This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 PARIS 001432 
 
SIPDIS 
 
STATE FOR EB/CIP FOR TIM FINTON, EUR/WE, AND EUR/ERA 
STATE ALSO PASS TO USTR FOR K SCHAGRIN AND J MCHALE 
USDOC FOR NTIA, ITA, AND 4212/MAC/EUR/OEURA 
FCC FOR INTERNATIONAL 
 
E.O. 12958: N/A 
TAGS: ECPS ETRD FR WTO
SUBJECT: FRANCE: ANNUAL SECTION 1377 REVIEW OF TELECOM TRADE 
AGREEMENTS 
 
 
NOT FOR INTERNET DISTRIBUTION 
 
Ref: STATE 026652 
 
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Introduction and Summary 
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¶1.  On January 26, EconOff and visiting USTR telecom trade 
specialist Ken Schagrin met with GOF Industry Ministry 
(DIGITIP) officials as well as Telecom Regulatory Authority 
(ART) officials to discuss concerns raised in response to the 
reftel Federal Register Notice published on November 24, 2004. 
The three sections that follow are based on our dialogue with 
these officials as well as our conversations with local telecom 
operators and industry groups throughout the year.  In response 
to our follow-up questions, ART provided further comments 
regarding unbundled leased lines in early March.  In sum, they 
noted changes to French law and subsequent changes to the 
process for negotiating the reference interconnection offering 
and stressed their view that the strengthening of ART's 
authority as well as the process of market analysis are 
calculated to provide the kind of remedies that are fundamental 
to a sound and well-functioning competitive telecom market. 
Indeed, ART wields much more power, as was noted by DIGITIP 
officials when they said that the EU regulatory framework's 
implementation is totally in the hands of the regulator, i.e. 
there is no role for the Industry Ministry in the process of 
drafting regulatory texts.  End summary and introduction. 
 
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EXCESSIVE FIXED TO MOBILE TERMINATION RATES 
------------------------------------------- 
Is there any ratio between rates charged for termination on 
fixed networks and rates charged for termination on mobile 
networks that reflects the disparate costs of the different 
networks?  What would be a reasonable ratio? 
 
¶2.  Our contacts have never mentioned a ratio, neither at the 
telecom regulator (ART) nor among industry experts.  There is 
general agreement in France that mobile termination charges are 
too high.  However, there is also widespread acknowledgement 
that ART has made significant and steady progress addressing 
this issue through mandatory decreases, which are imposed upon 
all mobile operators.  ART began regulating fixed-to-mobile 
(F2M) termination in 1999, imposing a series of reductions (20% 
in 1999, 20% in 2000, and 40% over three years from 2002-2004) 
that have moved France from one of the worst offenders in 
Europe for excessive pricing of F2M to one of the best in 
Europe.  During our January meeting, ART officials highlighted 
for us that they had once again just compelled all three mobile 
operators to reduce these charges further by 36% over two 
years.  This reduction was not required to be immediate, nor 
was it required to affect calls originating in foreign 
countries.  Nevertheless, mobile operators have taken quick 
action and are including foreign-originated calls in the 
reductions, we were told. 
 
¶3.  Orange began to lower its rates beginning in January 2005, 
with regular reduction from now until 2007 in order to allow 
the market to progressively adapt over the course of the 
period.  ART officials assured us that calls of foreign origin 
will experience the same evolution.  The lowering of 
termination charges decided upon by the ART (36% over 2 years) 
from January 1, 2005, will -- just like the tariffs themselves 
-- be identical for calls originating in France and in foreign 
countries.  To address charges of cross-subsidization between 
mobile and fixed line services, our ART contact noted that, 
while some have charged that Orange and SFR are vertically 
integrated companies, mobile and fixed phone services have 
separate accounts (an obligation contained in the European 
directives).  Moreover, mobile operators in France now include 
MVNO (Breizh Telecom and Debitel) and competition is 
progressing. 
 
--  What is the status of your implementation of the EU 
directive to analyze telecom submarkets and identify instances 
of significant market power, with respect to mobile 
termination?  If you have found SMP, what is the status of 
implementing remedies? 
 
