Interconnection and Competition
I. Interconnection - a key issue for the creation of a competitive European telecommunications market
The establishment and safeguarding of fair and non-discriminatory conditions for interconnection of networks is one of the key elements of EC-telecommunications policy aiming at the creation of a competitive European telecoms market to the benefit of the endusers. Alternative operators entering the market depend upon access to the developed networks of the incumbent TOs to be able to reach their customers with their services. In the absence of any regulation governing interconnection, the incumbents could thus significantly impede or even prevent the market entry of new competitors by imposing unfavourable conditions of interconnection agreements or by refusing to grant access to their networks at all.
EC law takes a two-tiered approach to protect the interests of new operators in the context of interconnection. First, it established a harmonised regulatory framework on interconnection in the liberalised telecommunications market in the ONP-Interconnection Directive and the specific interconnection provisions of the Full Competition Directive . Second, the application of the competition rules of the EC Treaty serves as a complementary measure to safeguard fair treatment of new market players in individual cases.
The purpose of this speech is to provide an overview on the field of application for Art 85 and in particular Art 86 on interconnection matters. Before I go into more detail in this respect, I want to briefly refer to the relationship between the competition rules and the sector-specific regulation of interconnection in the framework of the ONP-programme.
II. The relation between the competition rules and sector-specific regulation on interconnection
Already its guidelines on the application of competition rules to the telecommunications sector of 1991 , the Commission stated that ONP-legislation on the one hand, and the competition rules of the Treaty, on the other, must be regarded as two neighbouring, but strictly separate sets of rules which do not exclude, but complement each other with regard to telecom regulation on the EC level. The Commission reiterated this statement in its recent Notice on the application of the competition rules to access agreements in the telecommunications sector. As concerns the specific issue of interconnection, it follows that undertakings active in the telecommunications market have to respect both the rules set out in the ONP-Interconnection Directive and the competition rules of the EC Treaty.
Even though the ONP-Interconnection Directive includes a detailed set of rules aiming at ensuring fair and equal terms and conditions of interconnection agreements, there is still a wide range of possibilities for the competition rules to be applied in the interconnection area, in particular for the following reasons:
- The ONP-rules on interconnection have a different scope than the competition rules of the EC Treaty. In several respects, ONP-legislation leaves wide discretion to the Member States and the national regulatory authorities in implementing the ONP-Directives. For instance, the ONP-Interconnection Directive merely establishes the principle of cost-orientation for interconnection tariffs of operators with significant market power, but fails to specify detailed pricing and cost accounting rules. Another example is the provision of Art 7 para 3 of the Directive, which entitles network operators to apply different conditions in interconnection agreements to different types of operators, without clarifying how far such discrimination may reach. The competition rules can be applied in such context in order to complement and precisely determine the scope of such unclear provisions in ONP-legislation.
- Another important difference between the competition rules and the ONP-legislation with regard to interconnection is that the former have direct effect in the Member States, whereas the latter requires in principle implementation on the national statutory level in order to become effective. This distinction can be of major importance if a Member State fails to implement ONP-legislation in due time or in a proper manner. In such case, competition rules could be the main source of EC-law governing interconnection disputes.
- Since the competition rules are of a general nature, they can be more flexibly applied to new developments on the market than the ONP-rules, the amendment of which would require a potentially time-consuming political and legal process.
- Finally, it has to be borne in mind that the enforcement of ONP-legislation mainly takes place on the national level so that parties alleging a violation of such rules have to address the national regulatory authorities. Even though, as a main principle of EC-telecommunications law, such regulatory authorities are to be independent bodies, the exercise of influence by the often politically powerful former TOs can never be totally ruled out. A decision by the Commission as an international body might be advantageous to the new market players in this context.
III. Interconnection and Article 86 of the EC-Treaty
Art 86 of the Treaty prohibits abusive behaviour by dominant undertakings in so far as it affects trade between Member States. In the context of interconnection cases under Art 86, it is to be examined whether and under which conditions a dominant network operator would abuse its dominant position on the relevant market when refusing interconnection to its network or applying unfair or discriminatory conditions in interconnection agreements.
