C-146/00

OPINION OF MR GEELHOED — CASE C-146/00

OPINION OF ADVOCATE GENERAL GEELHOED delivered on 7 June 2001 1

Table of contents

I — Introduction I - 9770 II — Legal framework I - 9771 European law I - 9771 French law I-9775 III — The pre-litigation procedure I - 9775 IV — General remarks I - 9776 V — The complaints, the defence and the appraisal I - 9777 The first complaint I - 9777 The second complaint I - 9780 The third complaint I - 9783 The fourth complaint I - 9786 The fifth complaint I-9788 The sixth complaint I - 9790 VI — Conclusion I - 9790

I — Introduction — failing t o implement Article 4c of Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications ser- vices, 2 as a m e n d e d by Directive 96/19/EC, 3and

1. In this case the Commission of the European Communities seeks a declaration by the Court that the French Republic has failed to fulfil its obligations by

European law (b) connect and use approved terminal equipment situated on the users' pre- mises, in accordance with national and Community law. 2. The universal service obligation for fixed voice telephony stems from Article 3 of Directive 95/62/EC of the European Parlia- ment and of the Council of 13 December 1995 on the application of open network » provision (ONP) to voice telephony, which provides as follows:

'Member States shall ensure that the The term 'universal service provision' is not respective telecommunications organisa- used in the directive. It is, however, in tions separately or jointly provide a fixed Directive 98/10/EC of the European Parlia- ment and of the Council of 26 February 1998 on the application of open network 4 — OJ 1997 L 199, p. 32. provision (ONP) to voice telephony and on 5 — OJ 1995 L 321, p. 6. universal service for telecommunications in

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a competitive environment. 6 This directive Member States shall communicate any such stipulates which services universal service scheme to the Commission so that it can provision must always include. They are verify the scheme's compatibility with the connection to the fixed public telephone Treaty. network, directory services and public pay telephones.

7 — Article 4c was incorporated by Article 1(6) of Directive 6 — OJ 1998 L 101, p. 24. 96/19.

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5. Article 5 of Directive 97/33 relates to service obligations shall, at the request of interconnection and contributions to the their national regulatory authority, calcu- universal service. It provides that: late the net cost of such obligations in accordance with Annex III. The calculation of the net cost of universal service obliga- tions shall be audited by the national regulatory authority or another competent body, independent of the telecommunica- tions organisation, and approved by the ' 1 . Where a Member State determines, in national regulatory authority. The results accordance with the provisions of this of the cost calculation and the conclusions article, that universal service obligations of the audit shall be open to the public in represent an unfair burden on an organisa- accordance with Article 14(2). tion, it shall establish a mechanism for sharing the net cost of the universal service obligations with other organisations oper- ating public telecommunications networks and/or publicly available voice telephony services. Member States shall take due 4. Where justified on the basis of the net account of the principles of transparency, cost calculation referred to in paragraph 3, non-discrimination and proportionality in and taking into account the market benefit setting the contributions to be made. Only if any which accrues to an organisation that public telecommunications networks and offers universal service, national regulatory publicly available telecommunications ser- authorities shall determine whether a vices as set out in Part 1 of Annex I may be mechanism for sharing the net cost of financed in this way. universal service obligations is justified.

6. Until such time as the procedure The calculation shall be based upon the described in paragraphs 3, 4 and 5 is costs attributable to: implemented, any charges payable by an interconnected party which include or serve as a contribution to the cost of universal service obligations shall be notified, prior to their introduction, to the national reg- (i) elements of the identified services ulatory authority. Without prejudice to which can only be provided at a loss Article 17 of this directive, where the or provided under cost conditions fall- national regulatory authority finds, on its ing outside normal commercial stan- own initiative, or after a substantiated dards. request by an interested party, that such charges are excessive, the organisation concerned shall be required to reduce the relevant charges. Such reductions shall be applied retrospectively, from the date of introduction of the charges, but not before This category may include service ele- 1 January 1998.' ments such as access to emergency telephone services, provision of certain public pay telephones, provision of certain services or equipment for dis- abled people, etc.

