DRAFT GUIDELINES ON MARKET ANALYSIS AND THE CALCULATION OF SIGNIFICANT MARKET POWER UNDER ARTICLE 14 OF THE PROPOSED DIRECTIVE ON A COMMON REGULATORY FRAMEWORK FOR ELECTRONIC COMMUNICATIONS NETWORKS AND SERVICES RESPONSE FROM THE UNITED KINGDOM JULY 12, 2001

Contents

Introduction

Summary

Market Definition

Calculating significant market power

Co-ordination and consultation

Detailed points

Introduction 

The United Kingdom is grateful for the opportunity to comment on the draft guidelines on market analysis and the calculation of significant market power ("the guidelines") under Article 14 of the proposed Directive on a common regulatory framework for electronic communications networks and services arising from the European Commission’s 1999 communications review. If the Commission wishes to pursue further any aspect of the response that follows, it should contact:

Ilsa Godlovitch, Senior Policy Adviser, European Affairs
Office of Telecommunications
+44 (20) 7634 8721
+44 (20) 7634 8731

Summary

The UK welcomes the draft guidelines and the Commission’s decision to consult publicly on them. When finalised, the guidelines should provide a vital guide for national regulatory authorities (NRAs), ensuring that they handle similar situations in a consistent manner. Of equal importance will be their role in giving guidance to the courts on the intention behind the concepts introduced in the new regulatory framework. It is essential that the guidelines deliver in both these respects if the implementation of the framework is to be successful. Sectoral regulation must be applied speedily and with certainty to be effective; this cannot be the case if the interpretation of significant market power (SMP) is unclear.

While the UK believes that the draft guidelines go some way toward meeting these two aims, it considers the text to be capable of significant improvement in a number of areas.

Content

It is implied in the new regulatory framework that the Commission will identify retail and wholesale (or "access") markets separately and will focus mostly on the latter. Given that the ultimate aim of the framework must surely be to achieve sustainable and effective competition at the retail level in the absence of regulation, the UK would expect identification of wholesale markets to be justified by reference to potential competition concerns identified at the retail level. The relationship between the two should be further explored in the guidelines. The draft guidelines mention some of the technical and practical problems that may arise while defining markets and in applying the "hypothetical monopolist" test but fail to explain adequately how NRAs are expected to tackle them (e.g. how the "hypothetical monopolist" test is to be handled in circumstances where lack of competition has already influenced pricing levels). This could lead to inaccurate application and divergent approaches to analysis being taken across the Community.

Further explanation is needed of the application of the concept of collective dominance to ex ante regulation of the ecoms sector. In particular:

• the guidelines should explain clearly the differences between an ex ante and an ex post approach to market analysis and emphasise that it is the ex ante approach that is relevant to assessments made by NRAs under Article 13 of the Framework Directive. This means that not all of the conclusions reached in case law on the basis of an ex post assessment will necessarily be relevant;

• Article 13 and Annex II of the Framework Directive and the draft guidelines all appear to identify three central tests that should be applied for ex ante assessment of collective dominance. Further explanation is needed on all three and in particular on the meaning of "market structure conducive to co-ordinated effects" and "strong incentive to converge to a co-ordinated market outcome." The guidelines should also make clear that the interpretation given to "the power to act independently of competitors" (i.e. the ability for undertakings to price above the competitive level) should be applied when assessing the market power of a "collective entity" as well as when assessing an individually dominant undertaking;

• the guidelines should give some indication of how NRAs should assess some of the key criteria introduced in Annex II, particularly "concentration" and "transparency." An explanation of "retaliatory mechanisms," which the UK considers to be important in assessing whether undertakings "have an incentive to converge," would also be helpful; and

• while the draft guidelines imply that there is equivalence between "lack of effective competition" and one or more undertakings having SMP, the way in which the two interrelate, in particular from the perspective of how this fits into the market-analysis process, is not sufficiently clearly established. The UK also considers that further practical guidance is needed on how to conduct a market analysis to ensure that undertakings are only designated as having SMP in circumstances where competition is not effective. A particular aspect of the market-analysis process that the UK believes to be missing from the draft guidelines is discussion of how NRAs should assess levels of competition through gauging consumers’ perception of the market and benchmarking against similar markets elsewhere. This type of analysis may be particularly invaluable where other data may be incomplete or inconclusive.

