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EU Telecoms Regulation Based on Unilateral Market Power Would be Contrary to EU Law

The existing EU regulatory framework for electronic communications obliges the EU Member States to provide in their national laws for certain powers and responsibilities of national regulatory authorities (“NRA”), in particular related to the analysis of markets likely to be regulated ex-ante. The fundamental principle since 2003 is that only companies with significant market power (“SMP”) shall be made subject to ex-ante obligations. This is a carefully balanced regulatory system, taking into account the important goal of stimulating market entry, and thus promoting effective competition, while at the same time establishing adequate investment incentives for the network operators.

This balance would be seriously put in danger by the introduction of the so-called unilateral market power (“UMP”)-concept, as it is currently being discussed within the European Parliament, as part of the proposed Directive of the European Parliament and of the Council establishing the European Electronic Communications Code (“EECC”).

The UMP-concept would essentially put an undue additional regulatory burden on telecom network operators and violate their fundamental rights to do business in Europe, which is not justified by any imperative requirements or needs. The introduction of this concept into the EECC would therefore be contrary to the Treaty on the Functioning of the European Union (“TFEU”) and to the Charter of Fundamental Rights of the European Union, as explained in detail below.

 1. Continuous validity of the SMP concept

The existing SMP-concept strictly corresponds, in substance, to the dominance concept under Article 102 TFEU, as interpreted by the EU-Courts. This alignment leads to a predictable framework for all operators, both with regard to the application of sector specific regulation and to the de-regulation of the markets. In the absence of SMP, ex-ante regulation must be phased out, and the companies’ conduct shall only be reviewed under the competition rules.

This flexible SMP-concept is and remains well-suited to address all possible competition problems arising in oligopolistic markets. NRA are constantly applying this concept under the specific conditions set out in the 2002 Commission Guidelines on market analysis and SMP assessment (OJ EU 2002, C 165/6), which contains an entire section on EU case law and decision-making practice regarding collective dominance (paras. 86-106). Accordingly, the European Commission (“Commission”) has repeatedly applied these criteria when commenting on proposed national regulatory market analyses under Article 7 Framework Directive. In several cases, NRA have found collective dominance, and this was also accepted by the Commission.

In doing so, the NRA are already imposing regulatory remedies in oligopolistic markets. By contrast, the NRA had to refrain from imposing ex-ante remedies whenever they did not find SMP in any such markets. It is a desired outcome, and even one of the fundamental principles of the regulatory framework, to de-regulate markets when they are exposed to a sufficient degree of effective competition. As a result of this process, many electronic communications markets have gained this status over time, allowing for more flexible investment and business decisions by the operators, to the benefit of consumers.

 2. Failure to prove the need for the UMP-concept

By contrast, the UMP-concept, as proposed by several Members of the European Parliament (amendments 240, 794, 797, 800, 801, and 847 regarding Recital 139a, as well as Articles 61, 62 and 65 EECC), does not fit into the existing telecom regulatory system at all. This concept is derived from the unilateral effects doctrine under the significant impediment of effective competition (SIEC) test, which is highly specific to merger control. In this field, competition authorities have to assess the expected adverse impact of lasting structural changes of the market (through a reduction of the number of players, e.g. from four to three or from three to two) on competition.

The substantive test under the initial merger rules was based on the dominance test. Mergers were to be prohibited when they led to ‘the strengthening or creation of a dominant position’. In the current merger rules (Regulation 139/2004), this test was modified into the SIEC test (‘significant impediments of effective competition’), in order to expand the scope of EU merger control to unilateral effects in markets with only few large players. This change made a lot of sense, as many had questioned the ability of the old merger rules to deal with non-collusive oligopolies. In its Merger Guidelines, the Commission also indicated its willingness to shift the focus of the analysis to the unilateral effects of a merger, in particular the ability of firms to raise prices because of the removal of competitive constraints resulting from the merger, irrespective of the pricing decisions and actions of their competitors.

