Regulation of Market Power in the New Telecommunications Act

New Legislation
Potential Problems

New Legislation

The Hungarian Parliament is examining a draft Communications Act, which aims to regulate postal and communications services and frequencies in a single piece of legislation, and to provide the legal basis for the liberalization of Hungary's telecommunications market. It is expected that the Parliament will adopt the new act in 2001 and that it will enter into force on January 1 2002. The text of the new measure has not yet been finalized, but the structure and main provisions of the current draft are likely to be retained in the adopted text.

One major objective of the new legislation is to regulate the activities of dominant communications operators, so as to prevent abuse of market dominance and create a level playing field for new entrants (including existing alternative service providers). The draft uses the term 'market power' in connection with the regulation of dominant operators. The provisions regarding market power are not contained in a single section, but appear throughout the draft in conjunction with other provisions. However, the core provisions on market power are grouped in a specific section entitled "Rules concerning service providers with significant market power". 'Significant market power' is regarded as a characteristic of those who control the market, and constitutes the only definition of 'market dominance' in the draft. The definition corresponds with the criteria in the EU telecommunications framework directives, in particular open network provisioning directives such as Directive 98/10/EC (ie, in practice, a 25% share of the relevant market).

A service provider which is considered to have significant market power is subject to the following special obligations:

• It must submit a reference interconnection offer (RIO) with ex lege contents (ie, contents prescribed by law) to the Communications Advisory Board for approval;
  
  
• It must agree in writing to make access to its telecommunications networks available, on the same technical, legal and economic terms, to any other operator whose offer is both economically and technically reasonable;
  
  
• With respect to the local loop, it must also provide other service providers with access to all or part of its existing infrastructure according to their needs, and make a special RIO for the local loop;
  
  
• Its interconnection prices must be approved by the appropriate communications authority; and
  
  
• It must keep separate books and other accounting records for telecommunications services, non-telecommunications services and universal services, in order to ensure full transparency and prevent cross-subsidization between competitive and non-competitive service areas.

The Communications Advisory Board will be responsible for defining which service providers qualify as service providers with significant market power, as well as the geographical and other attributes of the regulatory markets, in particular the markets for interconnection, leased lines, mobile and voice telephony.

The draft states that universal service providers will be selected by means of public tenders or auctions, but does not lay down any special rules regarding the provision of universal services by service providers with significant market power (in events where such service providers are obliged to provide universal services due to the failure of a public tender). However, it is likely that universal services will initially be provided by service providers that currently operate under a concession and are therefore subject to universal service obligations. (Under the existing regulatory regime, public voice telephony service providers operate on the basis of concessions, while many other communications services, such as those to closed user groups, are provided on the basis of licences).

Potential Problems

Although the draft distinguishes between service providers with significant market power and other service providers, and imposes specific obligations on operators deemed to have significant market power, it draws no distinction between the duties of new entrants to the market and incumbent operators. This approach will not necessarily provide protection against abusive market practices by incumbent operators, for the following reasons:

• At the start of the liberalization process, it will probably be necessary to impose special obligations on incumbent operators, particularly with regard to universal service, interconnection and the like. However, even if new entrants to the market succeed in winning a significant market share relatively quickly, they may have difficulty in achieving sufficient critical mass and profitability to build up their infrastructure in order to compete with the incumbent service providers if they are subject to equally stringent obligations. It would probably be wiser to begin by imposing special duties on incumbent operators, under a more stringent but narrower umbrella regulation.
  
  
• Some experts consider that the significant market power test is not an appropriate method of controlling the market. They view it as a rigid approach which leaves the telecommunications authorities too much discretion and has proved to be ineffective in practice. These arguments were the main reasons why the European Commission has shifted to a new and more flexible definition of 'significant market power', which is closer to the concept of a dominant position in competition law. However, Hungary has apparently decided to follow the commission's former, more rigid approach.
  
  
• Moreover, the European Union's former regulatory measures based on significant market power were not applied in isolation, but were often used in parallel with the general competition rules regarding a dominant position. The exact relationship between the new Communications Act (to be enacted on the basis of the draft) and the existing Competition Act with respect to the applicability of competition rules has not yet been clearly determined. However, the draft act seems to rule out the possibility of applying traditional competition rules to the telecommunications industry in Hungary. According to the draft, the relevant authority will be the Competition Office, and not the communications authority, in cases involving competition issues (eg, exercise of abusive market practices by telecommunications service providers). However, the Competition Office will have to apply the significant market power test under the draft, and not the general rules of the Competition Act, in such cases.

For further information on this topic please contact István Réczicza, Balázs Fazekas or Szabolcs Koppányi at Réczicza Law Firm White & Case LLP by telephone (+36 1 488 5200) or by fax (+36 1 488 5299) or by e-mail ([email protected], [email protected] or [email protected]).