C-500/01

COMMISSION v SPAIN

OPINION OF ADVOCATE GENERAL LÉGER delivered on 10 July 2003 1

1. The Commission of the European Com- I — Legal background munities has brought an action for a declaration that the Kingdom of Spain has failed to fulfil its obligations under Com- mission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services, 2as amended by Commission Directive 96/19/EC of 13 March 1996 3 (hereinafter 'Directive A — Community law 90/388 as amended').

3. Tariff rebalancing is one of the oper- ations preparatory to opening up the voice telephony market to competition.

6. The new operators would have been able to concentrate their activities in the most profitable market segments (namely, regional and international calls). Given the high prices charged by the traditional operator, they could have set lower tariffs and in that way quickly returned a profit and gained market share. That develop- ment would have forced the traditional operator to reduce its margins on the '... the continuation of the exception profitable segments and would thus have granted with respect of voice telephony is deprived it of the ability to offset the losses no longer justified. The exception granted incurred on the less profitable services, by Directive 90/388/EEC should be ended which it would nevertheless continue to and the Directive... amended accordingly. offer (namely, the monthly subscription In order to allow telecommunications and local calls). organisations to complete their preparation for competition and in particular to pursue the necessary rebalancing of tariffs, Member States may continue the current special and exclusive rights regarding the provision of voice telephony until 1 January 1998. Member States with less developed networks or with very small networks must be eligible for a temporary exception... . Such Member States should be granted, 7. Before opening up the market to com- upon request, an additional transitional petition, the Community legislature there- period respectively of up to five and of up fore required Member States to place the to two years, provided it is necessary to telecommunications organisations in a pos- complete the necessary structural adjust- ition to 'rebalance' their tariffs, that is to ments. The Member States which may say, to align their tariffs with real costs. request such an exception are Spain, Ire- Specifically, that operation had to take the land, Greece and Portugal with regard to form of a reduction in the charges for less developed networks...'. regional and international calls and an increase in connection charges, the monthly rental and local call rates. 4 — See the second recital.

12. Under Article 1 of that decision, the Kingdom of Spain was authorised to post- pone until 1 December 1998 the perform- ance of certain obligations, in particular the effective granting of new licences for the provision of voice telephony and of public telecommunications networks.

10. Article 4c of Directive 90/388, inserted by Directive 96/19, provides: 5 — OJ 1997 L 243, p. 48.

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13. Lastly, on 18 December 2000, the unbundled access to the local loop allows European Parliament and the Council of new entrants to compete with notified the European Union adopted Regulation operators in offering high bit-rate data (EC) No 2887/2000 on unbundled access transmission services for continuous inter- to the local loop. 6 net access and for multimedia applications based on digital subscriber line (DSL) tech- nology as well as voice telephony services.

14. According to the second recital in the preamble to that instrument, local loop unbundling complements the existing 1 7 . A r t i c l e 3(3) of Regulation provisions of Community law guaranteeing No 2887/2000 provides: universal service and affordable access for all citizens of the European Union, by increasing competition, ensuring economic efficiency and bringing maximum benefit to users.

19. The first measure is the Orden por la 22. On 15 October 1999 they adopted Real que se determinan las tarifas y condiciones Decreto-Ley por el que se adoptan medidas de interconexión a la red adscrita al para combatir la inflación y facilitar un servicio público de telefonía básica que mayor grado de competencia en las tele- explota el operador dominante para la comunicaciones 11 (Royal Decree Law prestación del servicio final de telefonía 16/1999 containing certain measures to básica y el servicio portador soporte del counter inflation and increase competition mismo of 18 March 1997 (Order fixing in the telecommunications market), which tariffs and conditions for interconnection made provision for new increases in tele- to the public voice telephony network phone subscription charges. According to utilised by the dominant operator). 9The the timetable envisaged, the charge had to measure consisted in increasing the increase three times by ESP 100, on monthly rental by 16% and the price of 1 August 2 0 0 0 , 1 March 2001 and local calls by 13% and reducing charges for 1 August 2001. provincial, interprovincial and inter- national calls by 5 % , 15% and 12%.

