B. Factual and Legal Background

By an amendment of 18 February 2007, Germany introduced into its Telecommunications Act (Telekommunikationsgesetz, hereinafter: ‘TKG’)Footnote ³ paragraph 9a which is concerned with regulation of so called new markets.Footnote ⁴ From that latter provision it may be inferred that new markets (as defined in paragraph 3(12b) of TKG)Footnote ⁵ are not, as a rule, subject to ex ante regulation at all, unless some exceptional circumstances occur and Bundesnetzagentur in the exercise of its discretion decides to extend regulation to such markets. The adherents of this legislative solution in Germany claimed that since EU Directives on electronic communications do not contain any specific provisions concerning new markets, and since the guidelines relating to traditional markets are not appropriate to new markets (due to the information deficit and dynamics of the new markets), it is highly unclear whether new markets can be regulated by NRAs at all. Thus, the German legislator was forced to make it clear, under what circumstances, if any, the new markets could (but not necessarily must) be subject to ex ante regulation. Currently paragraph 9a of TKG enables regulation of new markets in accordance with the EU regulatory framework in electronic communications. Seen from such a perspective, the provision in question is fully compliant with the EU Directives.Footnote ⁶

In support of its action, the Commission alleged that Germany, in violation of articles 8(1) and (2), 15 and 16 of the Framework Directive, article 8(4) of the Access Directive and article 17(2) of the Universal Service Directive, limited the discretion of the NRAs by: 1) defining the concept of ‘new markets’ in the new provisions of TKG, 2) laying down in them the principle of non-regulation of those markets, 3) imposing more restrictive conditions in them than those provided for by the common regulatory framework when, exceptionally, those markets may be subject to regulation, and 4) giving priority to a specific regulatory objective in the analysis of those markets. Since Germany did not comply with the Commission's opinion in that regard, the latter brought an action before the Court of Justice.

C. Judgment of the CourtFootnote ⁷

In its judgment, the Court reminded that in carrying out their regulatory functions, in particular when adopting ex ante regulatory obligations on the basis of the EU electronic communications Directives, the NRAs have a broad discretion in order to be able to determine the need to regulate a market according to each situation on a case-by-case basis.Footnote ⁸ And that is the NRAs, and not the national legislature, that are charged with the task of determining the need for regulation of electronic communications markets.Footnote ⁹ The above-mentioned broad scope of discretionary powers of the NRAs in regulating markets cannot be limited by the national legislature in any of the following areas. First, the national legislator cannot exempt new markets (or any other markets) from regulation. True, there are some provisions within the EU regulatory framework in electronic communications which propose that, as regards new markets, the NRAs should proceed cautiously and cannot impose inappropriate obligations there.Footnote ¹⁰ But the fact remains that those provisions do not lay down any general principle of non-regulation with respect to those markets.Footnote ¹¹ Consequently, paragraph 9a(1) of TKG, by establishing the principle of non-regulation of new markets, is incompatible with article 16 of the Framework Directive.Footnote ¹²

Second, the national legislature cannot limit the NRAs' discretion in balancing the regulatory objectives referred to in article 8 of the Framework Directive, because it is for the NRAs, and not the national legislatures, to balance those objectives when defining and analysing a relevant market which may be susceptible to regulation.Footnote ¹³ Consequently, a national provision such as paragraph 9a(2) of TKG, which gives priority to only one of the objectives recognized by the Framework Directive during the analysis by the NRA of the need to regulate a new market, gives a weighting to those objectives, even though such a weighting exercise is (and should be) a matter for the NRA when carrying out the regulatory tasks assigned to it.Footnote ¹⁴ It thus follows that paragraph 9a(2) of TKG, which gives priority to one particular regulatory objective, limits the NRA's discretion in a manner incompatible with the EU electronic communications Directives.Footnote ¹⁵

Third, under article 16 of the Framework Directive, the NRAs are entitled to introduce ex ante regulation if it is established that the relevant market is not effectively competitive. The national legislature cannot impose conditions of introduction of ex ante regulation on NRAs that are more restrictive than those laid down by the Framework Directive in that regard. Accordingly, paragraph 9a(2) of TKG, by imposing conditions which are more restrictive than those laid down by the Framework Directive (i.e. a risk that the development of sustainable competition in the given new market will be hindered in the long term), infringes article 16 of the Framework Directive and limits the NRA's discretion.Footnote ¹⁶

