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October 1995 Public consultation document

CONTENTS

I - The objectives of the reform

II The conditions governing entry into the French market: the licensing regime

A - The basis on which licences are awarded

B - The necessity of correspondence between the licensing regime, the interconnection regime and the funding of universal service

C - Licence categories

D - Fair management of public or scarce resources

E - Guaranteeing effective equal access to markets

III - Strengthening and funding a high-quality public telephone service

A - A clear definition of universal service

B - Guaranteed and uniform universal service throughout the country

C - Gradual rebalancing of France Télécom's tariffs

D - Fair compensation to be paid by competing operators

E - Universal service funding mechanisms

F - Producing a universal subscriber directory

IV - The principles and practicalities of interconnection

A - Precise interconnection rights and obligations

B - Balanced regulatory control of interconnection and local networks

C - Calculating interconnection costs

V -Effective regulation of the telecommunications market

A - Arbitration on interconnection agreements

B - The necessity of price control to ensure the proper functioning of competition and the provision of universal service

C - Increased enforcement powers to ensure fair competition - disputes and penalties

D - The status of the regulatory authority

VI - Timetable

Annex - Task of the Select Committee

The purpose of this orientation document is to propose the ground rules to be implemented after 1st January 1998. It is intended to serve as a basis for public consultation and thus enable the views of all interested players to be ascertained on changes to be made to the French regulatory framework. On the basis of this consultation, the Government will draft a bill for a future telecommunications law, to be placed before Parliament in the Spring of 1996.

1st January 1998: this date may still seem to be a long way off, but from today only two and a half years remain before the whole range of telecommunications services and infrastructures in Europe are opened to competition, in compliance with the decision in principle taken by the European Union.

We must therefore prepare for rather than simply await this deadline, if we are to draw maximum benefit from it. The resolution adopted by the European Council of Ministers under the French presidency on 13 June 1995 set out the principles for the implementation of the change; discussions have already begun on draft directives giving practical effect to the decision. This does not mean that France should be content to await the adoption of the European regulations laying down the manner in which the market is to be liberalised. France must act rapidly to define the future ground rules and prepare the market and French market players for the stakes raised by competition.

I - THE OBJECTIVES OF THE REFORM

Within the current regulatory framework France has managed to channel the development of its telecommunications sector while never losing sight of the public interest, with results welcomed by our fellow citizens.

This regulatory regime must nevertheless evolve. Development of new technologies and services leads inevitably to increasing diversification of consumer demand, both for residential and business customers, which can be met most quickly and efficiently by a wide-ranging market supply. The opening up to competition of corporate services and mobile telephony shows that this kind of reform, if well implemented, can enhance competitiveness, free the creative energies of our economy and enable new needs to be satisfied.

We must ensure however that this reform is carried out in such a way as to make any progress achieved available to consumers throughout the country, with the same level of quality and at the same price as today. This is the precise definition of the public telecommunications service. It entails the social and geographic averaging of tariffs throughout the whole country to provide a service which could not be guaranteed by market forces alone.

The reform therefore has for ambition to reconcile the opening up of telecommunications to competition to improve our sector's economic competitiveness, with the strengthening of a high-quality universal service for the greater benefit of all consumers.

This ambition can be broken down into five objectives which should provide guidelines for reform:

First Objective<1>: To guarantee a high-quality public telecommunications service for all at an affordable price

Availability of the telephone and associated new technology has a major impact on our standard of living and bolsters our national identity. Society looks to telecommunications for solutions to problems in the areas of health care, education, social integration and employment. For this reason, we must take special care to ensure the maintenance and the development, for the benefit of all, of a public telephone service of high quality at an affordable price on the basis of the same principles that apply today - equality, continuity, flexibility and neutrality.

The concept of universal service adopted by the European Union makes it possible to guarantee the provision and funding of a public telephone service as it currently exists in France.

Second Objective: To meet the growing needs of consumers by diversifying available supply, and guaranteeing easy access to telecommunications services

Competition in the sector is increasing due to the growing diversification of consumer needs for new technologies, and the fact that a single operator is less and less likely to be able to meet these needs alone. The consumer, formerly a user, now demands that his own choices and priorities be satisfied. The aim of regulation is to respond to this by encouraging greater diversity in supply in terms of technology, price and quality of service.

Consumers must, however, continue to have easy access to telecommunication services, in spite of the diversity of available supply. They must be able to communicate with all other consumers connected to all other public networks, and they must also be able to choose from a number of operators for their calls, have information on the main services on offer and be able to compare the services available.

Universality of communications and consumer choice must be guaranteed. This presupposes interconnection between public networks as well as the portability of terminal equipment. Regulation should aim to guarantee these rights.

