monopoly on the market for the termination of calls directed to its subscribers because, in order to complete the call, the operator of the calling party (which pays for the call) can only purchase the wholesale termination service from the operator of the called party. Therefore, especially in negotiations between parties who do not enjoy the same economic strength, operators are able to favor their own internal divisions or affiliates, by imposing much higher termination tariffs, or by refusing or delaying the interconnection to their competitors.

The development of broadband data transmission has further complicated the picture. Most traditional broadband services use x-DSL technologies that build upon existing copper access networks, to enhance their data transportation capacity. Thus, incumbents have had an opportunity to leverage their existing position onto the new broadband markets and hinder the development of effective competition. From a regulatory point of view, incumbents have been obliged to offer new regulated wholesale services based on broadband technologies (e.g. bitstream, shared access). Numerous bundled offers combining phone services and high-speed internet access,exist on the retail market today,sometimes even including internet-protocol television .

Additional complications stem from the ongoing switch from old copper networks to new generation access infrastructures, built wholly or partly with fiber and based on ultra-broadband technologies. In this case, incumbents may be required to grant access to their current copper network’s civil infrastructures (e.g., ducts, manholes, poles, wells) on an equitable, transparent, non-discriminatory and, when appropriate, cost-oriented bases, in order to allow competitors to lay down their own fiber networks whenever no efficient alternatives are available. Furthermore, regulatory frameworks for third-party access to new generation networks should be devised in a way that does not discourage incumbents and other operators from investing in the development of their own innovative infrastructures connecting final customers.

EU regulation of third-party access

The EU legislator set out an articulated regulatory framework complementing EU competition law in this area. The underlying idea was that ex ante obligations are more effective in developing competitive market structures in such a complex environment.

EU Directive 2002/19/EC of 7 March 2002 (amended by Directive 2009/140/EC of 25 November 2009) lays down the applicable rules on access to, and interconnection of, electronic communications networks and associated facilities. Directive 2002/19/EC imposes a general obligation on all operators of public communications networks to negotiate interconnection with other authorized operators which request to do so. Pursuant to the same directive, when a market analysis establishes that certain operators have significant power in that market, NRAs must impose one or more remedies on these operators, including:

(i) a transparency obligation, which requires operators to disclose certain information, possibly by publishing a reference offer containing accounting information, technical specifications, network characteristics, terms and conditions for supply and prices (Article 9);

(ii) a non-discrimination obligation, requiring operators to apply "equivalent conditions in equivalent circumstances to other undertakings providing equivalent services" and to provide "services and information to others under the same conditions and of the same quality as [they provide] for[their] own services, or those of [their]subsidiaries or partners" (Article 10);

(iii) an accounting separation obligation, pursuant to which a vertically integrated operator may be required to keep separate accounting for activities carried out in different markets as well as "to make transparent its wholesale prices and its internal transfer prices" in order to ensure compliance with the non-discrimination principle and/or prevent unfair cross subsidization (Article 11);

(iv) an obligation to "meet reasonable requests for access to, and use of, specific network elements and associated facilities" (Article 12);

(v) price control and cost accounting obligations related to the provision of specific types of access, "where a market analysis indicates that a lack of effective competition means that the operator concerned might sustain prices at an excessively high level, or apply a price squeeze" (Article 13); or

(vi) an "obligation on vertically integrated undertakings to place activities related to the wholesale provision of relevant access products in an independently operating business entity" (functional separation), where the NRA concludes that the appropriate obligations imposed under Articles 9 to 13 have failed to achieve effective competition and that significant competition problems or market failures continue to exist in relation to the wholesale provision of certain access product markets (Article 13a).

In principle, NRAs are required to reassess each relevant market within three years from the previous assessment [1]. In performing the market analysis, NRAs should takethe utmost account of the Commission recommendation on relevant product and service markets [2] and the Commission guidelines on market analysis and the assessment of market power [3], which have been drafted "in accordance with the principles of competition law" [4]. Indeed, when they carry out their periodical market analysis and impose regulatory obligations, NRAs must apply competition law principles - e.g., the notion of ’significant market power’ established by Directive 2002/21/EC is almost identical to the definition of dominant position provided by EU courts under competition law [5] - and their interventions should always "promote competition" and "be proportionate" to such objective (Directive 2002/21/EC, Article 8) [6].

Based on a survey of competitive conditions, the Commission recommendation on relevant product and service markets identifies which markets require, in principle, a market analysis. However, NRAs may also investigate other markets, where they believe that competitive conditions could be impaired. NRAs can intervene in these other markets if high and non-transitory barriers exist to entry and effective competition is not likely to occur within a short timeframe notwithstanding the application of competition law.

