Select Committee on European Union Fifth Report

CHAPTER 6: TELECOMMUNICATIONS

Introduction

99.  This chapter considers the state of the EU telecommunications sector. Less evidence was received in respect of this sector than the others, which is understandable given the progress already made towards a Single Market in telecommunications. During the course of our inquiry proposals from the Commission for reform of the sector were published on 13 November 2007[20]. These proposals had been anticipated in the evidence received and, to a large extent, in the findings presented below.

Telecommunication Markets

100.  The telecommunications sector falls into three distinct markets: telecommunications equipment, service, and network infrastructure. The pace of liberalisation has differed between the different markets, with the equipment market having become a global marketplace in which EU-based companies are prominent. For telecommunication services, newly emerging services, such as the provision of Internet access, have been highly competitive from the start, while traditional voice telephony services have experienced fewer competitive pressures. The degree of competition in the provision of network infrastructure varies significantly between the Member States, due both to differing levels of economic development, particularly in the new Accession States, and to different Member State priorities.

EU Regulation and Market Liberalisation

101.  The telecommunications industry has undergone a fundamental change in structure, from that of monopoly to one of competition. Much of EU law and regulation in the sector has been concerned with this process of change: regulating to encourage competition. In July 2003 the New Regulatory Framework (widely referred to as the NRF) came into force. The NRF is designed to embrace all forms of communication or transmission technology, whether used to carry voice calls, Internet traffic or television programmes; while the concept of telecommunications has been replaced by the concepts of 'electronic communications networks' and 'electronic communications services'. The reform proposals published during our inquiry would result in a wide range of amendments to the NRF designed to improve its operation; complete the development of a single European market; and enhance the rights and protections for consumers and users[21]. However, the reforms do not constitute a fundamental realignment of the current regime.

102.  While liberalisation initiatives have aimed at opening up national markets to competition, harmonisation measures are required to address competition across markets in the EU. Harmonisation between Member State markets has inevitably involved greater complexity and detailed regulatory intervention than that required for the liberalisation of national markets.

Barriers to a Single Market

103.  There continue to be a number of barriers to the achievement of a Single Market in telecommunications. First, the national nature of the consumer markets means that trans-national operators cannot usually offer single products across a number of Member States. Second, the legacy position of national incumbents within national markets also seems to be a barrier to the achievement of a Single Market for telecommunications. For example, despite over 20 years of competition in the UK market, BT continues to dominate certain traditional market segments, such as residential fixed voice telephony. In its reform proposals, the Commission notes that incumbents continue to remain dominant in the area of fixed telephony (with an average market share of 65.8%), as well as in the broadband internet access market (generally over 55%)[22]. Incumbent operators have successfully leveraged their position in their domestic markets to enter and compete with incumbent operators in other national markets. So, for example, France Telecom (through Orange), Deutsche Telecom (through T-Mobile) and Telefonica of Spain (through O2) all have a significant presence in the UK market. While such incumbent operators do compete, there is also potential them to favour the status quo, rather than campaigning for radical regulatory intervention in the European market that would be viewed as undesirable in the domestic marketplace.

104.  Furthermore, Member States continue to exercise considerable discretion over a number of areas that impact directly or indirectly on the development of national markets, which then impinge on the Single Market project. Different approaches to the allocation of 3G spectrum, for example, resulted in a wide variance of national practice which in turn has resulted in differences in the roll-out and market for 3G services between Member States.

105.  As with every area of the Single Market, the nature of the law reform process within the Community means that Member States retain considerable flexibility in the transposition of EU measures. An inevitable consequence of this is continued existence of divergent approaches in the application of certain Community measures. One key element of the Commission's reform proposals is to improve co-ordination between Member State national regulatory authorities, partly through the establishment of an independent European Electronic Communications Market Authority (see below, paragraph 113).

STATE OF MARKETS

106.  The general impression given by witnesses is that the EU has achieved much in terms of a Single Market in telecommunications. Progress has been particularly spectacular in the market for telecommunications equipment. Where liberalisation of markets has already been progressed some witnesses were certain that it has provided "significant opportunities for cross border investment" (BT p 202).

107.  Historically both regulators and operators have viewed telecommunications markets as, "to a large extent, national markets" (T-Mobile p 238) with Member States responsible for "co-ordination between themselves and on cross-border interference" (Ofcom p 18). Ofcom, however, notes that the increasing use of IP technologies[23] means that services could "in theory, be offered from anywhere in the EU to anywhere else, without there being any need for the service provider to have a physical presence in the country where the service is being used. This offers the possibility of a genuinely new, pan-European telecoms service market developing" (p 20).

108.  British Telecom expressed concern that as the market changes the country of origin principle would continue to be important. Were it to be weakened British Telecom envisaged a situation where "an online service provider has to be aware of 27 different sets of national rules and thus may shy away from providing pan-EU services" (p 202).

REGULATORY FRAMEWORK

109.  Calls for reform centre primarily on issues relating to "inadequate enforcement and widely diverging application of the rules" (CBI p 217), rather than the substantive provisions themselves, which generally receive widespread approval.