On the other hand, the very definition of ‘new market’ in the national law (such as that included in paragraph 3(12b) of TKG), which refers to ‘a market for services and goods’, does not constitute a definition of a relevant market within the meaning of article 15(3) of the Framework Directive which might be the subject of a competition analysis under article 16 of that Directive. Such a definition cannot be regarded as limiting the power to define the market, which is the responsibility of the NRA under article 15(3) of the Framework Directive.Footnote ¹⁷

D. Promoting Efficient Investment and Innovation in New Markets under the EU Regulatory Framework for Electronic Communications

The EU electronic communications regulatory framework, although referring occasionally to the notion of a ‘new market’ (and/or ‘emerging market’),Footnote ¹⁸ does not contain any express legal definition of that notion. Nevertheless, from the existing provisions it can be inferred that a ‘new market’ is, as a rule, characterized by exactly the same general (generic) features as every single relevant market that is defined by the Commission or by the NRAs within the electronic communications sector, and the defining of which must correspond to the principles underlying the defining of the relevant markets in the EU competition law. At the same time, while not losing the above-mentioned characteristics, the new market also has some additional features. Namely, products or services available in such a market must not only be not interchangeable or not substitutable as regards other existing products or services (as it is the case in every typical product market), but must also be developed and improved (on the ground of past investments and innovations) in such a manner that they are significantly different from the currently available services or products (in particular in terms of their effectiveness, their range, their availability for a large number of users, their price or their quality from both demand and supply-side perspectives), and do not simply replace those latter products and services. The new products and services are incomparably better developed and more advanced, they have been made using the recent technical developments and innovative technologies, and are built up as a result of the process of foregoing (usually very costly) investments.

The best examples of new markets are those based on providing Next Generation Networks (NGNs). NGNs are products which currently by no means replace the existing traditional networks, but which, none the less, significantly differ from the latter. The former networks have incomparably better functionality, quality and are more efficient. NGNs are based on advanced and innovative technologies, including optical fiber and Internet technologies (the so called all-IP architecture).Footnote ¹⁹

From Commission v Germany it follows that under the national law the adjectives: ‘new’ or ‘emerging’ may only constitute a more specific qualification of markets that have been defined beforehand in accordance with the principles of the competition law. Thus, the national legislator's establishment of the criteria of classification of the relevant markets in the electronic communications sector as the ‘new’ or ‘emerging’ ones does not infringe the existing EU Directives, provided the NRAs still retain their full discretionary powers in the field of defining particular markets in the sector concerned in accordance with the principles of the competition law.Footnote ²⁰

The characteristics of new markets in the electronic communications sector presented above imply that investments, especially in modern and innovative technologies, are crucial to the emergence of such markets. However, investments in the field of electronic communications networks and services, in particular those capable of resulting in the creation of new markets there, are inseparably linked with huge expenses that must be incurred by undertakings wishing to play a leading role in those markets. Every undertaking providing electronic communications networks and/or services, and considering its future investments in the network (including NGN), must take into account not only the enormously high (and probably sunk) costs that have to be incurred in that respect and/or the future (uncertain) demand on the part of customers, but also the fact that its electronic communications infrastructure will be subject to a regulated access regime, including the regulation of access tariffs. When the investment proves to be profitable, then the NRA will set access charges that will facilitate downstream entry and competition, lower prices to customers, and eliminate monopoly profits of the given investor. But when the investment turns out to be unprofitable, then all the losses will have to be borne by the investor itself. And, taking the above into account, it is not surprising that investments in the new electronic communications infrastructure are very often held up by the investors, even if they are socially desirable. Every investor is aware of the fact that its prospective profits will be truncated ex post (i.e. after it makes its investment) by the NRA, and when the investor thinks that these truncated profits will not—from its subjective point of view—sufficiently reward its ex ante risk and costs (i.e. the risk and costs that the investor was facing before the investment was made), then the investment will be held up (the truncation problem). The access (tariff) regulation, thus, proves to be an ex post decision that affects the ex ante expected return on investment, and might make a socially desirable investment privately unprofitable.Footnote ²¹ That way, the investor's incentives to invest are largely reduced.

