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THE PRIVATIZATION AND REGULATION OFTELECOMMUNICATIONS IN SPAIN

by

Jose ¨ BAREA TEJEIRO and Olga RUIZ CAN ¬ ETEAutonomous University of Madrid

There are three aspects of the telecommunications sector which

clearly show the need for analysis of its evolution and future prospects

in Europe:

. The liberalization process undertaken by the European Union in

the mid-1980s. This ended in 1998 with the sector having been

completely opened up to competition.

. The importance of this sector in the economy as a whole and in

society (the worldwide telecommunications market was more than

ECU 700,000 million in 1997, and provides jobs for 1.5 million in

Europe), as well as its strong growth.

. The internationalization of the markets, with continuous

movement in mergers and business partnerships, and constant

and rapid technological innovations.

This analysis of the privatization process and regulation of the

telecommunications sector in Spain begins by making reference to thesituation prior to the opening up for competition, privatization and

regulation of the sector, as well as to the ¢rst steps towards

liberalization. Following that, there will be a focus on theory,

highlighting the characteristics of this essential service. In addition,

we will look at the reasons supporting the conclusion that the solution

is not to transfer public companies, which until recently operated as a

monopoly, into private hands. On the contrary, the process, in reality,

demands the introduction of competition and the creation of a

regulatory agency which would serve as a watchdog for competition.Finally, we will re£ect on the di¡erent measures which Spain has been

instituting over the past two years as part of the sector's liberalization

process. This will incorporate the European Community's regulations

regarding the complete opening up of the telecommunications sector

in December 1998.

&CIRIEC 1999. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UKand 350 Main Street, Malden, MA 02148, USA

Annals of Public and Cooperative Economics 70 :2 1999 pp.3 31^350

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332 J. BAREA TEJEIRO AND O. RUIZ CAN ¬ ETE

1 Situation prior to privatization-regulation and ¢rst steps of

liberalization (until 1996)

Before Spain's full membership in the European Community,

legislation on telecommunications was extremely scarce and disperse.

This legislation reserved the exclusive rights to essential

telecommunications services in Spain for Telefo ¨ nica S.A. (somewhere

around 32% of whose capital was government owned).This corporation

had a regulatory contract of the concession which established the

obligations and rights of Telefo ¨ nica with regard to providing these

services. There was also the post of Delegation of the Government inTelefo ¨ nica S.A., which had decision-making power in investment

policy and the company's business. This representative could veto the

decision of the Board of Directors for reasons of public order. In

addition, government could name ¢ve members of the Board of

Directors over and above those which they were entitled to because of

their stake in the company.

Following Spain's incorporation in the European Community, the

basic legislation regarding telecommunications was contained in the

Telecommunications Disposition Law (LOT), Law 31/1987, 18 December.

Nevertheless, the dynamic nature of telecommunications, the

evolution of the liberalization process and the progressive elimination

of the natural monopoly caused, over a short period of time, the 1987 law

to become outdated; it was necessary to carry out an in-depth

reformulation. Therefore, successive modi¢cations were made to the

law, special ones (such as that carried out by Law 32/1992, 3

December), as well as sectoral ones, which established a separate legal

system for certain speci¢c zones (such as Law 37/1995, 12 December, forsatellite telecommunications; or Law 42/1995, 22 December, for cable

telecommunications).

Liberalization measures were gradually put in place by way of

these modi¢cations.

. Thus, at the end of this period, the only services which are provided

under a monopoly system are those ¢nal ones related to basic

telephone service, telexes and telegrams.

. Carrier services are provided under a freely concurrent system.

. Value-added services are also provided under a system of free

competition. Among these services, mobile telephones are notable

in that, following a competitive process, a licence has been granted

for a second operator in the GSM service. The winner of this

competition was Airtel Mo ¨ vil (in partnership with BT, Airtouch

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TELECOMMUNICATIONS IN SPAIN 333

and Banco Santander), which began to provide service in October

of 1995.Telefo ¨ nica has also been granted a licence for GSM service(until the year 2010). Telefo ¨ nica is able to freely establish rates,

without doing more than reporting them to government. Thus,

there is a limited competitive system in place between Telefo ¨ nica

Mo ¨ viles and Airtel Mo ¨ vil.

