The European Commission has today published Decision C(2004)4070final, dated 20 Oct 2004, which requires the Austrian regulatory authority TKK to "withdraw a notified draft measure".

This is the third veto decision taken by the European Commission based upon Article 7(4) of the Framework Directive 2002/21/EC.

The veto decision follows the issuance of a "serious doubts" letter by the European Commission on 20 Aug 2004 (see also the T-REGS news item which covers its contents in detail), a public consultation (5 comments were received), and a discussion in the Communications Committee on 13 Oct 2004 (T-REGS has learnt that of the 25 Member State representatives, 5 voted in favour of the veto, 2 voted against, and the remainder abstained).

The Austrian Telekom-Control-Kommission (TKK) had, in its market analysis (see the relevant T-REGS news item), concluded that there is effective competition on the wholesale market for transit services in the fixed public telephone network (Market 10), and therefore put forward that all obligations on Telekom Austria should be withdrawn by the end of 2004. The key building blocks of the TKK’s reasoning were that direct interconnections between operators and self-supply by operators were included in the relevant market, and Telekom Austria’s market share would only be 45% on this basis.

Our previous news item already highlighted the European Commission’s key objections. These have now been expanded, to contain the following precedent-setting statements, which are worth providing as full citations addressing the following topics:

  • Actual versus hypothetical supply-side substitution
  • Treatment of self-supply through direct interconnection
  • Switching possibilities and costs
  • Necessity of thorough analysis of conditions in the absence of regulation

Actual versus hypothetical supply-side substitution

(15) [...] According to the guidelines on market analysis when defining a relevant market, NRAs should determine the substitutable products to which wholesale customers could easily switch in case of a relative price increase. Where wholesale customers face significant switching costs in order to substitute product A for product B, these two products should not be included in the same relevant market. NRAs should also ascertain whether a given supplier would actually use or switch its productive assets to produce the relevant product or offer the relevant service in the foreseeable future. Mere hypothetical supply-side substitution is not sufficient for the purposes of market definition. The NRAs’ findings in this respect remain subject to the procedure provided for in Article 7 of the Framework Directive.

(21) As far as supply-side substitutability is concerned, there is no substantiation of the claim that network operators which replaced the purchase of transit services by self provision through direct interconnection use their productive assets, i.e. the newly created capacity, to offer on a systematic basis the relevant transit services to third parties. In the notification and additional information no evidence is provided that network operators that ceased to purchase transit services subsequent to self-provision through direct interconnection would, in the short term, be willing and consider it economically viable to supply systematically transit services to third parties. Mere hypothetical supply-side substitution is not sufficient for the purposes of market definition.

(29) TKK should undertake, in accordance with the Guidelines on market analysis, a thorough and complete analysis of the economic characteristics of the relevant market. Evidence should be provided as to undertakings that are actually offering transit services to third parties or those which would, in the short term, be willing and consider it economically viable to offer such services to third parties. Following from the evidence presented so far, self-provision through direct interconnection appears only to provide a potential source of competition. Hence it should fall to be considered in terms of the SMP assessment and not the market definition with the corresponding effect on market share.

Treatment of self-supply through direct interconnection

(18) According to the Commission’s Recommendation regulatory authorities should decide on the elements to be included within particular markets identified in the Recommendation, while adhering to competition law principles. There is not sufficient evidence to justify the inclusion of self-provision through direct interconnection in the relevant market. On the basis of the information currently available to the Commission, it regards self-provision through direct interconnection to be outside the relevant market.

Switching possibilities and costs

(19) In this regard, in determining the existence of demand-side substitutability, there is insufficient evidence that network operators purchasing transit services could promptly shift to other products or services in response to price changes. In its notification TKK finds that self-provision through direct interconnection requires network roll-out associated with high investments as well as substantial planning and time. Given these findings, it is not readily apparent from the notification and the additional information provided how network operators could promptly shift to selfprovision through direct interconnection, and thus “demand” their self-provided transit services.

Necessity of thorough analysis of conditions in the absence of regulation

(26) A green field analysis should examine whether the market conditions that would prevail in the absence of regulation would indeed reflect those characteristic of the existence of effective competition in the relevant market. In this case, such an analysis should focus on the effects any withdrawal of obligations may have on TA’s actual supply of transit services. In terms of TKK’s analysis, TKK finds that the proposed withdrawal of regulation may lead to competitive disadvantages to operators with relatively small networks. TKK qualifies this finding with the suggestion that such an outcome would provide incentives for further network roll-outs of such operators, although it states further that direct interconnection for all operators would constitute, in economic terms, a waste of resources.

In conclusion, the European Commission considers that TKK’s market definition is not tenable, and that the notified draft measure must be withdrawn.

The full text of veto Decision C(2004)4070final can be accessed by clicking here.

The European Commission website notice document can be accessed by clicking here.

The Decision has also been added to the T-REGS repositories of veto decisions and eCCTF letters, which can be accessed by clicking on Documents at the top right of the website.