In order to overcome the truncation problem some regulatory instruments have been elaborated, all aimed at incentivizing the socially desirable investments. One of them is an access (regulatory) holiday, understood as a period of time during which an investor is exempt from the obligation to provide access to the given infrastructure to third parties and is also released from the regulatory pricing intervention in that respect (having thus the possibility to exploit its investments in a way it considers to be the most appropriate for itself). However, after Commission v Germany it is quite obvious that the general regulatory (access) holidays for new markets, such that would consist in exempting the undertaking providing electronic communications networks and services there from ex ante regulatory measures (for example until the given market loses its status as the new or emerging one), are not permitted under EU Directives. This, in turn, leads to the question what legal instruments could help overcome the truncation problem and promote the desired investments in new markets in the electronic communications sector, while at the same time being in full compliance with the EU regulatory framework for the sector concerned?

The EU legislator acknowledges that problem and therefore states in recital 27 in the preamble to the Framework Directive that newly emerging markets ‘should not be subjected to inappropriate obligations’. It means that newly emerging markets should be regulatedFootnote ²² (in order to enhance the competition process and the consumer welfare), but only by imposition of obligations that are ‘appropriate’, i.e. that duly outweigh and balance the conflicting values: enhancement the competition in downstream markets and promotion the consumer welfare there (on one hand) and the promotion of investments in new markets (on the other hand). This means that the scope and the content of regulatory measures that are to be imposed on the dominant undertaking active in a new market must be the result of thorough balancing the need for pursuing the static (allocative) and dynamic components of competition,Footnote ²³ under the stipulation that this balancing of conflicting values must be carried out by the NRA on a case-by-case basis. Moreover, when the NRAs are considering the imposition of obligations upon an operator active in a new market to meet reasonable requests for access to, and use of, specific network elements and associated facilities, they shall take account in particular of the following: the enhancement of sustainable competition at the retail level and the end-users' interests (article 12(1) of the Access Directive); the initial investment by the facility owner, taking account of the risks involved in making the investment (article 12(2)(c) of the Access Directive), and the need to safeguard competition in the long term, with particular attention to economically efficient infrastructure-based competition (article 12(2)(d) of the Access Directive).

The specificity of new markets and the need for promoting efficient investments must also be taken into account when NRAs conduct an examination whether the given market meets the ‘three-criteria’ test set out in the recommendation of 2007, the fulfilling of which allows to classify the given market as susceptible to ex ante regulation.Footnote ²⁴ In new markets it very often happens that the barriers to entry are merely transitory in nature, or the given market is tending towards effective competition (e.g. there is an excess capacity in a market, allowing rival firms to expand output very rapidly in response to any price increase), which, in turn, makes the classification of a given new market as susceptible to ex ante regulation impossible.

Obviously, the NRAs' obligation to take into account the dynamic efficiencies in regulating the electronic communications markets, especially in the case of new markets, does not mean that the static components of competition (associated with consumer welfare in downstream markets) may be completely omitted. On the contrary: as the Court reminds in Commission v Germany, the weighing of those conflicting values is a matter for the NRAs when carrying out the regulatory tasks assigned to them. After all, article 8 of the Framework Directive does not establish any hierarchy of objectives mentioned therein and does not give priority to any of those objectives.Footnote ²⁵

