FRANCE: ANNUAL SECTION 1377 REVIEW OF TELECOM TRADE

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


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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
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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.)

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EXCESSIVE PRICING AND PROVISIONING DELAYS
FOR ACCESS TO LEASED LINES
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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.

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INDEPENDENCE OF THE REGULATOR / FAVORING THE INCUMBENTS
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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