In order to guarantee a consistent and appropriate application of competition law principles and regulatory remedies, prior to taking any decision which (i) defines a relevant market differently from the Commission recommendation, (ii) designates one or more operators as having significant market power or (iii) imposes any of the remedies set out in Articles 9-13 of Directive 2002/19/EC, NRAs must consult with the Commission, the Body of European Regulators for Electronic Communications ("BEREC"), the other NRAs and, where appropriate, their Member State’s NCA. In particular, prior to adopting a decision, NRAs shall forward a draft decision to the Commission, the BEREC and the other NRAs, following the procedures set forth by Directive 2002/21/EC [7].

Pursuant to Article 7 of Directive 2002/21/EC, decisions concerning a relevant market definition or the designation of one or more operators as having significant market power are subject to the Commission’s veto power. Taking utmost account of the BEREC opinion, the Commission may require the NRA concerned to withdraw the draft measure and, where appropriate, to amend its proposals, if it deems that the draft measure would create a barrier to the single market or if it has serious doubts as to its compatibility with EU law [8].

Pursuant to Article 7a of Directive 2002/21/EC, where the NRA’s draft decision is aimed at imposing any of the remedies set out in Articles 9-13 of Directive 2002/19/EC, the Commission may suspend the adoption of the notified measure for three months if it deems that the draft remedy would create a barrier to the single market or if it has serious doubts as to its compatibility with EU law. Within this three-month period, the Commission, the BEREC and the NRA shall cooperate closely to identify which measures are the most appropriate and effective to address the Commission’s concerns. However, if the BEREC does not share the Commission’s concerns or the NRA amends or maintains its draft remedy, within one month after the three-month period, the Commission may issue a recommendation requiring the NRA to amend or withdraw the draft measure, including specific proposals to that end and providing reasons justifying its recommendation. Where the NRA decides to depart from the Commission’s recommendation, it should provide a reasoned justification.

If an NRA intends to impose an obligation for functional separation pursuant to Article 13a of Directive 2002/19/EC, it must submit a detailed proposal to the Commission, which may authorize or veto the adoption of the proposed measure, taking utmost account of BEREC’s opinion.

The concurrent application of regulatory provisions and competition law rules

Since the Commission and NCAs must follow competition law principles when making sector regulations concerning third-party access, one would assume that the application of EU competition law by NCAs or civil courts should not significantly depart from the conclusions reached by NRAs on the same facts. Nevertheless, this is very seldom the case: the Commission protects its role as guardian of EU treaties vis-à-vis national authorities or courts; NCAs defend the autonomous if not prevailing function of competition rules; and NRAs reject attempts to deprive them of their autonomy. As a result, the relationship between EU competition law and regulation in the telecommunications markets is not devoid of intricacies.

The fundamental principle in the matter is that undertakings who respect regulatory remedies are still subject to the concurrent application of competition law. In fact, the Commission made it clear from the outset that regulation and competition law "constitute two different but coherent sets of rules" and "[h]ence, the competition rules have full application, even when all [regulatory provisions] have been[applied]" [9].

EU Courts subsequently endorsed this approach. In the Deutsche Telekom case, the appellant had maintained that its wholesale and retail access pricing policy did not squeeze competitors’ margins in violation of Article 102 TFEU, because the German NRA had approved its wholesale prices [10]. However, the EU Courts found - in a nutshell - that Deutsche Telekom was fully liable for the price squeeze because it could have raised its retail prices. On the other hand, according to the EU judges, the NRA decisions had erroneously allowed cross-subsidization between retail access and call charges and were, in any event, not binding on the Commission.

Similarly, in the Telefonica decision, despite the fact that "the Spanish broadband market[had]been supervised through ex ante and ex post resolutions by the Spanish regulator", the Commission found that the Spanish telecommunications incumbent was liable for the contested price squeeze, because it had enjoyed freedom to decrease wholesale charges or increase retail prices [11]. The Commission further pointed out that the Spanish NRA could not (and did not) apply Article 102 TFEU.

The same principles were restated by the Commission in the recent Telekomunikacja Polska decision [12]. The Commission also added that, even though prior Polish NRA decisions had fined the same abusive conduct, there was no bis in idem, because the NRA had not applied Article 102 TFEU and, in any event, "[t]he aim of the Commission’s investigation and the fine imposed is to preserve undistorted competition within the European Union", while the Polish NRA "proceedings encompass other objectives" [13].

