European Regulatory Frameworks

Until the mid-1980s, regulation was highly national and EU institutions played almost no role in regulating network infrastructures although they already possessed a legal basis for doing so under the ECT. The reason was that the member states placed high emphasis on their national autonomy, and the Commission was restricted to formulating studies and forecasts (Matláry 1997). However, the EU gained more competencies with the extension of the liberalization rationale inherent in the ‘1992 goal’ of the SEA, especially in sectors previously exempted from competition, i.e. telecommunications, transport and electricity (Eising 2002: 92). The creation of regulatory structures at the EU-level thus reflects one of the two major goals inherent in the Treaty of Rome: the creation of a common market and the removal of internal borders (Francis 1993: 111-112).¹¹⁰

There are several reasons why the EU began to play a prominent role in infrastructure reform. First, if we assume that Europeanization is a regional instance of globalization, the EU can be regarded as a catalyser of the effects of the internationalization process. As such, Europeanization has caused an even deeper and faster process of market integration, and EU member countries should therefore experience a stronger case of globalization than other states (Verdier and Breen 2001: 233). The Single Market, whose creation was largely inspired by the upcoming industrial competition with the United States and Japan in the 1980s, fosters institutional competition between member states. Borders have been removed and governments need to offer competitive industries and attractive investment conditions. This required from these governments the breaking-up of national monopolies and the improvement of public sector efficiency.

110 The other goal was the realization of a common external tariff applicable to all imports of the community.

Second, the law of the EU and its application by the ECJ are both selectively promoting demonopolization and competition in the member states. Several cases before the ECJ demonstrate that the enforcement of competition is among the key priorities of economic integration (van Waarden and Drahos 2002: 923-927). The ECJ’s constitutional resource is the power to veto existing or proposed legislation. Other actors try to make use of this power in order to improve their bargaining position.¹¹¹ However, recently the ECJ has reconsidered its role as a power source for other actors. It argues that questions concerning the balance between public interest goals, i.e. aspects of welfare, culture, health, or free trade values are of a political nature and should therefore not be decided by the Court, but by the responsible institutions instead (Edward and Hoskins 1995: 169).

The third and presumably most important factor for the Europeanization of regulatory policy-making is the European Commission. As a relatively independent actor it is the driver behind market opening and competition. In course of economic integration, the Commission has demonstrated a clear preference for market liberalization. This is reflected by the strict application of anti-trust and competition law through DG IV in the past. Especially in sectors in which regulatory reform was highly controversial, i.e.

infrastructures, the Commission promoted open markets and thus gained the reputation of a

“powerful arbiter and watchdog of liberalization” (Jabko 2004: 211). Besides its fundamental right to propose legislation, it has the right under Article 86 (3) ECT to decide how to implement the provisions of Article 86 (2) ECT (Schmidt 1998).¹¹² The latter refers to special undertakings and asks the Commission to find a balance between the role of infrastructure companies and the competition rationale of the Treaty.¹¹³

111 The Commission, for instance, used infringement procedures in the telecommunications sector to make member countries call for EU liberalization policies.

112 Besides their active promotion of market liberalization based on Articles 81-89 ECT, neither the Commission nor the ECJ lead a crusade against public ownership: no Directive or court decision contains provisions concerning the privatization of state owned enterprises. Instead, there exists an indirect provision for ownership regulation through rules on state aids (Art. 87-89 ECT).

113 Any exception to the competition rules can be defined by the Commission and the ECJ without having to refer to the Council or the EP. Exceptions have frequently been made in relation to general-interest services.

The EP has in the past favoured policies which strengthen these general-interest services, especially as regards sectoral legislation for network industries.

While regulation through competition law has historically been a strong component of supranational intervention, sector regulation is still weakly developed at the EU-level.

The latter is largely limited to the formulation of general rules, the definition of instruments that member states can choose from, and the legal recourse against an improper implementation of EU rules by the member states. Most sector regulation still happens at the national level where decision-makers establish specific regulatory rules in the context of the EU’s legal frameworks. It is within these frameworks that member state governments undertake reregulatory action in accordance with the competition provision of the Treaty (Jabko 2004: 211). Hence, although the Commission is the key player of market integration it exerts no direct powers in sector regulation and acts mainly as a recourse authority (Genoud and Finger 2002: 14).

This becomes obvious if we look at the supranational provisions for the regulation of network infrastructures. The regulatory frameworks for the telecommunications, electricity or aviation sector are all characterized by a dominance of general competition rules. This is mainly due to the fact that competition rules are the only regulatory provisions that are clearly defined, officially legitimized and institutionally organized at the EU-level. Sector regulation, in contrast, has so far only weakly been institutionalized. Thus, in the past anti-trust and competition rules have been used as an indirect mean to achieve liberalization goals. This has caused a blurring of ex ante sector regulation and ex post competition regulation (Pelkmans 2001: 447).¹¹⁴

In the new CRF in telecommunications, for instance, competition policy is explicitly granted a regulatory role. However, the SMP concept is employed in an ex ante and not an ex post fashion by demanding the existence of dominance but not of an abuse of that dominance. In EU electricity regulation, in contrast, competition policy has been less actively promoted thus far.¹¹⁵ Aviation, finally, is the most prominent example of ‘waning’

114 Merger control, for instance, became a quasi-regulatory function affecting national regulatory frameworks and policies.

