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UNCLAS SECTION 01 OF 05 BRUSSELS 003391 
 
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TAGS: ECPS ECIN EINV EINT ETRD ECON EUN
SUBJECT: EUROPEAN COMMISSION PROPOSES SWEEPING TELECOM REFORM 
PACKAGE 
 
 
¶1. (SBU) SUMMARY AND INTRODUCTION.  The European Commission adopted 
proposals on November 13, 2007 for a major reform, the so-called 
E-Communications Framework Review, of the EU's telecommunications 
regulatory framework.  The Commission's goals with the package 
include promoting competition within the electronic communications 
sector, improving regulatory efficiency, boosting investment, 
freeing up the use of spectrum resulting from the "digital dividend" 
and rationalizing use of spectrum generally, enhancing consumer 
rights, expanding citizen accessibility to broadband and other 
e-services, and increasing e-communications security.  The package 
took shape only after fierce debate within the Commission over the 
issues of possible functional separation remedies and the creation 
of a new E-Communications Market Authority. 
 
¶2. (SBU) The package is designed to overhaul existing EU telecom 
rules in response to advances in technology and markets.  In the 
package, the Commission adopted a Recommendation immediately 
reducing from 18 to seven the number of telecoms markets national 
regulators should oversee.  The remainder of the package requires 
European Parliament and Council approval, which the Commission seeks 
by 2009.  Member state implementation would follow by late 2010. 
The Commission views the telecoms package as a key element of its 
internal market review, part of its goal of promotion of growth and 
jobs through Lisbon Agenda reforms and completion of the EU internal 
market.  Nevertheless, many proposals face strong opposition from 
key member states and incumbent telecom providers, which could 
result in the scaling back of any final reform.  Post will report 
separately on the potential impact of telecoms package reforms on 
U.S. firms and investment. END SUMMARY AND INTRODUCTION. 
 
BACKGROUND: UPDATING THE UNWIELDY 2002 REGULATORY FRAMEWORK 
--------------------------------------------- ---- 
 
¶3. (U) The EU introduced a new telecommunications regulatory 
framework in 2002-03 via the Electronic Communications Framework 
Directive (2002/21/EC), hereafter the Framework Directive, which 
entered into force in July, 2003.  This framework was: a) a response 
to technological developments and increasing convergence of 
communication devices; b) based on a principle of technology 
neutrality; and c) designed to respond to future developments.  The 
core of the framework consisted of five Directives, with several 
other pieces of legislation and a Recommendation on markets also 
part of the package.  The framework laid out guidelines for EU state 
National Telecom Regulatory Authorities (NRAs) to develop 
regulations to apply to all services transmitted electronically, 
whether wireless or fixed, Internet-based or circuit switched, data 
or voice, etc. 
 
¶4. (U) A key part of the framework is the expectation that national 
regulators, in consultation with competition authorities, conduct 
reviews of 18 separate telecoms markets.  The method for this 
approach is the Article 7 procedure of the Framework Directive 
(2002/21/EC).  Under this procedure, NRAs are expected to analyze 
markets listed in the Recommendation, taking into account national 
circumstances, to define market boundaries and assess whether one or 
more players is dominant or has significant market power (SMP). 
 
¶5. (U) When an NRA determines that significant market power (SMP) 
exists, it must propose appropriate regulatory remedies and notify 
the Commission Directorate General for the Information Society 
(DGINFSO).  DGINFSO can reject the proposed market definition and 
SMP analysis but not veto or block the remedies.  The entire 
requirement, that NRAs review 18 markets in each of 27 member 
states, resulted in a total of 695 distinct proceedings being 
reviewed by the Commission as of mid-November 2007. 
 
THE NEW REVIEW PROPOSALS 
------------------------ 
 
¶6. (U) The 2002 rules called for the Commission to conduct periodic 
reviews of the framework operation.  The Commission opened a public 
consultation on the issue in late 2005 and used the input to prepare 
the current reform proposals.  The new package, formally the 
E-Communication Framework Review, was released on November 13, 2007. 
 It contains two proposals amending existing Directives and one 
proposal for a regulation to establish an EU-wide regulatory 
authority.  Specific proposals are as follows: 
 
 
BRUSSELS 00003391  002 OF 005 
 
 
-- A Proposal for a Directive amending the Universal Service 
Directive (Directive 2002/22 EC) and the e-privacy directive 
(Directive 2002/58 EC). 
 
