46\100412\00018-528-n.6 price squeeze OPTA VII
LEGAL ANALYSIS OF THE PRICE SQUEEZE
CONSULTATION DOCUMENT OF OPTA
Houthoff Buruma
INDEX SUMMARY OF THE REPORT
Conclusions and Recommendations 3
CHAPTER I
Introduction 7
CHAPTER II
The EC legal Framework for the cost orientation principle 8
(i) The current ONP Framework 8
(ii) The ONP review and the new regulatory framework 10
(iii) Conclusions 14
CHAPTER III
The price control mechanism of the end user tariffs 16
(i) The Wtv and the Bart 16
(ii) The Tw and the BOHT 20
(iii) Conclusions 23
CHAPTER IV
The price control mechanism of the interconnection tariffs 26 (i) The cost orientation principle for interconnection tariffs 26 (ii) The non-discrimination principle 26
(iii) Accounting separation 29
(iv) Conclusions 32
Chapter V
The price squeeze test of OPTA vs general competition law 34 (i) The application of competition law by OPTA 35 (ii) Excessively high access tariffs 35
(iii) Discriminatory practices 36
(iv) Price squeeze 38
(v) Conclusions 41
Chapter VI
The procedural rules 46
(i) The end user tariffs (BOHT) 46
(ii) The Competition Act 54
(iii) The interconnection tariffs (Chapter 6 of the TA) 56
SUMMARY OF THE REPORT Conclusions and Recommendations
1. The European ONP directives do not provide extended guidance on the interpretation of the principle of cost orientation. It seems that the ONP Directives leave a large amount of liberty for national legislation to further interpret the requirement of cost orientation. Apparently, cost orientation, the implementation of a suitable cost accounting system and accounting
separation all have as a purpose to promote the introduction of effective competition on the market, taking into account the privileged position of the ex-monopolists as compared to the position of new entrants. News entrants did not have the change to build an infrastructure comparable to that of an ex-monopolist, since the latter had special and exclusive rights for a large amount of time. Accordingly, in order to introduce competition, it seems fair to impose strict cost allocation techniques on former monopolists.
2. It is clear that the principle serves as an instrument for intervention on a market where there is not enough competition. It can be argued that the principle can serve to set maximum as well as minimum limits to both interconnection and end-user’s tariffs. In an (almost) monopolist environment, the dominant firm could set excessively high prices that would harm consumers and excessively low prices that would harm competitors.
3. This view is confirmed by the proposals for new directives made by the Commission in light of the ONP Review framework. The proposed Directives and Regulations do specifically require national regulatory authorities to ensure sustainable competition and particularly that
incumbents with significant market power do not apply a price squeeze in their
wholesale/interconnection- and retail prices. This emphasis can be found both in the proposals for the interconnection/access directive as well as in the retail directives. It does seem that the Commission is of the opinion that the price squeeze problem can be solved at both levels: either the interconnection level or the retail level.
4. Starting point for intervention by any national regulatory authority is that a market appears to be, after a market analysis, not effectively competitive and that excessive pricing, predatory pricing or a margin squeeze seems unavoidable. In such a case, the NRAs may impose an obligation of cost orientation on the relevant incumbent to avoid a price squeeze. This extends to the incumbent concerned having to provide full justification for its prices and the possibility for the NRA to require the prices to be adjusted. Considering the setting in which the
Commission mentions price squeeze in most detail (namely in the proposal for the Interconnection Directive), any price squeeze test would predominantly seem to concern interconnection prices, as opposed to retail prices. However, nothing seems to prevent NRA’s to solve the price squeeze from the retail angle.
that an NRA should also have the possibility of imposing minimum retail prices.
6. In any case, the duty of the NRA to ensure effective competition, as a general principle underlying the ONP Framework, implies that it has to be able to avoid a price squeeze by using the regulatory means available to it. And, as explained above, if the NRA decides to intervene in case of (the threat of) a price squeeze, the relevant ONP documents indicate that this should be done in the direction of the interconnection fees.
7. In line with the EC Directives, the Dutch legislator under the Wtv (and presumably in line with this the TA) incorporates the price squeeze issue in the principle of cost orientation for the end user tariffs. This element is taken into account to avoid the distortion of competition, as one of the fundamentals of the ONP principles and the Dutch TA (and previously the Wtv). It seems very well arguable that the principle of cost orientation obliges the regulator to avoid any price squeeze to occur. If this test would not have been included in the cost orientation
investigation, one of the objectives of the TA – safeguarding competition on the telecom market in the Netherlands – would not be achieved. Although the avoidance of any price squeeze is not explicitly mentioned in the TA or the BOHT, this rule can be implied in the cost orientation principle. In this context reference can be made to the Otto-case, where the administrative court, the College van Beroep voor het Bedrijfsleven, stated that the act should be interpreted in the light of the object of the act, i.e. to achieve a competitive market. As a result, according to the court, when applying the act any distortion of competition must be avoided.
8. In its decisions of 2 September 1998 and 27 September 1999, OPTA seems to follow this line of reasoning. However, parts of the decisions suggest that OPTA does include this issue on the basis of general competition law and not on the basis of the principle of cost orientation. (see paragraphs 101 and 102 of the price cap decision of 27 September 1999). In the Consultation Document OPTA refers to articles 35 and 36 BOHT, but does not explain why these articles can serve as the legal basis for the price squeeze problem. Its line of reasoning is based entirely on general competition law and not on the interpretation of the principle of cost orientation. OPTA makes a basic mistake here. It is clear from the TA and the OPTA Act that OPTA has no general authority to apply competition law. OPTA can only act if an
infringement of the TA can be indicated.
9. As a consequence, OPTA must argue that KPN is infringing the cost orientation principle of articles 35 and 36 BOHT by causing a price squeeze between its whole sale and retail tariffs. In this context it can relay on the (proposed) EC Directives and the obligation laid down in these directives for an NRA to resolve any distortion of competition. OPTA has to make it clear in the guidelines to be published that the objectives of the EC Directives and the TA actually oblige OPTA to control this behaviour of KPN. According to the EC Directives and the Dutch legislator this behaviour can be controlled by imposing a minimum cap to the end user tariffs. on the basis of the cost orientation principle. If not, OPTA would allow KPN to distort
10. However, OPTA may use general competition law to interpret the principle of cost orientation. The AKZO-test, which is used in general competition law, however is not appropriate to evaluate predatory practices in the telecom sector. Under the AKZO-rule prices are only predatory where prices are below average total costs and if intention of elimination of a competitor is proved. OPTA is of the opinion that, because of the dependence of competitors on the incumbent, an abuse is present when the incumbent fixes prices below total costs. Under those circumstances, it can be assumed - according to OPTA - that the incumbent has the intention to eliminate competition. This view of OPTA seems in line with the Commissions opinions expressed in the (proposed) EC Directives, stating that the downstream price of the dominant firm must not only be based on the upstream price charged to its competitors, but also on the dominant firm’s assets (network) costs.
