3.3.1 The Evolution from Sector-Specific Regulation to Competition-Based Regulation

The degree of competition in the market plays an important role in the development of new regulatory trends. In a growing number of instances, especially for new services and technologies for which operators have no market power the focus has been on, if not removing ex-ante regulation, at least not creating additional conditions. Competition law tends to be ex-post as competition authorities are generally required to intervene after an anticompetitive practice has been committed. On the other hand, telecommunications regulations tends to be ex-ante as regulators are generally given authority to impose approval conditions and intervene prior to certain actions involving industry participants (e.g., approval of tariffs or interconnection rates; change of control or mergers).

A 2001 ITU Study Group report on the impact of convergence stated that “any possible action to review the ex-ante regulatory framework – and possibly imposing new conditions – may cause or ‘create’ undesirable restrictions, which may have a negative impact on the market expansion, and consequently on the growth of new businesses.”1 In 2004, the Study Group noted that the “main trend is to move from sector specific ex-ante law towards ex-post application of competition law.”2 Similarly, a 2005 OECD Roundtable on Communication Convergence highlighted “the need for regulators to move away from ex-ante towards ex-post regulation.”3 An argument in favor of ex-post regulation has been that it is more flexible and is not as interventionist as ex-ante regulation because it relies on market forces to dictate the rules of the game unless abuses are committed. Among the disadvantages cited for ex-post regulation is that it may be too slow to adapt in a fast paced communications environment4 (e.g., where cases take years to decide and parties end up resolving their contentions outside of the administrative process). Despite the increasingly important role that competition policy is playing in the telecommunications industry, the need for employing ex-ante regulation for some period of time is recognized as a necessary means to promote competition in markets where competition has not effectively developed and in certain traditional service markets which may not be ready for an immediate removal of such ex-ante regulation.5

Evolution of the European Union Model

The EU has followed a coordinated reform strategy which began almost two decades ago with the adoption of a series of directives to guide the transition from monopoly to full liberalization. This first framework, referred to as the “1998 Package” in honor of the year in which full liberalization was achieved, was comprised of a sequence of directives prescribing the progressive removal of market barriers and the encouragement of competition, as well as the harmonization of telecommunications regulation throughout the EU. The liberalization process began with niche market segments (e.g., terminal equipment) and moved gradually towards core market segments (e.g., voice telephony).

In light of the maturity and liberalization achieved, in 2002 the EC issued the a new regulatory framework, the NRF, essentially prescribing that sector-specific regulation (ex-ante regulations) be confined to cases where effective competition is absent, i.e., in markets where there are one or more undertakings with significant market power, and where national competition law remedies are not sufficient to address the problem.6 As such, the NRF places greater reliance on generic EU competition law, and seeks a “market-based” approach to regulation, as opposed to a “service-based” approach.

The NRF7 replaced much of the sector-specific regulation with technologically-neutral, general competition law rules,8 with the “aim [of reducing] ex-ante sector-specific rules progressively as competition in the market develops.”9 The NRF provides new market definitions and its significant market power (SMP) concept has been re-defined to be more closely aligned with the competition policy provisions of the concept of dominance set out in the European Treaty.10

Under the Framework Directive, the EC must identify the product and service “markets” that may raise competition issues and may be subject to ex-ante regulation.11 (See Table 3-4 for the list of markets currently identified by the EC.) In making such determinations, the member states rely on EU competition principles and practices. In turn, the NRAs must conduct an analysis of the markets that have been identified as being susceptible to regulation, using the following criteria: (i) determine whether there are entry barriers of a structural, legal or regulatory nature; (ii) examine the state of competition relative to such barriers to determine if effective competition could develop in a relevant period of time; and (iii) determine whether the exclusive application of competition law would properly address market failures.12 If after conducting its analysis, the NRA determines that regulation is warranted, it may propose a draft measure, which the EC may request be withdrawn if it (i) concerns definition of relevant markets; (ii) would create a barrier to the entry; or (iii) would be incompatible with the EC’s laws or policy objectives (e.g., to move from sector-specific regulations to competition laws). Even if the EC identifies a market as being “susceptible” to ex-ante regulation as it would be possible for an operator to maintain market power, it does not mean that regulation will always be required.13 Regulation will only be warranted if there is a finding that effective competition does not exist in the relevant market.

In essence, the NRF sets forth the following three-step process:14

• Definition of Markets: NRAs are required to identify markets the characteristics of which warrant the application of ex-ante regulation based on three criteria: (i) high and non-transitory entry barriers; (ii) the dynamic state of competitiveness behind entry barriers; and (iii) the sufficiency of competition law in the absence of ex-ante regulation.
• Market Analysis: NRAs are required to assess the level of competition in the markets which it has identified under (i) above.
• Imposition of Remedies: If the NRA finds that a particular market lacks effective competition and identifies operators with significant market power, it may impose certain specific obligations (i.e., those in the Universal Service Directive or Access Directive mentioned in Section 3.2.2 above). The NRA may also maintain or amend obligations that may already be in place. The Framework Directive provides a review and consultation process for the approval of any such remedies to ensure that they are consistent with the objectives of the NRF and that they do not further affect competition in the market.