E. The Discretionary Powers of NRAs in Regulating Electronic Communications Markets

In Commission v Germany the Court very strongly emphasizes that under the EU regulatory framework for electronic communications the NRAs must be bestowed with wide scope of discretionary powers (wide margin of discretion), in particular with regard to the assessment whether the given market should be susceptible to ex ante regulation (as fulfilling the ‘three-criteria’ test); whether this market is effectively competitive (which, in turn, should be the only condition determining the imposition of regulatory obligations there); and how to balance the regulatory objectives referred to in article 8 of the Framework Directive when carrying out the regulatory tasks assigned to NRAs (especially how to outweigh the need for enhancing the competitive process and consumer welfare in downstream markets with the necessity of promoting efficient investment and innovation). But it has to be added at once that the discretionary powers of NRAs in regulating electronic communications markets are not confined to the fields (or competences) outlined above only, but go beyond what was pointed out by the Court in the judgment in question. The discretionary powers of NRAs should also be guaranteed as regards such issues as, inter alia: the ability to choose the appropriate regulatory obligations in a given market situation,Footnote ²⁶ both from among obligations expressly provided for in the EU Directives (i.e. in Access Directive and Universal Service Directive)Footnote ²⁷ and from among obligations that are not mentioned explicite in the EU regulatory framework;Footnote ²⁸ including, the ability to shape the content of particular obligations, especially as far as their scope, intensity and duration are concerned; the ability to amend (modify) the regulatory measures or maintaining them where they already exist;Footnote ²⁹ the ability to define relevant markets appropriate to national circumstances, in particular relevant geographic markets within their territory, in accordance with the principles of competition law, etc.Footnote ³⁰

The competences and activities of NRAs outlined above are termed here as ‘discretionary’. The Court in Commission v Germany also refers to the ‘discretion’ of NRAs' actions.Footnote ³¹ However, the term ‘discretion’ is very general and vague, and raises the question as to what precisely this ‘discretion’ consists of. From the purely juridical point of view the term ‘discretion’ includes in that regard the following legal techniques that the NRAs are authorized to use while applying the relevant provisions of the EU regulatory framework for electronic communications: 1) administrative discretion in a strict sense; 2) interpretation of general clauses; 3) margin of appreciation with regard to the subsumption.Footnote ³²

Administrative discretion in a strict sense consists in a choice by an administrative body of a single decision from among many different decisions (i.e. from among many decisions having different content) that might potentially be taken. When the NRA is authorized by law to make a discretionary decision within the discussed meaning, then two or more decisions that are different as to their content are equally permitted and are legally placed on the same footing. And it is exactly the NRA that must choose the one decision that will be taken from among the many options available. The best example is the choice of regulatory measures that are to be imposed on a given undertaking.Footnote ³³

The interpretation of general clauses entails the determination by administrative authorities of the specific content of expressions (phrases) that are formulated in a rather general and vague way. Thus, this administrative action implies the concretization of notions that are rather unclear as to their exact content and require a more specific definition. The process of discovering those more specific contents that are included within the notion of ‘competition’ within the meaning of article 8(2) of the Framework Directive may serve as an example of the interpretation of general clauses. In turn, the margin of appreciation with regard to subsumption means an assessment by the NRA whether the specific facts and circumstances established (proven) in a given factual situation may be subsumed under the given legal notion in order to apply the legal norm that uses such notion. It means, thus, that the NRA evaluates whether some factual circumstances, as being able to be subsumed under the specific legal norm, may trigger the application of the above-mentioned legal norm by that body. An instructive example in that regard is the NRA's evaluation whether the competitive situation (structure) in a given market fulfils the ‘three-criteria’ test, which in turn makes it necessary to classify that market as being susceptible to ex ante regulation.

While applying the legal techniques outlined above, the NRA (as well as any other administrative body) should be guided by some legal principles. Those principles form the specific standards that help the NRA make its choice of the relevant decision (from among the many options available), and are useful in interpreting the general clauses. In this context, such principles include in particular the policy objectives referred to in article 8 of the Framework Directive. Since individual policy objectives indicated there sometimes call for the realization of conflicting values, and since there is no settled hierarchy between them,Footnote ³⁴ the NRA must outweigh those objectives (principles) on a case-by-case basis, balancing them appropriately in every factual situation. In other words, there is no abstract hierarchy between the principles in question, but in every single factual situation the NRA must—while making the choice of the relevant regulatory decision from among the many options potentially available, or while interpreting the given general clause—be guided by those principles, and may give a relative (as opposed to an abstract) priority to one of them, under the stipulation that in other factual circumstances the relative priority may be given to a quite different principle. Obviously, this relative priority must be the result of a process of thorough balancing of the above-mentioned principles by the NRA, while taking into account the facts of the given case.Footnote ³⁵

It has to be emphasized very strongly that the discretionary powers of NRAs not only cannot be limited by the national legislature, but they also cannot be limited by the NRAs themselves. In general, the NRAs have the right to exercise the discretionary powers conferred upon them by the EU regulatory framework for electronic communications, but those powers must be exercised by the said bodies in full conformity with EU Directives, without the possibility of exceeding those powers or acting against the very mandate of NRAs. In other words, the discretionary powers of NRAs have their definite limits set out in the EU law that the authorities concerned cannot ignore.