(ii) specific end-users or groups of end- users who, taking into account the cost of providing the specified network and service, the revenue generated and any geographical averaging of prices imposed by the Member State, can only be served at a loss or under cost conditions falling outside normal com- mercial standards.

6. Annex III to the directive states how the costs of universal service obligations for voice telephony are to be calculated. It provides inter alia that the 'cost of uni- versal service obligations shall be calcu- lated as the difference between the net cost for an organisation of operating with the Revenues shall be taken into account in universal service obligations and operating calculating the net cost. Costs and revenues without the universal service obligations.... should be forward-looking.'

11. The Commission subsequently put a 8. The provisions relevant to this case are number of questions to the French Govern- Articles R 20-31 to R 20-34 of the Code des ment by letter of 7 November 1997. The postes et télécommunications ('the Code'). questions related to the timetable for bal- Article R 20-31 provides that the net cost ancing the tariff structure of France Télé- of universal service provision is made up of com, the traditional telecommunications three components. These components are provider in France, and to the methods of referred to as CI, C2 and C3. In respect of calculating this tariff structure and the 1997 a decree of 13 May 1997 (No 97- procedures for financing and calculating 475) provides for a flat-rate calculation of the net cost of the universal service. The the total of the three components in French authorities responded by letter of anticipation of specific methods of calcula- 4 December 1997. tion which will be applied for each of the three components in subsequent years. Articles R 20-32 to R 20-34 contain methods of calculation for the years after 1997. All those articles were incorporated into the Code by Law No 96-659 of 26 July 1996. 12. On the basis of this response the Commission concluded that France had failed to fulfil certain obligations under Directive 90/388, as amended by Directive 96/19, and Directive 97/33. By letter of 24 July 1998 the Commission served for- 9. Finally, it should be noted that respon- mal notice on the French Republic. The sibility for supervising the telecommunica- French Government responded by letter of tions sector in France lies with the Autorité 4 November 1998, to which it attached a de régulation des télécommunications draft decree relating to France Télécom's ('ART'). hardship rates. On 8 July 1999 the Com-

13. The Commission's complaints in this case are directed at the way in which the 15. The rules must ensure that former rules on what is known as universal service monopoly-holders charge only real costs in the telecommunications sector were to newcomers to the market where they implemented in France. Article 2(g) of avail themselves of their networks. This Directive 97/33 defines universal service results in a second characteristic feature of as follows: 'a defined minimum set of these rules, that is to say their complexity. services of specified quality which is avail- That applies not so much to the rules able to all users independent of their themselves as to their implementation and geographical location and, in the light of monitoring. It is not easy to ascertain specific national conditions, at an afford- whether and to what extent an undertaking able price'. In other words, the universal charges real costs. That is because the rules service obligation includes maintaining generally involve supervision of the former non-profitable telephone services, for monopoly-holders which not only have a example in sparsely populated areas. In dominant position on the market but often France the universal service obligation lies also, on account of that position, are the with France Télécom. The Commission's only ones with any insight into the eco- complaints are directed at the way in which nomic soundness of the costs to be calcu- the cost of the universal service is calcu- lated. It goes without saying that they have lated and the circumstances in which other an interest in ensuring that the costs telecommunications providers may be calculated are not too low. The Commis- required to make a financial contribution sion's complaints relate to the costs which to it. France Télécom may take into account. Do