Table 3-4: Markets Susceptible to ex ante Regulation in the EU17

Retail Level		Wholesale Level
1.	Access to the public telephone network at a fixed location for residential customers.	8.	Call origination in the public telephone network provided at a fixed location.
2.	Access to the public telephone network at a fixed location for non-residential Customers.	9.	Call termination on individual public telephone networks provided a fixed location.
3.	Publicly available local and/or national telephone services provided at a fixed location for residential customers.	10.	Transit services in the fixed public network.
4.	Publicly available international telephone services provided at a fixed location for residential customers.	11.	Wholesale unbundled access (including shared access) to metallic loops and sub-loops for the purpose of providing broadband and voice services.
5.	Publicly available local and/or national telephone services provided at a fixedlocation for non-residential customers.	12.	Wholesale broadband access.
6.	Publicly available international telephone services provided at a fixed location for non-residential customers.	13.	Wholesale terminating segment to leased lines.
7.	The minimum set of leased lines.	14.	Wholesale trunk segments of leased lines.
		15.	Access and call origination on public mobile telephone networks.
		16.	Voice call termination on individual mobile networks.
		17.	The wholesale national market for international roaming on public mobile networks.
		18.	Broadcasting transmission services, to deliver broadcast content to end users.
[Note that markets are often referred to by the numbers assigned to them under the EC Recommendation (e.g., the mobile termination market may be referred to as “Market 16”).]

EU Directives are binding rules meant to be implemented on a national level by each member state. Depending on the maturity of the market and the legislation in place at the time of adoption of the Framework Directive, some countries have had to implement modifications in their national legislation and are at varying stages regarding their analyses of the above-mentioned markets.

Transposition of the EU Model

Understanding the EU’s regulatory evolution and the state of the EU markets during both phases of regulatory interventions is crucial when considering implementation of a similar model in developing countries. Many developing countries find themselves in a transitional stage similar to the one that existed in the EU during the implementation of the 1998 Package. Therefore caution may be warranted to avoid rushing into its implementation in markets that may not be ready for near-term regulatory dismantling, as they may require some continued regulation to ensure the development of competition.

Additionally, in markets where full liberalization has been achieved, effective application of the EU’s competition-based approach may be influenced by a country’s lack of experience and resources to dictate and enforce generic competition principles. The principal elements that may pose a challenge to the successful emulation of the EU model in developing countries are the differences in: (i) market composition and development; and (ii) the institutional frameworks.18

With respect to market composition and development, the following differences have been identified as potential challenges in adopting the EU model in developing countries:19

• Dominance of Mobile Networks. Large mobile penetration in developing countries, resulting in the preeminence of mobile networks with respect to fixed networks, may require that some elements of price regulation traditionally aimed at dominant fixed-line incumbent be applied to mobile networks. However, some other regulations (e.g., local loop unbundling) may be inapplicable to wireless networks.
• Universal Service and Rural Access. Compared with Europe and other developed countries, developing countries tend to have lower levels of teledensity. Where most developed countries (with higher teledensity levels) focus on issues of “content, quality and price of basic services,” countries with developing communications markets may be required to focus their regulatory resources on the implementation of access measures.
• Market Liberalization. Some developing countries have not achieved full liberalization of all market elements and certain monopoly vestiges still exist (e.g., incumbent telecommunications operator’s control over international gateway; preferential access to essential facilities by the incumbent’s mobile business). As such, developing countries may require greater regulatory intervention as the market transitions to greater liberalization.

The legal, political and institutional dynamics in developing countries also may contribute to the need for more prescriptive sector regulation. The legal and judicial systems in many developing countries may lack sufficient depth and expertise on matters of competition principles, and courts may lack the technical knowledge to effectively resolve complex matters in a constantly evolving market. Political interference by well-connected or state-owned operators is also a factor that supports maintaining sector-specific regulation in order to avoid arbitrary implementation of regulation.20

Where generic competition principles may not be applied for the reasons mentioned above, countries may consider incorporating competition law principles into their sector-specific framework, as a mechanism to foster the growth of the market and prevent anticompetitive practices that may hinder its development.

While the EU model as a whole may not be transferable to the developing world, certain of its underlying principles can serve as the foundation for an effective regulatory framework:21

• Establishment of an independent regulator;
• Existence of an efficient mechanism to appeal decisions of the regulator;
• Applying regulation with principles of transparency, non-discrimination and objectivity;
• ‘Two-tier’ regulation, where the activities of operators with significant market power are held to greater regulatory supervision;
• Adoption of technology neutral approach (i.e., recognizing the fast-paced development of convergence and shift regulation from technology/service-based, to technology neutral);
• Reducing market access barriers;
• Avoiding over-regulation and progressive reduction of unnecessary regulation upon the existence of effective competition;
• Engaging in open, transparent and thorough consultation prior to the issuance of any regulation that would impact the market; and
• Reducing bureaucratic processes in an effort to reduce costs and streamline processes where possible.