Third Objective: To create an environment to foster the competitiveness of the telecommunications sector

In order to satisfy consumer demand, a beneficial environment must be created, thus increasing the effectiveness and competitiveness of the telecommunications manufacturing and service industry. This implies the development of opportunities for players willing to invest, capable of satisfying consumer demand effectively in the long term and able to enhance the dynamics of both the market and competition in an economic sector with considerable potential for growth. This objective makes it necessary for regulatory changes to be legible, because an unstable environment does not encourage enterprise.

Fourth Objective: To develop the competitiveness and the excellence of France Télécom, the operator in charge of public service

Competition is a means of stimulating and increasing France Télécom's competitiveness, both on the French market, by tailoring supply and prices more effectively to market demand, and on international markets.

Competition should also make it possible to reinforce France Télécom's ability to fulfill and develop further its public service obligations.

This presupposes that the sector is opened up to competition on terms which are fair both for France Télécom and for new operators.

Fifth Objective: To institute effective market regulation

The State has a tool available to ensure that these four objectives are attained: regulation.

Consumers and players can only fully benefit from the improved service, better prices and enhanced economic efficiency resulting from a competitive environment, if competition is accompanied by effective market regulation.

To achieve this, a pragmatic approach to regulation is needed. Regulation must set up a dynamic framework, structured around basic rules which are both transparent and non-discriminatory. This regulatory framework must also be capable of adapting to the changing market, and applying general competition law when this can be fully effective.

***

The options put forward in the present document should enable us to achieve the five above-mentioned objectives. These options also derive from discussions already conducted in France and are in keeping with the decisions and orientations for future development adopted at Community level.

To begin we shall deal with four essential aspects of the future regulatory framework:

• market entry conditions as determined by the licensing regime and the thus, for calls of less than 100 km now charged at local rates, the tariff impulse frequency changes from 45 seconds to three minutes
• the conditions for maintaining and developing the various social and geographical aspects of a high-quality public service (III);
• the principles and practicalities of network access and of the interconnection regime (IV);
• the procedures for effective regulation of the telecommunications market with the goal of encouraging competition which is as fair and dynamic as possible (V).

II - THE CONDITIONS GOVERNING ENTRY INTO THE FRENCH MARKET: THE LICENSING REGIME

A) The basis on which licences are awarded

The will to create a dynamic market by opening it up to competition means that the number of players on that market cannot in principle be limited by regulatory controls, unless this is justified by the scarcity of resources, such as frequencies. This does not exclude the possibility, in justified cases, of a licence application being rejected, particularly when the applicant has in the past been in breach of his regulatory obligations or when it can be demonstrated that public security may be compromised.

As of 1 January 1998, the manner in which licences are granted and licence conditions will constitute an essential factor in the liberalisation of the telecommunications sector. Licences will have three separate functions:

• awarded on the basis of fully comprehensible and transparent criteria, they will provide players and investors in the economy with the certainties they need and will guarantee the absence of discrimination.
• embodying a fair balance of rights and obligations for operators in each category, they will form a foundation for market regulation.
• with precise obligations in terms of the quality and funding of universal service, they will also provide the means of reconciling the needs of public service and competition.

B) The necessity of correspondence between the licensing regime, the interconnection regime and the funding of universal service

The licensing regime must make it possible for all players to position themselves within the industry with full knowledge of the rights and obligations attached to the activity concerned.

The cornerstone of the licensing regime is the right of public network operators to interconnect<2> and the right of public telephone service providers to obtain network access at cost-oriented prices, along with the possibility of requesting the regulator to determine the interconnection tariffs. These rights must be reserved for providers of services to the public, who in return, contribute to the funding of the universal service.

On the other hand, operators who choose to offer services not open to the public will not be able to benefit from special interconnection tariffs and will have to pay tariffs applicable to any other client. The latter tariffs include an embedded contribution towards financing universal service.

C) Licence categories

1. The following will be subject to an individual licence:

• operators of networks open to the public;
• providers of telephone services to the public;
• operators of radio-based networks.

Individual licences will be awarded following the principles set out in the 1990 telecommunications law, and by widening the scope of the current individual licensing regime and the schedule of terms and conditions applicable to mobile communications operators (Article L33-1). This solution has the particular advantage of being both simple and consistent, as a single licence may be used for operators present in the mobile sector, the wired sector and providing resale (over leased lines) of voice telephony services.

Such a uniform system does not exclude the possibility of different applications — i.e. applying a different set of rights and obligations — for objectively distinct situations: for example, when an operator does not use his own infrastructure, or wishes to restrict his activity to defined market segments (e.g. long distance, local loop) or when he is willing to accept certain constraints in return for special rights.

