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Title: Structural separation in the electronic communications market : factors that may influence the actions of regulators and competition authorities in Europe
Author: Congedo, Pierluigi
ISNI:       0000 0004 5350 0447
Awarding Body: King's College London (University of London)
Current Institution: King's College London (University of London)
Date of Award: 2014
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This thesis analyses structural separation in the electronic communications market. It examines the factors that may lead competition and sectorial regulators to consider structural separation. It argues that the European Commission, when called upon to apply a sanction and choose a behavioural or structural remedy, should take into consideration the positive effects that, under certain conditions, may derive from structural separation in terms of (i) prevention of abuses and deterrence of such abuses and (ii) enhancement of competition. The thesis begins by setting out both exploitative and exclusionary abuses in the provision of electronic communications services provided through vertically-integrated structures (chapter II). It then (chapter III) considers alternative remedies to structural separation namely ex ante remedies available (i.e. price caps; recently introduced provisions on functional separation to prevent refusal to supply, margin squeeze, cross-subsidisation etc.); and looks at how, and with what results, ex post remedies have been imposed until now (chapter IV). The thesis examines functional separation as introduced by the BT Group creating, under OFCOM’s supervision, a separate access division (‘Openreach’). Following this model, Art. 2 of Dir. 2009/140/EC amended the Access Directive 2002, making functional separation one of the remedies to be proposed by the regulators to the Commission for approval (the directive also introduces art. 13(b) on voluntary ownership separation of the local access network assets as a more radical, but voluntary, form of separation). The question is whether the enforcer can go a step further, even in the presence of functional separation as a regulatory remedy, imposing structural separation in the presence of abuses of dominant position. On a strictly legal point of view the recent cases Deutsche Telekom and Telefónica at European level have demonstrated that the Commission (and the National Competition Authorities), in their enforcement activity, can go beyond regulatory provisions that may not be sufficient to avoid the most subtle forms of anticompetitive behaviours, such as margin squeeze. In other words, the compliance by the incumbent to the provisions of the sector regulator in setting, for instance, retail and wholesale prices, for the European Commission and the European Courts was not considered a sufficient reason to exclude the infringement of Article 102 TFEU putting in place margin squeeze practices. Once it is established that the incumbent might be still able to put in place exclusionary abuses even in the presence of ex ante (regulatory) measures, the thesis examines the modest impact that (i) pecuniary fines and (ii) functional separation have had in preventing abusive conducts. Both cases are linked to examples of recidivism. Examining pecuniary fines specifically, the thesis shows that on a quantitative point of view, these fines often represent an infinitesimal percentage of the total turnover of the telecommunications incumbents. Functional separation, either as an ex ante or ex post remedy, has proven not to be as effective as expected. This is evidenced by a study of the implementation of functional separation in the UK in the electronic communications sector which takes into consideration criticisms put forward by competitors in the Energy Sector Enquiry of 2007, stressing the importance of adopting structural remedies in both the gas and electricity generation and transmission markets. In Chapter V the role of commitments is discussed in order to establish what lessons can be learnt from the experience of structural separation in the energy sector. This is currently the category with the most relevant case-law at the European level. The discussion is underpinned by extensive literature and an analysis of the experience (cases E.ON Electricity3, RWE4 and ENI5, in particular). Therefore, chapters I to V provide the legal background (also in comparative terms, using examples from the energy sector) that could support the applicability of structural separation as a pro-competition remedy in the electronic communications sector. On the basis of existing case-law and experience, recourse to a sectorial comparative analysis drawn from the energy sector, the thesis shows that, in the presence of recurrent abuses and comparable foreclosing exclusionary effects, also in the electronic communications sector structural separation as an enforcement remedy should be also taken into consideration, going beyond the tradition pecuniary sanctions or functional separation (both as an enforcement remedy or as a new regulatory tool). The second part of the thesis demonstrates how structural separation can be considered not only ‘legally possible’ but also beneficial to competition. In Chapter VI the possibility of introducing structural separation in the electronic communications sector is examined in analogy to the energy sector in Europe, using the US experience of structural separation represented by the AT&T case (1981-1984) as an example. The division in the doctrine about the effects structural separation had on competition in the USA is highlighted. More importantly, the conclusion that the experience of local (or regional) vertical separation was tailored to the specific nature of the US communications market and is only partially applicable to Europe, where de facto local separation is already a reality, considering the fact that the electronic communications operators networks reflect the partition of Europe in 28 States. Though not directly applicable to the European scenario, it is nevertheless the first most relevant example of structural separation in the electronic communications sector and could not be ignored. After having analysed the various forms of separation identified by the doctrine (taking into consideration the examples collected by the OECD in the last thirteen years, in chapter VII), the thesis focuses in the conclusive chapter VIII on two very recent examples of structural separation in the electronic communications sector that can be applicable at the European level: one is the case of structural separation of Telecom New Zealand (2011) the other is currently under implementation in Australia, through structural separation of the national incumbent, Telstra. In both cases, structural separation takes place between network and services, and partially reflects the model of structural separation already implemented in the energy sector in Europe in the above-mentioned cases (E.ON, RWE and ENI). The fact that in New Zealand and Australia (where the government will deploy the New Broadband Network, once separated by the incumbent Telstra from 2018) structural separation has been considered beneficial to competition, represents a strong point in favour of structural separation as an enforcement remedy at European level. Two further elements reinforce the conclusion, acknowledging the benefits of structural separation. (i) The similarity in terms of anticompetitive effects between electronic communications and energy sectors (demonstrated in chapters II, III, IV and V of the thesis), underpin the argument that structural remedies adopted in the E.ON, RWE and ENI commitments decisions could be applied in the electronic communications sector; (ii) The fact that the European Courts in the Deutsche Telekom and Telefónica cases have reaffirmed the independence of the enforcer over the regulator demonstrates that, from a legal point of view, the Commission can go beyond the regulatory measures established by the regulator (including, on the basis of European Directive 2009/140/EC, also functional separation among these measures) imposing the most suitable remedy, including structural separation. All these factors underpin the conclusion. Once the form of structural separation that could be applicable in the European context has been identified (structural separation of the network from the companies providing electronic communications services being the most realistic) the European Commission (or the national competition authority) should not hesitate to take into consideration structural separation as a remedy, as per Article 7 of Regulation 1/2003/EC. The deterrent effect on the former incumbent; the fact that vertical structural separation erodes the position of strong market power of the vertically-integrated incumbent, and the fact that it may lead to more competition with regards services provision (possibly over a New Broadband Network deployed by the State, as in the Australian case from 2018) can be considered important factors in favour of structural separation.
Supervisor: Whish, Richard Peter; Bloom, Margaret Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available