Relationship with Council’s political agreement on the Framework Directive

The UK considers that the key amendments to Articles 6, 13 and 14 of the Framework Directive that form part of the political agreement reached at the April 4-5, 2001 Transport and Telecommunications Council are essential for the new regulatory framework to permit NRAs to conduct accurate and appropriate economic analysis at the national level. These amendments:

• substitute powers for the Commission to delay, amend and veto individual NRA decisions with provisions enabling the Commission to review decisions that it considers to be incompatible with Community law and to publish a critical opinion (Article 6);

• provide additional clarification on the meaning of "collective dominance" as it applies to ex ante regulation of the ecoms sector (Article 13 and Annex II); and

• substitute powers for the Commission to define at a Community level markets that are national in scope with a requirement to adopt a Recommendation identifying markets that NRAs should follow but may adapt as appropriate to national circumstances (Article 14).

• the UK supports Council’s view that it is neither necessary nor appropriate for the Commission to act as a gatekeeper for all major regulatory decisions (Article 6). Rather, the question of whether an NRA decision is contrary to Community law is properly a matter for the courts, backed up by infraction action from the Commission if necessary. While the UK supports the aim of ensuring that NRAs take similar decisions in similar circumstances, such harmonisation can be better achieved by other means, particularly through strengthening coordination between NRAs and between NRAs and the Commission. The guidelines should expand further on how this coordination should work, particularly with the proposed establishment of the new High-Level Communications Group;

• the UK supports Council’s view that clarification of the concept of collective SMP is necessary on the face of the Directive to ensure that NRAs have sufficient legal certainty to react swiftly and decisively to competition concerns. Now that this has been provided with the proposed addition of Annex II to the Framework Directive, the guidelines should explain the relationship of this Annex to Article 13 (i.e. that it describes how an assessment of collective SMP should be conducted ex ante under Article 13) as well as the relationship between the Annex and existing and future case law on dominance and collective dominance; and

• the UK is of the view that it is economically indefensible for the Commission to define at a Community level markets that are national or local in scope. Rather than achieving consistency, as intended, this is likely to lead to markets being defined incorrectly and, hence, incorrect decisions with regard to SMP being made. The UK therefore urges the Commission to accept Council’s view, as expressed in the proposed amendments to Article 14, that the list of markets identified by the Commission should be indicative only. The desired consistency across the Community can be achieved through increased cooperation between NRAs and between NRAs and the Commission, supported by more detailed guidance on how NRAs should define product and service markets within their jurisdiction.

Detail

1. Market definition

Defining markets at the Community level

1.1 The UK agrees with the Commission that market definition is an essential precondition to any assessment of market power and welcomes the Commission's proposal to align the market-definition exercise with standard competition-analysis practice as endorsed by national competition authorities (NCAs).

1.2 As the draft guidelines acknowledge, the main purpose of the market-definition exercise is to identify an area where, in both product/service and geographical terms, the competitive conditions are homogeneous. The economic "market" defined in this way will form the foundation upon which subsequent analysis is to be based.

1.3 While the Commission appears to endorse this principle, the UK is particularly concerned that its proposal for Article 14 of the Framework Directive, reflected in the draft guidelines, would not permit NRAs to conduct market analyses on this basis. In order to define markets accurately on the basis of economic analysis, it must be possible for the product and service elements to be defined at the appropriate level. This may be the Community for pan-European markets but will otherwise be largely national or local. The role of NRAs is crucial in ensuring that market definition is based on incontrovertible evidence regarding a Member State’s specific characteristics in terms of competitive conditions in any particular area. Only markets thus defined will provide a reliable and convincing starting point for the subsequent analysis.