The standard contractual specifications, defined according to the category of operator or service provider on the basis of transparent and non-discriminatory rules, will include the following specific items:

• essential requirements, among them interoperability;
• allocation and conditions governing the use of public or scarce resources (frequencies, call numbers, rights of way);
• universal service obligations (USOs) or compensation payments for USOs;
• conditions governing interconnection with, or access to other networks;
• stipulations required for national defence and public safety;
• contribution to telecommunications research and higher education;
• obligations pertaining to service provision, quality of service and geographical coverage.
• conditions required to ensure fair competition, equal treatment and the protection of consumers' rights: hiving off certain activities to subsidiaries or using accounting separation, transparency and non-discrimination of market supply, the mandatory use of standards or specific interfaces to ensure the interoperability of services and the interworking of terminal equipment. The establishment of subsidiaries will be required in particular when the operator enjoys a dominant position in its core business, other than in the telecommunications field.

Individual licences will set out the manner in which the schedule of conditions will be applied to the operators concerned.

Depending on the position of the operator on the market, licences may include an obligation to supply mandatory services to all users, as is the case for France Télécom (leased lines, packet switching for data transmission) and the possibility to define or amend the list of obligations to take account of new interfaces for access to the public network or conformance with technical standards.

Obligations in the field of research and training in telecommunications, as is already the practice today for mobile communications, should be proportionate to the scope of operators' activities and to their market position and should be defined in such a way as to avoid any distortion of competitive conditions.

Compliance with requirements relating to public safety or national defence is also necessary in a competitive environment. In this regard France Télécom is at present subject to a number of specific obligations. These involve providing national defence services for the Government (construction of highly secure networks, provision of the leased lines which form the backbone of various governmental networks) and will continue to be the responsibility of France Télécom. They also involve services of benefit to the general public (transmission of emergency calls, setting up of crisis management systems) which may be extended to other operators. Funding for these tasks may, when appropriate, be borne by operators, while taking care not to distort competition.

2. Operators of networks not open to the general public will be subject to a general licence based on a standard schedule of conditions.

The terms and conditions imposed on these operators will be limited in scope, focusing on the essential requirements, network access conditions and the terms governing the use of essential allocated resources (frequencies, rights of way) in addition to relevant public safety and national defence obligations.

3. The following may be provided without restriction or following a formal declaration, possibly on condition that a general schedule of terms and conditions is complied with:

• Services already freely supplied: services not supplied to the public, services not using leased lines;
• Value-added and data transmission services, requiring compliance with general obligations related to conformity to essential requirements;
• Local wired private networks (the majority of wired networks) requiring compliance with general conditions for connection with the network open to the general public but without authorising the exchanges of communications between third parties.

D) Fair management of public or scarce resources

In order to prepare for the opening up of the sector to competition, scheduled for 1998, the rules governing the management and allocation of resources which are essential to telecommunications operators' activities, such as frequencies, call numbers and physical resources (rights of way, high points etc.), must be revised in order to ensure that no operator enjoys preferential access to such resources, and thus has a determining competitive advantage. It will therefore be necessary before 1998 to devote some thought to the methods of allocating, sharing and pricing these resources, which satisfy the following criteria. The method should

• maintain or restore competitive neutrality;
• avoid compromising existing rights unjustifiably;
• give operators, manufacturers and consumers sufficient guarantees;
• respect the constraints and specific features of these resources.

1. The methods used to manage and allocate frequencies must be reformed in two ways. First, the interministerial management of radio frequency spectrum needs to be improved (eg. the planned frequency management agency) and the principle of imposing fees for the use of frequencies which is applied currently to certain categories of users should be extended to all users. This reform, which should be put in place at the same time as the reform of the telecommunications sector, should enable a more dynamic and economically-efficient management of the spectrum.

Secondly, the frequency bands allocated to civilian telecommunications, which are used both for fixed and mobile applications, should be published as early as possible, since allocation and pricing rules are the safeguard of neutrality between competitors and technologies. The frequency bands most in demand - in particular those for which technologies exist which are either standardised or already developed by manufacturers - should be allocated using a tender procedure accompanied by a special pricing structure. Other bands should be priced in as uniform a manner as possible using formulas published before 1998. Finally, spectrum historically allocated to France Télécom should be subject to the same pricing system.

Generally, measures will be taken to ensure that operators making insufficient use of their allocated bands either give them up or share them.

2. The allocation of call numbers will be subject to similar rules, and fees will be payable for their use. The aim of these measures is to offset the costs of managing the "numbering scheme" by the regulator. This management task will be transferred to the regulator when the new 10-digit system is implemented.

The change in the numbering scheme scheduled for 18 October 1996 will make it possible to put in place number-allocation mechanisms which guarantee authorised operators sufficient resources to enable them to develop their activity and furthermore offer the possibility of "portable" numbers for those users wishing to have them (these are numbers retained by the user when the latter decides to change service provider). Within the general numbering scheme, there will be two categories of numbers and allocation procedures:

• Number ranges will be allocated to operators with their licences and administration costs will be payable by them for those ranges;
• "Portable" ranges will allow personal number allocation to individual users.

Special pricing and allocation procedures may also be included for highly-desirable numbers.