The permanent authorization of long-lasting market changes in case of mergers justifies a strict test such as SIEC, but this is fundamentally different in the ex-ante regulation of the telecom markets where the competition issues at stake are more short-term and conduct-based than in mergers. The introduction of the UMP-concept into the EECC would essentially establish a standard rule whereby all companies in oligopolistic markets would always be and remain subject to ex-ante regulation. This would be contrary to the overall objective that ex-ante regulation should not be perpetual, and certainly not self-perpetuating. After almost 20 years of initially heavily regulated markets, followed by gradual de-regulation, if competition problems still occur, this should not trigger the extension of ex-ante regulation into new areas.

While the EU enjoys wide discretion on its policy objectives and the instruments used to achieve internal market goals, Article 114 TFEU does not grant the EU an unlimited legislative competence. Any measure taken under this empowerment provision must notably be compatible with the adequacy, proportionality and subsidiarity principles.

Given the importance of proportionality and subsidiarity in EU lawmaking, a specific Protocol (No. 2) was dedicated to the application of these principles (OJ EU 2008 C 115/206) when the Lisbon Treaty was adopted. The proportionality principle requires that the means used to attain a policy objective are not stricter than what is appropriate and necessary. It is a general principle on the basis of which the validity of all acts of the EU institutions may be tested (CJEU, C-177/99 and C-181/99, Ampafrance).

In practice, this means that any new EU rules require a clearly established need for (further) harmonization. Any new obligations or restrictions for companies must not go beyond what is required to achieve the internal market (CJEU, C-300/89, Commission/Council; C-376/98, Germany/European Parliament and Council). A failure to comply with the principle of proportionality is a manifest and serious disregard of the limits to the powers of the EU legislator under Article 114 TFEU.

The respective amendments put forward in the European Parliament fail to prove an actual need to extend ex-ante regulation with the new UMP concept. The solutions for any competition problems that may arise in oligopolistic markets should first of all be addressed under the existing SMP regulation, taking into account any possible amendments brought about by the EECC, which is currently under discussion in the European Parliament. The Commission’s SMP guidelines are also being revised at present, with a public consultation open since 27 March 2017, focusing mainly on collective dominance. The guidelines will thus be amended shortly, based on most recent case law and enforcement practice regarding “joint SMP”, to facilitate the ongoing debate with the European Parliament regarding the EECC.

Any remaining competition issues should be dealt with under the competition rules, notably Article 102 TFEU. Both at EU and national level, recourse has been made often to Article 102 TFEU to cover cases of (constructive) access refusals and unfair pricing in telecommunications markets. The mere fact that the conditions for finding collective dominance are rather restrictive as a result to the EU case law cannot be seen as a sufficient justification for UMP-regulation. If the collective dominance criteria are not fulfilled, this should rather be seen as a sign that the markets have reached a shape that fully complies with the objectives under sector-specific regulations and general competition law.

The additional burden imposed on companies under the UMP-concept would be inadequate and disproportionate to the aims pursued, investment and effective competition, in particular as this aim is already being achieved by a more appropriate measure with the SMP-concept. The proportionality principles requires that where there is a choice between several appropriate measures, the least onerous must be used – which in this case would undeniably be the SMP-concept rather than the (inappropriate) UMP-concept.

Contrary to Protocol (No. 2), the respective amendment proposals put forward in the European Parliament fail to substantiate the reasons for concluding that the UMP-concept would be better suited, and do not provide any reference to qualitative and quantitative indicators for that purpose either. Likewise, they fail to take into account the need to minimize any burden, whether financial or administrative, falling upon the economic operators.

In addition, and in accordance with the subsidiary principle, the EU should only act on the basis of Article 114 TFEU if, and in so far as, the objectives of the proposed action cannot be sufficiently achieved by the Member States (Article 5 TEU). The existing regulatory system already allows NRAs to achieve the desired result of balancing effective competition versus investment incentives. Only if Member States were manifestly unable to achieve these objectives and the EU actions were to provide added value, the EU would have a justification to adopt stricter rules. This is not the case here and the amendments put forward in the European Parliament so far fail to show why these fundamental criteria have been met.

 3. UMP-concept would violate companies’ fundamental freedoms

The introduction of unnecessary and disproportionate regulation with the UMP-concept would lead to severe violations of the network operators’ fundamental freedoms granted by the TFEU. The imposition of mandatory third party access to their infrastructure and services at cost-oriented prices, exclusively based on the finding of UMP, would considerably limit their commercial freedom for the establishment of companies and the provision of services within the internal market (Articles 49 and 56 TFEU).