¶4.  ART is in the process of carrying out the market analyses 
and taking the necessary measures according to the results of 
these analyses.  (The status of the various market analyses can 
be found on ART's web site at:  www.art-telecom.fr)  For 
instance, ART completed on February 1, 2005, its market 
analysis of voice call termination on mobile networks for 
overseas departments.  As a result, ART imposed a 49% decrease 
in wholesale prices for call termination over three years on 
the two main mobile operators in Reunion and in the Antilles- 
Guyana zone, with an initial decline of 20% on April 1, 2005. 
This measure should reduce the cost of fixed-mobile calls in 
France's overseas departments by 38% over three years. 
Currently for mainland France, ART is still in the process of 
doing the market analyses and will be envisioning some 
remedies: obligation of access, non-discrimination and 
transparency (reference: "Bill and Keep"), separation of 
accounting, determination of the reference costs, cost control 
and lowering rates over several years. 
 
¶5.  More generally, we found it noteworthy that DIGITIP 
officials not only acknowledged, but highlighted for us ART's 
increased power under the new EU regulatory framework that was 
transposed into French law last July.  DIGITIP Deputy Director 
for Institutional Relations Henri Breuil told us "our role was 
to give (regulatory) power to ART (such that) ART now has the 
same powers as the UK's Ofcom." 
 
-     Does ART's decision of December 10, 2004, to decrease 
fixed-to-mobile interconnection rates by 36% apply to calls 
originating outside of France?   If not, why not? 
 
¶6.  Our understanding of ART's explanation of their most recent 
imposed decreases in F2M charges was that, while ART did not 
require that these decreases be applied to calls outside of 
France, Orange and other operators were applying the reduced 
charges to all calls no matter what their origin.  (See para 3 
above.) 
 
------------------------------------------ 
EXCESSIVE PRICING AND PROVISIONING DELAYS 
FOR ACCESS TO LEASED LINES 
------------------------------------------ 
RATES:  Are the wholesale (carrier) rates being charged for 
leased lines used by carriers (e.g., two megabit link between a 
carrier's network and its customers) regulated?  If so, how are 
the rates set?  Does the regulator benchmark them against other 
comparable markets?  Is the process for determining rates 
transparent?  Can interested parties challenge cost-data 
submitted by the incumbent operator? 
PROVISIONING:  Is the regulator aware of complaints about the 
time it takes to receive a line?  What are the factors that 
effect delivery?  We have heard allegations that the incumbent 
is providing leased lines faster to their end-user customers 
than they are providing them to requesting competitors.  Are 
there reporting requirements to monitor this?  If not, how is 
this monitored?   If so, are the reports public? 
 
¶7.  While DIGITIP officials confirmed to us that the GOF 
Ministry of Finance and Industry has no role or power over 
leased lines, in response to these questions, ART officials 
told us that the process of supplying leased lines complies 
with the general approval process of the interconnection 
catalogue, namely the annual approval process of wholesale 
charges, which is identical for leased lines and for the 
interconnection network traffic.  ART detailed for us the 
approval process steps: 
--Proposed offerings ("the base offer") are sent by FT mid-year 
the year before offers are to take effect. 
--Negotiations with ART and with new entrants via the 
interconnection committee. 
--Discussion of rate levels (a comparison of the charges 
proposed by FT and those given by the CMILT Bottom Up model). 
--Comparison between the list of services proposed by FT and 
the needs of the new entrants to improve the base offer. 
--Final phase of direct negotiation between ART and FT. 
--Approval and publication by ART at the end of the year (we 
have noted that this usually occurs in November) to enter into 
force on January 1. 
 
¶8.  ART contacts told us that this process will be modified in 
2005 under the new law.  The new process anticipates that FT 
will publish its base offer without ART's preliminary approval. 
ART can then ask FT to make modifications at any time.  Article 
¶L. 38 of the new law, which transposed the EU framework 
directive, inter alia, specifies that "The (SMP or dominant) 
operators ... should publish a detailed account of technical 
and rate aspects of the interconnection or access they are 
offering, when they are obliged to be non-discriminatory.  ART 
can impose modifications on such an offer at any time in order 
to make it conform to the terms of the present code. To that 
end, the operator communicates all necessary information to 
ART."  This portion of the new law includes an obligation to 
make interconnection and access information publicly available. 
ART believes that this obligation applies to all of the 
wholesale markets on which France Telecom exerts a dominant 
position. 
 