3. Access to physical resources essential to the activity of the telecommunications operator (e.g. cables and conduits, access to restricted areas, high points) constitutes a major issue in the opening up of the market to competition: if fair terms for access to these resources do not exist for all operators, it will be difficult in practice to take advantage of the opportunities for investment and innovation generated by competition based around telecommunications infrastructures.

Given a general environment favouring the development of networks and the equality of competitive advantage, regulatory controls need to be adapted to cover different situations.

Firstly, operators of telecommunications infrastructures must be able to develop their networks in a non-discriminatory environment given their equivalent rights and obligations. No operator should enjoy any special prerogative conferring a competitive advantage for its physical installations.

Secondly, telecommunications operators must be able to gain access, under satisfactory conditions of transparency and non-discrimination, to the land usage rights controlled by companies enjoying special rights, in so far as those companies so wish and without compromising their activities. The regulations applicable to the sectors concerned (most notably rail and motorway networks) will thus need to include principles of transparency and non-discrimination, the implementation of these principles being guaranteed by the terms of the licences awarded to the telecommunications operators.

Finally, the scarcity of certain sites as well as environmental concerns dictate fair access and sharing - subject to the requirements of safety and technical considerations and without questioning existing regimes of ownership and right to occupy the public domain - of "high points", and indeed, in the absence of any alternative, of the lines and conduits of existing operators in the sector.

E. Guaranteeing effective equivalent access to markets

The commencement of multilateral negotiations on basic telecommunications, within the WTO, is likely to herald the general lifting of the restrictions now applicable in the various countries on companies based in third countries. This is in any event France's aim in these negotiations, which are due to end on 30 April 1996.

The reciprocity clauses currently applicable in France - largely to mobile communications operators - will therefore be removed or strengthened according to the outcome of these negotiations, which will be known before 1998.

Opening up the whole range of telecommunications activities to competition, including international services and infrastructure, necessitates a special regime for infrastructure in order to ensure effective equivalent access to international circuits for the operators at each end of the circuits concerned; it will be necessary to set up a specific interconnection arrangement. Licences for international operators or service providers (including France Télécom) will therefore include clauses intended to ensure that all authorised operators are treated equally.

The principle of equivalence, of which there are examples in UK and US regulations provides the regulator with additional tools.

Equivalence could be a useful concept to apply in the context of the French regulations governing international services supplied over leased lines. Naturally, this principle would not be included, and certainly not implemented, unless it is in line with the outcome of the ongoing WTO negotiations.

III - STRENGTHENING AND FUNDING A HIGH-QUALITY UNIVERSAL SERVICE

Telecommunications networks and the services they carry are a major component in social, economic and technical progress in the developed countries. The regulatory framework, intended to preserve the dynamics of a sector likely to encourage such progress largely through competitive rivalry, must also seek to guarantee a high quality universal service, which as experience has shown cannot be provided by the mere interplay of market forces.

A) A clear definition of the content of a universal telephone service

Recognition of a harmonised definition of universal telephone service now offers a basic foundation which includes many of the obligations now part of the contractual obligations of France Télécom, and thus upholds our view of what universal service should be in this area. But a clear definition enshrined in law will make it possible to reconcile the maintenance of public service with the liberalisation of the market.

The content of universal service will evolve as technology advances, the market develops and the needs of consumers change.

At present universal service comprises the following:

• the provision to the whole population of a telephone service of high quality at an affordable price and independent of the personal circumstances and geographical location of the subscriber. This implies averaged tariffs and, where applicable, pricing measures in favour of certain social categories - the underprivileged or those with special needs (eg. the disabled). This in fact reflects the basic principles of public service: equality, continuity, flexibility and neutrality.
• The provision of services for the general public:
• public callboxes;
• free emergency calls;
• a directory assistance service;
• a subscriber directory.

B) Guaranteed and uniform universal service throughout the country

Universal service already exists for all consumers, so the first aim must be to maintain it and to enhance it. It is therefore up to the Government to ensure that all consumers can obtain access to the universal service, under the terms set out above, regardless of their location, and to lay down the ensuing obligations.

How can such a result be attained? On 1 January 1998, France Télécom - the only entity in a position to deliver a high-quality universal service throughout France, in continuity with the prevailing situation - will be entrusted with the whole range of measures involved. The schedule of terms and conditions accompanying its licence will therefore lay down the corresponding obligations and these will apply at all locations. This decision will enable national and social cohesion to be strengthened.

In addition, it seems necessary to maintain geographically averaged tariffs for universal service across the whole country: any universal service operator must make the service available to all and at the same affordable price, regardless of the location anywhere within national borders. Complete universal service provision - with the tariff averaging which that presupposes - cannot be segmented into limited zones as this would directly result in differences in treatment and tariffs to the advantage of some and to the detriment of others, which is contrary to national planning and development policy. Consequently, it seems necessary to entrust these tasks as a whole to operators which agree to provide such services throughout the entire country.