The EU institutions are obliged to take into account the fundamental freedoms when devising their legislation (CJEU, C-51/93, Meyhui). Against this background, the EU would exceed its powers under Article 114 TFEU and infringe Articles 49 and 56 TFEU, because the additional restrictions resulting from the introduction of the UMP-concept cannot be considered justifiable in the public interest if they are not adequate and proportionate themselves, as shown in section 2 above.

Finally, the UMP-proposals are not in line with the companies’ freedom to conduct a business under Article 16 of the Charter of Fundamental Rights of the European Union. This provision protects their fundamental freedom against undue regulatory intervention into the markets, as it clearly results from EU case law. Any restrictions of this freedom must be adequate and proportionate so as to be justified, but this is clearly not the case for the UMP-regulation.

4. Comparison with other network industries

Furthermore, the use of UMP has never been considered in any other regulated network industries in the EU, i.e. natural gas, electricity, postal services or railway transport. All of them are characterized by stricter bottlenecks than electronic communications, because there is no comparable duplication of infrastructure in these sectors. Most of them are likely to remain natural monopolies forever, which certainly requires a higher level of regulatory oversight than in more competitive markets like electronic communications.

Every regulatory framework in these other network industries is based on its own specific set of parameters and criteria in order to address the critical gap between network operators and competitors (which do not have such networks). UMP-regulation might well have been introduced in the interest of more forceful market opening, but it was not even considered in these industries, in order to maintain a transparent and predictable set of rules for all parties involved. Accordingly, none of the other sector-specific regulations contains a comparable duality of SMP- and UMP-regulation, for good reasons.

In the energy and the railway sector, the need for such strict access regulations has been partly tempered by unbundling provisions, making the legal and structural separation of networks and commercial services mandatory. If these rules are strictly observed, the regulatory oversight will be greatly facilitated. Such an unbundling provision has also been introduced into the regulatory framework for electronic communications in 2009, in the form of functional separation as a possible remedy which can be imposed by regulators on SMP operators as a last resort (Article 13a Access Directive).

This unbundling tool has however never been used in practice so far, which shows – once more – that the need for more far-reaching ex-ante regulation with the UMP-concept is nonexistent and certainly has not been demonstrated to date. Before new forms of regulation are introduced into the regulatory framework, all existing tools, including general competition law, would first of all have to be exhausted, so that a real necessity appears which cannot be addressed otherwise.

Copyright © 2018, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Robert Klotz, Sheppard Mullin, European Commission lawyer, national authorities attorney
Partner

Robert Klotz is a partner in the Antitrust & Competition Practice Group in the firm's Brussels office.

Mr. Klotz concentrates on all aspects of EU and German competition and regulatory law and represents clients before the European Commission and national authorities, with a particular focus on network industries, such as energy, telecommunications, post and transport. 

Previously he served for almost a decade as an official with the European Commission in DG Competition, dealing with high level antitrust cases,...

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Partner

Mr. Vandenberghe focuses his practice on EU regulatory, energy and competition law.

Mr. Vandenberghe’s experience in EU regulatory law includes advising on sector-specific regulation, particularly for consumer electronics, medical devices, industrial equipment, chemicals and pesticides, food, tobacco, natural resources and waste industries. He also advises on a broad range of EU regulatory and compliance issues that affect market access and cross-border trade of products, including authorizations, package labeling, safety and environmental standards and CE marking.

In the energy industry, Mr. Vandenberghe represents gas and electricity grid operators, investors, power producers and large energy consumers. He advises on regulatory law matters, including TPA, unbundling, tariffs, investment structuring, network rules and licenses, and he also represents clients in fossil fuels and renewable energy contracts and projects, EU energy liberalization packages, and climate change and emissions trading matters. He has been recognized as a leading energy lawyer by independent legal directory Legal 500 EMEA, which noted his “wealth of experience in the regulation of fossil fuels and renewable energy” and “his expertise in EU energy liberalisation packages and issues relating to climate change”.

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