17. I should also stress the social aim of the universal service. It is a public service, 20. The Commission contends that the based on the view that the telephone is now requirement which France imposed on the an essential necessity of life. A Member operators of mobile telephone services — State must be able to guarantee that the France Télécom's new competitors — to quality of this service, for which it is not contribute to the universal service in itself responsible, is satisfactory. respect of 1997 has no basis in Community law. That is because in 1997 France Télécom still enjoyed an almost complete monopoly over voice telephony. For that reason it should finance the universal service in full. Furthermore, the Commis- 18. In the light of those considerations it is sion considers that it is wrong to make not surprising that the Commission moni- providers of mobile telephone services tors closely the implementation of the contribute to the universal service on the Community rules by the Member States. fixed network. Compliance with obligations in the tele- communications sector must be strict. I also take this as the main premiss of my Opinion. Having regard to the importance of strict compliance for the aim to be achieved, that is to say liberalisation of the 21. In its defence, the French Government telecommunications sector, and having contends that the general nature of Arti- regard to the fact that compliance in itself cle 4c of Directive 90/388, as amended by is difficult to monitor, I consider that the Directive 96/19, does not enable the opera- directive requires an interpretation centred tors of mobile telephone services to be on the wording of its provisions — that is excluded from financing the universal ser- to say a legalistic interpretation. vice. It does not consider that the French

25. The Commission contends that the French Government's argument that the emergence of mobile telephony affects the cost of the universal service has no basis in fact. The emergence of mobile telephony has led to an increase in the traffic on France Telecom's network but has had no impact on the cost of the universal service. 23. In the view of the French Government, the directive does not establish an express link between the abolition of the monopoly over fixed telephony and the introduction of a financing mechanism for the universal service. The date on which the monopoly over voice telephony had to be abolished, 1 January 1998, has no bearing on the 26. In its rejoinder, the French Government universal service. examines the criterion relating to the need

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for a system for cost sharing. Cost sharing provides that '[c]ontributions to the cost of may be necessary to abolish the monopoly universal service obligations if any... may over voice telephony. On the other hand, it take the form of a supplementary charge does not necessarily have to follow such added to the interconnection charge' abolition. The French Government also changes nothing in that respect. refers, inter alia, to Article 86(2) EC.

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certainly agree with the French Govern- 2000. However, the directive requires that ment that the universal service and the where such rebalancing cannot be comple- abolition of the monopoly are obligations ted before 1 January 1998 the Member which must be distinguished and fulfilled State concerned must report to the Com- separately from one another, I consider that mission on the plans for phasing out the that is not relevant to the appraisal of this remaining tariff imbalances. This must complaint of the Commission. include a detailed timetable for implemen- tation.

32. I therefore conclude that the Commis- sion's first complaint is well founded. 34. The Commission states that no time- table was submitted to it even though this should have occurred before 11 January 1997. Consequently, it was unable to determine whether or not France had fulfilled its obligations under Article 4c of Directive 90/388, as amended by Directive 96/19, read in conjunction with the first paragraph of Article 2 of Directive 96/19. The second complaint

considers that the French authorities should Government perceives it, was achieved in thus concede that the balancing had not yet France well before 31 December 2000. The been completed in accordance with their absence of balance could, according to the own criteria. The French authorities should wording of Directive 90/388, as amended either have confirmed that France Télécom by Directive 96/19, have the effect of was authorised to continue raising its tariffs increasing the net cost of the universal or have notified the timetable provided for service. A mechanism for sharing these in Article 4c of Directive 90/388, as amen- costs could temporarily take the place of ded by Directive 96/19. the balance in tariffs. The French Govern- ment also draws a distinction between a deficit resulting from local access — which France Télécom makes up through revenue from local calls — and other very minor deficits. 36. In its defence, the French Government states that it disagrees with the Commission as regards the content of the obligation to re-balance tariffs.

cover all connection costs. The deficit was 42. The requirement relating to a cost made up through the tariffs which France structure based on real costs must be Télécom charges for local calls. As a result viewed in the light of the underlying there was still no balance, on the definition purpose of the Community legislation, that applied by the Commission. The French is to say the liberalisation of the telecom- Government explains that competition for munications market. The calculation of an local calls would be possible only as of excessively low tariff could give France 1 January 2001, following the unbundling Télécom, the former monopoly-holder, an of the local loop. It also points out that it unfair advantage, because competitors was very difficult to work to a timetable would have to charge even lower tariffs to with intermediate stages. Fixing a realistic induce potential customers to switch their final date was consistent with the objectives subscriptions from France Télécom to of the directive and was also transparent them. It should be obvious that excessively for newcomers to the market. low tariffs can deter possible competitors from entering the market. For these reasons I consider that undercutting of the balan- cing tariff is unjustified.