1. Relevant Market
The first step in dealing with a case under Art 86 is to ascertain the relevant product or services market. The traditional test applied by the ECJ and the Commission to determine the exact scope of the relevant product market in a competition case is to examine which goods or services can be regarded as interchangeable from the customer´s point of view.
In its Notice, the Commission identified a separate product market for the provision of access to "essential facilities" in the telecommunications sector (such as telecommunications networks) which has to be distinguished from the market for the provision of services to end-users. One of such "access markets" is the market for the provision of interconnection services.
When determining the precise scope of an interconnection market in an individual case, only interconnection services will belong to the same market which have the same main characteristics for the operators requesting interconnection. Important factors to be taken into account in this context could be the scope of the network to which access is requested (i.e. the number of end users reached) and its technical features. Interconnection to networks including the local loop (such as the networks of the incumbent TOs or of cable network operators) and to the backbone networks of alternative operators lacking access to the local loop should thus, for instance, normally constitute separate markets due to the different functions of such networks from the interconnecting party´s point of view. The Commission indicated in this context, however, that it is difficult to make any statements of general nature with regard to market definition in interconnection cases and that it will be necessary to define the relevant product markets concerned according to the circumstances in the individual case.
With regard to the definition of the relevant geographic market (i.e. the area in which the objective conditions of competition for the provision of interconnection services are similar), the Commission intends to take into account in particular regulatory aspects, such as the terms of the licenses of the undertakings concerned. It is thus possible that the Commission would identify a geographic market covering the territory of several Member States, if the licensing conditions and the other conditions of competition in these Member States are sufficiently homogeneous.
2. Dominant Position
Article 86 applies to undertakings having a dominant position on the relevant product and geographic market. When identifying dominant positions on interconnection markets, the Commission has repeatedly stated that the mere ending of the remaining exclusive rights for the operation of telecommunications networks and the provision of voice telephony services on January 1, 1998, does not per se and immediately put an end to dominant positions held by the incumbent TOs which have enjoyed such monopoly rights so far. On the contrary, the Commission believes that the incumbents´ dominant positions on access markets (and in particular in the markets for access to telecommunications networks) will remain at least in the medium term.
In its Notice, the Commission established the basic principle that dominance in an access market stems from control over an "essential facility" necessary to enter a neighbouring service market. The Commission defined an essential facility as "facility or infrastructure which is essential for reaching customers and/or enabling competitors to carry on their business, and which can not be replicated by any reasonable means". I will come back to the significance of the "essential facilities doctrine" for interconnection cases in more detail later. A telecommunications network is the "classic" example for an essential facility in the telecommunications sector. Incumbent operators controlling the public network in a Member State will thus in most of the cases enjoy a dominant position on the access market concerned.
Control of a network is, however, not the only factor to be taken into account by the Commission when determining a dominant position in an interconnection market. Other relevant criteria are in particular the following:
- Market share
A market share in the relevant interconnection market above 50% will usually be a strong indication for the existence a dominant position. The Commission intends to also consider whether an operator has been notified by the national regulatory authorities as having significant market power pursuant to Art 4 para 3 of the ONP-Interconnection Directive. Under this provision, significant market power of an organisation is presumed if such organisation has a share of more than 25% on any given market. The impact that the concept of significant market power as introduced by the ONP-Interconnection Directive will have on the notion of dominance under Art 86 is however not yet clear. It is likely, however, that significant market power under the Interconnection Directive describes a degree of market control which is lower than that of dominance under Art 86.
- Supplyside substitutability
The dominance of a network operator on an interconnection market also depends on existing alternatives for parties seeking interconnection. The Commission will thus examine whether the networks of alternative operators exist on the market concerned and whether their networks have a sufficient geographic coverage and technological standard to provide serious competition to the incumbent´s network.
- Regulatory privileges
Privileged treatment of operators by the Member States with regard to regulatory aspects will also be taken into account when identifying dominance on interconnection markets.