23. The Spanish authorities then set up a 20. The Spanish authorities then adopted new pricing system, based on a capping the Orden sobre reequilíbrio tarifario de mechanism, enacting the Orden por la que servicios prestados por Telefónica Socie- se dispone la publicación del Acuerdo de la dad Anónima' of 31 July 1998 (Order Comisión Delegada del Gobierno para concerning the tariff rebalancing of services Asuntos Económicos of 31 July 2000 provided by Telefónica). 10 They set the (order for publication of the decision of monthly rental charge at ESP 1 442 for the Government Commission on Economic 'residential' lines and at ESP 1 797 for Affairs of 27 July 2000, establishing a new 'líneas de enlace' (trunk lines). pricing mechanism for the services pro- vided by Telefónica). 12

the services provided by Telefonica and - 9% in 2001, the annual variation in covers the period 2001-2002. It is based on the forecast RPI - 8% in 2002 and to calculation formulae involving Spanish the annual variation in the forecast RPI Government forecasts of changes in the - 4% in 2003; retail price index (hereinafter 'the RPF) and adjustment factors. It was extended to cover 2003 by the Orden por la que se dispone la publicación del Acuerdo de la Comisión Delegada del Gobierno para Asuntos Económicos del Acuerdo por el que se modifica el Acuerdo of 10 May 2001 — subscription charges may not rise in (Order for publication of the decision of 2001, but may be increased by a maxi- the Government Commission on Economic mum of the annual variation in the Affairs amending the decision of that com- forecast RPI + 9.4% in 2002 and by the mission of 27 July 2000, establishing a new annual variation in the forecast RPI + pricing mechanism for the services pro- 6% in 2003; vided by Telefónica). 13

— connection charges may rise by a maxi- mum of the annual variation in the forecast RPI -16.5% in 2001 and 2002 and by the annual variation in the forecast RPI - 2% in 2003.

25. The price cap mechanism, as set out in the aforementioned Orders, establishes the following pricing structure: 26. The other provisions of national law relevant to examination of the action are the measures concerning unbundling of the local loop.

27. Real Decreto-Ley 7/2000 de Medidas — all fixed telephony and fixed calls to Urgentes en el Sector de las Telecomunica- mobile telephony services shall be sub- ciones of 23 June 2000 (Royal Decree-Law ject to regulated change equivalent to on urgent measures in the telecommuni- the annual variation in the forecast RPI cations sector) 14 imposed a duty to provide

31. In the first phase, the Commission criticised the Spanish authorities for failing 29. The Orden... por la que de dispone la to send it a report on the phasing out of publicación del Acuerdo de la Comisión restrictions on tariff rebalancing, in accord- Delegada del Gobierno para Asuntos Econ- ance with Article 4c of Directive 90/388 as ómicos por el que de establecen los precios amended. de la primera oferta de acceso al bucle de abonado en las modalidades de acceso completamente desagregado, de acceso compartido y de acceso indirecto, a la red pública telefónica fija de 'Telefónica de España, Sociedad Anónima Unipersonal' of 29 December 2000 (Order for the pub- 32. Accordingly, on 11 December 1998, lication of the decision of the Government the Commission sent a formal notice stat- Commission on Economic Affairs, setting ing that the Kingdom of Spain had not yet the prices of the first offering of access by submitted to it a detailed timetable for the subscribers to the loop and the full phasing out of restrictions on tariff rebal- unbundled access, shared access and indi- ancing.

15 — BOE No 307 of 23 December 2000, p. 45567. 16 — BOE No 131 of 30 December 2000, p. 49758.

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41. On 4 May 2000, the Commission sent a letter of formal notice to the Spanish 37. In the second phase of the procedure, Government. It charged the Government the Commission continued its examination with failing to allow Telefonica sufficient of the case in the light of a complaint flexibility to enable it to rebalance tariffs as lodged by Telefonica on 23 November required by Article 4c of Directive 90/388 1998. as amended.

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COMMISSION v SPAIN

42. Not satisfied by the Spanish auth- unbundled access to the local loop, 17 orities' response to that notice, on changes made in May 2001 to the price 29 January 2001 the Commission delivered cap system 18 and the exact assessment, by a reasoned opinion. The Commission the Spanish Government, of Telefonica's pointed out that the tariff rebalancing deficit resulting from access in 1999. 19 process had not been completed in 1999 and probably would also not be in 2001. The Commission also stated that Telefoni- ca's deficit resulting from access in 1999 was ESP 258 billion.

