Annex 1: Liberalization of telecommunications

A Review of European Directives

Introduction

Liberalization and deregulation of Europe's Telecommunications services are widely seen as essential to the support of a strong and innovative trading base. The Telecommunications sector, which is acknowledged to be critical to the overall competitiveness of the European economy, is itself generating as well as facing dramatic technological advances. Its success in the promotion of evolutionary change, and in coping with revolutionary challenges to its own businesses, is crucial if Europe is to maintain a leading position in a global trading market. The national monopolies which have traditionally provided Telecommunications services have all too often proved resistant to change and are in danger of being outflanked by more thrusting and dynamic operators, using technologies which can circumvent present licensing restrictions. In those European Member States which have already moved towards deregulation, the advantages of greater innovation and enhanced consumer power are beginning to emerge from a re-vitalised industry.

National Telecommunications monopolies are typically state-owned, or state-controlled, and are often linked with postal services in a Posts, telephones and Telegraphs type of organisation. Having evolved in this way since the early days of voice Telephony, each one presides over a technological infra-structure which has a national identity and utilises nationally adopted technical specifications and protocols. Although a very considerable degree of harmonization has taken place, in order to facilitate cross-frontier traffic and international subscriber dialling, the national networks still retain much of that individual legal, technical and cultural identity. As a result, it has proved difficult to reach the European objective of opening Telecommunications services to full competition as part of the Single Market. A target date of 1 January 1998 has been set for achievement of this objective, although a few Member States will be granted additional time to arrive at full compliance.

Steps towards liberalization

As first step Member States needed to separate their postal and Telecommunication services, prior to removal of the exclusive rights granted to the monopoly Telecommunications providers. These moves allowed competing organisations to enter the market subject to national licensing rules, which are to be further relaxed in the later stages to remove any limits on the number of licences that may be granted. Selling-off State-owned service providers is not a requirement of the liberalization programme, but most are likely to pass wholly or partly out of State ownership. Even in those countries, such as the United Kingdom, Sweden and Austria, which have proceeded furthest along the route of liberalization in advance of European Directives, additional dramatic changes are likely to be seen as full competition ensues.

The legal instruments adopted by the European Union to bring about full competition in this complex area are themselves complicated. The issue has been addressed by three inter-linked strategies. Firstly, the slightly easier question of liberalization of telephone equipment supply was dealt with in a set of Terminal Equipment Directives, consistent with the "New Approach" adopted for the introduction of the Single Market. The second and third parts were the broadly simultaneous introduction of two enabling Directives: to remove regulatory barriers to competition, and to open up the Telecommunications infrastructure to new operators.

Since the existence of national Telecommunications monopolies was itself arguably in breach of the common market provisions of the Treaty of Rome - to which all EU members have assented - some of the liberalization measures could legitimately be introduced by the Commission in its role as guardian of the Treaty. Others needed specific assent and were therefore presented as New Approach Directives, requiring majority acceptance by the EU members in Council. The pattern of Telecommunications liberalization is therefore a mixture of Commission Directives and Council (and Parliament) Directives. Most of these measures are subject to a review of their outcomes as the EU moves gradually towards its goal of full competition in the provision of Telecommunications services and equipment.

The liberalization directives

In 1990 two Directives crucial to the objective of liberalizing European Telecommunications services were adopted. The Full Competition Directive, 90/388/EEC (also known as the Services Directive), was tabled by the Commission under Article 90 of the Treaty of Rome, in effect to remind Member States of their obligations under that Treaty. It required them to cease to grant special or exclusive rights to national Telecommunications organisations, as this practice was viewed as an improper restriction of trade. However, certain services, including voice Telephony, were exempted from this Directive in recognition of the problems posed by deregulation and the additional time required to find solutions.

The parallel Directive, on Open Network Provision, was a Council Directive brought under Article 100a (ie the New Approach procedure using qualified majority voting). This created the conditions for allowing other operators to gain access to the national Telecommunications networks on fair and non-discriminatory terms and thereby to compete with the established organisations while sharing their infrastructure. This Directive was adopted in June 1990 and came into effect at the start of 1991.

Both Directives are essentially framework Directives, requiring further legislation to achieve the objective. A number of amending and extending Directives have been introduced, using both Article 90 and Article 100a procedures, as well as Council Decisions on harmonized technical regulations. Because these are all so closely inter-related in both scope and content, it is convenient to consider the overall effect at the present time, without specific reference to particular items of legislation.

The original Open Network Provision Directive anticipated the gradual introduction of measures which would allow open and efficient access to public Telecommunications networks. This process would cover, in stages, liberalization of the following facilities (but not necessarily in this order):

- leased lines

- packet-switched and circuit-switched data services

- Integrated Services Digital Network (ISDN)

- voice Telephony services

- Telex

- mobile services

- new forms of network access (eg data over voice on the subscriber loop)

- broadband network access.

Of these, voice Telephony services would prove the most resistant to deregulatory pressures and were therefore to be left until last in the moves to liberalization.