11. To ensure that this view of OPTA is not in conflict with the interpretation of the Competition Act, the formal approval of the NMa will be required. Pursuant to Article 18.3 (3) TA and the
Samenwerkingsprotocol, OPTA must act in accordance with the rules of this protocol when
interpreting the principle of cost orientation on the basis of general competition law. As a consequence, OPTA needs in an individual decision the prior explicit approval of the NMa, unless a comparable decision has already been taken by the NMa in a comparable situation. 12. As an alternative, the NMa may publish guidelines, which OPTA must follow in applying the
price squeeze test in individual cases. To ensure that the price squeeze test of OPTA is accepted by the NMa, the NMa should publish guidelines on the application of the price squeeze test, more specifically the application of the test in the telecom sector, following the interpretation of OPTA. The current informal letter of the NMa does not provide legal certainty when OPTA is applying its test in an individual case. OPTA will still need to ask the approval from the NMa in an individual case. The best solution to ensure that the NMa completely follows the view of OPTA, is the publication of guidelines by OPTA and the NMa together. This was already done in previous occasions and avoids any future conflict between the authorities and the TA and the Competition Act.
13. The BOHT does not give interested parties legal protection against the approval by OPTA of the end user tariffs of KPN. However, case law does suggest that OPTA can act on its own initiative or on the basis of a complaint where OPTA takes the view that the end user tariffs are in conflict with the cost orientation principle. The complainant should ask OPTA to take a binding instruction to KPN to amend the tariffs. In case OPTA takes such an instruction, or refuses to take such an instruction or does not take a decision within a reasonable period of time (8 weeks). However, these procedures take a considerable period of time. The BOHT does not contain the possibility for an interim decision by OPTA in urgent cases.
14. An urgent request has to be made to DGTP to amend the BOHT from a procedural
judge will be very reluctant to decide in an interim procedure on a complicated matter as a price squeeze.
15. The price squeeze test should also apply to the fixed-t-mobile traffic and the 06700-traffic. With respect to the fixed-to-mobile traffic OPTA required in its position paper of 19 October 1999, KPN to differentiate its end-user’s tariffs for fixed-to-mobile calls according to the termination fees of mobile operators. This was based on the requirement of cost orientation of KPN’s end-user’s tariffs. There is no reason why the cost orientation principle cannot also be used in the case of fixed-to-mobile calls to introduce a price squeeze test.
16. Once Internet traffic becomes 067600-traffic it will fall outside the scope/reach of the proposed price squeeze test. When the Tw and BOHT no longer apply to this Internet traffic, the
competition rules, mainly article 24 CA (abuse of a dominant position), remain as the only legal basis for a price squeeze test. As will be explained in Chapter V a price squeeze test based on purely competition law will not have the same scope as a test based on
telecommunication law, unless the NMa accepts that the AKZO test cannot be applied for the telecom sector. This situation underlines the necessity of co-operation between OPTA and NMa. So the answer to OPTA’s question whether 06760 will bring relief for C(P)S wiba traffic, is clearly negative. It is foreseen that also on 06760 a price squeeze effect can occur. In that case OPTA would not have an ex ante instrument to apply a price squeeze test.
17. Nothing should prevent OPTA from applying the price squeeze test on the basis of the cost orientation principle for the interconnection.
18. In the context of interconnection OPTA is obliged also to intervene if KPN would act in conflict with the principle of non-discrimination. From the Consultation Document it seems to follow that KPN is de facto charging itself the same interconnection tariffs than it is charging its competitors. If this would be the case, this would clearly be an infringement of the Tw. 19. Cost accounting separation is the appropriate instrument to verify whether KPN’s tariffs are
CHAPTER I Introduction
1. In this paper the position of OPTA in its Price Squeeze Consultation Document of 9 October 2000 (“Consultation Document”) will be analysed from a legal perspective. OPTA approaches the price squeeze problem from the end user angle. It proposes to solve the squeeze by the introduction of a control mechanism for the end user tariffs of KPN. OPTA does not mention an instrument for the interconnection tariffs. The Dutch Telecommunications Act (“TA”) does not provide for a special provision for price squeeze or the relation between end user and whole sale tariffs in general, but only contains rules on cost orientation for the interconnection and end user tariffs. OPTA uses the cost orientation principle of the end user tariffs as the legal basis for its interference (article 7, 1 (1) TA and the articles 35 and 36 of the Decree of leased lines and telephony (referred to as “BOHT”).
2. The main question arises whether OPTA is choosing the correct legal basis for the
introduction of the price squeeze test. Contrary to, for example, OFTEL, the Dutch legislation on telecommunications law does not provide a general basis for OPTA to intervene in case of unfair competition or distortion of competition. When applying the principle of cost orientation OPTA will need to interpret the principle of cost orientation in accordance with the ONP Directives of the EC. In Chapter II the ONP Directives and the new regulatory framework of the ONP Review will be analysed in relation to the price squeeze problem. In Chapter III the BOHT will be investigated so see whether OPTA - in the light of the EC legislation - can use the cost orientation principle of the BOHT to incorporate the price squeeze test.
3. OPTA may use concepts of general competition law to develop the price squeeze test. In Chapter IV it is analysed whether the test of OPTA is in compliance with general competition law and whether OPTA has the competence to use a more liberal test than currently used by competition authorities.
4. In Chapter V it is considered whether OPTA, as an alternative, could use the rules on
interconnection (mainly the principles of cost orientation and discrimination) to solve the price squeeze problem. In addition, the rules of separate cost accounting will be dealt with.
5. In Chapter VI the procedural aspect of the regulatory regime chosen (end user tariffs,
CHAPTER II
EC Legal Framework for the cost orientation principle
1. In § 25-39 of the Consultation document, OPTA apparently uses the principle of cost
orientation as the legal basis for the introduction of the price squeeze test to KPN’s end user’s tariffs. This principle is embodied in the European ONP Directives as well as in the Dutch implementation thereof. In this Chapter it will be investigated how the price squeeze problem is embodied in the EC Directives.
(i) The ONP Directives
2. Article 7 (2) of the Interconnection Directive contains the obligation for incumbents to set their interconnection charges on the basis of cost orientation:
“2. Charges for interconnection shall follow the principles of transparency and cost orientation. The burden of proof that charges are derived from actual costs including a reasonable rate of return on investment shall lie with the organisation providing interconnection to its facilities. National regulatory authorities may request an organisation to provide full justification for its interconnection charges, and where appropriate shall require charges to be adjusted… ”
3. In Article 9 (1) of the Interconnection Directive, we find the general obligation for the NRAs to take into account “the need to stimulate a competitive market”. In this respect, Article 9 (3) states that in pursuit of this aim,
“… national regulatory authorities may intervene on their own initiative at any time, and shall do so if requested by either party, in order to specify issues which must be covered in an interconnection agreement, or to lay down specific conditions to be observed by one or more parties to such an agreement. National regulatory authorities may, in exceptional cases, require changes to be made to interconnection agreements already concluded, where justified to ensure effective competition… ” (emphasis added)
4. According to Article 17 of EC Directive 98/10 (the “Voice Directive”),1 national regulatory authorities must ensure that operators notified as having significant market power charge cost-oriented tariffs for use of the fixed public telephone network and fixed public telephone services. The Voice Directive refers further to Annex II of EC Directive 90/387 (the “ONP Framework Directive”), which provides for harmonisation of tariff principles with the European Community.2 This document states the following about harmonised tariff principles:
“tariffs must be based on objective criteria and, until such time as competition becomes effective in keeping down prices for users, must in principle be cost oriented, on the understanding that the fixing of the actual tariff level will continue to be the province of national legislation and is not the subject of open network provision conditions. Where an organisation no longer has significant market power in the relevant market, the
1
Directive of 26 February 1998, OJ 1998, L101, p. 24.