Nevertheless, some of the universal service obligations, especially in the interest of the general public (eg. free emergency calls, universal subscriber directory) will be imposed on public network operators. These operators will also be required to satisfy or fund other obligations (universally available directory assistance, public callboxes, special tariffs).

C) A gradual rebalancing of France Télécom's tariffs

Access to telecommunications networks and services for all has been possible due to a uniform low subscription fee, unrelated to actual costs, and also due to pricing levels for long-distance calls, which have in effect shifted the financial burden significantly from residential to business users.

Competitive pressure will bring about major reductions in call rates, especially for trunk traffic, from which all users will benefit. This trend will be accompanied, within the overall context of a general decrease in prices, by a gradual increase in the subscription fee in order to recover the fixed costs of local networks by non- traffic-sensitive revenue.

This tariff rebalancing, which is required if the degree to which long distance calls subsidise local services is to be reduced, must however be implemented gradually and accompanied by socially-targeted measures, given that consumers attribute considerable importance to the subscription fee.

Should the level of subscription fees not allow complete recovery of local network fixed costs, the unrecovered costs resulting from universal service obligations imposed by the Government will be borne by all players using the local network.

D) Fair compensation to be paid by competing operators

Maintaining universal service in a competitive environment cannot be guaranteed unless the obligations required to achieve it are subject to financial compensation paid by the operators which are not bound by such obligations.

Setting the level and the manner of payment of this compensation must comply with a certain number of basic principles to guarantee total equality for all operators:

• Compensation should be related to the net cost of the obligations involved in providing universal service (revenue being deducted from costs); the method of assessing the cost of universal service and the choice of the accounting methods used to calculate these costs will be discussed by the Select Committee (see annex);
• When, as is the case today for mobile communications, certain operators bear some of the public service obligations (e.g. provision of a free emergency call service), the extra costs generated by these obligations should be deducted from the universal service compensation payments owed by them;
• The amount of the compensation to be paid by the operator should be determined on the basis of cost accounts which have been examined by an independent auditor;
• Any compensation payment for universal service must have prior approval from the regulator;
• Compensation payments for the obligation to provide universal service should relate only to those activities falling within the scope of that service (i.e. the public telephone service and related functions) and should be incumbent only on operators of networks open to the public and providers of services to the general public.

E) Universal service funding mechanisms

A distinction can be made between two categories of cost generated by universal service:

• unrecovered local network fixed costs, resulting from price constraints imposed by the Government for the purposes of universal service tariff averaging and imposed on the incumbent operator offering network interconnection.
• the costs of the other universal service obligations (specific socially-targeted pricing measures, provision of public callboxes, directory assistance, subscriber directories) which can be identified more easily<3>.

Two types of mechanism for obtaining funds for compensation paid to operators responsible for universal service provision have been identified in the Community debate on the matter:

• inclusion of such compensation payments in the access charges paid for interconnection between the networks involved. The financial charges for interconnection would then include a component related to the costs of interconnection and of use of the network, and an access fee which would enable the cost of the universal service to be recovered. The disadvantage of this mechanism, which is already in use and which is relatively straightforward to implement is a lack of transparency, since it combines two different types of contribution. At the very least, it would be necessary to identify clearly the two components in the billing for network interconnection.
• Establishment of a "universal service fund" under the control of the regulatory authority. This "fund" could either receive contributions from the various operators to fund the universal service and then redistribute them, or it could consist of a direct compensation mechanism between operators, monitored by the regulatory authority to ensure the satisfactory balancing of the compensation payments without any monetary contribution actually passing through a fund. While this mechanism satisfies the requirement of transparency, it is more complex to implement.

A more satisfactory solution would involve combining the two mechanisms while making a distinction between the two cost categories. This would mean:

• Using the mechanism involving payment of an access charge by operators whenever there is interconnection with the local network, in order to fund the portion of local network fixed costs which remains unrecovered due to universal service tariff averaging imposed by the Government.
• Using a "fund" type mechanism to obtain financing from all operators of public services for the other obligations entailed by the universal service (socially-targeted pricing measures, public callboxes, directory assistance, subscriber directories) which some would not assume, in proportion to the duties incumbent on them.

With such a scheme, the access charge would reflect only those universal service costs related to the funding of the local network and would be more transparent, while the "fund" mechanism would handle smaller amounts and would make it more acceptable. Finally, given the policy of rebalancing local network tariffs, and as the incumbent operator responsible for the universal service makes productivity gains, the access charge would gradually diminish and could be assimilated in the medium term into the "fund" mechanism.

F) Producing a universal subscriber directory<4>

During the public consultation at the end of 1993, it was apparent that there is a wide consensus in favour of the production of a universal subscriber directory. This was particularly requested by consumers in order to avoid the appearance of multiple subscriber lists, which would undoubtedly be more difficult to consult.

