According to the European Commission’s latest Report on European Electronic Communications Regulation and Markets, which was released on February 20, telecom operators in Europe are investing in new technologies to cut costs and seize new opportunities opened up by the convergence of communication networks, media content and devices. The Commission confirmed that growing competition, especially in telecom retail markets, is bringing increased consumer benefits and the positive outlook for innovation and investment within Member States and across Europe.

This latest report of the EU’s telecom markets takes a snapshot of the situation in the electronic communications sector prior to a scheduled review of the EU telecoms framework established in 2002. The report describes the latest market developments mainly in broadband, cellular and fixed-line services, and the overall regulatory environment. Viviane Reding, European Commissioner for Information Society and Media, stated: “My objectives in this review process are strengthening investment through infrastructure-based competition; promoting innovation through openness of the rules for new technologies; and completing the single market by making the application of EU rules more consistent across the 25 Member States and by encouraging cross-border communication services.”

The report explains that competition is already delivering substantial consumer benefits, especially in the European broadband and mobile services sectors. Broadband, in particulars, has seen significant growth, with a rise of almost 20 million subscriptions to 53 million. Mobile phone penetration has now reached almost 93%, and exceeded 100% in eight Member States. The report confirms that some Member States have now introduced virtually all the national laws and regulatory practices required to implement EU telecom rules, and the remainder have made substantial progress.

In stark contrast, the Commission announced on February 16, that it would pursue investigations under EC Treaty antitrust rules into specific cases of closing off gas and electricity markets by means of long-term downstream contracts and restricting access to gas and electricity transport infrastructure and storage capacity. The Commission will also consider competition and regulatory remedies to a number of other serious “malfunctions” in the energy sector that were confirmed in a report on the findings of an energy sector inquiry launched in June 2005. European Competition Commissioner, Neelie Kroes, said: “We will act decisively to remedy the serious malfunctions identified on the energy market in order to uphold the interests of European consumers and industry and to help Europe become more competitive.”

The report alleges six main areas of electricity and gas market failure: (i) Wholesale markets generally maintain the high level of concentration of the pre-liberalization period, creating scope for incumbent European operators to raise prices; (ii) consumers are denied choice due to the difficulties for new suppliers to enter the markets; (iii) insufficient separation of infrastructure and supply functions prevents new entrants from reaching the end consumer; (iv) there is no significant cross-border competition because new entrants in gas are unable to secure transit capacity on key routes and integration in electricity is hampered by insufficient inter-connector capacity and long-term capacity reservations; (v) new entrants cannot get the information they need to compete effectively, and this lack of transparency benefits incumbents and undermines new entrants; and (vi) prices are often not determined on the basis of effective competition, and many electricity users distrust the way prices are set.

Merger activity is identified as a major problem, and the Commission emphasizes the importance of effective scrutiny of future energy deals under the EU’s merger regulation. While each merger transaction is assessed according to its own terms, the current market investigation identifies the most relevant criteria, and the most efficient remedies in a given market situation. The Commission also suggests that the rules of the EU Merger Regulation may have to be reviewed, and amended, in order to avoid inconsistencies in the outcomes of merger cases notified to individual Member States. This is a direct reference to the possible creation of national energy champions in individual countries, such as would be created by the potential merger of Spain’s leading electricity and gas companies, Endesa and Gas Natural. The proposed deal lacked sufficient European dimension to be notified to the European Commission, and was approved by the Spanish Government which overruled its own national antitrust agency’s recommendation to prohibit the merger.

Neelie Kroes, and her antitrust team at the Commission, is using its wide array of legal powers to support the European Commission’s wider economic reform agenda. While many structural reforms have to be enforced at the national level, the EU antitrust regime provides some powerful tools to combat inefficient and anticompetitive behavior in the EU which faces slow growth, lasting budget deficits, high unemployment, poor productivity and aging populations. As Ms. Kroes stated late last year: “Getting Europe back on the right economic track has to be our top priority.”