46. The Spanish authorities replied to that supplementary reasoned opinion by letter of 9 October 2001. Not satisfied by their response, the Commission brought the present proceedings on 21 December 2001. 43. In their reply of 29 March 2001, the Spanish authorities disputed the Commis- sion's assessment. In their view, the deficit resulting from access supposedly experi- enced by Telefonica in 1999 was ESP 173 449 billion, that is, ESP 85 billion less than the figure put forward. Additionally, the Spanish authorities announced a series of amendments to the price cap mechanism. I I I— The claims and pleas of the parties

49. Mindful of the constraints imposed by the price cap mechanism, the Commission takes the view that the monthly subscrip- tion charges could not be based on real 52. In order to determine the time-limit costs earlier than the beginning of 2003. It afforded to Member States to comply with asserts that the hypothetical productivity the obligation in question it is therefore gains of 6% per annum, calculated by the necessary, according to the Spanish Gov- Spanish authorities, required to eliminate ernment, to refer to the case-law of the the deficit resulting from access were Court, according to which failure to fulfil improbable, since infrastructure-related obligations must be assessed on the basis of efficiency gains are modest. the circumstances in the Member State as pertaining at the end of the period set by the reasoned opinion. In the present case, it claims, the period set by the supplementary reasoned opinion expired at the end of October 2001.

50. The Spanish Government, for its part, argues that Directive 90/388 as amended does not require it to impose on Telefonica tariffs based on real costs. That directive merely obliges it to phase out the restric- tions which prevent Telefonica from bring- 53. So, the Kingdom of Spain asserts, it ing its tariffs into line with real costs. could not, at that time, be criticised for any Article 4c of Directive 90/388 as amended failure to fulfil obligations. It is in its view does not therefore, it contends, impose an common ground that, even on the basis of obligation of result on the Government, but productivity increases of 3% to 4%, Tele- an obligation of means. fonica will not have recorded any deficit resulting from access in 2002 or 2003. 20 The fact that Telefonica withdrew its com- plaint in April 2001 is, it contends, the best possible proof of the truth of that claim.

IV — Assessment 58. It is apparent from the 20th recital in the preamble to Directive 96/19 that Member States had to phase out restric- tions on tariff rebalancing 'as rapidly as possible'. The fifth recital in the preamble to the Directive, for its part, states that 55. Article 4c of Directive 90/388 as tariff rebalancing is a measure preparatory amended requires Member States to take to opening up the market to competition, the measures necessary to enable their which opening up had to occur by 1 January telecommunications organisations to rebal- 1998 at the latest. Further, Article 4c of ance their tariffs, that is to say, to align Directive 90/388 as amended stipulates that their tariff structure with real costs. the tariff rebalancing itself had to take place before 1 January 1998 since, if it did not, Member States would be obliged to forward a report to the Commission con- taining a detailed timetable for implemen- tation.

61. Similarly, I do not believe that Decision A — The existence of tariff imbalances 97/603 had the effect of postponing imple- mentation of the obligation in dispute. As the Commission stated, 24 the operative part of that decision sets out specifically the obligations for which an extension of the implementation period is granted, and 63. According to the 20th recital in the the elimination of restrictions on tariff preamble to Directive 96/19, tariff bal- rebalancing is not one of them. 2 5 ancing must be achieved in respect of all five charges comprising the service pro- vided by the telecommunications organi- 22 — See in particular, as regards that requirement, the Opinion of Advocate General Geelhoed in Case C-146/00 Com- sation, namely, the initial connection, the mission v France [2001] ECR I-9767, point 44, where he monthly subscription, local calls, national asserts that the requirement relating to a detailed timetable clearly cannot be satisfied merely by stating a final date. calls and international calls. 23 — The requirement for that approval is, I consider, implicit in Directive 96/19. Since the detailed timetable postpones the time-limit for fulfilling the obligation in question (and the tariff rebalancing) and since that timetable could be the basis for bringing a further action against the Member State for failure to fulfil its obligations, it is scarcely conceivable that the Commission exercises no control over the timetables forwarded by the Member States. On the contrary, it is apparent to me that the internal logic and the purpose of Directive 96/19 require the Commission to indicate its agreement on those timetables for implemen- tation. 64. My view is that, in order to ascertain 24 — See the application (paragraph 66). whether there are imbalances in Telefoni- 25 — The obligations of which postponement is authorised are the effective grant of new licences for the provision of ca's tariff structure, the Court can rely on voice telephony and public telecommunications networks both the methods of calculation proposed (point 12 of this Opinion) and notification to the Com- mission and publication of all licensing or declaration by the Commission. 26 procedures for the provision of voice telephony and the establishment of public telecommunications networks, and of details of the national scheme envisaged to share the net cost of the provision of the universal service obligation (Article 1(a) and Article 1(b) of Decision 97/603). 26 — See the application (paragraphs 46 to 50).