NCAs, NRAs and national courts have also frequently advocated the concurrent application of sector regulation and competition law in cases concerning access to telecommunications facilities. For instance, according to the Brussels Court of Appeal, the NRA’s prior control over the incumbent’s wholesale tariffs does not rule out any subsequent control by competition authorities [14]. Similarly, the Slovak Competition Authority affirmed that dominant undertakings can be subject to both regulatory provisions and competition law [15].

By the same token, in a decision fining Telefonica’s failure to comply with the regulation on third-party access to the local loop, the Spanish NRA found that no violation of the ne bis in idem principle occurred even though the NCA had started parallel competition law proceedings with respect to the same conduct [16]. A Greek court also went so far as to uphold a decision by the Greek NRA issuing two fines cumulatively against the same conduct, one for breach of ex ante regulatory obligations and the other for infringement of national competition rules prohibiting the abuse of a dominant position. The Greek court affirmed the legitimacy of the concurrent application of the two sets of legislation, pointing out that they served different purposes [17].

Nevertheless, the Commission, NCAs or civil courts should never depart lightly from the conclusions reached by NRAs when imposing or enforcing regulatory remedies in analogous situations. As stated by the Court of justice in the Deutsche Telekom case, "the legislation relating to the telecommunications sector defines the legal framework applicable to it", "contributes to the determination of the competitive conditions" and is, therefore, "a relevant factor in the application of Article [102 TFEU] to the conduct of that undertaking, whether for the purposes of defining the relevant markets, assessing the abusive nature of such conduct or setting the amount of the fines" (§ 224). Moreover, the fact that sector regulations may have different objectives from EU competition law "does not in any way suggest that that legislation could be disregarded altogether in the application of Article [102 TFEU]" (§ 227) [18].

In its guidance on the application of Article 102 TFEU, with respect to access and price squeeze issues in particular, the Commission has also highlighted the importance of enforcing regulation and competition law in a consistent manner, by reaffirming a (controversial) principle first put forward in its Telefonica decision: imposing an obligation to supply is more likely warranted under competition law when a regulation compatible with EU law has already imposed similar obligations after careful consideration of their impact on the operators’ incentives to invest [19]. Regardless of the merits of this principle, it does seem to indicate that, in the Commission’s opinion, both competition law and sector regulations should be applied in a coherent manner, at least when they pursue in practice analogous objectives. After all, the Commission is constantly involved in the NRA rulemaking and thus guarantees the consistency of the two different sets of rules.

A practical example can illustrate the shortcomings of a formalistic application of the Deutsche Telekom case law.

Under the EU regulatory framework, an NRA can impose remedies pursuant to which each incumbent’s new retail offer is subject to a price-squeeze test prior to its launch and periodically thereafter. The NRA would normally design the test with the specific objective of preventing price squeezes in violation of EU competition principles, also by drawing on the experience gained in previous market analyses. Moreover, one would assume that the Commission and the local NCA would notice if the test were ill-conceived or unable to reach its scope during the consultation [20]. Furthermore, unlike NCAs, which cannot adopt reasoned acquittal decisions pursuant to Article 102 TFEU [21], NRAs may (and sometimes have to) declare the reasons in full-blown decisions as to why an incumbent’s offer does not squeeze competitors’ margins.

In those circumstances, while the Commission and the local NCA are both competent to enforce competition rules, can either of them realistically reach a different conclusion from the NRA, without calling into question the entire validity of the regulatory framework? And, if the NRA authorized all offers prior to launch, would it be possible to say that the undertaking concerned had no reason to legitimately expect that its behaviour was compliant with EU competition law, assuming there are no relevant changes to the facts at stake? Similar questions were addressed by the Italian Supreme Administrative Court (Consiglio di Stato) which maintained that the NCA should normally apply the price-squeeze test devised by the NRA, because the "market needs to be regulated by clear and transparent rules". The Consiglio di Stato also stated that the NCA could not impose fines with respect to abusive conduct that had been expressly authorized by the NRA [22].

Access refusal

Abusive refusals to supply are more frequent when sector regulation does not mandate specific access obligations and doubts exist about the indispensability of an infrastructure or service for the development of competition. These situations may arise, for instance, when technological advances allow the sudden launch of new services without prior intervention by an NRA, in the early stages of the liberalization or in the first cases of application of a new regulatory framework or in markets with dynamic competitive structures (like those of interconnection and mobile telephone services). There are numerous examples of this.

On 27 April 2001, the Italian NCA issued a Euro 59 million fine against Telecom Italia for having launched ADSL broadband services on the Italian market without providing a corresponding wholesale bitstream offer for its competitors, in addition to the unbundling of the local loop. Competitors brought several follow-on actions before the Rome Court of Appeals, which awarded damages in five cases [23]. A similar issue arose in France, where on 7 November 2005, the French NCA levied a Euro 80 million fine against France Telecom for having both refused access to its network’s local loop (which was not unbundled at the time of the facts) and having imposed excessively high access prices, thus preventing the development of effective competition by third-parties on the broadband internet market [24].