This market illustrates the bene¢ts which competition can bring

to users. In the past few years, the amount of documentation

required to obtain a line has been drastically reduced, usage fees

have fallen slightly compared with the previous situation, the price

of terminals has gone from being extremely high to being

practically free, and in practice the connection charge is zero. As

a result of all this, the number of users has absolutely exploded.The

penetration rate for mobile telephones in Spain is 10.5%, with 4.3

million users in 1997, and has been one of the highest growth

markets in Europe.

. Within broadcast services, television is controlled by speci¢c

legislation. This has established a system of limited competition

among the three private operators (Tele5, Antena 3 and CanalPlus), the television stations of the autonomous regions and

Televisio ¨ n Espan ¬ ola.

. Telefo ¨ nica de Espan ¬ a, S.A. maintains a contract with the state, in

force since 1991, by which it is accorded monopoly control over a

number of services (this has become more and more restricted, as

we have just pointed out).This same contract imposes onTelefo ¨ nica

a series of obligations, such as taking into account such factors as

the general welfare, availability, quality, etc., when providing

services. Together with those obligations come certain rights,such as the ability to establish the necessary infrastructure

network, occupying public domain, establishing easements and

limitations, etc. The post of Delegation of the Government is

created, whose prerogatives include the right to veto for reasons

of public interest, as well as prerogatives in Telefo ¨ nica's

investment policy and plans. The tari¡s are approved by the

government.

. The Cable Law constitutes the ¢rst step in our legislation towards

the liberalization of infrastructures, as it allows the concessionaryof the service to install their own network, separate from the

network of those holding the carrier services. Another important

milestone in the Cable Telecommunications Law is its willingness

to grant the right to provide service in general, without granting

licences for speci¢c services. This philosophy is a result of the

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technological evolution that allows any type of service to be

provided through the infrastructures devised.

The law allows for the existence of two cable operators within

territorial boundaries it creates. One of those could be Telefo ¨ nica

de Espan ¬ a, if it is in the interest of the current dominant operator

to participate in call for tenders. Certain time restrictions have

been placed on Telefo ¨ nica to aid the birth of its competitors (16

months, extendible to 24, should it be necessary).

In addition to Telefo ¨ nica, di¡erent operators are participating in

the development of cable. These have stated their intention tosubmit tenders in all of the zones which have been established.

Among these we ¢nd two business groups: Unio ¨ n Fenosa, Endesa

and Stet who have stakes in regional cable operations companies

such as Supercable Andaluc|a, and Cableuropa (made up of

SpainCom, Banco de Santander, Multitel Cable, Ferrovial and

Banco Central Hispano) which have won several of the regional

cable bidding contests which they have participated in. In 1997

cable telecommunications service concessions were been granted

in eleven key zones important for the coverage of Spanish

territory. In 1998, above all in the last trimester, we will see the

beginning of material activity by some cable operators. They are

already in the process of installing their infrastructures within

their territorial sphere in the corresponding zones.

The pricing system is by instruction from the Government, and

since 1 January 1998, they can provide basic telephone service.

. Satellite telecommunications service have been liberalized.

. The Ministry of Public Works,Transport and Environment has the

authority to propose legislation in the telecommunications ¢eld, as

well as assure coordination and interconnection of the existing

telecommunications. It also has the authority to grant

concessions, authorization and licences for equipment and

services. This regulatory authority is administered by Directorate

General of Telecommunications (DGT), which was created in 1985.

Additionally, the 1997 law created the Telecommunications

Advisory Board as the government's advisory body for this area.

2 Theoretical foundations for the privatization^ regulation of

the telecommunications sector

The telecommunications services are purely private domain,

known as `public services' characterized up until now as marketable

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goods using the market, and as a consequence, of private provision,

whose production, however, was chie£y reserved to the public sector.The reason used to explain this, explicitly or implicitly, was the public

interest for the provision of these services.

The reasons given for considering that the aforementioned

marketable public services require state intervention, both by public

enterprise's production of these services as by regulation, have been

very numerous (natural monopolies, economies of scale, accessibility,

equal treatment, universality of the service, strategic character, etc.).