¶9.  FT's base offer must be sufficiently detailed to guarantee 
that the companies are not obliged to pay for resources that 
are not necessary for the requested service.  It will include a 
clear description of the pertinent offers for the all wholesale 
markets of narrow band services, accompanied by the technical 
and rate conditions and the means of provision.  Adhering to 
the access directive, ART will be able to specify the 
information that is to be provided, the level of detail 
required and the mode of publication.  The base offer will 
specify the delays in application and the cancellation 
conditions for the entirety of the services offered.  With 
respect to delays in modifications of the base offer, rate 
changes must be preceded by a warning sufficient to assure ART 
and that the entire sector will be able to reflect these 
developments in retail prices.  As for the benchmarks, our ART 
contacts referred us to European Commission documents that give 
detailed information about how difference countries are 
performing in regards to leased line pricing.  (Post emailed 
these EC documents to EB/CIP, USTR, and EUR/WE on March 4.) 
With respect to the leased lines base offer, they also noted 
that the Commission is currently considering "Methodology, 
reference configuration and data of leased lines in Member 
States."  Finally, on provisioning, ART officials said that a 
sensible improvement is the first step toward a new European 
framework.  The strengthening of ART's authority, and the 
process of market analysis, are calculated to provide remedies 
that are relative to the anticipated delivery in the base offer 
of leased lines, which they viewed as fundamental criteria to 
this type of market. 
 
--------------------------------------------- ----------- 
INDEPENDENCE OF THE REGULATOR / FAVORING THE INCUMBENTS 
--------------------------------------------- ----------- 
How does France reconcile the continued shared oversight of 
France Telecom between ART and the Ministry of Finance with its 
Reference Paper commitment to have an independent regulatory 
body? Preferential loans recently extended to France Telecom 
underscore this appearance of favoritism.  What steps, if any, 
in the last year has the French government undertaken to 
rectify this situation? 
 
¶10.  In response to our questions on this subject, ART pointed 
out that, on the one hand, the GOF reduced its stake in the 
capital of FT.  Since September 2004, the state has no longer 
been majority shareholder in FT (GOF currently owns 42.25%). 
On the other hand, the ART is competent to accept or refuse the 
rates of the dominant operators, i.e., there will no longer be 
any "homologization" by the Minister of Industry to approve 
ART's opinion.  The new regulatory framework confers new powers 
on the regulator and reinforces its independence.  ART, and no 
longer the Minister as was previously the case, acts alone to 
homologize the retail rates, if necessary. 
 
¶11.  ART officials assured us that analysis of the markets 
follows a transparent process that limits the government's 
power of intervention.  In this context, they noted their 
activities with respect to public consultations, consultations 
with the Competition Council and with the opinion of France's 
highest Administrative Court, the State Council, as well as 
other national regulators.  We have heard nothing from our 
industry contacts to contradict ART's assurances regarding 
transparency and independence of this process.  On the question 
of illegal state aid Given to FT, our ART contacts made only 
one comment:  the European Commission concluded that, although 
it was a clear case of state aid, it did not justify a fine or 
a demand for reimbursement. 
 
¶12.  DIGITIP officials -- beyond noting that to implement the 
new law which transposed the EU telecom framework directive 
their role was "to give (regulatory) power to ART" as noted 
above -- said that their current role is similar to the U.S. 
Commerce Department's NTIA with, although they are somewhat 
more involved in rulemaking.  DIGITIP sits on the industry side 
of the GOF Ministry of Finance and Industry, but DIGITIP 
officials nonetheless pointed out the Finance Ministry has 
delegated authority to an independent Agency of State 
Participation (known by the French acronym APE) to act on its 
behalf as a shareholder in France Telecom and other companies 
in which the GOF has capital holdings.  In our view, this is 
meant in effect not only to create a Chinese wall behind which 
the GOF can claim that it acts as an unbiased policymaker, but 
also to de-politicize to the extent possible management of its 
financial interests and thereby maximize the value of its 
assets. 
 
Leach