1.4 Definitions of national markets provided by the Commission will no doubt provide a useful indicator that may apply in the majority of, if not all, Member States, but they can never be definitive in economic terms.

1.5 The UK therefore urges the Commission to accept that its list of markets will be neither exhaustive nor prescriptive but rather indicative only. In some instances, it will be necessary for NRAs to depart from a market defined by the Commission because of the greater wealth of information on national (or local) markets that an NRA can use. While the UK acknowledges the Commission's concern that implementation may diverge due to differing interpretations across the Community, it considers that the best way to address this is by bolstering guidance on the market-definition process and strengthening the means of coordination between NRAs and the Commission.

1.6 These concerns may be further illustrated through examples provided from the draft guidelines themselves.

1.7 According to paragraph 56, the Commission would consider demand patterns to indicate that two main services are offered in the fixed telephony market: "traditional" fixed-telephony services and "high-speed" communications services. While this subdivision may make sense in certain particular national or local conditions and when referring only to particular services carried over the fixed line, it does not seem to fit properly with the current situation in the UK. In particular, it is difficult to envisage a distinction between "traditional" and "high-speed" communications services. Clearly, what matters is the particular service being considered since entirely different markets (e.g. Internet service provision or video on demand) may all make use of what could be regarded as "high-speed" communications services; indeed, paragraph 36 of the draft guidelines recognises this very point. It would be rather odd to consider these services in all cases to be in the same market only because of the technology or infrastructure that they use in common. It would be even more controversial to prescribe such a definition for all Member States, even when NRAs' analyses and their consideration of national characteristics would lead to other conclusions.

1.8 Another example may be provided by the reference to two potentially separate markets with respect to mobile access: call origination and call termination, explicitly mentioned in paragraph 61 of the draft guidelines. While it may be appropriate to define a single national market for call origination, the competitive conditions would seem to indicate the presence of multiple call-termination markets for each operator. It is, indeed, difficult to argue that the price of terminating a call on any mobile number is constrained by the price of other possible terminations of the same call because the same call cannot be terminated on any other number or network but the one that the caller is intending to reach. In other words, mobile-terminating operators do not compete on price, and, since each operator's price is not a constraining factor for the price of the others, they cannot be seen as being in the same market.

1.9 Some of the examples used in the draft guidelines may provide definitions of markets that might be useful for, and shared by, a number of NRAs. However, it is more likely that they will not fit with the characteristics of each and every national/local market as they are monitored and understood by NRAs. Moreover, it is unlikely that a prescriptive list could be updated with sufficient rapidity to match the speed of evolution of ecoms markets.

Wholesale (or "access") markets vs. retail markets

1.10 In section 2.2.3.1 on "the Commission's own practice," the draft guidelines explain that there are two main types of relevant market to consider: retail markets and wholesale (or "access") markets, the latter describing types of infrastructure that can be used for the provision of a given service. The UK is of the view that the Commission should expand on the circumstances in which it would be considered appropriate to identify a wholesale market.

1.11 The UK considers—indeed, the Framework Directive requires—that pro-competitive regulation (as opposed to consumer-protection measures) should ultimately be aimed at ensuring that there is sufficient competition, including in infrastructure, to ensure sustainable competition at the retail level in the absence of any regulatory controls. It is thus important that the Commission justify any identification of wholesale markets by reference to the relevant retail markets in which it has identified a potential competition concern.

1.12 NRAs should similarly be encouraged to examine retail markets in parallel with wholesale markets when conducting a market review and should have a degree of flexibility in determining what the precise wholesale market should be. While retail services provided to customers may look broadly similar in different Member States, the relevant wholesale "inputs" (if any) will depend to some extent on the particular way in which infrastructure and services have developed. Establishing a linkage between wholesale and retail markets is also important in ensuring that NRAs can examine the interaction between markets (e.g. leveraging wholesale market power into new retail markets and the likely impact on consumers of regulatory action taken at the wholesale level).

