ARCEP puts in place the global process and proposes:1 - alleviating France Telecom's obligations on residential call offers in the Fall2 - establishing a multi-year framework for France Telecom's base telephone call tariffs under universal service

Paris, 25th July 2006

1 - Alleviating the regulation of retail markets: the overall process

• France Telecom has been designated as enjoying significant market power

In its market analysis decision for fixed telephony, ARCEP designated France Telecom as enjoying significant market power on all the relevant retail markets.
Since these markets are not competitive and given the time needed for the access and interconnection obligations which were introduced once more to become effective, ARCEP considered it necessary to impose specific obligations on these retail markets in order to ensure that fair and effective competition can develop on them.

• However, the implementation of access and interconnection obligations and the development of the market justify a re-examination of the obligations imposed on France Telecom

The progressive implementation of access and interconnection obligations and the development of these retail markets justify re-examining the remedies imposed on the retail market.
The development of broadband voice services has increased the competitive pressure on France Telecom.
Furthermore, under the abovementioned market analysis France Telecom is required to sell wholesale telephone service access. The technical aspects were defined in part by a multilateral working group. This offer has been available since the second quarter for analogue access, and since July for basic digital access or groups of access. This offer lets alternative operators provide global telephony service combining access and calls and, by removing France Telecom's control of access, limits the incumbent's commercial advantages as well as the leverage effect it had over calls.

• ARCEP proposes establishing retail market deregulation in several phases

ARCEP considers that the essential criterion which justifies alleviating the regulation of retail fixed telephony markets is the long-term development of France Telecom's wholesale offers, and in particular wholesale sales of telephone service access, which allow the creation of fair and effective competition.
Since development is not homogenous across all the concerned retail markets, ARCEP is proposing multi-phase deregulation of the retail markets in a text it is submitting today for public consultation.
Its aim is total deregulation of these markets before the term of the market analyses in progress, i.e. 1st September 2008, if justified based on the criteria presented in the text being submitted for public consultation.

• Timetable

The public consultation on global retail market deregulation will be closed on 15 September 2006.

2 - The first phase is launched today: ARCEP proposes alleviating France Telecom's obligations on residential calls

In addition to the overall alleviation submitted for public consultation, ARCEP is also launching today a first phase for alleviating retail regulation.
It concerns only residential calls, for which most of the retail obligations imposed on France Telecom will be removed in the Fall.

The draft decision proposing this first alleviation of retail regulation was notified to the European Commission and to all national regulatory authorities (NRA) today. It is also open for public consultation until 15 September 2006.
Upon completion of these last two steps, ARCEP will adopt and publish its final decision by the end of September 2006.

3 - Establishing a multi-year pricing framework for telephone calls under universal service

Today, ARCEP took a decision formalising the commitment taken by France Telecom when it applied for designation as the universal service provider; France Telecom had proposed a regular decrease in the telephone call tariffs of universal service customers.

The formalised framework applies to the period of 2005 to 2008, to the calls of two representative subscribers having chosen France Telecom's universal service offer: one residing in Metropolitan France, and the other in an overseas region. These form two distinct baskets: the Metropolitan basket and the Overseas basket (Reunion Island, Guadeloupe, Martinique, Guyana, St-Pierre-&-Miquelon and Mayotte).

The decision taken today by ARCEP conforms with France Telecom's proposals and with the recommendations expressed by ARCEP in its opinion in response to these proposals in early 2005.

This decision guarantees that the end customers of the universal service offer (France Telecom's default offer) will enjoy regular decreases in their call tariffs and that France Telecom will pass on to them all savings from reductions to mobile call termination charges imposed by ARCEP.

So, for the period 2005-2008, the average annual price of each basket will change each year by the rate of the consumer price index (excluding tobacco) at the most, less 3% and less the declines in mobile call termination charges imposed by ARCEP.

France Telecom has respected is commitments for 2005 and 2006, with price decreases applied in early 2005 and 2006 (The Metropolitan basket declined by 15% for these two years and the overseas basket by 16%).

1. Which calls are concerned by this framework?

The calls concerned are part of the telephone service provided under the telecommunications universal service framework; these are calls billed at the "base" rate to all subscribers wishing it. This invoicing reflects the subscriber's consumption; it is established based on the duration and destination of the calls made. It is does not include any flat rates, options or promotions offered by the operator and are not covered by the universal service call offer.

2. Which consumers will benefit from the framework?

The framework protects universal service subscribers with the lowest consumption, who use France Telecom's base rates; it guarantees that these subscribers benefit from the efficiency gains of their operator and the downward trend of prices in the sector. The law requires that the tariffs under universal service be affordable.

3. What is the composition of the baskets?

The baskets are composed of all the call tariffs to national fixed geographic and mobile numbers. The different types of calls have been weighted according to the average uses observed:

The call baskets can be summarised as follows:

4. Are calls to numbers beginning with 087 or 09 included in the baskets?

No, the prices of calls to 087B and 097B numbers are currently checked individually by ARCEP, prior to their implementation; this will not change for the time being. The market for calls to these numbers is still too immature, with consumers' uses in calling these numbers changing constantly. Furthermore, individual monitoring is still necessary for competitive reasons.

5. Are calls to special numbers included in the baskets?

No, calls to special services (such as 08AB, 3BPQ and 118XY) are not covered by the framework because their tariffs are determined in part by the service provider called (part of the tariff is paid to the service provider). France Telecom shares responsibility for the tariff practiced for these calls: so it is not reasonable to require it to bear alone a restriction on their development.

6. How are the average prices of calls evaluated for a basket for a year?

The average price is calculated at each price change over a period of one year, and each new price is calculated for the period in which it was applied. Therefore, the average price for a year is not the one practiced by the operator on 31 December, but reflects the various prices practiced throughout the 12 months of the year.