45. In the light of the foregoing, I conclude that the second complaint is also well founded.

48. In the second part of the complaint the Commission argues that the calculation formula in component CI contains no objective criteria for allocating the burdens associated with the financing of the uni- The third complaint versal service to the various telephone providers, contrary to Article 4c of Direc- tive 90/388, as amended by Directive 96/19. Furthermore, the principle of trans- parency laid down in Article 5(1) of Direc- 46. The Commission contends that the tive 97/33 was not observed. method of calculating the net cost of the universal service does not satisfy the requirements of the directive. Firstly, the profitable household subscriptions were wrongly included. Secondly, the calculation was not carried out in a transparent and objective manner.

49. The calculation formula had two spe- cific flaws. Firstly, the Commission objects to the reference value Pe. This reference value affected the amount deducted from 47. The Commission maintains, in the first components C1 and C2 and thus the part of the complaint, that the French contributions from the various telecommu- legislation was inconsistent with Arti- nications providers. It should therefore cle 5(3) of Regulation 97/33, read in con- have been fixed in a transparent manner. junction with Annex III thereto, since the There is no indication in the figures which calculation formula in Article R 20-32 of the French Government provided in the Code included the costs of profitable response to the reasoned opinion that it customers. In the view of the Commission, was.

51. In the view of the Commission, the first difference between the reference values P and Pe is as follows. In the countries of reference the detailed billing of customers forms part of the basic subscription, whereas this type of billing is optional for customers of France Télécom. This differ- ence results in an artificial increase in the 53. The second part of the third complaint value Pe, adding (in 1998) FRF 351 million leads the French Government to argue as to the costs of component CI. The second follows. The price of FRF 65 for the difference is that the value Pe included costs subscription stemmed from a comparison incurred in maintaining the so-called 'red between the countries in which the tariff list', whereas the value P did not relate to has been balanced. This price falls within the revenue which flowed therefrom. The the margin of between FRF 55 and FRF 75 red list is made up of subscribers who do defined in the Champsaur report. Further- not wish to be listed in the telephone more, the decision of the ART of 9 January directory. 1999 (No 99-120) increasing the subscrip- tion tariff to FRF 64.68 achieved a balance in practice. In short, the value Pe is sufficiently transparent.

52. In the defence, the French Government refers — in response to the first part of the third complaint — to point (i) in the fourth paragraph of Annex III to Directive 97/33, which provides, in so far as it is relevant, that it is possible to include 54. In its reply, the Commission contends specific end-users or groups of end-users that the French Government has not put

55. In its rejoinder, the French Government again points out that it was not possible — before the balancing of tariffs was 57. Costs may be included where they are achieved — to identify the subscribers attributable to activities which may only be served in accordance with normal commer- engaged in at a loss or under cost condi- cial standards. tions falling outside normal commercial standards. These are, in so far as I under- stand the annex, activities which a com- mercial operator would not carry out unless he were subject to the universal service obligation. Consequently, I consider that the Commission is also right to maintain that the costs must relate to 56. I take the following view as regards the non-profitable activities. They do not first part of the complaint. Annex III to necessarily have to relate to loss-making Directive 97/33 lays down rules for the activities but may also relate to the costs of calculation of the net cost of universal activities which, viewed in terms of normal service provision. It provides a limited and economic management, provide insufficient as precise as possible a description of the returns. By way of example, the annex costs which may be included. In my view, refers inter alia to the installation and the description shows quite clearly that operation of public telephone boxes. That only costs which result directly from uni- need not be a loss-making activity. It may versal service provision may be included. be that the risk is so great that a company The provider under the obligation to pro- would, after undertaking a normal com- vide the universal service must not be mercial assessment, decide not to instal burdened disproportionately by that obli- them. I do not agree with the French gation but, by the same token, may not Government that the directive draws no derive any financial benefit from it. This is distinction between profitable and non-