The "hypothetical monopolist" test

1.13 The "hypothetical monopolist" test—also known as the Small but Significant and Non-transitory Increase in Price (SSNIP) test—is probably the single most renowned analytical tool used in competition analysis to define markets. Although there are a number of technicalities as well as drawbacks involved in the use of this test, its usefulness is unquestionable. However, the UK is concerned that the Commission has not explained the concept or the difficulties associated with it in sufficient detail for NRAs to be able to apply it consistently.

1.14 In essence, the "hypothetical monopolist" test involves considering whether a hypothetical monopolist supplier of the product/service for which a market definition is sought could sustain a small but significant and non-transitory price increase above the competitive level. If the price increase is sustainable by the hypothetical monopolist supplier, the conclusion must follow that that product/service represents a market in its own right. If, on the other hand, consumers switch to other products/services (demand-side substitution) or producers switch from the production of other products/services to a substitute (supply-side substitution), it must equally follow that these other products/services are to be considered as being in the same market as the product/service provided by the hypothetical monopolist supplier. This experiment can then proceed up to the point where no more substitutes are found for the product/service in question, at which point the market-definition exercise will have been completed.

1.15 Some of the remarks that the draft guidelines make are clearly helpful in clarifying the approach that should be taken when using the "hypothetical monopolist" test. However, some other passages may give rise to uncertainty on how to tackle certain issues that can arise during its performance. Such is the case, for example, with the so-called "cellophane fallacy," arising from a renowned case before the U.S. Supreme Court and relating to the possibility that the reference price for the "hypothetical monopolist" test may actually be higher than the competitive level. This may be because, for example, a monopolist supplier is already charging an inflated price for its product/service or price regulation is distorting prices charged in the market. Under these circumstances, it would be misleading to consider a further small but significant increase in that price since the starting price is not at the competitive level.

1.16 Since this particular issue is mentioned in the draft guidelines and its resolution is likely to involve the use of a great deal of information on prices and their structure, it is essential in assisting NRAs to reach consistent and coherent decisions that the guidelines address this issue.

1.17 A further point worthy of more attention is the use of demand elasticities. In essence, these measure the change in the quantity of a product/service that is demanded following a change in the price of that product/service.

1.18 It is true that demand elasticities provide a wealth of information on market characteristics that is probably unrivalled. However, it is also true that it is normally quite difficult to gather enough information to calculate demand elasticities in a number of markets. This is all the more true for ecoms markets, which tend to be highly dynamic and rapidly growing and for which demand elasticities would need to be calculated very frequently.

1.19 The guidelines should thus clarify that the "hypothetical monopolist" test is useful in that it provides a thorough line of reasoning that, if followed properly, leads to the definition of markets according to their competitive conditions. However, it is not without its complications and difficulties. It may be useful for the guidelines to give guidance to NRAs on how to overcome these difficulties and to explain how NRAs might use a combination of this and other tools to ensure that the final market definition reached is accurate.

Switching costs

1.20 The draft guidelines also touch on a number of issues concerning demand- and supply-side substitution, which are two very useful concepts in defining markets. Among these issues, the presence of switching costs is described as potentially undermining demand-side substitution.

1.21 Demand-side substitution refers to the possibility that switching behaviour takes place in a market when a producer of a certain product/service raises its price. The fact that customers may be prompted to switch to another producer's product/service means that, from a demand-side perspective, the two products/services belong to the same economic market. However, there may be circumstances in which a small but significant lasting price increase may not lead to customers switching. For example, customers may be locked into long-term contracts or have invested substantially in technology and are therefore unwilling to abandon it. The draft guidelines argue that, under these circumstances, the two products/services may not be seen as being in the same market.

1.22 When considering supply-side substitution, it is important to limit the scope to considering the likelihood that undertakings not currently active in the relevant product market may decide to enter it, within a reasonable time frame, following a small but significant lasting price increase. It is important to recognise that the presence of switching costs related to any particular product may be the consequence of a strategic decision by a particular undertaking in the market. In other words, the switching costs may be the result of the undertaking’s attempt to exploit its market power. Such constraints would therefore be better considered in the subsequent stage of the assessment of market power rather than in the earlier stage of market definition.

