Arcep speaks

New year wishes for 2005 presented by Paul CHAMPSAUR, chairman of the French Telecommunications Regulatory Authority (ART) / La Sorbonne, 18 January 2005

<font size="3">Ladies and Gentlemen,</font>

 

<font size="3"> In the name of the Board and all the ART staff, I would like to convey my best wishes for the coming year. We hope that 2005 will be an innovative and fulfilling year for each of us. I would like to welcome Edouard Bridoux, who has just been appointed to the Authority, and to thank Dominique Roux publicly for his contribution to regulatory affairs during the 8 years he spent with ART. The Board has benefited greatly from his economic expertise and his gift for communication.</font>

<font size="3"> Finally, I would like to take advantage of this opportunity to thank each and every one of you for the work that we have achieved together in 2004. Whether you are operators, consumer associations, public authorities, institutional players or local bodies, you have helped us, through your active participation in public consultations and working groups, to implement regulation for the electronic communications sector in a climate of cooperation and exchange and I am grateful to you for this. </font>

<font size="3"> It is customary each year for the Authority to take stock of the regulatory situation in the sector and to outline some of the developments for the coming year. This year will be no exception.</font>

 

<font size="3"> The telecommunications services market in 2004 confirmed the pick-up in growth observed in 2003. Sector turnover for the first nine months increased by 4.7% compared with the same period in 2003 and was distinctly higher than growth in GNP. Fixed revenues continued to decline slowly and for the first time, full-year mobile revenues exceeded full-year fixed revenues. Besides mobile, Internet, and in particular broadband, continued to fuel growth. At the end of 2004, there were nearly 6 million broadband lines of which some 1.6 million were unbundled; six times more than at the beginning of the year. The rise in usage, which included voice thanks to mobile, continued in 2004. The outlook for 2005 is encouraging after commercial opening of the UMTS networks and the take-off of broadband and e-commerce. </font>

<font size="3"> We have closely followed the restructuring of the cable sector and have noted with interest the plans of the new cable operators to invest in upgrading their networks. Their objective is to provide their customers with triple play services combining television, broadband and telephony. These projects lead to more infrastructure-based competition and increased usage, which is something we can be pleased about.</font>

 

<font size="3"> Last year, I indicated that the essential condition for developing investment and new services was a stable legal framework consistent with the European framework. Today this has been achieved and the European directives have been transposed into French law. The decrees specifying how the law should be enforced have been published or are in the process of being examined by the <em>Conseil d’Etat</em> and provide, or will soon provide, the legal means necessary for us to carry out our mission. Already, the decree relating to the measures applicable to SMP operators, published in November 2004, allows our draft decisions to be adopted and become effective. The publication of the last set of decrees will mark completion of the process of transposing European directives into National law. ART, like its European counterparts, will enjoy appropriate powers to encourage the development of sustainable competition for the benefit of all users.</font>

 

<font size="3"> In this context, what are the broad outlines of ART’s programme for 2005? From my point of view, there are essentially three. </font>

<font size="3"> First, in liaison with the application of the new framework, it is our ambition to implement regulation which reflects sector developments and corresponds as closely as possible to the reality of the situation.</font>

<font size="3"> We also wish to use the new regulatory tools available to us to ensure more efficient management of rare resources . </font>

<font size="3"> Finally, one of the regulator's missions is to keep a watch on public service and regional development issues. In 2005 we will endeavour to do this through the universal service mechanism and local body actions. </font>

<font size="3"> Today, regulation is more adapted to the real market situation, thanks to the new legal and regulatory framework.</font>

<font size="3"> All industry players are now familiar with the new market analysis process and the regulatory logic behind the new framework. Nevertheless, I think that it is worthwhile to go back over three essential elements.</font>

<font size="3"> First, ART has greater flexibility in defining relevant markets, whether in terms of commercial services, geographical reach or customer base. This new approach allows regulation to match the reality of these different markets more closely. </font>

<font size="3"> There is of course a risk that the segmentation will be too detailed, but I think that ART is conscious of this and has so far managed to avoid this pitfall. No one has contested the relevance of the geographical segmentation of mobile telephony into five wholesale markets. It is clear that an operator in La Réunion is not in competition with an operator in metropolitan France. As concerns the segmentation of the retail market between residential and business customers, I believe that all industry players recognise that the manner in which competition works in these markets is substantially different. This brings us back to the issue of being able to define in detail the services which are or are not to be included in a market. </font>

 

<font size="3"> Secondly, the Commission’s recommendation on relevant markets systematically distinguishes between wholesale and retail markets, a distinction which was imperfect in the previous framework. ART’s action will be more concentrated and incisive in the wholesale markets, i.e. markets related to services between operators, even if the final objective is to rectify competition problems in the retail market. Consequently, the progressive reduction in regulation will first of all concern the retail markets. </font>

