EUROPEAN COMMISSION PROPOSES SWEEPING TELECOM REFORM

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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
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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
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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:


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-- 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?"

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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
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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

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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

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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