EU opens investigation into Amsterdam FTTH project; will take action against Germany

The EU is looking into whether Amsterdam’s investment in the private consortium that is building out the Amsterdam FTTH network violates the EU’s state aid rules. The European Commission received complaints from UPC (a cable company) and the cable operators’ association, VECAI. The state aid regulations are designed to ensure that there is no distortion of competition in the market. The EU is looking into whether Amsterdam’s investment in the private consortium that is building out the Amsterdam FTTH network violates the EU’s state aid rules. The European Commission received complaints from UPC (a cable company) and the cable operators’ association, VECAI. The state aid regulations are designed to ensure that there is no distortion of competition in the market. The openness of the network to all service providers will be a critical factor in the Commission’s decision. See James Enck’s post on the Amsterdam project.

The European Commission’s telecommunications and competition policies – run by two different departments – seem to conflict at times. Viviane Redding, commissioner for information society and media (in charge of telecoms policy), blasted the German telecoms regulator for allowing Deutsche Telekom to preclude competitors from using its fiber optic networks. Redding also believes in structural separation between infrastructure and service.

This month, German parliament allowed Deutsche Telekom to exclude competitors from its fiber networks on grounds that Deutsche Telekom should be allowed to recoup its EUR 3 billion investment in “new services”. Reding has already said that the European Commission will take action against Germany:

“We are prepared to take all necessary steps,” said Martin Selmayr, a spokesman for Viviane Reding, the EU commissioner responsible for communications and computer issues. “We know from the vote in Berlin that Germany now has no intention of observing EU law.”

But if a private company does not want to make a EUR 3 billion investment in communications infrastructure unless it is granted a monopoly, then shouldn’t local governments be allowed to make these investments, then open the infrastructure to companies like Deutsche Telekom, KPN, etc.? Apparently, Neelie Kroes, commission for competition, does not see it in those terms. What Amsterdam is trying to do would fit well into the EU telecom regulator’s plans, but it might not get the blessing of the competition commission.

Viviane Reding’s view on the special treatment given to Deutsche Telekom

In the annual meeting of BITKOM (27 June 2006), Reding explained why Germany’s special treatment of Deutsche Telekom’s new fiber infrastructure violates European telecom rules. Here is an excerpt taken from her presentation:

It this context, a few words are necessary on the German proposal for a new legislative provision in Germany on “new markets”, the so-called “Paragraph 9a TKG”. The proposal says, in simple terms: New markets should only be regulated if there is a problem for sustainable competition “in the long term”. The objective of this is apparently, as several German politicians have confirmed to me, to allow for a regulatory exemption of the new VDSL network currently built by Deutsche Telekom.

It is important to understand what EU law says on this issue: The EU rules of 2002 say clearly that so-called emerging markets are not exempt from regulation, but that they should not be subject to “inappropriate regulation”. The reason for this open approach is to allow time to decide whether markets that are new and fast-moving satisfy the criteria for ex-ante regulation. Under EU law, a market is only considered new where there is supply and demand for products or services which are not substitutable for already existing products or services. In other words: a faster service, the label “triple play” or the use of fibre technology instead of copper will not by themselves suffice for the recognition of a new market.

Against this background, I have serious concerns as regards the compatibility of the German approach reflected in the wording of Paragraph 9a TKG with EU rules:

- First of all, I see no evidence yet that the VDSL network in Germany would really lead to services or products which are, from the consumer’s perspective, not substitutable with already existing services or products.

- Second, I am worried about the word “in the long term” used in the German draft law. The underlying assumption appears to be that effective competition is the enemy of investment. Let me be very clear about this: On the telecom markets, the Commission is concerned about all obstacles to competition, whether today, tomorrow or in the long-term. We therefore do not accept monopolistic situations even if we are promised that they would “only” last 4 or 5 years.

- Third, the new German law is creating a lot of regulatory uncertainty. I have not yet heard of one operator or consumer on the German market seeing an added value in the new draft law. I instead note that the new German law could have the effect of making investment on the German telecom market more difficult than in the past, in particular for new market entrants. This is why I have already stated publicly my intention ‚Äö?Ñ?¨ which I reaffirm today ‚Äö?Ñ?¨ to start infringement proceedings against Germany if the draft should become law without substantial changes. I also see that legal disputes in national courts about the compatibility of the new law with EU rules could substantially weaken the attractiveness of the German telecom market ‚Äö?Ñ?¨ which is of crucial importance for growth and jobs in the entire EU ‚Äö?Ñ?¨ for investors.

- Finally, I am worried about the unilateralist attitude behind the German approach. Under the EU telecom rules, agreed by the European Parliament and the Council of Ministers, the decision of whether or not to regulate a market is based on the market analysis of an independent national regulator, approved by the Commission. It is therefore not a unilateral political decision of a single national government whether competition problems need to be addressed by regulation or not. The German approach therefore sets a very dangerous precedent: If other governments choose to follow the German “Sonderweg” for telecoms on the energy markets, then I am pessimistic about the chances of more liberalisation in these important markets.

I hope that the German Parliament will still adapt the draft law to the requirements of EU law in the ongoing legislative process.

I also expect the German regulator not to be influenced by the current approach of the German government when looking, in these days, on the issue of bit-stream access on the German broadband market. Bit-stream access is, as you know, a key tool for opening competition in the broadband market. It enables competitors to offer their own state-of-the-art products to consumers. However, unlike in nearly all other Member States, in Germany competitors still do not have a real chance to get bit-stream access. This is due to the fact that up to now the German regulator has not imposed a bit-stream access obligation on Deutsche Telekom even though the incumbent is considered, in the analysis made by the German regulator last December, to be dominant on the broadband market. This is particularly disadvantageous for Germany, as unlike in other Member States, hardly any alternative broadband infrastructures exist. Cable television networks, for example, are only slowly being upgraded. The effect of the present status of non-regulation of bit-stream access is thus that of a “de facto” regulatory holiday which lasts, under the present system, as long as the German regulator does not opt for an efficient remedy. I am therefore expecting a credible notification of this important issue from the German regulator in the weeks to come.

Broadband penetration in Germany is 12.5%, which is just the average of the 25 EU Member States; hardly the level of performance one would expect from this leading economic and technological nation. It is only half the rate of Europe’s leading nations in this field and has been overtaken by Estonia, a new Member State which has chosen a pro-competitive approach for regulation of the broadband market. Germany therefore has no time to lose in the broadband market.

Germany, as the largest economy in the EU with a very important telecom sector, certainly has a particularly responsibility for the European economy as a whole. And until recently, my understanding had been that not the word “Regulierungsferien”, but the word “Ordnungspolitik” was a German invention.