The fourth complaint

59. The second part of the third complaint, which relates to the appropriateness of the reference value Pe, leads me to make the following remarks. In general, I consider 61. The Commission contends that certain that bench-marking is an appropriate components of the cost of the universal method of establishing a criterion for service were fixed on a flat-rate basis, calculating the net cost of the universal contrary to the specific method of calcula- service. In the light of the differences tion laid down in Article 5(3) of Directive between the Member States, the result of 97/33. This complaint breaks down into such bench-marking must be used pru- three parts.

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64. The third part of the complaint relates to the hardship tariffs. In the view of the Commission, the contributions paid to France Télécom to offset the costs of certain hardship tariffs were calculated in an imprecise manner. In the defence, the French Government refers to the decree of 8 March 1999 (No 99-162) amending Articles R 20-34 and R 20-40 of the Code 63. The second part of the Commission's and Article R 251-28 of the Code de la complaint concerns Article 3 of the decree, sécurité sociale in which a new system was which fixed the net cost of the universal introduced. This system included a reduc- service in respect of 1997 at a flat rate. tion for minimum wage earners and dis- According to the French Government, the abled war veterans of FRF 27.60 a month calculation of the geographical component (in 2000). The reduction was paid for from

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68. In its reply, the Commission notes that the French Government's acknowledge- ment that it acted incorrectly as regards The fifth complaint the proceeds from 'comfort services' until 1999 is not accompanied by any resolve to remedy the situation. It therefore maintains this part of the complaint. The Commission 66. The Commission's fifth complaint goes on to observe that the administration relates to certain other components of the of the red list and the publication of a paper

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69. Secondly, the Commission complains that in respect of 1998 the French autho- rities included traditional data in the calcu- lation and did not apply best practice. It refers to Annex III to Directive 97/33, 71. In appraising this complaint it is impor- which provides that costs and revenues tant to note that on almost all counts the should be forward-looking. In the defence, French Government concedes that it failed the French Government contends that as to comply with the directive. In my view, far as was possible account was taken of that acknowledgment makes the complaint the Commission's recommendations relat- well founded. On one count, which relates ing to the application of Annex III to to the red list, the French Government does Directive 97/33. In its reply, the Commis- not agree with the Commission. However, sion contends that France acknowledges on that count, too, I conclude that the that it failed to fulfil its obligations in complaint is well founded. To me it is clear respect of 1998. In its rejoinder, the French that the maintenance of the red list is a Government refers to the difficulties in separate activity from the publication of a terms of application which would arise if telephone directory. The cost of maintain- the correct methodology, which was ing this list can also be regarded as a applied in 1999, had had to be applied to separate cost component. In that respect 1998. the following considerations apply. The red list is maintained with a view to managing subscriptions and has, in itself, nothing to do with the universal service. On the other hand, the publication of a telephone direc- tory forms — under Directive 98/10 — part of the universal service. For those reasons, the subscribers of all other provi- ders should — in a competitive environ- 70. Thirdly, the Commission contends that, ment — also be included in the telephone with the exception of the proceeds from directory, with the costs and proceeds public pay telephones and the provision of which that entails.

(a) declare that by failing to adopt the laws or regulations necessary to implement Article 4c of Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services, as amended by Directive 96/19/EC, and to implement Articles 5(1), (3), (4) and (5) of

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Directive 97/33/EC of the European Parliament and of the Council of 30 June 1997 on interconnection in Telecommunications,

or, in any event, by failing to inform the Commission of such laws or regulations,

the French Republic has failed to fulfil its obligations under the above- mentioned directives.