Technological changes have meant that a large part of the reasonsthat justi¢ed public intervention have lost their raison d'e ª tre and, at the

same time, the introduction of competition in these marketable public

services determines an increase of the regulatory activity of Public

Administration in order to assure equality and transparent and real

competition of these services. These facts delimit the necessary

separation between the regulatory function of the telecommunications

sector and the operational function of the national telecommunications

company.

The ¢rst question to be considered is whether the market cane¤ciently provide this type of marketable public service. Instead of

the traditional solution of entrusting the production of these services

to public enterprise, granting it the monopoly, other alternatives exist,

such as the following:

. to ignore the problem, considering that intervention is unnecessary,

given that potential competition would su¤ce (Baumol);

. for the production of public services to be carried out by private

enterprise to which the licence would be granted;. to regulate private monopoly.

The alternative that is defended by a large part of the doctrine

nowadays is that of adopting regulations that introduce competition

as soon as possible.

2.1 Reasons for privatization

The theoretical reasons that have been brandished in favour of theprivatization of public enterprise, can be summed up in the following

way.

Technologies.Telecommunications have constituted a natural monopoly

of public service, that has been gradually ruptured as a consequence of

the profound technological advance that has taken place in the sector.

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The existence of a network for providing the service gave

rise to a market failure, making public intervention necessary.The technological process has left the network concept of

telecommunications, which currently allows it to generate

competition for providing an e¤cient service.

Economic. According to Alvaro Cuervo (1997) privatization is conceived

to be a way of improving allocation and organizational e¤ciency, thus

facilitating the adaptation of enterprise to the new economic

environment. Public property, as a consequence of the singular agency

relations that it motivates, generates a behaviour of the members of

public enterprise that lack incentives for increasing e¤ciency, for

developing capacities and resources within the enterprise and for

competing in open markets.

The opening up of markets is necessary for privatization to generate

e¤ciency and for the current limiting regulations of competition, that

should be substituted precisely for the regulations that eliminate the

entry barriers in the market and avoid monopolistic powers.

Financial. The important technological advance in the tele-

communications sector requires strong investment, that Government,the owner of public enterprise, is not able to ¢nance. Given that this

would imply having to have recourse to capital markets with the

consequent repercussion in the level of government borrowing, an

important indicator for the monetary union countries.

Other ¢nancial reasons, which justify privatization, are found in

the necessity to eliminate the subsidies and relief for investment of the

public owners that a¡ect public de¢cit, an indicator that has acquired

special relevance for achieving economic stability for the monetaryunion countries. On the other hand, the cash that generates

privatization, although it does not produce a reduction of the public

de¢cit in accordance with the European System of Integrated

Economic Accounts, can be destined to paying o¡ public debt and,

therefore, indirectly reduce public de¢cit.

2.2 Reasons for introducing competition

As already mentioned, the action of privatizing public enterprisein the ¢eld of telecommunications does not give rise simultaneously to

the introduction of competition. The question that arises is whether

competition should be introduced to public service companies or

whether regulating private monopoly following privatization would

su¤ce.

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According to Stiglitz there are various reasons for attempting the

introduction of competition in the production of marketable publicservices:

. to provide a comparative basis, given that if there are no

competitors it is di¤cult to determine if the company that

monopolizes the production is e¤cient or not;

. to permit the establishment of a system of incentives that

compensates the task of e¤ciency;

. the competitive spirit not onlyleads to greater innovation, but also

a rapid di¡usion of suitable innovations.

When we talk about the introduction of competition in a sector,

this does not mean that everything in this sector is subject to

competition. Within the productive processes that a sector develops,

di¡erent types of goods or goods of di¡erent qualities can be obtained

and competition can be introduced in some of them. In the same way,

the production of a good can be divided in subprocesses and some of

these may be subject to competition.

Although it is quite clear that the introduction of competition in

public marketable services can, in some cases, introduce wastefulness,

nevertheless, it is also true that, in the case of monopolies, the same, if

not more, wastefulness is produced, albeit hidden by the lack of

transparency.

One reason that is given for the introduction of competition in the

communications sector, is that in this way consumer sovereignty and

their possibilities of choice are reinforced. However, as stated by the

Tribunal for Competition (1993) the liberalization of a sector does notmean that competition within a sector appears immediately.

Liberalization is the ¢rst step needed for competition to take place.