Without calling into question the competition which already exists in the telephone directory market and the absence of any exclusive rights in this area, the establishment of a universal directory must be based on a few straightforward principles:

• the right for all those who subscribe to a voice telephone service, whether fixed or mobile, to choose to be included or not to be included in such a universal directory;
• the obligation, embodied in the terms of its licence, of any provider of a public telephone service to allow its subscribers to exercise the above right and to sign a contract with the body responsible for the directory agreeing to the publication and updating of the subscriber lists involved and the sharing of the administrative costs;
• the management of the universal directory in such a way as to provide safeguards for business confidentiality and fair competition conditions.

In order to avoid any solution that is too cumbersome to implement (assumption of responsibility by the regulator, creation of a dedicated independent body), it is suggested that the task of managing the universal subscriber directory should be entrusted to France Télécom, the operator providing the universal service, via a subsidiary. Other operators could hold a stake in this company and could subcontract the material tasks involved in publishing the universal subscriber directory to France Télécom. This would prevent France Télécom from distorting fair competition conditions by performing this function This obligation would be specified in France Télécom's schedule of contractual obligations.

IV - THE PRINCIPLES AND PRACTICALITIES OF INTERCONNECTION

A) Precise interconnection rights and obligations

In compliance with the resolution adopted on 13 June 1995 by the European Council of Ministers, network interconnection is to be the essential vector for telecommunications market regulation after 1998. Any operator or service provider authorised to do business in this market will enjoy the right to access networks open to the public; it is important for this reason to define the exact scope of this interconnection right and the terms under which it is applied, which will in most cases be set out in the conditions of the general or individual licence granted to operators or service providers.

Which operators will be bound by the obligations corresponding to the interconnection right?

All operators using public-access networks will in principle have to respond favourably to requests for interconnection from authorised operators and to requests for network access from service providers. Their licences will define the precise scope of their obligation to do so, especially as regards the reasonable nature of the requests made. In particular, account may be taken of the interests of consumers, the existence of technically and commercially viable solutions offering possible substitutes for the interconnection requested, the relative positions of the parties involved in the market, and the need to preserve network integrity.

Furthermore, certain operators will have more extensive obligations. Specifically, they will be obliged to publish an interconnection offer in advance, the structure and pricing of which will have to be approved by the regulator. They will also have to keep up-to-date and detailed cost accounts enabling the regulator to determine if interconnection with their network (whether covered by a prior published offer or specifically negotiated) has been correctly priced in terms of actual costs plus normal return on capital investment and to separate interconnection costs from access charges.

This second category of operator, to which France Télécom will belong, will be formed by those operators whose network will condition access to consumers. The obligation to ensure transparency in accounting terms will enable not only the costs of interconnection (and of network use) to be calculated but also those relating to provision of universal service.

In return for rights of access to the public network there will be an obligation to abide by technical criteria (interconnection and communication standards) laid down by the regulator in accordance with European regulations. These criteria will be published in advance and their application will be monitored. Specifically they will be directed at ensuring the open provision of networks and services, the portability of terminal equipment and the efficient use of scarce resources.

B) Balanced regulatory control of interconnection and local networks

In a network economy where interconnection is an essential means of access to the market, regulatory measures to prevent the abuse of a dominant position must focus on interconnection conditions, which in practice are the source of the dominance.

In particular, there will be a need to pay very close attention to the parts of the network which cannot be bypassed, in order to guarantee access for other public operators. This is especially true of local switched networks, where interconnection must be possible if communications are to be universal.

When competition becomes effective on certain parts of the network, it will be possible to deregulate the pricing and commercial terms of the corresponding interconnection services. In that event, specific regulation of interconnection services will have given way to general competition law.

C) Calculating interconnection costs

Regulation of access, use and interconnection to the local network, takes on special importance in this context.

The aim of such regulation must be to reconcile the need for the long-term economic equilibrium of local networks with the need to encourage productivity, investment, competition and innovation.

The precise methods used to determine the various costs (interconnection service, universal service) must be clearly set out in terms of the practicalities of implementation and they must be firmly based on auditable costs.

Although the cost calculation method used to date has been based on fully distributed costs, the various possible methods for their calculation will be reviewed by a Select Committee (see annex), set up in conjunction with the present consultation, before any decision is taken on this point.

V - EFFECTIVE REGULATION OF THE TELECOMMUNICATIONS MARKET

Regulation of the telecommunications market, which is founded largely on interconnection and tariffs, is essential in order to guarantee fair, effective competition in conformance with public service requirements.

A) Arbitration on interconnection agreements

Regulation of interconnection agreements should not take the place of normal business negotiations between two market players, which should be the rule.

Nevertheless, when such negotiations have been concluded and at any time thereafter, either party should be able to appeal to an arbitration authority for a determination within a period commensurate with the operational constraints of the market —two months at the most. Such appeal should not compromise the rights of the parties to seek other possible means of appeal.