-- A Proposal for a Directive amending the general framework 
Directive (Directive 2002/21 EC), the access Directive (Directive 
2002/19 EC) and the authorisation Directive (Directive 2002/20 EC). 
 
-- A Regulation of the European Parliament and of the Council 
establishing the European Electronic Communications Market Authority 
(EECMA). 
 
¶7. (U) These core proposals are accompanied by the Commission's new 
Recommendation on Relevant Markets, applicable immediately, and a 
document on spectrum policy.  These and the other major areas of 
reform proposed in the package are discussed below. 
 
FUNCTIONAL (STRUCTURAL) SEPARATION 
--------------------------------- 
 
¶8. (U) The Commisson proposal would give national regulatory 
authorities the possibility of imposing functional separation on 
incumbent infrastructure and the service providers (differing from 
the forced separation that the U.S. imposed upon AT&T in the 1980s). 
 The proposal stops short of requiring ownership unbundling (e.g 
forced sale of service provider or infrastructure units), in 
contrast to recent energy sector proposals that would mandate 
ownership separation.  The telecom proposal would allow national 
regulators to impose functional separation as a last resort if they 
"deem it necessary to tackle important competition problems."  Under 
the plan, NRAs must seek approval from the Commission and need to 
take into account the effect on investment by the incumbent as well 
as by new market entrants.  The proposal would require NRAs to 
conduct a thorough cost-benefit analysis (for both the operator and 
the NRA, given the complexities of the remedy) before introducing 
functional separation. 
 
¶9. (U) The Commission cited continuing competition problems in the 
fixed voice telephony and broadband markets in introducing the 
proposal, noting that on average 87.8% of fixed-line subscribers 
still use incumbent networks for access.  The Commission pointed to 
successful cases of functional separation in the UK, Australia and 
New Zealand in defending the plan.  The Commission said that "this 
remedy enhances overall investment in services and network 
infrastructures," noting that UK functional separation spurred a 
wave of infrastructure-based market entry and an explosion of local 
loop unbundled lines from 2005-07. 
 
¶10. (SBU) Functional separation has generated the fiercest 
resistance of any of the telecom proposals.  Even before the plan's 
release, media cited an internal Commission split over the idea, 
with officials from the Commission's Directorates General for 
Competition (DG COMP) and Internal Markets (DG MARKT) quoted as 
saying functional separation was unnecessary and could harm 
investment in telecom networks.  This dispute appears to have been 
quelled by internal Commission agreement that the remedy would be an 
optional, last-ditch measure, subject to Commission approval. 
 
¶11. (SBU) Opposition to functional separation has also emerged from 
many incumbent telecoms operators and several member state 
governments.  The European Telecommunications Network Operators' 
Association (ETNO), representing incumbent operators, criticized the 
proposal harshly, stating that "mandatory functional separation 
risks...increased costs for access and less investment in new and 
alternative networks, thereby reducing long-term network competition 
and limiting consumer choice." 
 
¶12. (SBU) Major national incumbents quickly attacked the proposal. 
France Telecom's Director of Regulatory Affairs, Jacques Champeaux, 
said functional separation "is a real risk for next-generation 
networks," adding that the measure would create dedicated companies 
operating network businesses, amounting to new monopolies.  Didier 
Bellens, head of Belgian incumbent Belgacom, said EU backing of 
Belgian regulator efforts to force Belgacom to open its broadbank 
fiber network to competitors would hurt investment.  The board chair 
of Slovene incumbent Telekom Slovenije echoed this sentiment, saying 
"if we have to offer fibre to competition, what will be our 
advantage in investing in fibre?" 
 