2
requirement for cost orientation may be set aside by the competent national regulatory authority. One of the aims should be the definition of efficient tariff principles through the Community while ensuring a general service for all. (emphasis added)
[… .]
Any charges for access to network resources or services must comply with the principles set out above and with the competition rules of the Treaty and must also take into account the principle of fair sharing in the global costs of the resources used, the need for a reasonable level of return on investment and, where appropriate, the financing of universal service in accordance with the Interconnection Directive.”3 (emphasis added)
5. The Voice Directive states that the requirement of cost orientation is a regulatory instrument to be used on an imperfect market where there is not enough competition to allow the price of services to be set according to market forces:
“whereas certain obligations concerning tariffs and cost accounting systems will no longer be appropriate once competition is introduced and whereas others can be relaxed by the competent national regulatory authority as soon as competition achieves the desired objectives;
whereas in all cases the non-discrimination requirements of the competition rules of Community law apply;”4
6. This was also made clear by the Commission in its proposal for the current Voice Directive:
“Provisions for specific types of organisations
Provisions in the existing Directive concerning cost orientation of tariffs, implementation of specific cost
accounting systems, and discount schemes are carried over into the revised Directive, but with the possibility for the national regulatory authority to relax these requirements once competition is sufficiently developed to allow market-driven pricing to take over as the best means of keeping down prices for users.”5
7. According to Article 18 of the Voice Directive, where an operator has an obligation to charge cost-oriented tariffs, the cost accounting systems used by this operator must follow the principle of cost orientation. This cost-accounting system is controlled by the national regulatory authorities.
8. The current Voice Directive (Directive 98/10) is a revised version of the “old” Voice Directive (Directive 95/62)6 to adapt it to the requirements of market liberalisation and the introduction of competition on the market. The “old” Voice Directive stated the following on the principle of cost orientation:
“Whereas national regulatory authorities should have responsibility for supervising tariffs; whereas tariff structures should evolve in response to technological development and user demand; whereas the requirement for cost-oriented tariffs means that telecommunications organisations should implement within a reasonable
3
Please note that in the consolidated version of the ONP Framework Directive, Annex II has become the only annex.
4
Voice Directive, recital 14.
5
Proposal for a European Parliament and Council Directive on the application of open network provision (ONP) to voice telephony and on universal service for telecommunications in a competitive environment, 11 September 1996, COM(96) 419.
6
time limit cost accounting systems by which costs can be allocated to services as accurately as possible on the basis of a transparent cost accounting system; whereas such requirements can be fulfilled for example by implementation of the principle of fully distributed costing;”7 (emphasis added)
9. In April 1998, the Commission published a recommendation on the implementation of cost accounting systems by notified operators.8 This recommendation concerns in particular the implementation of the principle of cost orientation and transparency contained in the Voice Directive:
“Whereas [the Voice Directive] requires tariffs for use of the fixed public telephone network and the voice telephony service to follow the basis principles of cost orientation and transparency, including the implementation by notified operators of a suitable cost accounting system for this purpose.”9
10. This recommendation is without prejudice to the application of general competition rules: “Whereas the application of the principles of this Recommendation is without prejudice to the duty of Member States and of undertakings to comply fully with the Community competition rules, taking account of the specific positions set out in the Communication from the Commission on the application of competition rules to access agreements in the telecommunications sector. ”10
11. This is repeated by the Access Notice:
“… The NRAs must ensure that action taken by them are consistent with Community competition law. This duty requires them to refrain from action that would undermine the effective protection of Community law rights under the competition rules. Therefore, they may not approve arrangements which are contrary to the
competition rules. If the national authorities act so as to undermine those rights, the Member State may itself be liable for damages to those harmed by this action. In addition, NRAs have jurisdiction under the ONP directives to take steps to ensure effective competition.” 11 (emphasis added)
(ii) The ONP Review and New Regulatory Framework
12. In the Communication containing the 1999 Communications Review,12 the Commission repeats the general principle that
7
Recital 29.
8
Recommendation of 8 April 1998 on interconnection in a liberalized telecommunications market, Part 2 – accounting separation and cost accounting, OJ 1998, L 141, p. 6.
9
Preamble, 9th recital.
10
Preamble, 13th recital.
11
Notice on the application of the competition rules to access agreements in the telecommunications, OJ 1998, C 265, p. 2-28, paragraph 19.
12
Communication from the Commission to the European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions, Towards a new framework for Electronic Communications infrastructure and
“Under the ONP Framework, NRAs must take into account, the need to stimulate a competitive market and may impose conditions on one or more parties, inter alia, to ensure effective competition.”13 (emphasis added)
13. Concerning costing and pricing of interconnection and access, the 1999 Communications Review mentions the following, in particular on the possibility of a price squeeze in relation to local loop:14
• “Pricing rules should be neutral as to service or network based competition, allowing individual firms to decide on the most appropriate network and service mix needed to achieve their strategic objectives. In particular, where retail price regulation is also enforced to protect consumer interests, care is needed to avoid anti-competitive effects such as price squeeze.” (emphasis added)
• “Demand for some forms of access to existing infrastructure can be of a temporary nature while a new entrant builds out its network. This gap results in a special form of the ‘make/buy’ decision and hence provides the basis for a pricing rule which recognises the transitory nature of the access sought by a new entrant. The case of local loop unbundling presents a specific problem, in that there is a legacy of unbalanced tariffs in most Member States which adds complexity to this issue.” (emphasis added)
• “As a consequence, if LRAIC based tariffs are applied to unbundled local loops on the grounds that LRAIC sends the appropriate price signals to encourage sustainable investment in alternative local network infrastructures, it could be argued that there is the possibility of a ‘price squeeze’ between the actual telephone retail prices and the wholesale price of an unbundled local loop charged to new entrants. On the other hand, it is necessary to take into account that local loop unbundling allows more services than simple voice telephony; this is the case in particular for fast Internet access. Therefore the wholesale price for local loop unbundling cannot always be compared only to the retail price for voice telephony in order to establish the risk of a price squeeze.” (emphasis added)
• “Wholesale prices for unbundled local loops should be set at a level that stimulates competition in the retail market. One option to avoid this price squeeze is to require that the incumbent’s retail prices for a service exceed the prices of the component parts (e.g. unbundled loops and co-location) by a reasonable margin. A second option is to require the incumbent operator to rebalance its end user tariffs in line with the principle of cost orientation. “ (emphasis added)
• “Another would be to have all wholesale prices based on a pricing principle such as fully allocated historic costs, with a migration path to ensure that over a defined period both retail and wholesale prices become aligned to the prices that would apply in a competitive market. The transitional period would depend on the specific market conditions and the speed with which tariffs can be re-balanced. A regulator should not force new entrants to apply unbalanced tariffs in the retail market as a consequence of the failure of an incumbent to rebalance its tariffs.”
14. Recital 10 of the preamble to the Draft Regulation on unbundled access to the local loop15 mentions the following about costing and pricing rules:
13
Paragraph 3.3.3. This principle could already be found in Articles 9 (1) and 9 (3) of the current Interconnection Directive.