- Joint dominance
Due to the specific structure of interconnection markets in some Member States, the concept of joint dominance could be of particular importance when determining dominant positions in interconnection cases. Art 86 in principle also applies when a dominant position is shared by more than one undertaking. The Commission indicated that it is prepared to apply this concept in competition cases regarding access issues in the telecommunications sector, in particular (but not only) if the operators concerned have links such as agreements for co-operation, interconnection or roaming. An example for such joint dominance could be the markets for access and interconnection to the local loop in several Member States, where the local loop is controlled by the incumbent operator together with one or two cable operators. Depending on the circumstances of the individual case, such operators could be considered to hold a joint dominant position on the market.
There is a wide range of potentially unfair practices of dominant operators in interconnection markets. The following is an outline of the most important and practically relevant of such abuses:
a) Refusal to grant interconnection
The refusal of a dominant operator to supply competitors or customers with its products or services without objective justification is a typical example for an abusive behaviour under Art 86. In its recent case law, in particular in the transport sector (starting with the decisions Stena Sealink and Rödby ), the Commission established the principle that a company controlling an essential facility (i.e., a facility or infrastructure which is essential for entering a certain market) is obligated under Art 86 to grant other companies non-discriminatory access to this facility under fair conditions, unless there is objective justification to refuse such access.
This "essential facilities-doctrine" will be of particular importance in access disputes in the telecommunications sector and in particular with regard to interconnection issues. In its Notice, the Commission tried to clarify its position with regard to the refusal by dominant operators to grant competitors access to their networks. In this context, the Commission distinguished between three different scenarios:
- First, the refusal of access by a dominant operator that has already offered interconnection to its networks to other competitors on the market would constitute a discriminatory treatment and thus an abuse under Art 86, unless such refusal is objectively justified (unless there is an objective justification for such refusal). In particular, the Commission indicated that a dominant operator would be obligated to provide interconnection to third parties under the same terms and conditions as it applies to its own downstream operations. It seems that this would even be the case if the operator has not provided access to its network to any other third party before.
- Second, it is established in the case law of the ECJ and the Commission under Art 86, that the unilateral with-drawal from an existing interconnection agreement by a dominant operator would be abusive in the absence of objective justification.
- Third, the question arises whether a dominant network operator is obligated to grant interconnection to its network to another operator for the purpose of the provision of a specific service, if no other third party has been given access by the dominant access provider before in order to operate on the service market concerned. In its Notice, the Commission indicated that also in such circumstances a refusal to provide interconnection could constitute an abuse of Art 86 if the following elements are cumulatively fulfilled:
- Interconnection to the network of the dominant operator is essential for the other operator to compete on the service market;
- there is sufficient capacity available to provide interconnection;
- the facility owner fails to satisfy demand on the service or product market concerned, blocks the emergence of a potential new service or product, or impedes competition on an existing or a potential service or product market;
- the company seeking interconnection is prepared to pay a reasonable and non-discriminatory interconnection fee and to accept other non-discriminatory terms and conditions of interconnection;
- there is no objective justification for a refusal of interconnection.
Relevant justifications for a refusal include capacity constraints, overriding technical difficulties of interconnection but also the need for a network operator investing in the development of new services to have sufficient time to place such new service or product on the market.
Pricing issues are among the most disputed issues in the area of interconnection. The ONP-Interconnection Directive sets out the basic principles for interconnection pricing in the liberalised telecommunications market and in particular establishes the principle of cost-orientation to be followed by dominant operators. In its recent Communication on interconnection pricing in the liberalised telecommunications market , the Commission clarified its position in the context of interconnection pricing and recommended price limits to the Member States.
Art 86 could also be applied with regard to unfairly low prices charged by operators for access to their networks in order to eliminate competition from other network operators entering the interconnection market.