F. The Role of National Legislator in Regulating Electronic Communications Markets

In Commision v Germany the Court made it clear that the national legislature cannot exempt new markets (or any other markets) from ex ante regulation, cannot impose conditions for analysing the markets or for imposing regulatory obligations that are more restrictive than those laid down by the Framework Directive, and cannot give priority to one particular regulatory objective referred to in article 8 of the Framework Directive. But taking into account the whole of the Court's reasoning and the content of the EU regulatory framework for electronic communications one might easily come to the conclusion that the scope of NRA's immunity from legislative actions of the national legislature is in fact much broader. Namely, the national legislator certainly cannot limit the NRA's discretion with regard to exercising its administrative discretion in a strict sense, which consists in the NRA's choice of the relevant decisions to be taken from among many other available options. The national legislator is also not allowed to limit the NRA's competences in the field of interpreting the general clauses included in EU Directives, in particular by modifying the content of those clauses as compared with the said Directives, or by mandating the interpretation clearly incompatible with the very wording of EU Directives. The national legislator cannot deny the NRA the possibility of subsuming the given factual situation under the notions included within the legal norms in order to decide whether these norms could in fact be applied. Finally, the national legislator cannot release the NRA from the obligation to consider the regulatory objectives referred to in article 8 of the Framework Directive while exercising its discretionary powers.

The fact that the national legislator cannot exempt new markets from ex ante regulation, or give an absolute priority to any of the policy objectives referred to in article 8 of the Framework Directive is obvious insofar as such actions cannot be undertaken by the NRAs either because they are clearly incompatible with the content and aims of the EU regulatory framework for electronic communications. But what is more, in matters expressly attributed by the Directives to NRAs, the national legislature is not permitted to enact such rules that are quite compliant with the content and aims of the EU regulatory framework, and which, if they were issued by the NRA, would be fully legally admissible. For example, the national legislator cannot mandate any specific regulatory obligations that are to be imposed on the given dominant network operator, even if such obligations are fully appropriate to the market situation in question and are in accordance with the policy objectives referred to in article 8 of the Framework Directive. The national legislator cannot issue such rules exactly because their enactment (usually in the form of individual regulatory decisions) is reserved by the Union legislator for NRAs, and not for the national legislator. This division of regulatory competences established at the Union level cannot be reversed at the national level. Taking the above into account it might be said that the EU secondary legislation in the field of electronic communications protects administrative authorities from legislative determination. The parliamentary legislator is perceived here as a potential manipulator of competition that may wish to pursue a protectionist policy.Footnote ³⁶

But such a stance of the EU legislator is in clear contradiction with the fundamental constitutional principles of many Member States which—being inspired by the concept of the state of law—accept the so-called ‘reservation of a statute’ (Gesetzesvorbehalt), having important democratic implications. This means that the decision-making in important political matters should be assigned to the parliamentary legislator who must steer the administration by specific and sufficiently dense rules. The main point is to prevent the situation in which the decisions determining the freedom of citizens could be taken unilaterally and in the exercise of a discretion by administrative authorities, without the possibility of strict judicial control.Footnote ³⁷ Therefore, the protection of administrative authorities against legislative steering by the general and abstract programming is at odds with the above-mentioned constitutional principles.Footnote ³⁸

