Legal Briefing

Commission victorious in ‘regulatory holiday’ action brought against Germany

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Public Sector | 01 February 2010

On 3 December 2009, following an action brought by the European Commission under article 226 of the EC Treaty (now article 258 of the Treaty on the Functioning of the EU) the European Court of Justice (ECJ) confirmed that Germany had failed to comply with its obligations under the European regulatory framework for telecommunications (the Common Regulatory Framework (CRF)). The ECJ’s judgment in European Commission v Germany [2009] confirms that Germany acted unlawfully by adopting a national law excluding ‘new markets’ from regulation – so called ‘regulatory holidays’.

The case is a victory for the Commission, and Commissioner Reding who will be moving to take charge of the new Justice, Fundamental Rights and Citizenship portfolio, but the updated regulatory package may increase the scope for similar provisions in the future.

GERMAN LEGISLATION

The national legislation in this case was the Telecommunications Act (the TKG) of 22 June 2004.1 By an amendment of 18 February 2007 Germany introduced the following provision at paragraph 9a of the TKG:

  1. Save as provided for in the following paragraph, new markets shall not, in principle, be subject to regulation within the meaning of Part 2.
  2. Where certain facts suggest that, in the absence of regulation, the development of a sustainable competitive market in the area of services or telecommunications networks would be hindered in the long term, the [German regulatory authority] may, by way of derogation from subparagraph 1 above, submit a new market to regulation within the meaning of Part 2… In order to assess the need for regulation and in imposing specific measures, the [German regulatory authority] shall take into particular account the objective of promoting efficient investment in infrastructure and of supporting innovation.’

‘New markets’ were defined as follows:

‘… a market for services or products which are significantly different from currently available services or products in terms of their effectiveness, their range, their availability for a large number of users (mass-market capacity), their price or their quality from the point of view of a knowledgeable buyer, and which do not simply replace those products.’

COMMISSION’S ACTIONS

After an unsuccessful attempt to persuade the German authorities to drop the proposed amendment in late 2006, the Commission initiated fast-track infringement proceedings against Germany under article 226 of the EC Treaty. In the Commission’s view, the amendments would effectively exempt Deutsche Telecom’s fast internet access network (VDSL) from competition (as had been requested by the incumbent operator) in spite of its dominant position on the German broadband market. The Commission considered that the amendment jeopardised competition on the German broadband market and fettered the discretion of the German national regulatory authority (NRA) in breach of the provisions of the CRF.

BEFORE THE ECJ

As no agreement between the Commission and the German authorities was reached, the action was brought before the ECJ on 13 September 2007. The Commission identified four ways in which the NRA’s discretion was limited:

  • By defining the concept of ‘new markets’ the TKG limited the discretion of the German NRA under article 15 of the Framework Directive (Directive 2002/21/EC) pursuant to which the NRA is to define relevant markets appropriate to national circumstances in accordance with the principles of competition law.
  • Contrary to the market definition and analysis provisions of the Framework Directive, the TKG laid down a principle of ‘no regulation’ in new markets.
  • Paragraph 9a(2) of the TKG set down more restrictive rules concerning when, in exceptional circumstances, ‘new markets’ can be regulated. Article 16 of the Framework Directive provides that regulation can be imposed in the absence of effective competition in the relevant market concerned. In contrast, the TKG provided that regulation could only be imposed where there is a long-term impediment to the development of a sustainable competitive market.
  • Paragraph 9a(2) required the German NRA to prioritise a single regulatory objective when considering whether to impose regulation, namely the promotion of effective investment in infrastructure and support for innovation. In contrast, article 8 of the Framework Directive sets out a range of regulatory objectives without any hierarchy between them.

Germany maintained its defence that the provisions of the TKG were compatible with European law. In particular, Germany pointed to recital 27 in the preamble to the Framework Directive, which provides that:

‘It is essential that ex ante regulatory obligations should only be imposed where there is not effective competition… [Commission] guidelines will also address the issue of newly emerging markets, where de facto the market leader is likely to have a substantial market share but should not be subjected to inappropriate obligations.’

Germany argued that recital 27 made it clear that, as a general rule, new markets should not be subject to ex ante regulation.

The ECJ upheld the Commission’s case on each of the grounds noted above, rejecting Germany’s interpretation of the CRF. The ECJ confirmed that member states are obliged when implementing the CRF to guarantee the independence of the NRAs. The NRAs are required under the CRF to analyse relevant markets and determine whether ex ante regulation is required, taking into account the Commission’s guidelines and the regulatory objectives set out in the Framework Directive. TheECJ confirmed that the CRF confers abroad discretion on NRAs in carrying out these activities.

The ECJ expressly rejected any notion that recital 27 of the Framework Directive prescribes a general principle that new markets should not be subject to regulation. Rather, that provision indicated at most that member states should proceed cautiously when regulating new markets. In any event, the discretion to adopt such regulation is in the hands of the NRA and must not be prescribed by the national legislature. As such the definition of ‘new markets’ in the TKG would preclude the German NRA from undertaking its analysis of relevant markets as required by the CRF and the general principle of no regulation would unlawfully stymie the NRA’s discretion to regulate in appropriate circumstances. Moreover, paragraph 9a(2) of the TKG infringed the CRF by prioritising a specific regulatory objective, whereas it is the role of the NRA to balance, as appropriate, the various regulatory objectives provided for in the CRF.

The ECJ also confirmed that the TKG infringed the obligations in the CRF, which require the German NRA to consult with the Commission and other member state regulatory authorities when making a regulatory decision.

COMMENT

The case is a clear victory for the Commission in upholding the virtues of open competition against member states favouring national incumbent operators. However, it is arguable that the telecoms reform package, which entered into force on 19 December 2009 following its publication in the Official Journal of the EU, includes changes to the CRF that may be used to justify preferential treatment for infrastructure operators in the future.2 Under the reformed rules, article 8 of the Framework Directive will oblige NRAs to carry out their policy objectives by inter alia:

‘… promoting efficient investment and innovation in new and enhanced infrastructures, including by ensuring that any access obligation takes appropriate account of the risk incurred by the investing undertakings, and by permitting various co-operative arrangements between investors and parties seeking access to diversify the risk of investment, while ensuring that competition in the market and the principle of non-discrimination are preserved.’

In the UK, a similar approach is being taken. Following the publication of its Digital Britain report, the government intends to amend Ofcom’s statutory obligations to require it to have particular regard for the need to promote appropriate levels of investment in infrastructure when carrying out its activities.3 The provision is intended to address concerns that Ofcom has previously tended to prioritise short-term cost reductions over longer-term investment in infrastructure but, as with the EU reform highlighted above, this could represent a shift in the balance between the need for competition and the need to roll out next-generation infrastructure networks.

Notes

Telekommunikationsgesetz, BGI. 2004 I, p1190.Member states are required to implement the two Directives constituting the reform package into national law by 25 May 2011.The obligations can be found in s3 of the Communications Act 2003.