115 Nevertheless, since Directive 96/92/EC entered into force the Commission has frequently used the argument of promoting competition to set the conditions, i.e. divestiture, transmission and interconnection, under which a merger or an acquisition in the sector would be acceptable. Examples are the VEBA/VIAG or RWE/VEW mergers in Germany or the various take-overs of EdF in Italy and Spain.

sector regulation, in which the recourse on general competition policy has been especially strong. In course of liberalization, policy-makers relied on the SEA’s definition of the Single Market in combination with a block exemption based on Article 81(3) ECT. Except for slot-allocation, there does not exist a typical ex ante regulatory provision for scheduled air transportation (Pelkmans 2001: 447-448).¹¹⁶

In addition, in recent years there has been a growing emphasis of aspects of social cohesion at the EU-level. This is, for instance, expressed in the tendency to maintain universal services (Scott 1995). The legal basis for the promotion of general interest services in infrastructures is Article 86 (2) ECT which allows national governments to grant special rights and obligations to particular undertakings. And, Article 86 (3) ECT empowers the Commission with the implementation of the corresponding competition rules. The objective of universal service provision is to ensure a balance between the requirements of the Single Market and free competition on the one side and general-interest objectives on the other.¹¹⁷ This has consequences also for the general competition policy of the EU. According to the provisions of Articles 86 (2) and (3) ECT and corresponding rulings of the ECJ, fiscal advantages given to public network companies are not regarded as illegal state aid, in case they do not exceed the financial burden which results from the company’s particular public service mission (Héritier 2001b: 4-5).

Beside the three factors discussed above, transnational activity played an important role in the Europeanization of regulatory policy. Besides formal European institutions, non-state actors, i.e. groups representing business or consumer interests, have made a

116 The justification for this extreme form of ‘regulatory competition policy’ is the great vulnerability of new entrants in the airline business.

117 In its Communication of 1996, the Commission defines ‘services of general interest’ as “market and non-market services which the public authorities class as being of general interest and subject to specific public service obligations”. The ‘services of general economic interest’, according to Article 86 (3) ECT, are defined more narrowly as “market services which the member states subject to specific public service obligations, such as transport networks, energy and communications” (European Commission 1996a: 2). For the first time in the history of European integration, the Amsterdam Treaty of 1999 explicitly mentions goals of general economic interests as European values. This contrasts sharply with the provisions of the SEA of 1987 or the Maastricht Treaty of 1993 in which general interest services were considered as inhibiting economic integration.

substantial contribution to the emergence of regulatory structures at the EU-level.¹¹⁸ O’Reilly and Stone Sweet (1998: 451), for instance, are convinced that

“as transnational activity increases within a given sector governed by national authorities, those societal actors most adversely affected by state-centric control will press for European rules and governance to replace national rules and governance”.

Accordingly, European economic integration will provoke demands from those actors whose prosperity is mostly dependent upon further integration activity. In infrastructures, for instance, an industry whose economic well-being is heavily dependent on further market liberalization might lobby and push for respective initiatives. These and similar transnational demands will thus create the decision-making context in which supranational institutions operate and in which intergovernmental bargaining takes place.

Telecommunications and aviation both provide good examples for sectors in which this logic of Europeanization becomes visible.

Today, network infrastructures make up at least 5 per cent of European GDP (Coen and Doyle 2000: 21). Two of them, telecommunications and electricity, have experienced high degrees of Europeanization over the past two decades. The transformation in these two sectors is obviously more remarkable than in any other infrastructure. The case looks different for the transportation or postal sector, in which reform initiatives at the supranational level have been comparatively weaker so far (Conant 2003). The following section provides a brief overview of the reform developments at the EU-level in the two sectors under study. This overview shall not only demonstrate the emergence of regulatory competencies at the supranational level, it shall also mirror the status quo of the Community acquis at the time the eight CEECs acceded the Union.

118 According to Stone Sweet and Sandholtz (1998: 4-6) transnational activity has been a major catalyst of European integration. They argue that as transnational exchange rises, also the costs for national governments of maintaining individual national regulation rise. Member state governments should attempt to adjust their national policy positions in a way that favours the emergence of supranational governance. New sector-specific European rules are then expected to catalyze the gradual deepening of integration in adjacent sectors (cf. Deutsch 1953; Haas 1958). Hence the assumption that intergovernmental bargaining and supranational decision-making are embedded in processes are provoked and sustained by transnational activity. In the long term, supranational governance will undermine the capacity of member states to control outcomes.