<font size="3"> Finally, the other key principle introduced by the new framework concerns the regulation of markets based on dialogue with the players, transparency with respect to the methods used and systematic justification of all decisions taken. This is not revolutionary as far as ART is concerned, because it has always handed down clear recommendations and decisions made after due consultation. </font>

 

<font size="3"> I would like briefly to look at an example that illustrates the application of these three principles in our market analyses. </font>

<font size="3"> In the broadband sector, ART did not consider it necessary to establish regulation for the retail market where competition is already intense. However, it designated France Telecom as an SMP operator in the unbundling (option 1) and in the regional wholesale or "bitstream" markets (option 3 and regional option 5). As far as the wholesale market for nationwide access offers is concerned (national option 5), regulation should be reduced and ART no longer wishes to exercise control over individual tariffs since this market has become increasingly competitive. </font>

<font size="3"> ART demonstrated its ability to question its analyses during the public consultation process for fixed telephony markets by modifying its proposed definition for the retail call market. Last July, the Authority indicated that telephony call services marketed together with broadband access were considered as being equivalent to call services provided over traditional telephone lines. However, the telephony call services currently being proposed by broadband ISPs are part of a bundle of services which are complementary to the access offer. Consequently, the competitive environment for these services is definitely part of the wider framework of the retail broadband access market. For this reason, ART considered that voice services using broadband access should not be included in the relevant market for narrowband fixed telephony listed by the European Commission.</font>

<font size="3">These telephony call services will therefore not be subject to retail market regulation. However, the Authority will keep a close watch on the functioning of the underlying wholesale markets for interconnection and broadband access to guarantee that these offers can be duplicated by all the players under satisfactory economic conditions.</font>

 

<font size="3"><strong> </strong>I come now to the development and implementation of new spectrum-regulation methods.</font>

<font size="3"><strong> </strong>The Act dated July 2004, gave the regulator new tools for regulating the spectrum and reinforced the economic measures for allocating frequencies in accordance with the "framework" and "authorisation" directives. This development arises from three observations. The extreme rapidity and diversity of technological progress offers new opportunities to market players while at the same time making it more difficult to anticipate technological or service developments. A number of recent examples demonstrate this point across the electronic communications sector and in particular in the field of radiocommunications. Moreover, harmonised spectrum management is essential to enable customers to take advantage of pan-European services. Lastly, the market has become aware of the value of spectrum, notably through the UMTS licence allocations. </font>

<font size="3"> The increasingly fast pace at which market conditions are changing has led to a re-examination of spectrum regulation methods with a view to providing more efficient frequency management. Consequently, work is under way at European level and in each of the member states with the objective of introducing secondary markets for frequencies, on the one hand, and the development of more flexible spectrum management on the other. </font>

<font size="3"> ART has initiated a study on implementation of these new regulatory instruments, notably to establish a secondary market, which would allow an operator to transfer its rights to use a frequency to another operator. This secondary frequency market would allow a better match between resources and requirements.</font>

<font size="3"> Its implementation requires publication of a decree setting out the general rules and the regulator’s powers as well as a ministerial order defining the frequency bands in which frequencies could be exchanged. These texts are currently being drafted by the government and ART is actively contributing to the work.</font>

<font size="3"> More generally, ART is carrying out a market analysis on each frequency market to determine what the opportunities and benefits would be in offering players the possibility of reselling on the secondary market, all or part of the spectrum allocated to them. We intend to evaluate the possible consequences of such a transfer mechanism on the initial spectrum allocation procedures and, in particular, the consequences of implementing an auction procedure. </font>

<font size="3"> This analysis will be carried out pragmatically and in consultation with industry players. It will allow the public authorities to select the relevant frequency bands, define the accompanying measures market-by-market, guard against anti-competitive behaviour or the risk that an operator will hoard frequencies to increase their value and define the transfer notification procedures. We can already consider the wireless local loop market in the 3.5 GHz band as a relevant example for introduction of a secondary market and possible organisation of an auction. </font>

<font size="3"> Having said that, it is not my intention to reactivate previous debates between advocates of the auction system and beauty contests. I simply want to point out that when the law requires us to introduce a market mechanism in this area by creating a secondary market, it is logical to think about the initial frequency allocation procedures along the same lines. Auctions are a part of the equation and the Authority is studying the possibility.</font>

 

<font size="3"> The third area of ART’s action in 2005 is to deal with the issues of public service and regional development, which are evolving with the development of electronic communication services.</font>

<font size="3"> ART is concerned with preserving strong universal service provisions within the public telecommunications service as defined by the Act dated 31 December 2003.</font>

<font size="3"> The procedure for designating an operator in charge of universal service is under way and was launched on 25 November 2004 with a call for applications. ART is not directly involved in the practical development of this procedure, which falls under the responsibility of the national government. It is indirectly involved through its powers to regulate universal service tariffs and, in particular, the subscription and tariffs of basic telephone services. This power will become effective after the decree covering universal tariff control has been promulgated by the <em>Conseil d’Etat</em>. </font>