The licences awarded to operators with more extensive obligations in terms of network interconnection will specify a reasonable time limit on business negotiations beyond which the matter could be submitted to the arbitration body.

When appropriate determinations may be published by the regulator.

B) The necessity of price control to ensure the proper functioning of competition and the provision of universal service

Price controls, at present imposed on the monopoly enjoyed by France Télécom, will remain essential for three reasons:

• It must be at the very heart of the definition of universal service if national planning and development requirements and the need for universal access to the service are taken into account;
• While strong dominant market positions will remain after 1998 in several important sectors of the market, price control must be used to limit abuse of dominant positions, particularly by controlling possible cross-subsidisation;
• Similarly, the regulator will need to verify that genuine productivity gains are made and passed on to users in all market segments and to all consumer groups (and not only those where competition is most intensive).

The objectives set out above imply that the following categories of operator and service should be subject to price control under the joint purview of the Ministry of the Economy and the regulatory authority for telecommunications:

• Services within the scope of universal service;
• operators, including France Télécom, enjoying a de facto monopoly (i.e. a position which is not "contestable" by competitors) as regards certain services and/or market segments. Such control would be applied to the services or segments protected from competition.

Price control, when implemented, must be based both on specific constraints (equality of users regardless of their geographical location, cost-orientation, preferential tariffs for certain user categories) and on multi-year targets for each of the products and market segments involved. The approval procedure for tariff changes should be based on the compatibility of the changes proposed with objectives defined elsewhere; this will give the operator more freedom to make changes within the framework of the general objectives.

C) Increased enforcement powers to ensure fair competition - disputes and penalties

Since the adoption of the law of 29 December 1990, experience has shown that fair competition in telecommunications could be improved.

A distinction must be made between the different categories of dispute in order to put in place a system which is both effective and consistent with our legal framework:

a) The first type of dispute concerns compliance with the obligations imposed by telecommunications regulations and the schedules of terms and conditions of the operators.

Operators and service providers feel above all a need for remedies which are rapid, which could on occasion enforce equity rather than law in the strictest sense, and which prevent further difficulties. They are reluctant to begin long legal proceedings and insist that such disputes, which require in-depth investigation of technical or accounting issues, must be examined by experts.

Compliance with the ground rules must also be guaranteed by a system of dissuasive penalties, particularly in the form of financial penalties imposed on the operators which fail to abide by the obligations ensuing from regulatory provisions and the terms of their licence. In addition to the accompanying solid procedural safeguards, putting in place such a mechanism would necessarily involve the creation of an entity of recognized credibility and impartiality, which would be guaranteed, for example, by its peer status and the duration of its mandate.

The settlement of disputes related to regulatory controls, network interconnection, licences or schedules of terms and conditions presupposes the existence of an authority with powers of injunction and sanction placed under judicial control.

In reality therefore, these issues bring us back to the debate on the status of the regulator.

b) Other types of dispute and disagreement exist, most notably those related to the exercise of competition and the right to fair trading. These may for example take the form of understandings between operators or abuse of a dominant position enjoyed by one operator, or the whole range of stratagems (refusal to allow access to infrastructures, discriminatory rates, conditions attached to sales, etc.) intended to raise barriers to the entry of an operator into a given market.

In such cases, general competition law — i.e. the Order of 1986 — would apply. According to the precise nature of the dispute, the case could be brought before the Competition Council [Conseil de la concurrence] or the judiciary controlling actions such as misleading or comparative advertising, and restrictive trade practices.

It is quite clear that non-compliance with certain licence conditions or schedules of terms and conditions can affect the proper working of the market. For this reason it is necessary to ensure that there is effective interfacing between the body responsible for enforcing the ground rules in the sector and the Competition Council. The body issuing licences and monitoring their application may itself also be notified of practices likely to distort the functioning of the market. In so far as that body would have autonomous status, it may be thought useful to give it the additional right to submit matters to the Competition Council, both for opinion and for dispute settlement. Similarly, the Council could also bring matters before the regulatory body to seek its opinion.

D) The status of the regulatory authority

While the experience acquired by the DGPT since its foundation confirms the potential and the advantages inherent in the current transition towards a competitive market, the complete opening up of the French market to competition makes a new approach necessary. There appear to be two feasible solutions:

• the first is to entrust to an autonomous body the tasks of carrying out arbitration and imposing penalties, while regulation (i.e. regulation arising from the application of market ground rules) would be handled directly, as is the practice today, within a ministerial organisation;
• the second would involve giving the regulatory body more independence from the Government to enforce the ground rules, to act as arbitrator and to impose penalties.

a) Creation of a body to settle disputes and impose penalties

Experience has shown that if the needs of the players in the sector are to be met, there has to at least be a body suited to the new competitive environment which would settle disputes and impose penalties.