Nevertheless, it is necessary for time to pass for e¡ective competition

to take place, as new companies need to carry out investment in order

to captivate market quotas from monopolies.

Price controls must be maintained until the situation of perfect

competition is reached.

2.3 How competition is introduced

In public services that require networks for operations, as is the

case, to a certain extent, in the case of telecommunications, if

competition is introduced, as well as liberalization and privatization,

a vertical and horizontal restructuring of the sector is essential.

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The aforementioned vertical restructuring implies the separation

of the infrastructures of commercial activity, this is a necessarycondition, given that if public enterprise is left to possess or manage

the infrastructures of monopoly, especially other activities, there

would be theoretical rather than e¡ective competition. Experience

has shown that in some countries in which the network continued to

be managed by the monopolistic enterprise, despite the fact that

freedom of establishment and access of third parties to the network

had taken place, the introduction of competition has failed.

The horizontal restructuring implies the rupture of the

monopolistic enterprise so that there are su¤cient companies giving

rise to rivalry and competition, or rather, limiting to a large extent the

monopolistic action in order to allow possible competitors to have the

possibility of installing themselves. This restrictive policy is

established to avoid the extraordinary bene¢ciaries of the

monopolized activity from being used to ¢nance the crossed subsidies

in favour of liberalized activities, o¡ering below cost prices, and

therefore, preventing or hindering the entry of new operators.

When dealing with a market in expansion, as is the case of telecommunications in Spain, where the growth of demand is very

important, it has not been necessary to divide Telefo ¨ nica, but to

simply eliminate the barriers that impeded the entry of other

competitors.

Another essential condition for liberalizing public sector services

and, therefore, introduce competition is that of separating the function

of operator from that of regulator, without there being the smallest

confusion among these.

The function of operator should be that of producing the services of

telecommunications in the most e¤cient way, to the extent that the

function of the regulator, is a public function that consists in exerting

supervision and control. For competition to exist, it is necessary that

identi¢cation of the regulator with the objectives of the regulated does

not occur in order to avoid what is called capture of the regulator'; this

demands total incompatibility between the positions of regulator of the

telecommunications sector and whatever position at whatever level

within companies of the sector.

In Spain, as from the beginning of the current year, (1998)

Government representatives have ceased to be on the Board of

Directors of companies in the telecommunications sector.

The introduction of competition in the telecommunications sector

should not imply a collapse of the equity principle as regards the public

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objective of the universalization of the telephone service. Despite the

existence of the monopoly of the Compan ¬ | ¨a Telefo ¨ nica de Espan ¬ a, upuntil 1996 the plans of rural telephony had not been covered, even

with the existence of explicit subsidies from the a¡ected Autonomous

Communities.

In a monopolistic regime, the additional costs that are produced in

the areas in which demand does not economically justify investment,

they remain covered by crossed subsidies; the rate system of internal

precaution permits the monopolist to cover these costs.

In a regime of competition, the cost of universalization of thetelephony service can ¢nance itself either by way of the budget of

public entities, thus providing absolute transparency of the cost of this

universalization policy, by the former monopolist when it has a

overwhelmingly dominant position of the market, or by all the

competitors in function of the tra¤c that each of these channels, from

the moment in which the monopolist loses its dominant position in the

market.

3 Current telecommunications policy in Spain (1997^1998)

The Member States, and among them Spain, should fully and

rapidly apply the European directives. Once the new conditions have

been established, it will be the responsibility of Member States to

defend the general welfare as much as fair competition and guarantee

that universal service is provided in the telecommunications sector.

Even when a state decides to completely abandon the management

of general interest telecommunications service, it will continue to exert

in£uence in various areas: control of the market and its agents,

participation in the ¢nancing of some infrastructures and regulation

in the area of consumer protection.

The time limit ¢xed for the liberalization process in Spain to be

completed ends in December 1998.

The evolution of a legislative framework has considerably

transformed the traditional landscape of telecommunications services

based on two basic events:

. the privatization of telecommunications operators having

government participation;

. the culmination of the liberalization process for tele-

communications services.

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The Spanish government's ¢rst steps toward privatization-

regulation in the telecommunications sector over the past two yearshave primarily been through the Telecommunications Liberalization

Law (April 1997) and later the recently approved General

Telecommunications Law (April 1998). They can be grouped into the

categories outlined below.