Summarised outcomes of the liberalization directives

The liberalization process consequent upon the two Directives 90/387/EEC and 90/388/EEC has, or will have, achieved the following aims:

Setting-up of national regulatory bodies which are independent of the Telecommunications operators.
Abolition of special or exclusive rights granted by governments to their national Telecommunications organisations.
Liberalization of all Telecommunications services, including voice Telephony, and of the use of the infra-structure, by 1 January 1998 (with some deferments allowed for Spain, Ireland, Greece and Portugal).
Establishment of tariffs for services and for use of the infra-structure based upon fair and objective cost-oriented criteria, supported by transparent cost-accounting systems and subject to supervision by the national regulator.
Granting of the user's right of access to the public telephone network, by means of a termination point (ie line socket) to be provided upon request within a reasonable period, for the connection and use of any legally approved terminal equipment.
Definition of the limited circumstances in which access to the network may be interrupted or restricted.
Obligatory publication of information about the types of service available, their tariffs, conditions of contract, performance targets and quality indicators.
Obligatory availability of features such as tone dialling, direct dialling-in (for private branch exchanges), call diversion and calling line identification, with further facilities to be introduced subsequently. [Utilisation of these features may depend upon the users having appropriate terminal equipment].
Discretion to allow discounted tariffs and low usage schemes.
Itemised billing to be available upon request.
Regularly updated directories of subscribers to be made available, subject to data protection legislation and the right of any subscriber not to have an entry; coupled with an obligation on service providers to supply directory listings to other publishers on fair and reasonable terms.
Reasonable provision of public payphones to be ensured; emergency calls from these to be free of charge.
Pre-payment cards conforming to a European standard to be made available.
Authority for Regulators to introduce specific conditions to aid disabled users and others with special needs.
An obligation for Regulators to manage national numbering plans in a way that ensures fair competition, with transparent procedures for number allocation.
A requirement for Member States to authorise, and publish, measures related to non-payment of bills and disconnections.

The need for further amendments to these Directives was still being stated in December 1995 (in Directive 95/62/EC, which set out the detail of most of the objectives described above) and proposals for a further amending Directive followed in January 1996. By September 1996, the volume of suggested amendments had become so large that a proposal was introduced to repeal Directive 95/62/EC in favour of a new piece of legislation. This proposed new Directive would also contain a framework for Universal Service obligations which had been referred to, but not specified, in the previous measures. Also, a Directive on Interconnection of networks was being negotiated during 1995 and 1996, in order to address the situations where competition in service delivery would be desirable but would be resisted by the incumbent network operator (for example because it would not be commercially attractive in terms of additional traffic).

Revision of the open network provision directive

The proposal to repeal Directive 95/62/EC and replace it with a new one, which would also set out the basis of Universal Service, is contained in a Commission paper [COM(96)419]. This addresses some of the problems which have arisen with the earlier Directives, notably the questions of the tariff re-balancing necessitated as national organisations plan the move away from geographically averaged tariffs towards the cost-oriented structures that are imposed by the Directives and are consistent with the advent of local competition. Users who have high provision costs and no choice of service provider could have faced steep price rises as the one-time monopoly provider phased out cross-subsidies; under the new proposals, the Regulator would be allowed to retain a price cap mechanism to control the pace of such rises. The concept of "affordability" is specifically mentioned as a key aspect of the definition of Universal Service. As with the present Open Network Provision Directive, the proposal will not apply to mobile telephone services.

The proposed revision would remove some provisions on network interconnection and on management of numbering allocation, as these will be covered in the Interconnection Directive now under negotiation. Dates will be set for the compulsory availability of the facilities of tone dialling and itemised billing; selective call barring is also added to this list of facilities. Provisions for use of international, European and national standards are to be included in a revision of the Framework Directive 90/387/EEC and would be dropped from a revised Open Network Provision Directive. The requirements relating to telephone pre-payment cards are dropped. Universal Service obligations are set out more explicitly.

Universal service provisions

State monopoly service providers are under little pressure to identify "item-of service" costs very closely. Instead, it has become the practice to bundle up costs over wide sectors of business and to set charges in relation to these aggregated costs. In this way an element of cross-subsidy arises, in which the more profitable customers subsidise the others. As well as being convenient to the service provider to have common tariffs, regardless of the customer's geographical location or revenue contribution, this form of universal service is arguably to be desired for other reasons, both commercial and social. A close parallel is the way in which the postal services set standard rates by class of service and not by location of either originator or recipient. However, this arrangement breaks down as soon as competition is introduced and the more profitable customers are targetted by other service providers offering the choice of cheaper or better facilities. The need to protect vulnerable users of the Telecommunications services, that is those who would have little consumer power in a free market, has been acknowledged from the start in the European liberalization measures. The problem has been, and still is, how to protect them without strangling competition in its infancy. The concept of a defined Universal Service has been written into the Directives in order to address this, but the details are only beginning to appear now, in the proposed revision of the Open Network Provision Directive.