14
“Costing and pricing rules for local loop and related facilities should be transparent, non-discriminatory and objective to ensure fairness. Pricing rules should ensure that the local loop provider is able to cover its appropriate costs in this regard plus a reasonable return in order to ensure the long term development and upgrade of local access infrastructure. Pricing rules for local loops should foster fair and sustainable
competition, bearing in mind the need for investment in alternative infrastructures, and ensure that there is no distortion of competition, in particular no margin squeeze between prices of wholesale and retail services of the notified operator. In this regard, it is considered important that competition authorities be consulted.”16 (emphasis added)
Concerning the supervision of the national regulatory authority (NRA), Article 4 (2) (a):
“The national authority may intervene, where justified, on its own initiative in order to ensure non-discrimination, fair competition, economic efficiency and maximum benefit for users.”
15. The preamble to the Commission Proposal for the new access and interconnection Directive17 contains the following relevant considerations:
“(14) Price control may be necessary when market analysis in a particular market reveals inefficient
competition. The regulatory intervention may be relatively light, such as an obligation that prices for carrier selection are reasonable as laid down in Directive 97/33/EC, or much heavier such as an obligation that prices are cost oriented to provide full justification for those prices where competition is not sufficiently strong to prevent excessive pricing. In particular operators wi4th significant market power should avoid a price squeeze whereby the difference between their retail prices and the interconnection prices charged to competitors who provide similar retail services is not adequate to ensure sustainable competition. In its Recommendation 98/195/EC of 8 January 1998 on interconnection in a liberalised telecommunications market (Part I-interconnection pricing), 18 the Commission recommended the use of long-run average incremental costs, as the basis for interconnection prices in the Community that serves to promote efficiency and sustainable competition.” (emphasis added)
16. Article 13 of the proposal for the new Interconnection Directive then states as follows:
“1. A national regulatory authority may (… ) impose price controls, including obligations for cost orientation of prices and obligations concerning cost accounting systems, for the provision of specific types of
interconnection and/or network access, in situations where a market analysis indicates that a potential lack of effective competition means that the operator concerned might be capable of sustaining prices at an excessively high level, or applying a price squeeze, to the detriment of end users… ” (emphasis added)
15
Draft Regulation of the European Parliament and the Council on unbundled access to the local loop, Informal consolidated text of 27 October 2000.
16
See also recital 8 of the preamble to the Commission Proposal for a Regulation of the European Parliament and the Council on unbundled access to the local loop, 12 July 2000, COM(2000) 394 final.
17
Commission proposal for a Directive of the European Parliament and of the Council on access to, and interconnection of, electronic communications networks and associated facilities, 12 July 2000, COM(2000) 384 final.
18
Here, the Commission discusses the price squeeze in relation to interconnection - as opposed to retail- prices. The same angle seems to be taken by the NRA in the United Kingdom, OFTEL, who -while recognising that a price squeeze could in principle occur both at the level of interconnection prices as well as the level of retail prices- seems to take interconnection prices as the starting point for a possible price squeeze test: 19
“In considering whether an undertaking is engaging in price squeezing in breach of the Competition Act, the Director General will consider whether the dominant undertaking would be profitable in the relevant downstream market if it had to pay the same input prices (i.e. access/interconnection prices) as its competitors.”
(emphasis added)
17. Furthermore, paragraph 3 of Article 13 explains that the burden of proof for showing that the charges of the operator are indeed cost-orientated, lies with the operator concerned. In that respect,
“… national regulatory authorities may require an operator to provide full justification for its prices, and may, where appropriate, require prices to be adjusted.” (emphasis added)
18. As regards retail prices, the preamble to the Commission Proposal for a Directive on universal service and users’ rights relating to electronic communications networks and services20 contains the following relevant considerations:
“(9) … In general for reasons of efficiency and to encourage effective competition, it is important that the services provided by an undertaking with significant market power reflect costs. For reasons of efficiency and social reasons, end user tariffs should reflect demand conditions as well as cost conditions provided that this does not result in distortions of competition. There is a risk that an undertaking with significant power may act in various ways to inhibit entry or distort competition, for example by charging excessive prices, setting predatory prices, etc… ” (emphasis added)
19. Article 16 of this proposal, concerning retail tariff regulation, requires the Member States to maintain all obligations relating to retail tariffs for the provision of access to and use of the public telephone network at fixed locations that are in force under Article 17 of the current Voice Directive until a market analysis and review have been carried out on the basis of which they can determine whether to maintain, amend or withdraw these obligations.
20. In this regard, paragraph 3 of Article 16 prescribes that:
“Where as a result of a market analysis (… ), national authorities determine that a market is not effectively competitive, they shall ensure that undertakings with significant market power in that market orient their tariffs towards costs, so as not to charge excessive prices or inhibit market entry, or restrict competition by setting predatory prices, showing undue preference to specific users or unreasonably bundling services. National
19
OFTEL, The application of the Competition Act in the Telecommunications Sector, January 2000, paragraph 7.26.
20
regulatory authorities may apply appropriate retail price cap measures to such undertakings in order to protect user and consumer interests whilst promoting effective competition.” (emphasis added)
(iii) Conclusions
26. The European ONP directives do not provide extended guidance on the interpretation of the principle of cost orientation. It seems that the ONP Directives leave a large amount of liberty for national legislation to further interpret the requirement of cost orientation. Apparently, cost orientation, the implementation of a suitable cost accounting system and accounting
separation all have as a purpose to promote the introduction of effective competition on the market, taking into account the privileged position of the ex-monopolists as compared to the position of new entrants. News entrants did not have the change to build an infrastructure comparable to that of an ex-monopolist, since the latter had special and exclusive rights for a large amount of time. Accordingly, in order to introduce competition, it seems fair to impose strict cost allocation techniques on former monopolists.
27. It is clear that the principle serves as an instrument for intervention on a market where there is not enough competition. It can be argued that the principle can serve to set maximum as well as minimum limits to both interconnection and end-user’s tariffs. In an (almost) monopolist environment, the dominant firm could set excessively high prices that would harm consumers and excessively low prices that would harm competitors.
28. This view is confirmed by the proposals for new directives made by the Commission in light of the ONP Review framework. The proposed Directives and Regulations do specifically require national regulatory authorities to ensure sustainable competition and particularly that
incumbents with significant market power do not apply a price squeeze in their
wholesale/interconnection- and retail prices. This emphasis can be found both in the proposals for the interconnection/access directive as well as in the retail directives. It does seem that the Commission is of the opinion that the price squeeze problem can be solved at both levels: either the interconnection level or the retail level.
29. Starting point for intervention by any national regulatory authority is that a market appears to be, after a market analysis, not effectively competitive and that excessive pricing, predatory pricing or a margin squeeze seems unavoidable. In such a case, the NRAs may impose an obligation of cost orientation on the relevant incumbent to avoid a price squeeze. This extends to the incumbent concerned having to provide full justification for its prices and the possibility for the NRA to require the prices to be adjusted. Considering the setting in which the
Commission mentions price squeeze in most detail (namely in the proposal for the Interconnection Directive), any price squeeze test would predominantly seem to concern interconnection prices, as opposed to retail prices. However, nothing seems to prevent NRA’s to solve the price squeeze from the retail angle.
not distorted, whether through excessive pricing or predatory pricing; the latter could imply that an NRA should also have the possibility of imposing minimum retail prices.