1.23 The assessment of market power involves, among other things, the consideration of any strategic choice put in place by undertakings. By defining markets taking into account some of these choices, NRAs would, in practice, be pre-empting the stage of the assessing market power by artificially restricting the scope of the market. This may result in some undertakings’ market power being overstated and others’ underestimated. It would be useful for the guidelines to shed some light on this issue. In particular, they should make clear that switching costs are to be considered at the market-definition stage only when they stem from exogenous and insurmountable factors (e.g. technological characteristics) rather than from strategic choices by undertakings.

Ex post vs. ex ante analysis of markets

1.24 Paragraphs 19 and 20 of the draft guidelines note that markets defined ex ante may differ from, and are without prejudice to, markets that may be defined by NCAs and the Commission in the course of a competition investigation. The UK welcomes the Commission’s recognition that the forward-looking approach, starting off not on an identified problem but on the market structure as a whole, may give rise to different conclusions from those reached as a result of an ex post analysis. However, it is concerned that the difference may not be so apparent to the courts and that they are likely to want to examine closely any divergences between markets so defined. It would be helpful in this context for the guidelines to establish more clearly what the differences in approach are and to provide some guidance on the circumstances in which markets defined for ex ante and ex post purposes could be expected to differ.

2. Calculating significant market power

SMP and collective SMP

2.1 The UK welcomes the Commission's proposal to align the definition of SMP with the concept of dominance as developed by the European Court of Justice, the Court of First Instance and the Commission's own practice, within the meaning of Article 82 of the Treaty establishing the European Community. This will establish a level of regulatory consistency across the Community and lay the foundations for an even more successful internal market.

2.2 In particular, the move away from sectoral regulation to horizontal application of standard competition principles is an important step in ensuring increased openness of Member States' markets, easier movement of resources across the Community and greater certainty and transparency on the application of rules in each Member State. Nonetheless, the UK remains concerned that there are still uncertainties inherent in the concept of dominance that have not been fully addressed in the draft guidelines. Until this is done, consistency and certainty of application cannot be guaranteed.

2.3 The concept of individual dominance has become well established in the past few years. A considerable number of cases have been assessed by national and European courts, contributing to what amounts to a large bulk of jurisprudence. However, the same cannot be said for the concept of collective dominance, on which, as the draft guidelines themselves demonstrate, there is little jurisprudence and less still that is relevant to ex ante regulation of the ecoms sector—Gencor perhaps being the significant exception.

2.4 The UK's strongly held view is that, while adequate as far as individual dominance is concerned, there are serious deficiencies in placing reliance on existing case law on collective dominance for ex ante regulation of the ecoms sector without further clarification. In particular, the UK believes that:

• the relative sparseness of case law relating to ex ante application of collective dominance means that the concept has not been sufficiently developed to give NRAs a clear steer on how to apply it. Thus, divergent interpretation and application is likely; and
• lack of clarity on how collective dominance should be interpreted is liable to increase the risk of legal challenge, with cases likely to be brought before the national, and ultimately European, courts. Particularly if points of law are referred to the European Court of Justice for clarification, this will undermine the purpose of sectoral regulation, which must be swift and certain if it is to be effective.

Applying collective dominance to ex ante regulation of the ecoms sector

2.5 The UK believes that the inclusion in the Framework Directive of the new Annex II, as agreed by Council, is the right way to address concerns over the relative lack of case law. It recommends that this should be complemented by further clarification in the guidelines of the concepts introduced in Annex II to ensure that this test is coherently applied by NRAs.

2.6 First, the guidelines should further elucidate the differences between ex ante and ex post assessment of collective dominance. The explanation in paragraph 62 that application of the new definition of SMP, ex ante, calls for methodological adjustments to be made in the assessment of market power is helpful but could usefully be developed further, particularly as far as the assessment of collective SMP is concerned. 2.7 Taking Article 13 with the contents of Annex II and the draft guidelines (particularly paragraphs 86 to 88 thereof), the UK would see the "test" for ex ante collective SMP as having three parts:

• a market structure conducive to co-ordinated effects;
• identified undertakings enjoying a position of economic strength affording them collectively the power to behave to an appreciable extent independently of competitors etc.; and
• those identified undertakings having a strong incentive to converge to a co-ordinated outcome and refrain from reliance on competitive conduct.