<font size="3"> The government called upon ART last week for a recommendation on the complete set of long-term tariff offers and the proposals put forward by France Telecom. ART is examining these offers with a view to issuing a justified recommendation which will be made public. </font>

<font size="3"> 2005 will be a very important year as far as future changes to universal service are concerned because the government has to submit a report to parliament before 1 March assessing the situation with respect to universal service content and financing. In parallel, the European Union must, pursuant to the "universal service" directive, re-examine universal service content before July and propose changes if need be.</font>

<font size="3"> Although ART is not the decision-maker for these questions, which are the prerogative of the political authorities, it will be closely monitoring the deliberations on the subject, particularly during the period when it must submit its recommendation on the draft report to the government.</font>

<font size="3"> Regional development is one of the regulator’s objectives as set out in the legislation. Consequently, ART is particularly interested in the question of national coverage for both mobiles and broadband. </font>

<font size="3"> Moreover, the requirement for nationwide development of these services was reiterated in the contractual operating conditions for mobile operators when the expired GSM licences were renewed and during the rollout compliance checks for UMTS networks. It was also confirmed on signature of the amendment to the national agreement on mobile telephony coverage. </font>

<font size="3"> For broadband, it is logical for rollout to start in built-up areas where costs are lower rather than in less-densely-populated areas. As a result, broadband coverage is disparate, but we hope that this situation is only temporary. In this respect, we welcome announcements made by France Telecom regarding its plans to extend coverage to 96% of the population by the end of the year and to provide broadband capability in 100% of its exchanges by the end of 2006. There will still be lines that are too long for ADSL and for which other alternative technologies such as satellite, WLL or even PLC could be used. </font>

<font size="3"> ART wants the main broadband access suppliers to be national operators providing nationwide coverage. We will be paying close attention to their ability to reinforce their presence by combining unbundling wherever possible with regional collection. The extension of the unbundling footprint remains a priority and the involvement of local authorities can facilitate this extension beyond built-up areas. This is particularly important for enabling businesses to remain competitive. </font>

<font size="3"> Operators will be able to rely on infrastructure deployed by local authorities under the new powers given them in article L. 1425-1 of the regional authorities general code. </font>

<font size="3"> To open up or reinforce the attractiveness of their area, a number of regional authorities have in fact launched broadband network projects. Construction of more than ten public networks has been launched in different regions including Alsace, Limousin, the <em>départments</em> of Sarthe, Loiret, Moselle etc. The implementation of more than 40 others is under way and some 100 more are at the planning stage. The legitimacy of these regional authority initiatives has been recognised at European level; the Pyrénées Atlantiques network obtained the green light from the Commission which recognised it as providing a service that is economically beneficial to the general public. </font>

<font size="3"> ART has initiated a public consultation among the relevant players on the issues surrounding public intervention in the competitive electronic communication sector. A summary of the replies received was presented during a one-day event dedicated to regional authority intervention. Points of comparison were drafted based on the initial ART analyses of public investment in telecommunications and the conclusions that ART has drawn from broadband regulation. </font>

<font size="3"> To conclude, several exemples taken during the course of the year will show that regulation only makes sense when it allows markets to develop for the benefit of consumers. </font>

<font size="3"> It is worth recalling that telecommunications services represent a growing proportion of household expenditure: 2.6% in 2003 compared with 1.5% in 1997. In value, spending has doubled over the period, primarily because of the development of mobile. In the same period, the price of these services has dropped significantly, confirming the benefits of competition for consumers. In particular, the price levels of telecoms services fell by 0.3% between October 2003 and September 2004 set against inflation of 2.1% for the same period.</font>

<font size="3"> As regards the regulator’s action in the field of mobile, the number-portability process will be simplified and lead times reduced this year. The three metropolitan operators will be able to accommodate new virtual mobile operators. For fixed telephony, the price of calls to mobiles has just dropped by an average of 11% and will drop further in the coming two years. Finally, full unbundling and subscription resale should allow consumers to benefit from a genuine single bill and make the commercial relationship with the operator of their choice clearer. </font>

<font size="3"> The process of consultation and dialogue with industry players, which ART established as a working rule from the outset, will be renewed and reinforced in 2005. It is worth noting that more than ten public consultations were launched last year.</font>

<font size="3"> This will be our guiding principle in the question of postal sector regulation, assuming that parliament entrusts us with this responsibility. In this respect, ART is preparing to undertake this mission, which is provided for in the draft legislation governing postal regulation, adopted on first reading by the Senate and currently being examined by the National Assembly. Following on from its European partners, France is preparing for the opening-up of this sector and the regulator will endeavour to exercise this function objectively and impartially as it has done in the area of electronic communications. </font>

 

<font size="3">Thank you for your attention.</font>


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