Establishing full competition in the sector as from December 1998

Telecommunications services in general are quali¢ed as services in the general interest.1 Nevertheless, some services, such as establishing and

exploiting public telecommunications networks, providing telephone

service available to the public, providing services or infrastructures

which involve the use of the public radio-electrical domain, are con-

sidered public services or are subject to general interest obligations.

Free competition to be introduced on 1 December 1998 , as much for

providing services as for establishing and exploiting the

telecommunications infrastructure. The only things excluded from

this are radio and television.2 Having ¢xed 1 December 1998 as the

deadline for completely open competition, until that time, the main

impetus for opening up competition is primarily regulatory, that is, in

preparation for the ideal conditions for competition, once the moment

arrives, to be real and e¡ective.

Nonetheless, the possibility remains that the number of licences will

be limited, in order to guarantee e¤cient use of the radio-electrical

spectrum.

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1 Change in the legal nature of telecommunications, as opposed to its

previous conception as `essential services of state ownership reserved for the

public sector' in the 1987 Law.

2 The monopoly of the singular service of signal transport for the channels of

land television. The latter, within the carrier service which supports the

service of Hertzian di¡usion, continues in its regime of restricted competition

until the year 2000 . The fact that the regime of radio and television are not

contemplated, albeit in accordance with Community regulation, could causeproblems in the near future, given the technological and entrepreneurial

convergence between the telecommunication and audiovisual operators, that

will inescapably lead to a future transformation of the panorama of the latter

two. In fact, the Telecommunications Market Commission has authority over

the converging services with telecommunications, such as audiovisual ones,

among which are included radiodifussion and television.

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A transition period has been established (until 1 August1999) to trans-

fer the current concessions to authorizations or licences, which under nocircumstances should imply maintaining special or exclusive rights.

Until the date of complete liberalization, the current situation is

characterized by the following basic elements:

1. Three existing basic telephone service operators: Telefo ¨ nica de

Espan ¬ a, S.A., Retevisio ¨ n (in operation since January 1998) and

Lince (not in operation).

2. Free competition in carrier and value-added services, among

these the following should be noted:

. Three mobile telephone operators have appeared: Telefo ¨ nica

Mo ¨ viles, Airtel Mo ¨ vil (in operation since October 1995) and

Retevisio ¨ n Mo ¨ vil (not in operation). The growth of these

services in Spain has been extraordinary.

. In public data transmission services, the competition has

remained in£uenced by the presence of Telefo ¨ nica de

Espan ¬ a's e¡ective monopoly in circuit hire. For the growth

of e¡ective competition it is necessary to break down thissituation. Although competition in these services has been

formally established for a long time, in reality it is poor.

. Information access services, which occupy the area between

telephone service and the Internet network, have seen much

growth in Spain in terms of the number of operators in

comparison with other countries.

. The services of voice telephony in a closed group of users has

seen barely any growth.

3. Two cable telecommunications operators have appeared in each

zone.

4. Liberalization of satellite telecommunications services.

The introduction of competition into the telecommunications

sector has as one of its main bene¢ts a direct e¡ect on growth,

employment and productivity in the economy as a whole.

One of the more noticeable e¡ects of this liberalization process has

been the price reductions and discount programmes launched by the

operators. The presence of discounts in a competitive market is a signof healthy competition. However, in those markets where competition

still has not become well-established, even more importantly during

the initial start-up stages of new operators, price discounting can be a

form of anti-competitive behaviour. In general, those discounts which

re£ect underlying di¡erences in the costs of supplying the service

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would not be competitive. Other forms of discounts can also have a

negative e¡ect on competition (discounts or bonuses for loyalty,volume discounts which are selectively applied to certain users, etc.).

Therefore, the Telecommunications Market Commission (TMC) has

paid special attention to Telefo ¨ nica's discount plans and has required

them to be applied only under certain, determined conditions.

Between 1995 and 1997, the evolution of tari¡s has been as follows,

in nominal percentage terms.3

Installation ^ ¢rst line 0

^ second line 743

Rental 0

Local calls 0

Regional calls 0

National calls 78.7

International calls ^ EU 724

^ USA 738

To be exact, the prices Telefo ¨ nica is charging users are gradually

undergoing adjustment. These modi¢cations have been centred in two

main areas:

1. Lowering the ¢xed rates which Telefo ¨ nica charges. There have

been reductions in national circuit hire, international circuit

hire and in inter-provincial service.

