“let your own discretion be your tutor”*: advocate general on the “regulatory holidays”-case

Posted on April 23, 2009 | Filed Under communication technologies 

The case C-424/07 Commission v. Germany is, as I have written before, of a highly symbolic nature, as it comes down to the long awaited showdown between the Commission - or specifically Commissioner Reding - and Germany on the powers of the regulatory authorities versus the power of national lobbies politics. Today, the advocate general delivered his opinion in this case, and it amounts to a small reprimand for the Commission in questions of style, but to a complete victory for the Commission in substance.

Just briefly for a little background: Germany had amended its Telecommunications Act in 2006, after “the incumbent German telecommunications operator (Deutsche Telekom) had lobbied for the broadband network it intended to create to be exempted from regulatory intervention (namely compulsory access at regulated prices)” (quoted from the advocate general’s opinion, Nr 31). The text (here in German) sets out the definition of new markets:

“A ‘new market’ is a market for services or products which are significantly different from currently available services or products in terms of their effectiveness, their range, their availability for a large number of users (mass-market capacity), their price or their quality from the point of view of a knowledgeable buyer, and which do not simply replace those products.”

Section 9a of the Telecommunications Act then introduces a rule of regulatory exemption of new markets in its first subparagraph, and an exception to that rule in its second subparagraph:

“1.      Other than as provided in the following subparagraph, new markets shall not be subject to regulation within the meaning of Part 2.

2.      When certain facts allow the assumption that in the absence of regulation, the development of a sustainable competitive market in the area of services or telecommunication networks would be impeded in the long term, the [German NRA] may, in derogation from subparagraph 1 above, submit a new market to regulation within the meaning of Part 2, in accordance with Paragraphs 9, 10, 11 and 12. In order to assess the need for regulation and in imposing specific measures, the [German NRA] will take into particular account the objective of promoting efficient investment in infrastructures and of supporting innovation.”

The Commission was furious, as the new text seemed to deprive the national regulatory authority of part of its regulatory tool-box, as the law had laid down a general rule that new markets should not be regulated, and if it is absolutely unavoidable to intervene, promoting investment would be a paramount regulatory aim (even though article 8 of the framework directive also lists other regulatory aims of equal importance).

Just days after the amended act entered into force, the Commission started infringement proceedings and announced it would go to the European Court of Justice as soon as possible. The advocate general found that the “Commission’s impetuousness is regrettable, particularly in the light of its duty of loyal cooperation with Member States. However, this is not enough to conclude that Germany’s subsequent observations in response to the letter of formal notice and the reasoned opinion were not duly considered by the Commission. As such, the present action is admissible.” (Nr 42). And from then on it’s downhill for Germany:

A) Regulatory exemption for new markets 

“It would come down to a policy choice: to restrain regulation, and suffer the associated effects of substantive market power, in order to favour investment in infrastructure.
53.      In normal circumstances, Germany would be allowed to make such a policy choice; but not when there is Community regulation of the telecommunications sector. Here, the choice has already been made by the Community legislature to submit this sector to regulation, with all the possibilities for intervention that it entails. 
54.  … Germany cannot reverse the decision of the Community legislature and, as a rule, exempt these new markets from regulation. …
57.      The Commission Guidelines state that evolving conditions in new markets may be disturbed by regulation; but, at the same time, that these markets should not be foreclosed at their outset by undertakings with significant market power. This puts a special duty of care on NRAs when intervening in these markets, particularly in the light of the possibility of delaying that intervention to a time when competitive conditions have stabilised. The Commission Recommendation, and its reference to market power acquired because of ‘first-mover’ advantages, should also be read in this light.
58.      It is therefore clear, as regards exempting new markets from regulation, that the step from mere cautionary recommendations to a binding legal rule was unintended by the Community legislature.
59.      As a result, Germany cannot institute a rule of regulatory exemption for new markets, as it does in Paragraph 9a(1) of the TKG.”

B) Limiting of the discretion of the German NRA by giving priority to a particular regulatory objective

“NRAs have been set up and given particular powers by the Community regulatory framework for a reason: they are expected to be insulated from certain interests and to reach their decisions governed only by the criteria established in that framework.
64.      As such, I believe that the balancing of the regulatory framework’s objectives lies with the NRAs. Article 8 of the Framework Directive expressly assigns the pursuit of these objectives – and therefore their balancing – to NRAs, not to the national legislature.
65.      This creates an institutional arrangement whereby the task of the national legislature is limited to ensuring that NRAs take all necessary measures to pursue those objectives, as the Court has confirmed on several occasions. Even the autonomy of the Member States as regards the organisation and structuring of the NRAs has been subordinated to this pursuit. 
66.      This also presupposes that it is NRAs, faced with specific assessments, which are better placed to decide how those different objectives are to be balanced in order to maximise them. In other words, a decision by a national legislature to give priority to one particular objective would, in fact, affect the way in which the Community legislature intended the specific market assessments to be made: by the NRAs, taking into account the different objectives on a case-by-case basis. The absence of a system attributing priority as between the objectives laid down in the Community regulatory framework, and the consequent discretion granted to the NRAs, was therefore fully intentional on the part of the Community legislature.
67.      Thus, Germany cannot limit the discretion of the German NRA regarding intervention in new markets by subjecting it to conditions, such as those laid down in Paragraph 9a(2) of the TKG, which give priority to one particular regulatory objective.”

*) Shakespeare, Hamlet, Prince of Denmark, Act III, Scene 2

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