Box 3-4: Singapore In 2005, the Info-communications Development Authority (IDA), the telecommunications regulator in Singapore, issued a Code of Practice for Competition in the Provision of Telecommunications Services following adoption of a regulatory policy similar to that of the EU. The Code of Practice specifically recognizes that consumer welfare is best promoted through market forces rather than regulation, and states that the IDA will “place primary reliance on private negotiation and industry self-regulation” subject to its duty of preventing anti-competitive conduct.22 However, the Code of Practice recognizes that ex ante regulatory intervention may be required where markets are not sufficiently competitive.23

ENDNOTES

1 International Telecommunication Union, ITU-D Study Group 1, Document 1/187 (Rev. 1), Final Report on ITU-D Question 10/1: Regulatory impact of the phenomenon of convergence within the telecommunications, broadcasting, information technology and content sectors, 6 September 2001, at 1 [hereinafter ITU-D Q 10/1 Final Report].

2 International Telecommunication Union, Telecommunication Development Bureau, ITU-D Study Groups, Document RGQ10-1/1/013(Rev.1)-E, Question 10/1: Impact of convergence of telecommunications, broadcasting, information technology and content sectors, 23 March 2004 (response to question 2.3).

3 OECD, Working Party on Telecommunication and Information Services Policies, Summary of the OECD Roundtable on Communications Convergence, London, July 8, 2005. DSTI/ICCP/TISP(2005)8, at par. 1 [hereinafter Summary of OECD Roundtable].

4 International Telecommunication Union, Competition Policy in Telecommunications: The Case of Denmark, November 2002, at Box 4.3 (citing ITU source).

5 Id.

6 See Viviane Reding, Member of the EC responsible for Information Society and Media, The Review of the Regulatory Framework for e-Communications, SPEECH/05/515, 1st Meeting of the Centre for European Policy Studies Taskforce on Electronic Communications, Brussels, 15 September 2005, at 3, stating that: “one of the main goals of the framework is to re-focus regulation, and to withdraw regulation as competition becomes effective.”

7 In 2002, the European Union approved a new regulatory framework consisting of a Framework Directive (Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002, on a common regulatory framework for electronic communications networks and services, [hereinafter the Framework Directive]. Sector specific-regulation has been reduced from more than twenty directives to five. Available at http://www.euroblind.org/fichiersGB/com200221.htm, supplemented by other directives. See also (i) Directive 2002/20/EC of the European Parliament and of the Council of 7 March 2002 on the authorization of electronic communications networks and services (Authorization Directive) (ii), Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on access to, and interconnection of, electronic Communications networks and associated facilities (Access Directive) (iii), Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services (Universal Service Directive) (iv), Directive 97/66/EC of the European Parliament and of the Council of 15 December 1997 concerning the processing of personal data and the protection of privacy in the telecommunications sector (Data Privacy Directive). [hereinafter the NRF], available at http://www.spamlaws.com/f/docs/97-66-ec.pdf.

8 See NRF.

9 See Framework Directive.

10 See Article 82 of European Treaty. See also International Telecommunication Union, Competition Policy in Telecommunications: The Case of Denmark, November 2002, at 21, Section 4.1.1.

11 Commission of the European Communities, Commission Recommendation of 11/02/2003 on the 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 Common Regulatory Framework for Electronic Communications Networks and Services, C(2003)497 [hereinafter EC Recommendation on Relevant Markets], available at http://europa.eu.int/information_society/topics/telecoms/regulatory/maindocs/documents/recomen.pdf.

12 For definitions of what constitutes structural and legal entry barrier, see Whereas clauses 11 - 14 of EC Recommendation on Relevant Markets.

13 EC Recommendation on Relevant Markets, at Whereas (20).

14 Directive 2002/21/EC, Article 15 and 16.

15 Commission Recommendation on Relevant Markets, OJ 8.5.2003 L 114/45.

16 Directive 2002/21/EC, Articles 6 and 7.

17 Id. at Annex. The EC recommended that EU member states conduct a market analysis of the markets described above and determine whether ex-ante regulation is warranted.

18 Ann Buckingham and Mark Williams, Designing Regulatory Frameworks for Developing Countries, in Telecommunications Law and Regulation (Ian Walden and John Angel eds., 2005), section 15.3.

19 Id.

20 Id.

21 Id., at Section 15.4.

22 Singapore, Telecommunications Act (Chapter 323), Code of Practice for Competition in the Provision of Telecommunication Services 2005, Government Gazette, S 87/2005, 18 February 2005, at Article 1.5.1.

23 Id. at Article 1.5.4.