110.  A number of witnesses expressed concern that NRAs in certain Member States, particularly in the new Accession states, were not sufficiently resourced or independent from government to carry out their functions satisfactorily (BT p 201, Ofcom p 22). NRAs in the telecommunications sector have played a key role in assisting the process of liberalisation and harmonisation within the EU. However, independence has proved difficult in a number of Member States, particularly in terms of political influence. British Telecom saw "a strong correlation between continued state ownership of former monopoly operators and inadequate implementation and enforcement of EU telecoms regulation" (p 202).

111.  British Telecom in their evidence also suggested that the development of pan-European services for business has been constrained by the failure of national incumbents to provide suitable "local access" products (p 202). They argued that this is due to the debate on EU telecoms regulation focussing on "the needs of residential telecoms users rather than major business customers" (p 202).

MODERNISATION

112.  As noted above, the main concerns raised by respondents relate to the implementation of the existing rules, rather than the rules themselves. The Commission has recently reviewed the current regime and proposed certain substantive and procedural revisions. Overall, the Commission's reform proposals have been welcomed by respondents. Ofcom argued that access to spectrum was an increasingly important and valuable commodity and stated that it was necessary to find ways of accurately valuing and efficiently allocating spectrum (p 18). Some witnesses argued that this was best achieved through reconciling the needs for spectrum harmonisation, to avoid interference between services, with a flexible approach to usage. Proposals to both harmonise and liberalise spectrum management[24], for example, met with support (CEPS pp 210-211, Harbour, Purvis, Wilcox p 223).

113.  The one point on which witnesses disagreed with the Commission concerns centralised EU regulation mechanisms. Viviane Reding, the Commissioner for the Information Society, has proposed the establishment of the 'European Electronic Communications Market Authority'[25], to address issues with a pan-European dimension rather than the current system of co-operation between NRAs. Nearly all respondents expressed concern or hostility towards this proposal, considering that the European Regulators Group (ERG), comprising representatives of the 27 Member State NRAs, is capable of operating in an appropriate manner (BT p 203, CBI p 218, Ofcom pp 21-22, T-Mobile p 237). Despite the current inconsistency between Member States, witnesses like Ofcom (p 21) and the CBI argued that NRAs "are closest to the market and ultimately should be best placed to make regulatory decisions", whereas a "Euro-regulator" would simply add an unnecessary "additional layer of policy or decision-making on top of the existing institutional arrangements" (CBI p 218). Commission officials told us that the proposal was aimed at "improving the better functioning of national regulators and improving their cooperation among themselves" (Q 406). But it was not clear why a new level of authority, with the power to make recommendations to the Commission to veto remedies proposed by an NRA, was necessary to achieve this aim.

Conclusions for the Telecommunications Sector

114.  The policy to liberalise and harmonise the telecommunications markets for the provision of networks, services and equipment has been substantially successful, particularly in the services and equipment markets. Such developments have contributed to the very considerable rate of technical and market innovation experienced in the sector over recent years, which has resulted in extensive economic and social benefits accruing to EU citizens.

115.  In general, the current regulatory framework for the provision of electronic communications networks and services has met its objectives and does not require any radical revision. The main concern continues to be failures by Member States in the implementation and enforcement of certain elements of their regulatory obligations. The Commission has recognised this in its reform proposals, with new measures designed to improve its oversight of the decisions of Member State NRAs, to ensure greater consistency in approach between Member States. We therefore welcome its reform proposals in this respect.

116.  The Commission should consider what steps can be taken to reduce further the market power of the national incumbents. Functional separation, where an operator places the provision of certain wholesale access products in an independently operated business unit supplying all market players on equal terms and conditions, including the operator's own retail business, provides a potential model that should be considered by NRAs for other incumbent operators. This approach was voluntarily implemented by BT through Openreach. The Committee supports the Commission's proposal to enable NRAs to impose this as a remedy[26].

117.  The Committee was not persuaded that the Commission's proposal to establish an EU regulator for the telecommunications sector is necessary. The ERG is a co-ordinating agency similar to what has been proposed for the energy sector. Despite the claims made by the Commission, the Committee believe that such a measure is likely to increase regulatory complexity and uncertainty for market participants and bring insufficient benefits for the costs involved.

118.  Ensuring that spectrum management is flexible enough to meet the challenges of technological advances was raised to some witnesses. We therefore welcome the Commission's initiative on spectrum, including the facilitation of secondary trading; greater access to licence-free spectrum, and further co-ordination on the conditions applicable to spectrum authorisations.

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20   Available at http://ec.europa.eu/information_society/policy/ecomm/tomorrow/index_en.htm Back

21   Communication from the Commission, 'Report on the outcome of the Review of the EU regulatory framework for electronic communications networks and services in accordance with Directive 2002/21/EC and Summary of the 2007 Reform Proposals', COM(2007)696. Back

22   Ibid. Back

23   "IP" stands for Internet Protocol. In telecoms IP technologies are those that operate over the internet, such as Skype. Back

24   Reaping the full benefits of the digital dividend in Europe: A common approach to the use of the spectrum released by the digital switchover COM (2007) 700 final. Back

25   COM(2007)699 rev 2, 13 November 2007. Back

26   COM(2007)697 rev 1. Back