A dominant network operator discriminating between parties seeking interconnection to its network with regard to interconnection tariffs or other terms and conditions of interconnection violates Art 86 (c), unless such discriminating behaviour is objectively justified. Discrimination may, for instance relate to pricing, the time of service provision, the technical realisation of interconnection, restrictions on network use and use of customer network data, the number and/or locations of points of interconnection and the level in the network hierarchy at which interconnection is granted.
The obligation of non-discrimination with regard to interconnection includes the duty of a dominant operator to treat third parties seeking interconnection in the same way as its own subsidiary or downstream operating arm.
d) Bundling of interconnection services
Dominant operators are under an obligation to provide unbundled interconnection to their networks both under Art 86 and the ONP-Interconnection Directive. A dominant operator is thus refrained from offering interconnection to one part or level of its network only in connection with other interconnection services not being requested by the other party.
e) Technical realisation of interconnection
According to the Commission, interconnection to the networks of dominant operators must be realised under such technical conditions as are most suitable to the party seeking interconnection, unless there are objective justifications not to do so. This duty concerns in particular the number and locations of points of interconnection.
IV. Interconnection and Article 85 of the EC-Treaty
Art 85 of the EC-Treaty prohibits agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have an anti-competitive object or effect on the common market.
Generally speaking, interconnection agreements are likely to have rather procompetitive aspects than a restrictive impact on competition in the light of Art 85, since they are a precondition for new operators to enter the market.
On the other hand, interconnection agreements can also be used as a means for anti-competitive practices of the parties involved. In this regard, the following issues are of particular concern for the Commission:
a) Coordination of prices
Interconnecting parties could use their interconnection agreements as a basis for coordination of their prices charged on the service markets. Such price coordination would be a typical example of an anti-competitive practice prohibited by Art 85.
b) Market sharing
Another anti-competitive practice in the context of interconnection agreements falling under Art 85 would be the sharing of the services markets concerned among the interconnecting parties.
c) Exclusivity clauses
Exclusivity arrangements between interconnecting parties will usually fall under Art 85 para 1 due to their anti-competitive effects, but may qualify for individual exemption when fulfilling the criteria laid down in Art 85 para 3.
d) Exchange of customer and traffic information
The exchange of competition-related information, in particular concerning customer data or business strategies in the framework of interconnection agreements can also result in restrictions of competition (such as market sharing) and would thus require an individual exemption by virtue of Art 85 para 3.
V. Procedural Aspects
As a last issue, I would like to briefly address some procedural aspects in the application of the competition rules to interconnection cases. In its Notice, the Commission emphasized that it intends to prevent simultaneous proceedings by the Commission and the national courts or regulatory authorities. Thus, the Commission will generally not pursue any investigation as long as a case is pending with a national court or authority, unless immediate action by the Commission is necessary considering the circumstances of the individual case. If the national court or authority, however, does not reach a decision within six months, the Commission will begin its investigation upon request of a party concerned.
As regards its capacity to impose fines for violations of the competition rules under Regulation No. 17/62, the Commission indicated that it would not impose any fine in respect of interconnection agreements which have been notified to a national regulatory authority but not to the Commission, unless such agreement would be in breach of Art 86 or would seriously violate Art 85. This intention of the Commission would extend the scope of Art 15 para 5 a of Regulation No. 17/62 pursuant to which no fines for violations of Art 85 are to be imposed in respect of acts taking place after notification to the Commission and before its decision under Art 85 para 3, provided that such acts fall within the limits of the activity described in the notification. Since the wording of the Commission´s notice is rather unclear in this respect, however, a certain degree of uncertainty with regard to the immunity for fines for interconnection agreements notified to national regulatory authorities remains.
The strict application of the competition rules of the EC Treaty to interconnection issues in the telecommunications sector will be of major importance for the creation of fair and competitive conditions on the liberalised telecommunications market. In the absence of any precedents, some guidance on how the Commission will apply Articles 85 and 86 to interconnection agreements and disputes can be obtained from the Commission´s recent Notice on access agreements in the telecommunications sector. It remains to be seen how the principles as set out in this Notice will be applied in the cases to come.
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