In Slovakia, in a decision of 21 December 2005, after acknowledging that the local loop was an essential facility, the Slovak Competition Authority found that Slovak Telecom had abused its dominant position by refusing to grant its competitors access to its local network [25].

Regarding the interconnection markets, in October 2004, the Commission vetoed the Austrian NRA’s draft decision on the market for transit services on the fixed telephone network, because it deemed that the NRA had defined the market too broadly and, therefore, could have come to the wrong conclusion that no operator enjoyed market power and no remedy had to be imposed [26].

In the mobile telephone sector, again in October 2004, the Commission vetoed the Finnish NRA decision according to which TeliaSonera enjoyed significant market power in the market for mobile access and call origination. According to the Commission, the NRA’s concerns about the importance of access to TeliaSonera’s mobile network for mobile virtual network operators and service providers could have been dispelled by a more in-depth competitive analysis of, among others, market dynamics and barriers to entry [27].

The Italian NCA came to similar conclusions in the proceedings opened against the three main Italian mobile phone operators to investigate, inter alia, whether they had abused their alleged collective dominant position by refusing to grant access to several alternative operators. In its final decision of 3 August 2007, the NCA found that there was insufficient evidence as to the existence of a collective dominance [28].

On the contrary, with respect to the premium SMS market, the Cypriot Competition Authority applied the essential facility doctrine and in a two-year period fined the national telecommunications incumbent twice for its refusal to grant access to its SMS center to two different competitors for the provision of their own SMS services [29].

As noted, access to the incumbent’s civil engineering infrastructure may also be crucial for the development of new generation networks based on ultra-broadband technologies. On 2 July 2007, a telecom operator who wanted to deploy its fiber network in France Telecom’s ducts in order to offer very high speed internet services, sought interim measures before the French NCA. The NCA rejected the complaint stating that the urgency requirement had not been met, but nonetheless decided to carry out an investigation on France Telecom’s contested refusal [30]. Currently, many NRAs are imposing similar obligations of access through market analysis decisions.

More frequently, once it is established that competitors have a right to access certain infrastructures of the incumbent, operators may claim that the proposed terms and conditions of supply are unfair and discriminatory or complain about possible breaches of the supply agreements by the incumbent.

The Commission’s most recent decision in the telecommunications sector fined the Polish incumbent, Telekomunikacja Polska, Euro 127 million for abusing its dominant position on the basis of a number of different conducts. In the Commission’s view, all these different conducts added up to a strategy aimed at hindering other operators from efficiently accessing its network and using its wholesale broadband products [31]. In particular, the Commission established that Telekomunikacja Polska had carried out a constructive refusal to supply by: (i) proposing unreasonable conditions in the agreements for wholesale broadband access and local loop access or delaying their negotiation; (ii) unjustly rejecting or delaying numerous orders for the activation of wholesale broadband access or local loop access on single lines; (iii) overestimating costs for the construction of new parts of the network; (iv) not repairing faulty lines in a timely manner; (v) providing unreliable data to operators who needed it to make sound decisions about purchasing wholesale broadband access at specific locations. The Commission found that the incumbent gave its subsidiary preferential treatment and that, therefore, the obstacles created to the other operators were not justified by objective circumstances.

On 23 June 2010, the Italian NCA also initiated proceedings to assess, among other things, whether Telecom Italia had carried out a constructive refusal to supply, by rejecting, for allegedly unjustified technical reasons, very high volumes of other operators’ orders for the activation of various wholesale services on single lines [32].

Price squeeze

According to the Commission, a price (or margin) squeeze occurs where, "instead of reducing supply, a dominant undertaking[...]charge[s]a price for the product on the upstream market which, compared to the price it charges on the downstream market, does not allow even an equally efficient competitor to trade profitably in the downstream market on a lasting basis" [33]. The enforcement of sector regulation and competition law against these practices raises several interesting issues.

First of all, building a legal test to detect price squeezes is not an easy task and involves many discretionary choices about a series of variables, such as the questions listed below.

- Should the test protect only operators that are as efficient as the incumbent (equally efficient operator or EEO test) or also reasonably efficient operators whose costs are slightly higher than the incumbent’s only because they do not enjoy similar economies of scale and scope (reasonably efficient operator or REO test)? The legal test may also result from a combination of both criteria: for instance, with respect to parts of the network that can be duplicated (e.g., the higher layers of a network and the operating apparatus), the NRA could demand that alternative operators reach a level of efficiency at least equal to that of the incumbent, because they have had the opportunity to build a network from scratch with more advanced architecture and technologies; with respect to other service components (such as the mix of wholesale services that an efficient operator would purchase from the incumbent in order to offer certain services to the public in the entire national territory), the NRA could use the costs of a reasonably efficient operator as a parameter.