31. In any case, the duty of the NRA to ensure effective competition, as a general principle underlying the ONP Framework, implies that it has to be able to avoid a price squeeze by using the regulatory means available to it. And, as explained above, if the NRA decides to intervene in case of (the threat of) a price squeeze, the relevant ONP documents indicate that this should be done in the direction of the interconnection fees.
CHAPTER III
The national price control mechanism of the end user tariffs
1. In the Consultation Document OPTA uses as the legal basis for introducing the price squeeze test the articles 35 and 36 the Governmental Decree of 10 November 1998 on ONP Leased Lines and Telephony (Besluit ONP Huurlijnen en Telefonie, “BOHT”).21 In these articles the cost orientation principle for the end user tariffs is laid down. The central question is whether OPTA can use these articles as the legal ground for introducing and applying the price squeeze test.
(i) the Wtv and the BART
2. The provisions in the ONP Directives referring to the cost orientation of end-user’s tariffs were implemented in the Dutch national legislation by the Telecommunications Act
(Telecommunicatiewet, “TA”),22 which entered into force on 15 December 1998, and the BOHT. Before the entering into force of the TA and the BOHT, KPN’s end user’s tariffs were governed by the Telecommunications Act 1989 (Wet op de Telecommunicatievoorzieningen, “Wtv”)23 and the General Guidelines for Telecommunications (Besluit Algemene richtlijnen
Telecommunicatie, “BART”).24 The BART was the implementation in the Netherlands of the “old” Voice Directive (Directive 95/62).
3. It was in the first interconnection dispute case in 1997, Telfort vs. KPN25, decided by the Minister of Transport and Communications (the “Minister”) under the Wtv, where the Minister stated:
“Ik zou het in beginsel ongewenst vinden als er [… ] een zodanig kleine marge tussen inkoopprijs en het eindgebruikerstarief van KPN zou bestaan dat het een concurrent daardoor onmogelijk wordt gemaakt deze optie te kiezen. In het kader van dit geschil is dit echter niet op te lossen. Wel zal ik er bij een toekomstige toetsing van kostenoriëntatie van de eindgebruikerstarieven van KPN op letten dat KPN zowel een (maximum) wholesale-marge als een afdoende retail marge hanteert. Alsdan zal concurrentie in dit segment in de markt mogelijk zijn.”26
Translation:
“In principle, I think it would be undesirable if [… ] KPN would use such a small margin between the wholesale tariffs and the end user tariffs that a competitor cannot choose for this option. This can, however, not be solved in the context of this dispute. In any future test of the end user tariffs on the basis of the cost orientation principle, I will ensure that KPN will use a (maximum) whole sale margin and a sufficient retail margin. As a
21
Ministerial Decree of 10 November 1998, Bulletin of Acts and Decrees 1998, 639.
22
Law of 19 October 1998, Bulletin of Acts and Decrees 1998, 610.
23
Law of 26 October 1988, Bulletin of Acts and Decrees 1988, 520.
24
Ministerial Decree of 16 December 1988, Netherlands Government Gazette 1988, 252.
25
Decision of 26 June 1997, Netherlands Government Gazette 1997, 124.
26
consequence, competition will be possible in this segment of the market.”
4. In this interconnection case, Telfort pleaded that the Minister had to prevent KPN from
squeezing its competitors. The Minister refused this in the context of this interconnection case, but recognised that such a safeguard was necessary. It considered that the safeguard had to be introduced in the application of the cost orientation principle on the end user tariffs of KPN. 5. The first assessment of the cost orientation of KPN’s end user’s tariffs for fixed telephony was made by OPTA on 2 September 199827 (the independent regulator OPTA had competence to control these tariffs as from 1 August 1998 on the basis of the OPTA-Act).28 This assessment was based on § 5.2 BART, which contained the same requirements as Article 35 BOHT. The explanatory memorandum to the BART, states the following about § 5.2 and the application of the principle of cost orientation:
“In dit onderdeel is uitvoering gegeven aan de artikelen 12 en 13 van richtlijn 95/62/EG. Deze artikelen handelen over tariefbeginselen en kostentoerekeningsbeginselen. Artikel 12 van de richtlijn bepaalt, kortweg, dat de tarieven voor het gebruik van het openbare vaste telefoonnet en de spraaktelefoondienst transparant en kostengeoriënteerd moeten zijn. Ingevolge artikel 13, eerste lid, van de richtlijn dienen de Lid-Staten ervoor te zorgen dat een voor het in de praktijk brengen van transparante en op kosten gebaseerde tarieven een geschikt kostentoerekeningssysteem wordt gehanteerd. De bandbreedte voor de relatie tussen de tarieven en de kosten zal aan de bovenkant begrensd worden door een redelijke winstopslag, aan de onderkant door de eis dat de daadwerkelijke mededinging niet beperkt mag worden.” 29(emphasis added)
Translation:
This section implements Articles 12 and 13 of Directive 95/62/EC. These Articles concern the tariff- and cost accounting principles. Article 12 of the Directive provides, in short, that the tariffs for the use of the public fixed telephone network and the voice telephony service should be transparent and cost oriented. Pursuant to Article 13 (1) of the Directive, all Member States need to ensure that a proper cost accounting system will be used when implementing the transparent and cost oriented tariffs. The margin for the relation between the tariffs and the costs will find its limitations in, as far as the upper-limit is concerned, a reasonable profit and, as far as the bottom-limit is concerned, the requirement that actual competition is not disturbed.
6. Apparently, the Dutch legislator based its interpretation of the principle of cost orientation on Annex II of the ONP Framework Directive (Directive 90/387), which refers to “a reasonable level of return on investment” and to the “competition rules of the Treaty” (see Chapter II, §4). 7. OPTA’s interpretation and application of the principle of cost orientation has not been
completely transparent. In its assessment of 2 September 1998, OPTA seems to assume, on the one hand, that the requirement of cost orientation serves exclusively to protect consumers against excessively high pricing by monopolists:
27
Oordeel van het college van de Onafhankelijke Post en Telecommunicatie Autoriteit over de mate van
kostengeoriëenteerdheid van de door KPN voorgestelde tarieven voor de spraaktelefoondienst, OPTA/E/98/2190, 2
September 1998.
28
Law of 6 July 1997, Bulletin of Acts and Decrees 1997, 320.
29
“Hieruit [Annex II ONP Kader richtlijn] valt op te maken dat kostenoriëntatie als een tijdelijk substituut voor werkelijke mededinging moet worden beschouwd. Zolang van effectieve concurrentie nog geen sprake is, dient kostenoriëntatie ervoor om te zorgen dat de tarieven die gebruikers moeten betalen niet te hoog zijn. Dat wil zeggen: niet te hoog in vergelijking met tarieven die tot stand zouden zijn gekomen in een situatie van voldoende marktwerking.”30
[… ]
“Het betekent dat in een situatie van volledige mededinging toezicht op de tarieven, in de zin of tarieven niet te hoog zijn, in beginsel niet meer nodig zal zijn. In de hierboven geciteerde passage uit de ONP-kaderrichtlijn wordt dat ook onderkend: tariefregulering wordt noodzakelijk geacht tot het moment dat concurrentie zodanig effectief is dat daarvan voldoende druk uitgaat dat de tarieven die gebruikers moeten betalen niet te hoog worden.”31 (emphasis added)
Translation:
“It can be concluded [from Annex II of the ONP Framework Directive] that cost orientation should be regarded as a temporary substitute for actual competition. As long as there is no effective competition, cost orientation should ensure that the tariffs to be paid by end users are not too high. This means: not too high in comparison to the tariffs that would have existed in a situation of effective competition.”