BRUSSELS 00003391  003 OF 005 
 
 
 
¶13. (SBU) Support for the proposal emerged from several quarters, 
however.  ECTA, a lobby group for new operators such as Colt and 
Virgin Media, said the proposal would speed broadband development. 
ALTO, representing Irish telecom operators, also backed the 
proposal, calling it a "move towards a more competitive 
telecommunications market in Europe."  The Financial Times 
editorialized in favor of functional separation, citing how the UK 
example has improved access for rival providers, promoting greater 
competition and broadband use. 
 
A EUROPEAN ELECTRONIC COMMUNICATIONS MARKET AUTHORITY 
--------------------------------------------- -------- 
 
¶14. (SBU) The Commission's proposed European Electronic 
Communications Market Authority's (EECMA) would have two key roles, 
the most important one being the development of a consistent 
regulatory framework across the EU-27.  To achieve this, the 
Commission proposes that EECMA assume the role of the European 
Regulators Group (ERG), an advisory group to the Commission which 
consists of National Regulatory Authorities (NRAs).  According to 
the Commission, this loose form of cooperation has failed despite 
many efforts and good intentions.  EECMA would be given power to 
veto NRA decisions.  EECMA's second task would be to increase 
information security by absorbing the independent European Network 
and Information Security Agency (ENISA), which since operated since 
September 2005 and is based in Heraklion, Greece. 
 
¶15. (SBU) The Commission's goal is to use the EECMA to "ensure 
greater consistency of approach amongst Europe's regulators, both in 
the types of remedy used and in the timescales applied."  The reform 
proposals would empower the Commission to act on EECMA's advice to 
tell national regulators when and how particular regulation should 
be applied, including requiring regulators to accelerate imposition 
of new measures.  EECMA would deliver expert opinion to the 
Commission on specific national regulatory proposals, with the 
Commission having the final say.  EECMA would also review fewer 
telecom markets (see below), reducing the burden on national 
regulators.  The goal is to converge toward a single pan-EU market, 
and produce "less, but more effective and faster regulation." 
 
¶16. (SBU) Reaction to the EECMA proposal also has been predominantly 
negative.  The ERG, representing NRAs, attacked the idea, saying a 
new regulator would add new layers of unnecessary centralism.  Ed 
Richards, CEO of OFCOM, the UK telecoms regulator, opposed EECMA as 
well, noting in an FT editorial that "centralisation of power in 
Brussels, plus a new European bureaucracy, is not the answer..." 
Richards added that a central regulator could undermine proposals 
designed to reinforce independent regulation at the national level. 
Germany Deputy Economy Minister Bernd Pfaffenbach said the creation 
of a new EU body "would go against the principle of subsidiarity," 
(keeping EU decisionmaking as locally-based as possible), and runs 
counter to EU deregulation goals. 
 
¶17. (SBU) The head of ARCEP, the French NRA, said that creation of 
EECMA would alter the relations between the Member States and the 
European institutions.  France Telecom officials also spoke out 
publicly against the proposal.  The same FT editorial that supported 
functional separation opposed EECMA, calling the idea "a 
one-size-fits-all strategy."  Little opposition has surfaced to the 
incorporation of ENISA, though it remains unclear what actual 
synergies of such a move might be. 
 
REDUCTION IN THE NUMBER OF REGULATED MARKET SEGMENTS 
--------------------------------------------- ------- 
 
¶18. (U) As part of the reform, the Commission adopted a new 
Recommendation on Relevant Markets, effective November 13, that 
reduces from 18 to seven the number of telecom markets where "ex 
ante" (prior) regulation by NRAs is required.  The Commission 
explained that it removed most of the retail markets (e.g. for 
landline or mobile services) since "effective wholesale regulation, 
checked by the Commission, serves in all EU member states to protect 
retail users."  The Commission also removed some wholesale markets 
after most NRAs found these markets competitive.  The remaining 
seven markets include access to and call origination on fixed 
networks, wholesale local loop and broadband access, and others. 
The Commission stressed that this reform will cut in half the 
 
BRUSSELS 00003391  004 OF 005 
 
 
regulatory burden on member states. 
 