In the future it is predicted that the price of these services will

be reduced by even more, approaching the costs of providing the

service.

2. O¡ering discounts in relation with ¢xed-rate services. Telefo ¨ nica

has carried out a campaign with di¡erent types of discounts in

relation to these services (discounts of between 40% and 60%

for certain destinations).

The prices o¡ered by Retevisio ¨ n are very competitive compared

with the dominant operator. Among their advantages we should

mention price rating by seconds and not by units and variable

discounts of up to 25% in line reductions, without connection or

installation charges.

Telefo ¨ nica Espan ¬ a has a price adjustment which will mean an

increase in the quota of monthly charges and local tari¡s and a

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3 Data taken from the ¢nal COM (1998) 101.

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decrease in the cost of provincial, interprovincial and international

tari¡s planned for August 1998.

The separation of regulators and operators

Legislative functions, understood to be those of preparing basic

legislation and the resulting regulations, have been separated from

regulatory functions, or the administration of these laws with the

purpose of establishing the rules of the game and acting on

the mechanisms of the market. The former have remained within the

jurisdiction of the government and The Ministry of Development,while the latter have been transferred to the TMC.

An independent organ has been created, the Telecommunications

Market Commission (TMC). Its province is safeguarding the conditions

for e¡ective competition, looking after proper price-setting interests

and serving as arbiter in con£icts. Speci¢cally, to have as its functions

arbitration; granting qualifying titles (concessions, satellite tele-

communications authorizations, value-added services, and that cable

which is not granted via tenders) and registration; shipping titles;

assigning numeration; supervising compliance with the obligations of public service; intervention in the area of interconnection; serving as

watchdog for free competition in the telecommunications market

(activities related to the dominant operator and the other operators,

strategic alliances, etc.); sanctioning power in con£ict resolution; and

intervention in the audio-visual, telematic and interactive service

markets.

The regulatory authority of the sector rests with the government,

speci¢cally, with the Ministry of Development. This agency, in turn,

reserves the right to set prices and to grant authorization and licences

through tenders.Therefore, if the government does not give up its stake

in Retevisio ¨ n (30%) before December 1998, it will not be possible to

speak of an e¡ective separation of regulator and operator.This has also

been a criticism made by Telefo ¨ nica, where, while the government no

longer has a stake in the company, for the past 10 years it has continued

to maintain a position of control over extraordinary situations.

We return to the ¢gure of the Telecommunications Advisory

Council , with the purpose of study, deliberation and proposal.In general terms, the laws seems to be ambiguous on many points

regarding the assignment of authority to the TMC and the delineation

of its ¢eld of action in contrast with the Ministry of Development, the

Competition Defence Tribunal and the government itself, (especially

between the TMC and Development). A clear separation of functions

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has not been achieved. That is, between the legislative function (which

pertains to the government), and intervention and direct promotionfunctions (executive functions, related to the management and

application of regulations) which should be assigned to the

independent regulatory body, the TMC. (Speci¢cally, it is possible to

mention the imbalance of power in the granting of titles, this having a

detrimental e¡ect on the TMC's authority, competition in inter-

connections or the modi¢cation of operator^ user contracts.)

Obligations of public service: regulation of universal service

The de¢nition of communal universal service is understood to be a

de¢ned group of telecommunications services of a certain quality,

accessible to all users independent of geographical location, and at a

reasonable price, special consideration being given to the island

situation'. The services included, subject to change with time, are the

following: connection to the ¢xed telephony network and ¢xed

telephony service which allows national and international calls, fax

and data transmission, telephone directories, a su¤cient supply of

public pay telephones, and disabled access.

The requirement for the service to be reasonably priced is an

essential part of universal telecommunications service. However,

together with this requirement it is necessary for each member state

to make it clear how this reasonable price should be determined in its

legislation or in the licences it grants. In terms of this, in Spain, price

limitations have been determined based on the costs of the sector,

productivity and the retail price index. Reasonable prices are a

requirement, but there are no speci¢c criteria to measure them by.