[… ]
“This means that in a situation of perfect competition supervision of tariffs, to establish whether they are not too high, will in principle no longer be necessary. This is also acknowledged in the paragraph of the ONP
Framework Directive cited above: tariff regulation is considered necessary up till the moment where competition is so effective that this exercises enough pressure to ensure that end user tariffs do not become too high.”
8. On the other hand, OPTA recognises in the same decision the importance of setting a maximum as well as a minimum limit to KPN end-user’s tariffs:
“Voorts merkt het college op dat het voor sommige diensten die door KPN Telecom worden aangeboden wellicht wenselijk is een ondergrens te stellen aan het te behalen rendement. In het consultatiedocument heeft het college zich op het standpunt gesteld dat het behalen van een zeer laag rendement voor bepaalde diensten in de beginfase van de concurrentie-ontwikkeling mededingingsverstorend zou kunnen werken. Aangezien het niet aannemelijk is dat risicodragend kapitaal beschikbaar is indien een rendement in het vooruitzicht wordt gesteld dat nog onder het risicoloze rendement op staatsobligaties ligt, moet in een dergelijk geval haast wel worden aangenomen dat de lage tariefstelling voor de korte termijn mede wordt gehanteerd om concurrenten van de markt te houden. Pas naarmate de concurrentie-ontwikkeling het beginstadium verder achter zich laat, kan voor wat betreft het bepalen van een tariefbodem meer worden aangesloten bij de algemene
mededingingsregels.” 32 [… ]
“Naar het oordeel van het college behelst het toepassen van kostenoriëntatie op de tarieven dat in beginsel een redelijk rendement op de gedane investeringen moet worden behaald. Redelijk wil in dit verband niet alleen zeggen niet te hoog, maar ook niet te laag.” 33
30
Paragraph 5.3 of the decision, at page 6.
31
Paragraph 5.3 of the decision, at page 7.
32
Paragraph 5.5 of the decision, at page 12.
33
Translation:
“Furthermore, OPTA notes that for some services offered by KPN, it may be desirable to impose a minimum profit that should be attained. In the consultation document, OPTA has expressed the opinion that attaining extremely low profits for certain services might disturb competition in the start- up phase of competition development. Considering that it is not very likely that risk-bearing capital is available when a profit is held in prospect which is even below the risk-free profit on government bonds, it almost has to be assumed that in such a situation, the short term low tariff level is used to keep competitors off the market. Only when competition developments have left the early stage can a tariff-floor be determined in line with the general competition rules.”
[… ]
“OPTA is of the opinion that the application of cost orientation on the tariffs in principle implies that a reasonable profit has to be attained on the investments made. In this context, reasonable does not only mean not too high, but also not too low.”
9. However, OPTA chose to put the emphasis on the maximum limit to the tariffs and leave the minimum limit aside:
“Anderzijds zou daar waar nog geen sprake is van een voldoende mate van effectieve concurrentie en waar dat ook niet op korte termijn te voorzien is, naar het oordeel van het college vooralsnog de nadruk moeten liggen op de bescherming van de belangen van gebruikers. Hierbij dient wel voldoende rekening te worden gehouden met het uitgangspunt dat KPN Telecom een redelijk rendement op gedane investeringen moet kunnen behalen.”34 [… .]
“Tenslotte wordt opgemerkt dat het college zich op het standpunt heeft gesteld (zie ook § 5.5) dat daar waar nog geen sprake is van effectieve concurrentie en waar dat ook niet op korte termijn is te voorzien, de nadruk bij het beoordelen van de tarieven thans zou moeten liggen op bescherming van de belangen van gebruikers, met name consumenten.”35(emphasis added)
Translation:
On the other hand, in a situation where there is not a sufficient degree of effective competition yet and where this is not foreseeable in the near future either, OPTA is of the opinion that the emphasis should be on the protection of the interests of end users. However, it has to be taken into account that KPN should be able to attain a reasonable return on investments made.”
[… ]
“Finally, it is noted that OPTA is of the view that (see also paragraph 5.5) where no effective competition has been achieved yet nor will be achieved in the foreseeable future, the emphasis, when assessing the tariffs, should at present be on the protection of the interests of users, particularly consumer.
10. Apparently, OPTA recognised – as was considered by the Minister in the Telfort-case - in its decision of 2 September 1998 the opinion of the Dutch legislator (as voiced in the explanatory memorandum to the BART) that the requirement of cost orientation concerns the setting of maximum as well as minimum tariffs. However, OPTA decided to concentrate on the
regulation of the maximum tariffs. As a consequence, it did not follow-up the instructions of the
34
Paragraph 5.5 of the decision, at page 12.
35
Minister in the Telfort case.
(ii) the TA and the BOHT
11. Pursuant to Article 20.1(1) TA , KPN is notified as an operator having significant market power for the fixed public telephone network and fixed public telephone services for the period between 15 December 1998 – 15 December 2000. According to Article 35(1) BOHT, KPN, as notified operator, has to set cost oriented tariffs for the use of the fixed public telephone network and the fixed public telephone services. In addition to the cost orientation principle the BOHT only states that KPN must apply the end user tariffs on a non-discriminatory basis, i.e. that the same tariffs apply throughout the country in the same way. The BOHT does not contain specific rules in relation to competitors.
12. On 27 September 1999, OPTA published its “Price Cap decision” on KPN’s tariffs for fixed telephony services. It based this decision on Article 35 (7) BOHT and its competence to evaluate whether KPN’s tariffs follow the principle of cost orientation. The Price Cap decision introduces a system for the determination of the maximum tariffs that may be charged by KPN for fixed telephony for the period between 1 July 1999 – 30 June 2002. It does not contain rules on minimum tariffs. In the Price Cap decision, OPTA indicates that the minimum tariffs that KPN may charge are still subject to the cost orientation test under Articles 35 and 36 BOHT:
“Het in te voeren price cap-systeem ziet slechts op één van die [ONP] verplichtingen, te weten het vereiste van kostenoriëntatie en dan ook nog maar op één aspect daarvan, namelijk het stellen van een bovengrens aan de tarieven die onder de price cap vallen. De ondergrens wordt separaat getoetst aan de artikelen 35 en 36 BOHT.”36 (emphasis added)
translation:
“The price cap system that will be implemented concerns only one of the ONP obligations, i.e. cost orientation and besides only one aspect of this obligation, i.e. the determination of a maximum limit for the tariffs falling within the price cap. The minimum limit will be dealt with separately under Articles 35 and 36 BOHT.”