- Which accounting standards and methodologies should be used to quantify the incumbent’s cost? This is also a very important choice, because current and historical values may considerably differ, and the cost of a service could be much higher if it has to include a share of all common costs (with the method of fully distributed costs), rather than only long-run incremental cost, long-run average incremental cost or short-run incremental cost.

- Should the test be applied prospectively (i.e., based on the information available at the time when the incumbent launches the offer) or objectively (i.e., based on the information available at the time when it is applied)?

- What is the relevant time period for evaluating the offer: a month, a year, more than a year, the average consumer life-time, the commercial life of the offer or a combination of two or more such periods?

- Should the test apply in a different manner to bundled offers?

- How can the information about prices and costs of the incumbent and of the other operators best be used in order to ensure that the test effectively protects competition?

Different answers to the same questions may lead to completely different price-squeeze thresholds. This is the reason why, in this area, consistency between regulation and competition law enforcement would be particularly important. However, the legal framework does not always provide clear and straightforward guidance.

For instance, the relationship between price squeeze and refusal of access is uncertain. The Commission Guidance on enforcement priorities under Article 102 TFEU treats the margin squeeze as a type of constructive refusal to supply. Therefore, according to previous case law of the Court of Justice, a dominant undertaking should be able to legitimately refuse to supply a product or service, if it is not indispensable for competing in a downstream market [34].

However, in the TeliaSonera case [35], the EU Court observed that margin squeeze "is in itself capable of constituting an abuse within the meaning of Article 102 TFEU" and "constitute[s] an independent form of abuse distinct from that of refusal to supply" [36]. Therefore, according to the Court, even "where the wholesale product is not indispensable", a margin squeeze may occur if "the practice may be capable of having anti-competitive effects on the markets concerned" [37]. This is also why, according to the EU Court, "the absence of any regulatory obligation to supply the ADSL input services on the wholesale market has no effect on the question of whether the pricing practice at issue in the main proceedings is abusive" under competition law rules [38]. A similar conclusion was reached few years before by the French Supreme Court [39].

In this respect, it is difficult to understand why a dominant undertaking should not be able to freely set the selling prices of a wholesale service, when it could legitimately refuse to provide it. Such inconsistency might even have the perverse effect of encouraging undertakings to refuse altogether to deal with their competitors, in order to avoid the risk of margin squeeze allegations [40].

Another important issue is the treatment of bundled offers. In the Deutsche Telekom case [41], the General Court noted in passing that the German NRA had misapplied Article 102 TFEU by authorizing the German incumbent to apply retail access prices that competitors could only match by resorting to cross-subsidization between their retail access and traffic prices [42].

However, in its Guidance on enforcement priorities under Article 102 TFEU, the Commission highlighted that, if "competitors of the dominant undertaking are selling identical bundles, or could do so in a timely way without being deterred by possible additional costs, the Commission will generally regard this as a bundle competing against a bundle" and, therefore, will consider "whether the price of the bundle as a whole is predatory" [43]. The same principle could apply to the analysis of margin squeezes in bundled offers. In fact, some NRAs find it appropriate in certain circumstances to run a margin-squeeze test on the price of the bundle as a whole, rather than allocate separate margins to each of the services composing the bundle.

This argument was actually raised by the Danish telecommunications incumbent in its appeal against a decision of the NCA, which had found that the former had perpetrated a margin squeeze on a retail offer that combined fixed and mobile telephony, in that it charged certain call directions below cost at the retail level [44]. Due to the wide variety of telecom operator offers which combine two or more services, the same issue is likely to concern a significant number of margin squeeze cases in the telecommunications sector [45].

In the Telefonica case [46], the Commission shed some light on the matter of the relevant time period and scope for a margin squeeze assessment under EU competition law. In order to apply the equally efficient competitor test, the Commission assessed the profitability of the prices charged by Telefonica using two different methods: (i) the period-by-period method, which assesses profitability on a year-by-year basis; and (ii) the discounted cash flow method, which takes into account learning effects and economies of scale that characterize fast-growing markets and, therefore, allows below-cost pricing in the initial phase of an expanding market (such as the broadband markets under scrutiny in the proceedings), but requires profitability in the medium/long term. Since both methods proved that Telefonica had engaged in a margin squeeze for around five years, the Commission imposed a fine of more than Euro 151 million.