2.8 The UK believes that further discussion is needed on the first concept of "market structure being conducive to co-ordinated effects." In particular, Annex II makes clear that "transparency" and "concentration" are important factors in a market having this characteristic, but no further examination is made of these concepts.

2.9 As a way of providing some guidance on the levels of concentration that would be expected in such a market, the UK suggests that the Commission make reference to the Herfindahl-Hirschman index (HHI). The UK recognises the limitations of the HHI but believes that it may be an appropriate starting point. For instance, it could be mentioned that, in the Commission's guidelines on horizontal co-operation agreements, an HHI of 1,800 is considered to represent a high degree of concentration, although, of itself, it would not necessarily result in a finding of SMP.

2.10 On "transparency," the UK considers it important to make clear that transparency of "market conditions" is in question (i.e. the ability of undertakings to accurately predict how their competitors will react) and not necessarily transparency of prices to the end-customer. The UK also considers barriers to entry to be an important factor in determining whether a market has characteristics that make it "conducive to co-ordinated effects" and would expect to see this highlighted.

2.11 It would also be useful for some indication to be given of the relative importance of the various other indicators listed as being associated with collective dominance in paragraph 86 of the draft guidelines and in Annex II. Some are more relevant than others. For example, references to "mature markets" and "stagnant growth" are less likely to be characteristic of the ecoms sector than some of the other indicators listed, while "retaliatory mechanisms" would appear to be a more significant factor in a finding of collective dominance than "similar cost structures."

2.12 On the second limb of the test, the UK would find it helpful for the guidelines to make clear that the interpretation normally given to "the power to act independently" (i.e. the power to raise prices without incurring a significant loss of sales or revenues) is equally relevant to an assessment of whether a collective entity is dominant as to an assessment of an individual undertaking.

2.13 Finally, clarification is needed on how to assess which undertakings within the market being examined collectively have SMP (i.e. which undertakings have "a strong incentive to converge to a co-ordinated outcome" as well as possessing "the power to act independently"). Clearly, evidence that undertakings are, collectively, actually pricing above what is deemed to be a competitive level, should satisfy this condition. If existing pricing patterns provide insufficient proof, the UK would expect such an assertion to be clearly justified by evidence that given undertakings are highly likely to behave in this manner (e.g. by reference to similar behaviour observed in similar situations in related markets or in other Member States). Case studies of how the Commission has identified ex ante which undertakings within an oligopolistic market possess collective dominance would be helpful in this respect.

2.14 The UK is also concerned to ensure that there is true parity between the concept of collective SMP and the absence of effective competition and would thus welcome an explanation of how, in the course of performing a market analysis, NRAs should assess the overall level of competition in the market and whether any competition is sustainable in the absence of regulation. A summary of cases in which the Commission has found an oligopolistic market to be effectively competitive ex ante (i.e. where it has found no player to have SMP) would be useful in this context.

Significance of retaliatory mechanisms in assessing collective SMP

2.15 The UK believes that, as elaborated in Gencor, the potential for retaliation is of particular significance in assessing whether undertakings have a strong incentive to converge to a co-ordinated market outcome. However, it is concerned that the absolute language used in Gencor, which suggests that retaliation is characterised by "identical action" and that an undertaking would derive "no benefit" from its initiative, will not always reflect the situation on the ground, which may be more complex. For example, action may be similar rather than identical, and the undertaking may gain some benefit but not sufficient to encourage it to break away from the pack. The UK would welcome further clarification on this subject, perhaps expanded through case studies.