¶19. (U) Most commentary on this proposal has been positive, with 
analysts viewing the step as a significant liberalization.  ETNO, 
however, stated that it "strongly regrets that the list proposes to 
extend wholesale regulation to any new network." 
 
SECURITY 
-------- 
 
¶20. (SBU) The Commission identified network and information security 
as a priority of the Telecoms reform, citing increasing threats to 
internet and telecom networks from organized cyberattacks, viruses, 
malware, spam and other criminal activities.  The Commission 
therefore proposes that the EECMA focus on network and information 
security as a core task, using incorporated ENISA staff, to 
coordinate EU-wide responses to security threats.  EECMA would 
appoint a Chief Network Security Officer to lead such functions, 
supervising exchange of security information, training and best 
practices across the EU. 
 
RATIONALIZATION OF SPECTRUM MANAGEMENT 
-------------------------------------- 
 
¶21. (U) The Commission also seeks to move towards a common spectrum 
plan at the EU level, saying this will increase spectrum efficiency 
beyond that achievable at the national level.  The Commission notes 
that existing radio spectrum allocation was done decades ago, is 
inconsistent across member states, and is highly inefficient, 
resulting in only 50 percent of spectrum being used at any point in 
time. 
 
¶22. (U) The Commission therefore proposes to start preparatory work 
on a binding Community law instrument to adopt a spectrum clustering 
decision.  This clustering of spectrum would apply to the main part 
of the "digital dividend" - the UHF band - that will be freed up by 
the switch from analog to digital TV broadcasting (which is to be 
completed by 2012 for most member states).  The Commission notes 
that a digital channel uses 6-15 times less spectrum than an 
analogue channel.  The Commission seeks to use spectrum freed after 
the switchover for interactive digital TV, expanding wireless access 
to broadband (especially for rural areas), and mobile multimedia 
services.  The spectrum clustering effort may meet member state 
resistance, given the potential impact on uses of spectrum for 
national security purposes, and potential resistance from existing 
broadcasters. 
 
¶23. (SBU) The Commission is proposing to make the principle of 
technological neutrality in the use of spectrum binding.  In 
addition, it is proposing the introduction of the principle of 
service neutrality. These principles are to be accompanied by a 
procedure alloing exceptions in order to avoid interference, r in 
order to "protect public health against electromagnetic fields", or 
on public interest grounds.  The Review also proposes the EU-wide 
legalization of spectrum trading, but leaves the mechanisms to be 
used for the Commission to determine at a later date. 
 
¶24.  (SBU) The proposals list a series of important areas of 
spectrum harmonization where the Commission would be empowered to 
act.  Together, these proposals would represent a significant 
increase in EU powers over spectrum - currently jealously guarded by 
national governments and regulators. 
 
COMMENT - LEGISLATIVE PROCESS AND TIMING 
---------------------------------------- 
 
¶25. (SBU) Parliament is working to assign rapporteurs for the 
legislative proposals, and plans to move forward on review of the 
proposals in early 2008.  The Telecoms Council will begin 
consideration of the proposals at its November 29 meeting.  Council 
discussions are expected to be very conflictual, given strong 
opposition to the functional separation and EU regulator elements of 
the plan already expressed by officials in France, Germany and 
elsewhere.  This opposition will test the ability of the Commission, 
and Information Society and Media Commissioner Reding in particular, 
to persuade key member states of the benefits of these reforms. 
 
¶26. (SBU) Many sources indicate Reding and other Commissioners see 
 
BRUSSELS 00003391  005 OF 005 
 
 
the telecoms package as a key component of the internal market 
review, part of the Commission's strategic goal of promotion of 
growth and jobs through Lisbon Agenda reforms and completion of the 
EU internal market.  The Reforms are also a "legacy" issue the 
Commission would like to count among its achievements when its term 
ends in 2009.  Nevertheless, given the strength of opposition to key 
parts of the telecoms package, it is likely any final reform will be 
scaled back.  It also remains to be seen how effective reform 
transposition into national law, expected to occur by late 2010, 
will be. 
 
¶27. (U) Post will report separately on the potential impact of 
telecoms package reforms on U.S. firms and investment. 
 
GRAY