Another critical issue, highlighted in the TeliaSonera judgment, concerns the prices and costs that should be taken into account in order to assess whether the pricing practices of a dominant undertaking have an exclusionary effect on equally efficient competitors. In line with the Deutsche Telekom judgment, the EU Court stated that, as a general rule, reference should be made to "pricing criteria based on the costs incurred by the dominant undertaking itself and on its strategy", since this enables "that undertaking to assess the lawfulness of its own conduct" in conformity with "the general principle of legal certainty" [47].

However, making reference to its own costs does not necessarily enhance legal certainty for the dominant company. When it launches a new offer or a bid in a call for tender, the dominant company - just like any other telephone operator - can only rely on predictions as to the volumes which will be sold and the expected trends of the internal and external costs (such as, for instance, the future variations of other operators’ termination tariffs). A retrospective review may reveal that the assumptions were wrong.

Moreover, to quantify its costs and allocate them to the offer, the dominant company has to choose some cost-accounting standards, without certainty that all of the possible authorities which could investigate the matter will agree with the choice made. The regulated tariffs of wholesale services can provide a reliable indication as to the cost of the corresponding services used by the dominant company, but the incumbent will still have to choose which appropriate mix of wholesale services could ensure the replicability of its offer at the lowest possible cost [48]. Furthermore, there are no similarly reliable indications for the other network costs (corresponding to the parts of the infrastructure that can be duplicated by other operators), nor for other types of cost (such as commercial costs).

In fact, making reference to its own costs could give certainty to the incumbent only if it overestimated costs and set prices at the highest possible level to neutralize any risk of diverging opinions by the enforcement authorities. However, an overly prudential attitude would prevent the incumbent from effectively competing on the market, to the detriment also of consumers and of the industry’s overall efficiency. It is therefore not a realistic option.

On the other hand, competitors’ costs could be important in the analysis of a price squeeze. Let us assume, for instance, that a robust series of calls for tenders is adjudicated to the incumbent’s competitors over a significant period of time: could the winning prices be used to identify a reliable threshold for the incumbent to avoid price squeezes? Traditional theory says that competitors can cross-subsidize between different services or different offers, and that the incumbent is not allowed to behave like its competitors, because it has a special responsibility owing to its dominance. However, all offers presented in public bids must be serious and meet certain levels of profitability; moreover, the fact that competitors offered similar levels of price over a significantly long period of time could show that such prices are sustainable. As a result, if the incumbent prices its bid slightly above those levels, there will be strong indications that competitors could match the bid and, therefore, that there is no price squeeze. The same reasoning can apply if the incumbent launches a new offer whose price is above that of competing offers that have been on the market for some time.

It comes as no surprise, therefore, that according to the TeliaSonera judgment in many cases it might also be appropriate to refer to the prices and costs of the dominant undertaking’s competitors [49]. However, possibly because of the intransigent stance taken on the concurrent application of regulation and competition law, the EU Court’s reasoning in TeliaSonera fails to notice that, at least in some Member States, NRAs have already been applying for quite some time detailed legal tests aimed at preventing abusive price squeezes. In these countries, perhaps the best way to grant more legal certainty to incumbents could be to ensure consistency between regulation and competition law enforcement.

In fact, the NRAs’ legal tests normally draw on their considerable and continuously updated knowledge of the market and of operators’ costs. Furthermore, through the repeated application of these tests and the ensuing interaction with the NRAs, incumbents may glean the test’s assumptions about an efficient operator’s network models and cost accounting standards and, therefore, conform their pricing policies to those criteria. In these cases, there could be a vulnus to legal certainty if the Commission or an NCA were able to apply different assumptions at their own discretion, at least when the legal test applied by the NRA was not illegitimate.

The importance of all of the above issues is further demonstrated by the significant number of margin squeeze cases that NCAs have dealt with in the telecommunications sector. In recent years, the Italian NCA alone opened three proceedings against telecommunications operators where margin squeeze conduct was at issue. On 16 November 2004, the Italian NCA found that Telecom Italia had abused its dominant position in the Italian market for telecommunication services to business customers by offering its business customers retail prices that were not sustainable in light of the wholesale prices charged to its competitors [50].

On 3 August 2007, the Italian NCA found that TIM and Wind, two mobile phone operators, had abused their dominant position in the wholesale market for termination services on their respective mobile networks, as the termination rates offered to third-party operators were often higher than those charged to certain corporate clients in the downstream market of fixed-to-mobile phone calls [51]. Accordingly, the Italian Competition Authority found that the companies investigated had adopted a margin squeeze strategy against their competitors. On 23 June 2010, the Italian NCA initiated proceedings to assess whether Telecom Italia could legitimately offer some of its clients retail prices that were lower than the wholesale prices charged to its competitors [52].

