November 28, 2022
This case concerned proceedings in Ireland between Eircom Ltd, which was designated in 2003 as the sole operator for the provision of universal service in Ireland, and the Commission for Communications Regulation (Ireland) (ComReg), in relation to ComReg’s refusal to grant Eircom financing to cover the allegedly unfair burden on Eircom of the net cost borne because of its universal service obligations.
Hearing an appeal from Eircom in relation to ComReg’s decision, the High Court in Ireland asked the CJEU whether Articles 12 and 13 of the Universal Service Directive (2002/22/EC) must be interpreted as requiring the competent National Regulatory Authority (NRA), in order to determine whether the net cost of universal service obligations represents an unfair burden on an operator entrusted with such obligations, to examine the characteristics particular to that operator, taking account of its situation relative to that of its competitors in the relevant market.
ComReg had based its decision not to grant funding on an “Unfair Burden Report” prepared at its request by a firm of consultants, according to which the benefits for Eircom resulting from its universal service obligations did not outweigh the net cost of those obligations. Eircom’s profitability and its ability to earn a fair rate of return on its capital were not significantly affected by the net costs of its universal service obligations. In other words, the burden was not excessive in view of Eircom’s ability to bear it.
However, the consultants had not assessed whether the net cost of the obligations had had an impact on Eircom’s ability to compete on equal terms with its competitors in the future.
The CJEU noted that ensuring universal service may involve providing some services to end users at different prices to usual market prices. Therefore, the Directive states that Member States should, where necessary, establish mechanisms for financing the net cost of the obligations where they can only be provided at a loss or at a net cost that falls outside usual commercial standards.
Therefore, NRAs are obliged under Article 12(1) to calculate the net costs of the obligations where they represent an unfair burden on the provider. However, although the Directive sets out rules for calculating these costs, the Directive does not prescribe the conditions in which NRAs must consider unfair burden.
Although the concept of “unfair burden” is not defined in the Directive, in Case C-389/08 Base and Others EU:C:2010:584, the CJEU found that “unfair burden” is a burden that is excessive in view of the undertaking’s ability to bear it, account being taken of all the undertaking’s own characteristics, in particular the quality of its equipment, its economic and financial situation and its market share.
In the CJEU’s view, any consideration of the provider’s market share implies that the process of determining whether the burden may be unjustified has a comparative component that the NRA cannot disregard. No useful conclusions can be drawn from the mere finding of facts relating to market share, considered in isolation, meaning that the NRA must carry out a comparison with the market shares of the provider’s competitors. The NRA should consider the number of competitors in the market, any links between them and the different sectors of the market in which the competitors operate.
Therefore, the CJEU held that the NRA must take account of the situation of the universal service provider relative to that of its competitors in the relevant market when assessing unfair burden.
In fact, the CJEU said, assessing the competitive situation is an integral part of the application of Articles 12 and 13 of the Directive, as the objective of the Directive is to ensure availability throughout the EU of good-quality, publicly available services through effective competition and choice and, under Article 3(2), Member States must minimise market distortions. In addition, Recital 4 of the Directive states that compensating an undertaking designated to provide services to end users at a different price to the usual market price need not result in any distortion of competition provided that the undertaking is compensated for the net cost involved and the burden is recovered in a competitively neutral way.
The CJEU found that the mere finding that a universal service provider remains profitable despite the burden of providing universal service does not necessarily mean that there are no repercussions in terms of the provider’s ability to compete with other operators in an evolving market. It is certainly possible that the burden prevents, or makes more difficult/complicated, the financing of investments in new technologies or related markets, investments which its competitors might be able to make, and which would likely give them significant competitive advantages. Further, any deterioration in the competitive position of a universal service provider resulting from the unfair burden on it would adversely affect competition which would undermine the main objective of the Directive.
Therefore, when calculating the net cost borne by a universal service provider, the costs that any designated undertaking would have chosen to avoid had there been no universal service obligation must be considered. Those conclusions must be fed in to the NRA’s consideration of the provider’s situation relative to that of its competitors. The NRA must also take account of the scope of the request for compensation and the evidence relied on by the provider. (Case C/494/21 Eircom Ltd v Commission for Communications Regulation EU:C:2022:867 (10 November 2022) — to read the judgment in full, click here).