13. In paragraph 101 of the same Decision, OPTA takes, however, a restrictive position towards the possibility of imposing minimum tariffs:
“101. In hun reactie op het consultatiedocument brengt een aantal partijen naar voren dat niet alleen een bovengrens (via de price cap), maar ook een ondergrens aan de tarieven zou moeten worden gesteld. Men denkt aan het vaststellen van een minimum-rendement dat KPN moet behalen bij de prijszetting van haar diensten. Vorig jaar is het college reeds uitgebreid op dit vraagstuk ingegaan. Na overleg met de Nma is het college toen gebleken dat er onvoldoende basis is om op te kunnen treden als KPN genoegen zou nemen met een wat minder rendement dan het ‘redelijke rendement’. Pas als er sprake is van een aanbod onder de kostprijs kan er sprake zijn van overtreding van de mededingingsregels (en zelfs dat hoeft dan niet altijd het geval te zijn).
36
102. Bij de ex ante beoordeling van tariefwijzigingen zal het college toetsen of deze niet zullen leiden tot een aanbod onder de integrale kostprijs. Als dat toch dreigt te gebeuren, zal het college hieraan uitsluitend zijn goedkeuring kunnen geven als verzekerd is dat dit geen strijd oplevert met de algemene
mededingingsregels”. (emphasis added)
Translation:
“101. In their reaction to the consultationdocument, several parties argued that not only a maximum level (through the price cap) but also a minimum level should be imposed on the tariffs. Here one thinks of determining a minimum profit that KPN has to attain when setting the prices for its services. Last year OPTA already examined this problem in depth. After consulting with the Nma, it became clear to OPTA that there is insufficient basis for it to intervene should KPN be satisfied with a slightly less than
“reasonable” profit. Only if there is an offer below costs can there be an infringement of competition rules (and even this does not necessarily have to be the case).
102. In the ex ante assessment of tariff changes, OPTA will examine whether these will not result in an offer below the overall cost price. If this might be the case, OPTA will only grant its approval if it is certain that this will not countervail general competition rules.”
14. This time, OPTA’s indicates again that the principle of cost orientation in the Netherlands has been interpreted to include the setting of a maximum as well as a minimum limit to the tariffs. However, up till now, OPTA has not imposed a minimum limit to the tariffs. It is also not clear from the decision whether OPTA did not apply a price squeeze test at all or whether it applied the test, but that it did not consider it to be necessary to intervene.
15. In another decision of 20 December 1999 concerning a notification under on the basis of Article 16 (7) BOHT,37 KPN was instructed by OPTA to reset its retail prices for fixed lines destined for church telephony, on the basis of the principle of cost orientation. This instruction was given after a competitor, who wanted to offer church telephony services on the cable, had objected to OPTA’s previous approval of these tariffs. In this approval by OPTA it had allowed KPN to introduce a special low price for church telephony, which was not cost orientated. KPN was allowed to do this on the basis of political and social grounds. The cable operator argued that this price did not leave any room for competition (in other words: it were too low). KPN complied with the notification, which resulted in considerably higher tariffs for the end users of this church telephony service. In fact OPTA ensured in this case, by applying the principle of cost orientation, that a minimum was introduced in order to ensure effective competition. Although the case did not deal with the relation between whole sale and end user tariffs, the decision makes clear that OPTA must also ensure effective competition when approving the end user tariffs of KPN.
16. KPN’s end-user’s tariffs for fixed to mobile calls, as well as the tariffs for fixed to fixed calls, have to be cost-oriented. OPTA reconfirmed this in its Position paper on the cost orientation of fixed to mobile calls of 19 October 1999.38 SMP operators for the fixed telephony market,
37
Netherlands Government Gazette 1999, 248.
38
such as KPN, have to charge cost-oriented tariffs for the use of fixed lines for calls to mobile phones. This is referred to as the “retention charge”:
“In summary, the retail tariff of a fixed-to-mobile call should only add up to the ‘termination’ charge set up independently by each mobile operator, the ‘retention’ cost element set up by the fixed operator. In case the originating fixed network has SMP status the retention charges have to be cost-oriented and non-discriminatory (e.g. same retention charges under comparable conveyance conditions). This retention may be based on retail costs that include the costs of physical conveyance as well as those of billing, bad debt provision, etc.”39
17. In its position paper of 19 October 1999, OPTA required KPN to differentiate its end-user’s tariffs for fixed-to-mobile calls according to the termination fees of mobile operators. This was based on the requirement of cost orientation of KPN’s end-user’s tariffs. There is no reason why the cost orientation principle cannot also be used in the case of fixed-to-mobile calls to introduce a price squeeze test.
18. From the Consultation Document can be deduced that OPTA will apply the price squeeze test for all types of voice traffic, so also Internet traffic. But OPTA also remarks:
“Of importance furthermore, is that the fact that some of the Internet traffic will, in the future, be separated via the 06760 code. Internet traffic that was previously established via the wiba traffic, will, in this manner, be withdrawn from the C(P)S-service. With this, the current loss-making offer for Internet traffic would seem to lapse partically” 40.
OPTA explicitly asks parties to express to what extent Internet separation via 067600 numbers will relief in the price squeeze problem.
19. From a legal perspective OPTA’s solution for the squeeze effect with regard to Internet traffic is rather remarkable. Once Internet traffic becomes 067600-traffic it will fall outside the scope/reach of the proposed price squeeze test. The test is mainly based on the articles 35 and 36 BOHT, i.e. voice telephony only, while the 06760 traffic has to be qualified as data traffic. The latter has as a (severe) consequence that the current BOHT will not apply to the 06700-traffic. In the “Rapportage Internetuitkoppeling”, a joint effort of OPTA and NMa, OPTA summaries the relevant judicial framework in the following rule (of thumb):
“Als het internetverkeer het vaste openbare telefoonnetwerk heeft verlaten (is uitgekoppeld) gelden de ONP (Open Netwerk Provision)-regels niet”. Waar de ONP-regels niet gelden, kan OPTA met de
telecommunicatieregels niet optreden”41.
Translation:
“In case the internet traffic leaves the fixed public telephony network (has been separated), the ONP rules do
39
Explanatory note of 14 July 1999, p. 3.
40
Consultation Document, paragraph 82.
41
no longer apply. Where the ONP-rules do no longer apply, OPTA can not act on the basis of the telecommunications rules.”
20. When the Tw and BOHT no longer apply to this Internet traffic, the competition rules, mainly article 24 CA (abuse of a dominant position), remain as the only legal basis for a price squeeze test. As will be explained in Chapter V a price squeeze test based on purely competition law will not have the same scope as a test based on telecommunication law, unless the NMa accepts that the AKZO test cannot be applied for the telecom sector. This situation underlines the necessity of co-operation between OPTA and NMa. So the answer to OPTA’s question whether 06760 will bring relief for C(P)S wiba traffic, is clearly negative. It is foreseen that also on 06760 a price squeeze effect can occur. In that case OPTA would not have an ex ante instrument to apply a price squeeze test.