70. On the one hand, the Spanish Govern- 67. As regards the following years, I would ment disputes the Commission's assessment draw attention to the fact that, in their of the amount of Telefonica's deficit result- letter of 9 October 2001, 29 the Spanish ing from access for 1999. 30 It holds that the figure is too high because the Commis- sion included the cost relating to non- 27 — Point 38 of this Opinion. 28 — Points 27 and 28. 29 — Annex 24 to the application. 30 — See the defence (paragraph 34).

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profitable telephone lines, whereas that evidence relating to the error which it cost was, it contends, already included in claims it made. the net cost of the universal service obli- gation.

75. The second method of calculation con- sists of comparing the monthly rental invoiced by Telefonica with the charge for unbundled access to the local loop. 73. Nor, I believe, is that argument tenable, since the Spanish Government offers no 34 — Ibid, (paragraph 36, second subparagraph). 35 — The initial two-month period granted by the Commission 31 — Letter of 29 March 2001 (Annex 22 to the application, was extended by one month at the request of the Spanish authorities (see the defence, paragraph 11). Since the second subparagraph of paragraph 3). supplementary reasoned opinion was issued on 27 July 32 — The defence (paragraphs 27 and 28). 2001, the period expired three months later, that is to say, 33 — Ibid, (paragraph 35). on 27 October 2001.

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76. As the Commission has observed, 36 78. In the present case, it emerges from the charges for unbundled access to the local evidence in the case-file that Telefonica set loop must be based on real costs, in the monthly rental for residential lines as compliance with Article 3(3) of Regulation follows: No 2887/2000. The monthly rental must also be based on real costs, under Article 4c of Directive 90/388 as amended.

— approximately ESP 1 742 for 2001; 37

— ESP 1 942 for 2002, 38 and

83. The Spanish Government also asserts that since August 1998 the monthly rental has risen by more than 56% for residential 80. The foregoing comparison reveals that lines, with the effect that the sacrifice the monthly rental will have remained less required of consumers as regards the fixed than the charge for unbundled access to the cost of the telephone service will allow local loop in 2001 (with a difference of elimination of the deficit resulting from 19.43%) and in 2002 (with a difference of access in 2002. 7.52%). Only in 2003 will the monthly rental be higher than the charge for access to the local loop (with a difference of 2.38%).

84. I consider those arguments to be irrel- evant. In the defence, the Spanish Govern- ment seems not in fact to dispute that the second method of calculation is appropri- ate nor even that there is a difference 81. The Spanish Government's arguments between the monthly rental and the charge seeking to refute that analysis are uncon- for access to the local loop. As for the first vincing. method of calculation, the Spanish Govern- ment appears to recognise that there was a deficit resulting from access until the start of 2002. 42

82. The Spanish Government considers that the fact that the monthly rental is less than the charge for unbundled access to the local loop is not such as to impede compe- 85. Consequently, I take the view that the tition or to place new operators at a Court can find, from the evidence in the disadvantage. In its view, a finding that case-file, that the traditional Spanish oper- there are distortions of competition can ator will not have rebalanced tariffs as only be made taking into account a number required by Article 4c of Directive 90/388 of factors, and in particular the fact that

87. It is pertinent to note that, in practical terms, tariff rebalancing should take the — on 16 April 1999, the Spanish auth- form of an increase in the initial connection orities again lowered provincial, inter- charge, the monthly rental and charges for provincial and international call local calls and of a reduction in the charges charges, and that for regional and international calls.

— Royal Decree Law 16/1999 imple- 88. Until the price cap system came into mented three successive increases of force in 2001, the Spanish authorities ESP 100 in the monthly rental in themselves carried out the various increases August 2000, March 2001 and August and reductions in the charges for the 2001.

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89. It follows from the foregoing that, until used its freedom to set tariffs in 2002 and implementation of the price cap mech- 2003. The Government stated that 'Tele- anism, Telefonica had no margin of dis- fonica used the full margin of discretion cretion in setting its charges. It is legitimate afforded it [by the price cap scheme] by to find, therefore, that the absence of any increasing the rental charges for business tariff rebalancing for 1999 and 2000 is and residential lines on 1 January 2002 to exclusively attributable to the Spanish the maximum limit established for the authorities. whole year'.

95. I therefore suggest that the Court should grant the application and

(1) Declare that, by failing to adopt all the measures necessary to enable the traditional telecommunications operator, Telefonica de España SA, to rebalance its tariffs in accordance with Article 4c of Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for tele- communications services, as amended by Commission Directive 96/19/EC of 13 March 1996, the Kingdom of Spain has failed to fulfil its obligations under those directives;

(2) Order the Kingdom of Spain to pay the costs.

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