Relevance of Compagnie Maritime Belge to ex ante application of collective dominance

2.16 The draft guidelines focus on two cases—Compagnie Maritime Belge and Gencor—in establishing that it is not necessary for there to be any formal links (e.g. collusion or co-ordination) between undertakings for them to be found collectively dominant. These cases are helpful in making clear that "oligopolistic interdependence" is sufficient for a finding of collective dominance. However, the UK considers that some of the other aspects of Compagnie Maritime Belge are less relevant to an ex ante assessment of collective dominance. In particular, the tests established by the case—and particularly "adopt a uniform conduct or common policy on the market"—imply that a co-ordinated outcome has, in fact, been reached. This would result from an ex post analysis and not one as described above (or as established in Gencor) where the central tests are that the market structure is conducive to co-ordinated effects and the parties have a strong incentive to converge to a co-ordinated outcome. The guidelines should make this distinction clear.

Relationship between Article 13, Annex II and the guidelines

2.17 In general, it would be helpful for the guidelines to explain in procedural terms how NRAs should apply Article 13 and, in particular, how Article 13 relates to Annex II, to the guidelines and to case law on dominance and collective dominance. The UK suggests that the relationship may best be explained as follows:

• the central test that should be followed in assessing whether an undertaking has SMP in the new regulatory framework is Article 13 (i.e. whether an undertaking or collective entity is in a position of economic strength etc.);
• when using this test to examine a case of suspected collective dominance, NRAs should follow the criteria set out in Annex II, which itself represents principles established in the Commission's own practice (largely in merger regulation) and in case law for ex ante application of collective dominance. The Annex should be interpreted in the light of any case law that is relevant to an ex ante assessment of collective dominance; and
• utmost account should be taken of the guidelines in conducting the above analysis.

2.18 It is also important that the guidelines make clear that any reference to SMP relates to the interpretation of that concept in ex ante regulation of the ecoms sector under Article 13. The UK notes that other documents produced by the Commission—in particular the Horizontal Guidelines—use the term "significant market power" in a different context. An example is where, in paragraph 24(5) of the Horizontal Guidelines, the end note suggests that companies may have significant market power below the level of dominance.

Relationship between effective competition and SMP

2.19 It is implied throughout the document and particularly in paragraph 105—correctly, in the UK's view—that, in a market where competition is not effective, at least one undertaking must have SMP. However, the concept of effective competition, while often used, is not explained, nor do the draft guidelines expand on how an assessment of effective competition should fit into the market-analysis process.

2.20 The UK suggests that an assessment of the overall characteristics of the market (i.e. the level of competitiveness within the market) should be undertaken in parallel with an examination of any available data concerning the behaviour of particular undertakings in the market. Many of the factors that are relevant to such an assessment are contained in the lists of criteria supporting a finding of SMP or collective SMP at paragraphs 70 and 86.

2.21 However, the UK believes that an important omission from these lists is any reference to consumer behaviour and consumer outcomes, which may be assessed through benchmarking and quantitative analysis. Market research of this kind, in the UK's view, provides a valuable indication of whether a market is functioning effectively and may be particularly useful where other data are incomplete or inconclusive.

2.22 Consumer outcomes that may reflect a competitive market include:

• consumers appearing to enjoy a "good deal" in comparison with consumers in similar economies;
• a wide range of services readily available to consumers;
• consumer satisfaction over quality of service; and
• prices that broadly reflect underlying costs (i.e. an absence of persistent excessive profits).

• consumers are able to access information to help them make effective choices;
• consumer are confident and knowledgeable in using information and in taking advantage of market opportunities; and
• consumers do not face barriers to switching suppliers.

2.24 The UK urges the Commission to list factors such as these in the guidelines as additional criteria that should be examined by NRAs when assessing whether markets are effectively competitive and thus do not contain undertakings with SMP. The importance of consumer outcomes and behaviour in assessing effective competition also underlines the need for the Commission and NRAs to look at the characteristics of the relevant retail market when determining whether action at the wholesale level is appropriate.

2.25 Another issue that should be examined in the guidelines is how to assess whether any competition present in the market is sustainable (i.e. whether it will persist in the event that regulation is withdrawn).