Similar margin squeeze issues have also been investigated by the NCAs of several other EU countries, including Belgium, [53] Bulgaria, [54] Denmark, [55] Hungary, [56] Lithuania [57] and Slovakia. [58]

Conclusion

Access to facilities is crucial to guaranteeing effective competition in the telecommunications sector, and competition law rules have always acted as a significant deterrent against artificial market foreclosures. In the past decade, enforcement of the EU regulatory framework has entailed that competition law rules have de facto been increasingly applied through detailed ex ante obligations which NRAs have imposed on operators enjoying significant market power. However, regulatory provisions - whose violation may cause the application of sanctions by NRAs - have also raised significant concerns of legal certainty and consistency, in so far as the Commission and NCAs have repeatedly established that practices which have received ex ante approval from NRAs (in conformity with competition law principles and with the direct involvement of the Commission) may nonetheless be subsequently found to be contrary to competition law rules. Thus, better coordination in the enforcement of competition law and regulatory provisions is certainly needed in the telecommunication sector, to reduce both the vacuum of legal certainty in which telecom operators are often left and the risk of bis in idem.

The author wishes to thank his colleague Philippe Croene for his help in the preparation of these notes.

Footnotes

[1Article 16.6 of Directive 2002/21/EC of 7 March 2002, on a common regulatory framework for electronic communications networks and services, as amended by Directive 2009/140/EC of 25 November 2009.

[2See Commission recommendation of 17 December 2007 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services, OJ L344/2007 p. 65 (which replaced the analogous Commission recommendation of 11 February 2003).

[3See Commission guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services, OJ C165/2002 p. 6.

[4Article 15 of Directive 2002/21/EC.

[5Article 14 of Directive 2002/21/EC provides that "An undertaking shall be deemed to have significant market power if [...] it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers".

[7Articles 6, 7, 7a and 16 of Directive 2002/21/EC, as amended by Directive 2009/140/EC of 25 November 2009.

[9Commission Guidelines on the application of EEC competition rules in the telecommunications sector, OJ C233/1991 p. 2, § 17. See also Commission Notice on the application of the competition rules to access agreements in the telecommunications sector, OJ C265/1998 p. 2, § 18 ("[e]ven where other [EU] legislation has been respected, this does not remove the need to comply with the [EU] competition rules") and Commission guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services, OJ C165/2002 p. 6, § 31 ("[c]ompetition authorities may [...] carry out their own market analysis and impose appropriate competition law remedies alongside any sector specific measures applied by NRAs").

[13Commission decision of 22 June 2011, in case COMP/39.525 - Telekomunikacja Polska, § 144.

[18Court of justice judgment of 14 October 2010, case C-280/08 P, Deutsche Telekom v. Commission, not yet published.

[19See Communication from the Commission - Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ C45/2009, p. 7, § 82.

[20See cases mentioned above at footnote 8, where the Commission vetoed the NRA draft decisions also because of their inconsistency with established competition law principles.

[22Judgments of the Administrative Tribunal of Lazio, Telecom Italia v. Italian Competition Authority, 11 May 2005, No. 3655 and of the Supreme Administrative Court, Italian Competition Authority v. Telecom Italia, 10 March 2006, No.1271. See Paolisa Nebbia, The Italian supreme administrative Court confirms a decision of the NCA condemning the formerly State-owned telecommunications monopolist for the abuse of its dominant position on the market of the fixed network telecommunications services for business customers (Telecom Italia/Albacom - Colt Telecom - Tiscali), 10 March 2006, e-Competitions, n°1146.

[23Rome Court of Appeals, 20 January 2003, Albacom v. Telecom Italia; Rome Court of Appeals, 20 January 2003, Wind v. Telecom Italia; Rome Court of Appeals, 20 January 2003, Data Service v. Telecom Italia; Rome Court of Appeals, 20 January 2003, Cable & Wireless v. Telecom Italia; Rome Court of Appeals, 29 September 2006, McLink v. Telecom Italia.

[33See Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ C45/2009, p. 7, § 80.

[34Court of justice judgment of 26 November 1998, case C-7/97, Oscar Bronner, Rec. 1998, p. I-7791, § 41.

[36Court of justice judgment of 17 February 2011, case C-52/09, Konkurrensverket v. TeliaSonera, not yet published, §§ 31 and 56.

[37Court of justice judgment of 17 February 2011, case C-52/09, Konkurrensverket v. TeliaSonera, not yet published, §§ 70-72.