Such needs could be met by setting up an ombudsman, independent of any operator to which issues could readily be submitted.

Its status and the appointment of its directors must be such as to ensure that it is autonomous, while capable of working closely with the authorities supervising market competition.

Its activities would include the following:

• It would make conciliation and arbitration proposals to resolve disputes related to competition and network interconnection;
• It would order operators to comply with the proposed measures, such orders possibly being published;
• It would be able to submit matters directly to the Competition Council and would work directly with the Council on procedures related to the telecommunications sector.

This body would also have the power to impose penalties for breaches of licence conditions.

The possible relationship between this body and the Competition Council would need to be examined.

In the case of the first option, prerogatives at the highest level (international negotiation, detailed preparation of regulatory and legal provisions) would naturally belong to the Minister in charge of telecommunications, along with powers for awarding licences, allocating public resources and monitoring compliance with licence terms.

b) Giving the regulatory authority more independence from the Government

To set up an autonomous regulatory body would be to adopt a similar approach to most of our partners.

The independence of such a body would be guaranteed by the manner of appointment of its director(s), i.e. for a fixed term of office and not renewable. That body would also enjoy all the guarantees necessary to its proper operation.

Charged with the task of economic regulation of telecommunications conduits, and not with any "ethical" supervision of content as in the case of the CSA (Conseil supérieur de l'audiovisuel/High Council for Broadasting Affairs) - this body would justify a new organisation, different from existing models of independent administrative authorities and would require close coordination with the Minister responsible for telecommunications. Such coordination might be assured as follows:

• government prerogatives (international negotiation, detailed preparation of regulatory and legal provisions) would belong to the Minister, who would work in conjunction with the regulatory authority, when appropriate;
• powers related to regulation (settlement of disputes arising from network interconnection and licences, application of the schedules of terms and conditions, allocation of essential resources, monitoring of universal service provision) would fall within the remit of the regulatory authority by delegation under law or by decision of the Minister. Licences could be granted by the Minister on the basis of reports submitted by the regulatory body (as in the UK) or directly by the regulatory body itself (as intended in Germany).

The High Commission for Public Postal and Telecommunications Service [Commission Supérieure du Service Public des Postes et Télécommunications] could, according to the above models, participate at all stages, in the definition, organisation and monitoring of the mechanisms designed to ensure proper functioning of the universal service.

Whatever structure is finally chosen, the creation of a new regulatory body will constitute a major step forward in the preparation for the 1998 deadline. That step could be taken as early as 1 January 1997, before the operating licences are issued.

VI - TIMETABLE

Preparation for 1998 will be based on the following timetable:

• October 15 - December 15 1995: public consultation based on the present document.
• October 1995: formation of the Select Committee on the economics of interconnection and universal service provision (deadline June 1996).
• Spring 1996: Parliament to pass bill (submitted by the Government in March).
• End 1996: regulatory provisions embodying the new law to be passed, along with the principles for calculating interconnection charges, universal service ptinciples and the main licensing schemes, after consultation of market players during the second half of 1996.
• January 1997: implementation of new telecommunications regulatory mechanisms.
• Spring 1997: licences issued to competing operators, effective from 1 January 1998.
• July 1997: list of interconnection tariffs published by France Télécom.

ANNEX

Task of the Select Committee

In the perspective of the liberalisation of telecommunications infrastructure and services as of 1st January 1998, the Select Committee will assess, from an economic viewpoint, the advantages and disdavantages of the different options for defining, evaluating and calculating interconnection charges, for funding universal service, for regulating local networks, and for separating accounts between certain activities performed by operators.

The Committee will pay particular attention to encouraging innovation, to effects on investment, employment and productivity, and to the interests of consumers, the international environment and the competitiveness of the economy.

The Select Committee may consult external experts and economic players in the telecommunications sector. It will base its work on the studies commissioned by the DGPT on these issues.

<1> Certain concepts used in this document can be defined as follows:

1) Public supply of telephone services: the supply to the public of a voice telephone service whose price, quality level and coverage are set by the operator.

2) Public telephone service: the supply to all of voice telephone service at the same level of quality and price for all users across the entire country.

3) Universal telephone service: the supply to all of voice telephone service at a determined level of quality and at an affordable price,in confomance with the principles of equality, universality and flexibility

4) Public service obligations, such as those relating to higher education, research, security and national defence in the field of telecommunications.

<2> In the pages which follow, the term "interconnection" is used to refer to two concepts: the interconnection of networks and the connection of telecommunications capacity leased by public telephone service providers; the costs of these two services may be different.

<3> Emergency call services do not need to be financed by such mechanisms since they are an obligation for all operators providing telephone services to the public.

<4>This issue is independent of the universal service obligation to provide a telephone enquiry service and of the establishment by France Télécom or other operators of subscriber lists.

© Secretary of State for industry - France