3. Co-ordination and consultation

3.1 The sections of the draft guidelines on processes for imposing obligations and co-operation procedures between NRAs and between the Commission and NRAs appear to be little more than a copy-out of the relevant passages from the Commission's original proposed Framework Directive. The UK's views on these issues—and in particular on Article 6—are well known. The UK supports the Commission's aim of ensuring greater harmonisation of the application of rules within the new regulatory framework. However, it considers that the Commission's proposals would tend to achieve harmonisation at the (significant) cost of adding uncertainty and delay to the national decision-making process. The proposals would also enable the Commission to make quasi-judicial decisions over whether a given NRA action is contrary to Community law. This is a power more properly exercised by the courts.

3.2 The UK believes that the Commission's objective can be better met through other means, in particular increased co-operation and co-ordination between NRAs and between NRAs and the Commission.

3.3 With this in mind, the UK suggests that it would be helpful for the guidelines to explain how the Commission envisages the roles of the proposed Communications Committee and (if established by the Commission under its own ægis, as favoured by the UK) the High-Level Communications Group, both of which will play vital parts in the future drafting of guidance and in the sharing of regulatory best practice.

4. Detailed points

Draft guidelines, paragraph 11: ". . . NRAs must consider what effect the measures imposed will have on the competitive environment . . ."

4.1 While achievement of the objectives is clearly central to an NRA's decision making, the guidelines should also make clear that NRAs must consider both the fitness for purpose (will they solve the problem identified?) and the proportionality of the measures that they propose to take. Draft guidelines, paragraph 17: "The purpose of imposing obligations on undertakings designated as having SMP is to guarantee that the undertaking’s market power could not be used to restrict or distort competition . . ."

4.2 This should also refer to the restriction or distortion of the development of effective competition so that NRAs are able to promote effective competition and not simply defend levels already present on the market. Draft guidelines, paragraph 53: ". . . In essence, chain substitutability occurs where it can be demonstrated that although products A and C are not directly substitutable, product B is a substitute for both product A and product C . . ."

4.3 The Commission should make it clear that chain substitutability may also occur where an undertaking providing services at a national level constrains the prices of undertakings providing services in separate geographic markets. This may particularly be the case where the prices charged by undertakings providing cable networks in particular areas are constrained by an undertaking with SMP operating nationally. Draft guidelines, paragraph 63: ". . . In accordance with the Framework Directive, market assessments by NRAs will have to be undertaken on a regular basis, typically once a year. . . ."

4.4 The time period between market reviews should not be prescribed but rather set to meet market needs. While the UK accepts that market assessments should be "regular," conducting them annually is liable to prove onerous and unnecessary in areas where the market situation has not developed significantly. Similarly, with a sector that develops and changes as quickly as ecoms, market reviews for certain sections may need to be conducted more frequently than on an yearly basis. Draft guidelines, paragraph 88: "In an oligopolistic market where most, if not all, of the above mentioned criteria are met . . ."

4.5 This phrase could be read as being contradictory to paragraphs 71 and 87, which make clear that the criteria listed in paragraphs 70 and 86 are not cumulative but equally are not necessarily individually determinative of SMP or collective SMP in their own right. The UK's reading of paragraph 88 is that these criteria, however many of them are met, are still not sufficient for a finding of collective dominance because a further test—i.e. undertakings having "an incentive to converge to a co-ordinated market outcome and refrain from reliance on competitive conduct"—needs to be satisfied. The wording should be amended to make this clear. Draft guidelines, paragraph 100: ". . . NRAs must impose at least one regulatory obligation on an undertaking that has been designated as having SMP. . . ."

4.6 This appears to suggest that ex ante regulatory action will always be appropriate when a finding of SMP is made, whereas it may be that ex post action under competition law is more appropriate when an abuse has also been found. While the UK agrees that it should be clear that any competition problems identified should be addressed—whether by the NRA or the NCA—it believes that a better formulation, reflecting the need for any action to be proportionate, would be "obligations should be applied as appropriate."