The EU Court of Justice (ECJ) ruled on September 15, 2016 that national courts have the power to make final decisions on fixed and mobile termination rates, following the referral of an appeal by the Dutch Court of Trade and Industry (CBb). The decision effectively authorizes national courts to depart from the European Commission's (EC's) recommendation to adopt a bottom-up long-run incremental cost (BU-LRIC) model on occasions where it deems it suitable. The ruling will have consequences for several other EU member states that have failed to comply with the recommendation so far, which include Germany, Finland, and Ireland.
The ECJ's ruling will finally remove uncertainty surrounding Dutch termination rates
In 2011, the Authority for Consumers and Markets (ACM), the Dutch regulator, set termination rates in line with the EC's recommendation to use pure-BU-LRIC methodology, which only reimburses the incremental cost of providing the service. However, this was subsequently annulled by the CBb, which stated that a BU-LRIC Plus model would be more suitable because it takes into account a broader set of costs. In 2013, the ACM issued a new notice for termination rates, which were once again based on the pure-BU-LRIC model. According to the ACM, this model would ensure there would be no risk of excessively high tariffs and margin squeeze, and would act to maintain sufficient competition.
The rates were challenged by operators for a second time, because they argued that the rates do not effectively reflect their costs. Again, the CBb suspended the ACM's decision based on the view that conditions in the national market remained unchanged and so there was no reason to adjust the methodology to take account of the recommendation. It issued an interim termination rate based on the BU-LRIC Plus model, which was lower than the previous price cap, but 180% higher than the one set out by the ACM.
The CBb also referred the case to the ECJ, which ruled on September 15, 2016 that national courts such as the CBb can have final say on all rates. This decision should finally remove the uncertainty faced by operators in the Dutch market surrounding the methodology used for calculating rates. The news came a day after the EC announced a new Electronic Communications Code, which amends the existing telecoms directives. Under the new plans, the frequency of reviews by regulators of the termination rate cost methodology and price cap would be increased from three to five years. This will account for the limited changes that occur within these markets. Additionally, price caps would not be allowed to exceed €0.0123 ($0.0138) per minute.
Following the ECJ's ruling, the EU explained that its recommendation to adopt a BU-LRIC methodology was not legally binding, so the telecoms regulatory framework can be interpreted to leave the final decision up to national courts. After hearing a dispute concerning the legality of a tariff obligation for fixed and mobile call termination services imposed by a national regulatory authority (NRA), national courts may on a case-by-case basis depart from the EC's recommendation to adopt a pure-BU-LRIC model. The ruling states that national courts should assess the proportionality of the obligation set out by the NRA and take into account that the obligation has the effect of promoting the interests of end users on a retail market that has not been earmarked for regulation. However, it enforced that a national court cannot require an NRA to demonstrate that the obligation meets the objectives of the telecoms regulatory framework.
The Netherlands is not the only country to deviate from the EU recommendation in the past. The ruling will have consequences for other countries, such as Germany, Finland, and Ireland, which have faced EC investigations after failing to comply with the recommendation. Several of the investigations have been on hold until the Dutch case was resolved. In Germany, for example, the regulator has rarely followed EC recommendations on price controls. The EC requested BNetzA to recalculate its draft fixed termination rates in July 2014. However, the regulator ignored the EC's request and decided to adopt rates that were 200% higher than other EU member states. Meanwhile, the Finnish regulator has been employing a fully allocated cost model, arguing that a LRIC model conflicts with national rules. In 2013, Vodafone Ireland won an appeal in the High Court against new termination rates on the grounds that they were not a fair reflection of the costs of providing termination services. The ECJ’s ruling will enable market analysis to be completed, which takes greater account of national context. It will, however, make it difficult for rates to be harmonized across the EU.
Interconnect Benchmarks: 2Q16, TE0007-001042 (June 2016)
Netherlands (Country Regulation Overview), TE0007-000914 (June 2015)
"The EC plans to overhaul regulatory framework with a new Electronic Communications Code," TE0007-001062 (September 2016)
"Finnish mobile termination rates mark the start of a new conflict between regulators," TE0007-000934 (August 2015)
"The EC opens an investigation into German fixed termination rates as BNetzA continues to flout the rules," TE0007-000851 (November 2014)
Sarah McBride, Analyst, Regulation