(iii) Conclusions
22. In line with the EC Directives, the Dutch legislator under the Wtv (and presumably in line with this the TA) incorporates the price squeeze issue in the principle of cost orientation for the end user tariffs. This element is taken into account to avoid the distortion of competition, as one of the fundamentals of the ONP principles and the Dutch Tw (and previously the Wtv). It seems very well arguable that the principle of cost orientation obliges the regulator to avoid any price squeeze to occur. If this test would not have been included in the cost orientation
investigation, one of the objectives of the TA – safeguarding competition on the telecom market in the Netherlands – would not be achieved. Although the avoidance of any price squeeze is not explicitly mentioned in the TA or the BOHT, this rule can be implied in the cost orientation principle. In this context reference can be made to the Otto-case, where the administrative court, College van Beroep voor het Bedrijfsleven, accepted this line of reasoning in the Dutch Postwet (the Post Act), which was also introduced to ensure competition42:
“Op grond van het bovenstaande moet naar het oordeel van het College de interpretatie van de Postwet en de daarop gebaseerde bepalingen (… ) plaatsvinden tegen de achtergrond van het met die wet nagestreefde evenwicht in de concurrentieverhoudingen op de markt voor postdiensten. Voor de interpretatie van artikel 5.1, sub d van het BARP is het derhalve van belang vast te stellen of en in hoeverre een bepaalde uitleg van dat artikelonderdeel een verstoring van de concurrentieverhoudingen toelaat, die niet in overeenstemming zijn met de bedoeling van de wetgever.” (emphasis added)
Translation:
“On the basis of the abovementioned, the College is of the opinion that the Post Act and provisions based on this Act should be interpreted in light of the balance in competition that is pursued by this Act for the postal services market. Concerning the interpretation of Article 5.1., sub d of the BARP, it therefore is relevant to establish to what extent a certain interpretation of that provision allows a disturbance of competition, which is not in conformity with what the legislator intended.”
42
Uitspraak van 18 september 1996 van het College van Beroep voor het bedrijfsleven in de zaak KPN en PTT
This (kind of) interpretation of the principle of cost orientation is also in line with the general duty, based on the case law of the Court of Justice, by which national judges - and reasoned by analogy also national regulators like OPTA43 - have to interpret national law in accordance with the ONP Directives (hereinafter “sympathetic interpretation”)4445.
24. In its decisions of 2 September 1998 and 27 September 1999, OPTA seems to follow this line of reasoning. However, parts of the decisions suggest that OPTA does include this issue on the basis of general competition law and not on the basis of the principle of cost orientation. (see paragraphs 101 and 102 of the price cap decision of 27 September 1999). In the Consultation Document OPTA refers to articles 35 and 36 BOHT, but does not explain why these articles can serve as the legal basis for the price squeeze problem. Its line of reasoning is based entirely on general competition law and not on the interpretation of the principle of cost orientation. OPTA makes a basic mistake here. It is clear from the TA and the OPTA Act that OPTA has no general authority to apply competition law. OPTA can only act if an
infringement of the TA can be indicated.
25. As a consequence, OPTA must argue that KPN is infringing the cost orientation principle of articles 35 and 36 BOHT by causing a price squeeze between its whole sale and retail tariffs.
43
Please note that this question has not yet been answered by the Court of Justice. In the light of the very wide
interpretation of the concept “State” (in combination with the Saeed judgement) if can be argued that also regulators have to interpret national law in accordance with directives.
44
Two main categories of “sympathetic interpretation” can be distinguished:
a) cases where there is no incorrect implementation of the directive and the national law is implemented/filled in by the rule of community law, which is of higher ranking, i.e. a form of sympathetic interpretation which hardly causes problems and b) cases where there is an incorrect implementation of the directive, and the national law is (nevertheless)
implemented by the EU rule. In the latter situation national and community law are in conflict. If, in such a case, a national judge applies community law, he will set aside national law, and will to a certain extent “sit on the chair of legislator”. Moreover, sympathetic interpretation can get in conflict with the principle of legal certainty, or even effect a “contra legems” application of national law. The question is whether a national administrative judge or regulator as OPTA could be held to such an application of sympathetic interpretation.
A separate issue is whether sympathetic interpretation can cause horizontal effect(s). With regard to the doctrine of direct effect of Directives, the Court of Justice has in principle rejected horizontal effect - i.e. when a provision of a directive is applied in cases between two (or more) individual parties, so where one of the individual parties involved invokes a directive against another individual - and also reversed direct effect - i.e. when a public authority applies a provision of a directive against an individual party, for example in a penal case .
Until now the Court of Justice has not addressed the question of horizontal effect resulting from sympathetic interpretation in detail, but there are indications that the Court will also will reject such effects. The Court already rejected the
In this context it can relay on the (proposed) EC Directives and the obligation laid down in these directives for an NRA to resolve any distortion of competition. OPTA has to make it clear in the guidelines to be published that the objectives of the EC Directives and the TA actually oblige OPTA to control this behaviour of KPN . According to the EC Directives and the Dutch legislator this behaviour can be controlled by imposing a minimum cap to the end user tariffs on the basis of the cost orientation principle. If not, OPTA would allow KPN to distort
competition on the Dutch telecom market. OPTA, however, cannot solely refer to (European) competition law in this respect, as this is not a legal basis for OPTA to intervene. However, it may use competition law to interpret the cost orientation principle for the end user tariffs. This aspect will be further dealt with in Chapter V.
26. The price squeeze test should also apply to the fixed-t-mobile traffic and the 06700-traffic. With respect to the fixed-to-mobile traffic OPTA required in its position paper of 19 October 1999, KPN to differentiate its end-user’s tariffs for fixed-to-mobile calls according to the termination fees of mobile operators. This was based on the requirement of cost orientation of KPN’s end-user’s tariffs. There is no reason why the cost orientation principle cannot also be used in the case of fixed-to-mobile calls to introduce a price squeeze test.
27. Once Internet traffic becomes 067600-traffic it will fall outside the scope/reach of the proposed price squeeze test. When the Tw and BOHT no longer apply to this Internet traffic, the
competition rules, mainly article 24 CA (abuse of a dominant position), remain as the only legal basis for a price squeeze test. As will be explained in Chapter V a price squeeze test based on purely competition law will not have the same scope as a test based on
CHAPTER IV
The price squeeze control mechanism of the interconnection tariffs (i) the cost orientation principle for interconnection tariffs
1. As follows from the (proposed) EC Directives, discussed in Chapter II, the price squeeze problem can also be solve by the cost orientation principle applicable to the interconnection tariffs. Although the Minister in the Telfort case (see Chapter III) was of the opinion that the price squeeze problem had to be dealt with in the context of the approval of the end user tariffs, nothing seems to prevent OPTA from applying the price squeeze test on the basis of the cost orientation principle for the interconnection tariffs, as laid down in Article 6.6 (1) Tw. Also the European Commission focuses mainly on the interconnection/access tariffs when dealing with this problem.
(ii) the non-discrimination principle (undue discrimination)
2. In line with EC legislation, the Tw provides for the non-discrimination principle in relation to the interconnection tariffs. This principle is laid down in Article 6a of the Interconnection Directive:
“For interconnection to public telecommunications networks and publicly available telecommunications services as set out in Annex I provided by organisations which have been notified by national regulatory authorities as having significant market power, Member States shall ensure that:
(a) the organisations concerned adhere to the principle of non-discrimination with regard to interconnection offered to others. They shall apply similar conditions in similar circumstances to interconnected organisations providing similar services, and shall provide interconnection facilities and information to others under the same conditions and of the same quality as they provide for their own services, or those of their subsidiaries or partners; “
Article 10 of the proposal for the new Interconnection Directive states that:
“1. A National authority may, in accordance with the provisions of Article 8, impose obligations of non-discrimination, in relation to interconnection and/or network access.46
46