The modern sector-specific regulation aims at the realization of many conflicting values. The establishment of competition, the promotion of investments and innovation, the interoperability of networks, and also the consumer welfare must be politically balanced and set in some reasonable relation to each other. Undoubtedly, the principal political decisions are at stake here, such that cannot be substituted by economic model building since they constitute the essential political and regulatory problems. When the statutory (general and abstract) norms are lacking, the NRA must compensate this lack of statutory pre-structuring by its own assessments. In contrast, the resolution of essential economic and socio-political conflicts is traditionally included exactly among the tasks of the parliamentary legislator, because the administrative procedure alone is not able to accomplish this mission, both due to the democratic and functional reasons.Footnote ³⁹ Thus, the ‘reservation of a statute’ in the field of resolution of conflicts concerning competition and infrastructure should be the binding (democratic) standard, and the decisions on those issues cannot be shifted to NRAs completely.Footnote ⁴⁰

The European legislator and the Court are tending to shield the NRAs against national legislators, admittedly in the interest of greater objectification of NRAs' activities. But it leads in fact to the replacement of parliament—which is seen from that perspective as not capable of resolving such complex problems anymore—by the network-bound administrative expertocracy. And it is exactly the administration that currently takes in the foreground the most important political and regulatory decisions with regard to market players, while the legislator fulfils a rather preparatory function in that regard: it must grant the administration the discretionary powers (that should be as far reaching as possible), while at the same time shielding the administration against any intervention. That way the loss of distance with regard to the issues being resolved occurs, because the regulatory and technical perfectionism replaces the legislative pragmatism that is inherent in the parliament's enactment of general and abstract rules that are distanced with regard to the executive level. This loss of distance is very often linked with the loss of freedom. Finally, this technical and regulatory de-politicization makes those politically essential questions invisible and, as a result, the political public is deprived of the opportunity to deal with them. Rather than a public and political debate, there is only the right of access to documents that is leftFootnote ⁴¹ (and there is also the consultation procedureFootnote ⁴² which is, however, not open to the general public and is limited to interested parties only).

The tendencies outlined above may also be identified in other network-bound sectors, i.e. in energy, railway, or postal sectors. Especially instructive in that regard is the energy sector where the recent legislative changes at the EU level have led to a further strengthening of the role and position of NRAs vis-à-vis national legislators and other national authorities.Footnote ⁴³ And what seems to be the most striking is the fact that while the decision-making process of NRAs may be strongly influenced by the NRAs from other Member States, or by some supranational administrative institutions (in particular by the European Commission and European agencies),Footnote ⁴⁴ that form together the networks of regulatory authorities, this decision-making process cannot be influenced by national legislators. Thus, the directly elected and democratically legitimised bodies that are best placed to transmit the will of the sovereign into the statutory rules cannot steer the activities of NRAs in a way desired from the point of view of national community's welfare, while the steering of NRAs' activities may be lawfully effectuated by some administrative institutions, either European or from other Member States. This is a really regrettable example of promoting pure expertocracy, and of weakening the role of national representatives. That way, national parliaments turn out to be the ‘victims’ of the process of institutional reconstruction that has been effected in recent years in network-bound sectors at the EU level. This process may in fact lead—at least to some extent—to a kind of ‘deparliamentarisation’ of the sectors concerned.Footnote ⁴⁵

One may reasonably ask why the democratic implications resulting from such shielding of NRAs from parliamentary influence at the national level are not perceived by the EU legislator as a real problem?Footnote ⁴⁶ It is submitted that taking into account the provisions on democratic principles introduced by the Treaty of Lisbon to the TEU (articles 9-12 thereof), both the EU legislator and the Court of Justice should now be more sensitive to the need for democratic participation of national legislatures in resolving highly debated regulatory issues (e.g. the promotion of investment in new markets), especially when the necessity of balancing the conflicting essential values is at stake. The need to enhance the democratic legitimisation of the sector-specific regulation and the necessity to better protect fundamental rights of regulated parties should prompt us to think about the future strengthening of the role of national parliaments in regulating network-bound sectors. It is submitted that there are two principal ways of achieving this objective. First, de lege lata, national parliaments may already take up some more active steps in the field of supervising, monitoring, controlling and supporting NRAs, but on the understanding that such parliamentary activity does not lead to the limitation of NRAs' discretion or to the taking over of the tasks that are conferred by EU Directives on NRAs. Second, de lege ferenda, the EU regulatory framework for network-bound sectors should be amended in such a way so as to enable national parliaments to enact statutory rules that in some strictly defined areas would steer the NRAs' activities, helping them to make the optimal regulatory choices.