[38Court of justice judgment of 17 February 2011, case C-52/09, Konkurrensverket v. TeliaSonera, not yet published, § 59.

[39On 10 May 2006, the French Supreme Court established that, in order to assess whether a margin squeeze had occurred, the fact that the incumbent’s competitors had found alternative technical solutions to avoid the excessively high prices applied on the service originally requested was not relevant, as long as the incumbent’s practice had as its purpose, or could have as its effect, distortion of competition (e.g., raising competitors’ costs). On this case see Jerome Philippe, The French Supreme Court lowers the standard of proof for anticompetitive practices and quashes the Paris Court of Appeal judgment in the T2nor case, regarding calls from landlines to mobile phones (ETNA/France Telecom-SFR), 10 May 2006, e-Competitions, n° 1389, Michel Debroux, The French supreme Court alleviates the standard of proof of actual or potential effects of an abusive price squeeze in the telecommunications sector (Etna / France Telecom), 10 May 2006, e-Competitions, n° 597, Noelle Lenoir, Dan Roskis, Charlotte-Mai Doremus, The French supreme Court holds that the fact that competitors have found alternative solutions to avoid detrimental effects of price squeezing of the telco incumbent is irrelevant to establish an abuse under Art. 82 EC (ETNA/France Telecom-SFR), 10 May 2006, e-Competitions, n° 1371, Olivier Freget, Alban Saget, The Paris Court of appeal confirms the NCA’s decision having fined two telecom operators for margin squeeze in the market for fixed to mobile lines calls (SFR-Cegetel / France Telecom), 2 Avril 2008, e-Competitions, n° 18722, Elise Provost, The French Supreme Court clarifies the use of the indispensable input criterion in a margin squeeze case (SFR-France Telecom), 3 March 2009, e-Competitions, n° 26721 and Laetitia Guillet, The Paris Court of Appeal quashes the decision of the French Competition Authority in a margin squeeze case (SFR-France Telecom), 27 January 2011, e-Competitions, n° 35300.

[40A more consistent approach on margin squeeze and refusal to supply abuses was followed by the US Supreme Court in the Linkline case, where the court established that there cannot be any abusive margin squeeze where there is no obligation to supply (Pacific Bell Tel. Co. v. linkLine Communications, Inc., No. 07-512, S. Ct. - 503 F. 3d 876 (Sup. Ct., 2009).

[42A few months after its decision to levy a Euro 12.6 million fine against Deutsche Telekom for the margin squeeze abuse described in the text, on 1 March 2004, the Commission accepted commitments from the same company to terminate another presumed margin squeeze for broadband access in Germany. Commission press release IP/05/1033. Also see Joachim Lucking, The European Commission concludes a settlement with telecommunications incumbent in a case concerning a presumed margin squeeze for broadband access in Germany (Deutsche Telekom), February 2004, e-Competitions, n° 36882.

[43Communication from the Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ C45/2009, p. 16, § 61.

[45See e.g. Belgacom’s "Happy time" offer was considered bundling of the line rental service with unlimited calls to fixed lines during off-peak times. See Tim Van Emelen, The Brussels Court of Appeal annuls the interim decision of the President of the Competition Council on the telecom incumbent’s bundled tariffs (Belgacom), e-Competitions, n° 15915.

[47Court of justice judgment of 17 February 2011, case C-52/09, Konkurrensverket v. TeliaSonera, not yet published, §§ 41 and 44.

[48For instance, to calculate the cost of retail broadband access, the incumbent could make reference to the price of an unbundled line plus the cost of the additional equipment necessary to transform it into broadband access, or to the more expensive price of bitstream access; to calculate the cost of a telephone line, the incumbent could make reference to the price of a carrier pre-selection service (i.e., an interconnection service whereby the other operator buys from the incumbent only the call origination, without accessing its network) or to the much cheaper price of an unbundled line.

[49"It cannot be ruled out that the costs and prices of competitors may be relevant to the examination of the pricing practice at issue in the main proceedings. That might in particular be the case where the cost structure of the dominant undertaking is not precisely identifiable for objective reasons, or where the service supplied to competitors consists in the mere use of an infrastructure the production cost of which has already been written off, so that access to such an infrastructure no longer represents a cost for the dominant undertaking which is economically comparable to the cost which its competitors have to incur to have access to it, or again where the particular market conditions of competition dictate it, by reason, for example, of the fact that the level of the dominant undertaking’s costs is specifically attributable to the competitively advantageous situation in which its dominant position places it" (Court of justice judgment of 17 February 2011, case C-52/09, Konkurrensverket v. TeliaSonera, not yet published, § 45).

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