Universal Service has come to be defined as a minimum set of services of specified quality which is available to all users independent of their geographical location and, in the light of specific national conditions, at an affordable price. Member States will have an obligation to ensure that this defined minimum set is available throughout their territory and, in particular instances where the provision is considered to be commercially uneconomic, they will be able to set up funding schemes to share the costs. The proposed Directive will require national regulators to maintain the affordability of service to users in rural and other high cost areas, as well as to groups such as elderly and disabled people, and low volume users. To facilitate this it allows for the use, for an appropriate period of time, of price cap mechanisms which would otherwise be inconsistent with the move to cost-oriented tariff structures.

This proposal reflects the expectation that nationally-averaged levels of charges will be replaced by cost-linked tariffs, under which charges to profitable users would be forced down by competition while other users lose their cross-subsidy. Universal Service, as defined in the European Directives, does not extend to geographical uniformity of tariffs throughout each Member State. The minimum set of services has to be universally available, and affordable.

The elements of universal service

In the proposed Directive, the elements of Universal Service are set out as the availability of the following facilities throughout each Member State, at a cost which is affordable in the context of the economic conditions in that State.

1. Access to the public telephone network at a fixed location, through a connection which allows the user to make national and international calls supporting speech, Fax: or data communication.

2. Directory enquiry services (covering all listed subscribers) for all users, including users of public payphones, and printed (and electronic) directories which are regularly updated.

3. The right to have an entry in public directories and to verify and if necessary correct that entry; also the right to request removal of that entry.

4. Reasonable provision, in terms of numbers and geographical coverage, of public payphones; emergency calls (999 or 112) from public payphones to be free of charge.

5. Specific measures (not specified in the proposed Directive) to ensure access to and affordability of telephone services for disabled users and others with special needs to be implemented by Member States.

Where provision of these services would not be commercially viable, the net cost of ensuring that this level of universal service provision is made may be shared through a Universal Service Fund. However, commercial viability can be defined in many ways. Service providers may be fully prepared to offer rebates to low volume users, for example, in preference to loading their tariffs in an attempt to recover the fixed costs of providing the connection. By so doing, such users are encouraged to stay as part of the network and may thus generate a traffic volume far in excess of that which they themselves originate. The proposed mechanism for sharing the net cost of serving unprofitable users would require the service provider to take into account the revenues generated as a result of the connection. This would seem to imply that the eligibility for funding of Universal Service will be determined case by case, rather than by user groups. The calculation of revenues generated by incoming as well as outgoing calls, in addition to fixed charges, could prove complex. While this would be primarily a matter to be settled between the service provider and the Regulator, there is room for concern that an unwieldy mechanism would deter potential service providers from offering provision to users whose freedom of choice is already minimal.

Universal service for disabled people

Access to telephone services means the provision of a connection, usually in the form of a line socket. The proposed Directive does make it clear that the connection must allow of the use of appropriate terminal equipment, and through it to be able to access operator assistance and directory enquiry services. Free of charge access to emergency services, through 112 and any other national emergency dialling code, would also be a mandatory provision. Although not stated, this could be read as requiring all operator assistance points, including 112/999 operators and directory enquiries operators, to be able to deal with deaf subscribers using text telephones. By extension, network tone signals and announcements might need to be made compatible with text telephones. These points remain to be confirmed in a Directive which is, as yet, merely a proposal.

However, any such obligations can apply only to the provision of network services and not to the provision of terminal equipment, which has become the responsibility of the user. Furthermore, the obligations referred to above apply only in the case of users provided with a connection to the network, which would exclude users of public payphones. In the United Kingdom, it is probable that the requirements of the Disability Discrimination Act will cause public payphone service providers to make reasonable provision of text terminals and other facilities for disabled users. Similar obligations will apply to the managers of premises to which the public have access and places of employment. However, it does not follow that this will constitute a sufficient market to ensure the commercial viability of all the types of telephone terminal which disabled people might wish to purchase for domestic use. Since their access to the telephone network is governed by the performance of their telephone terminal to the same or greater extent than by the performance of the network, a concept of Universal Service which excludes terminal equipment will prove hollow. It could be an appropriate specific measure for national Regulators to impose an obligation upon service providers to ensure the availability - and affordability under Universal Service provisions - of a range of terminal equipment that would enable disabled people to make use of the connection to which they have a legal right.

Key points for discussion with negotiators

Establish a target list of network service provisions which represent priority needs of disabled users.

Ensure that mandated work in the European standardisation bodies (particularly ETSI) takes full account of the needs of disabled users and exploits opportunities for addressing them as technologies stabilise.

Look to the progress of the Directive replacing 95/62/EC [proposal in COM(96)419] and ensure that ambiguities concerning access for disabled people are resolved and that targets for specific national measures are clarified.

Confirm that a Universal Service obligation to sustain the availability and affordability of terminal equipment for disabled subscribers is consistent with both the letter and spirit of the proposed Directive.

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