The dominant operator (Telefo ¨ nica, at least until the year 2006) is

obliged to provide this service.4

In terms of calculating costs and ¢nancing the universal

telecommunications service, it is important to highlight three areas:

1. The operator, in order to calculate the costs, can only include

those costs associated with the obligation of universal service as

de¢ned by community legislation. In addition, it may only recoupcontributions to the `net'costs of these obligations. The national

regulatory authority may verify said calculations.

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4 Although all the operators that require an individual licence are required

to follow the obligations of the public service.

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2. It is the responsibility of the member states to evaluate, based on

the calculation of net costs, if this represents an equitable burdenfor the operator in question. Only in an inequitable case can it

resort to mechanisms for distributing these costs among the

market agents.

3. The community framework provides two mechanisms for

recouping costs (creating a universal service fund on the

national level or a system of supplementary surcharges) apart

from direct ¢nancing from the Government budget.

In Spain, in order to deal with ¢nancing universal tele-

communications service, the TMC has been made responsible for

determining if providing this service supposes a competitive

disadvantage for the operators providing the service. If this is the

case, the mechanisms for distributing the net costs of providing the

service among all the operators will be established and made public.

The method of calculation would be as follows:

Net cost � Incremental costs of providing non-profitable services

À Income derived from the activity

À Intangible benefits associated with the universality

of the serviceX

5

In each case, this calculation will be made by the operator who

provides the universal service, in accordance with whatever principles

the TMC may establish and with the TMC's approval of the results.

It will be the TMC itself that determines the distribution of this

cost among each one of the operators.This is to be done in accordancewith the principles of transparency, non-discrimination and

proportionality and taking into account the activity of each operator.

&CIRIEC 1999

5 In this way, the ¢nal COM (1996) 608 speci¢es that the immaterial bene¢ts

that the operator obtains in the role of provider of a universal service should be

taken into account. Although the bene¢ts that result from being a universal

service provider cannot be calculated in detail, it is possible to establishreference estimations for each of the following categories. Nevertheless, in the

evaluation of these types the bases of calculation and all the suppositions used

should be indicated with clarity. These advantages include:

1. A greater recognition of its brand name (compared with that of its

competitors).

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The objective parameters which will serve as indicators6 of said activity

will be determined by the Ministry of Development and will be appliedby the TMC.

The contributions received will be deposited in the National

Universal Telecommunications Fund, which was created by the 1998

law, with the purpose of guaranteeing ¢nancing for universal service.

This fund will be fed, primarily,7 by the cash contributions coming from

those operators required to contribute to the ¢nancing of universal

service and its management by the TMC.

The operators subject to requirements for the provision of universal service will receive from this fund the amount

corresponding to this net costs this obligation would suppose.

In Spain, therefore, the ¢nancing of the cost of this service will be

provided for through a national fund which the operators will

contribute to, according to their relative tra¤c. Thus the system of a

national fund has been chosen, in place of supplementary quotas

(which is also being considered by the EU). However, there will be a

system of supplementary quotas in addition to those of

interconnection until this fund is in operation.

The cost of universal service has been estimated to exceed Pta

32,000^55,000 million, this is between 2.1% and 3.7% of the volume of

business of Telefo ¨ nica de Espan ¬ a, S.A. (Data taken from the COM

(1998) 80).

&CIRIEC 1999

(continued from previous page)

2. A universal coverage in the ubiquitous zone of operation ( that is to

say, inferior charges to those of their competitors when extending thenetwork to new clients).

3. An evaluation of the clients and groups of clients that embrace all its

vital path (this evaluation mentions the fact that a client is not currently

economical might become economical in the future; for example, a young

family that is, in principle, `unviable', can, as time passes, be pro¢table

when their incomes increase and their children start to use the

telephone). This means that, for the operator, to assist this client in the

short termcanbe bene¢cial, given theincomesgenerated over their life span.

4. Advantages as regards commercialization, having access to all types

of data regarding the use of the telephone.

6 Until eachoperator is not established, the percentage of gross income from

operations will be taken into account, in proportion to the volume of overall

business of the market.

7 The provisions for disinterested contributions to the ¢nancing of the

universal service are also contemplated.

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Administrative systems for concessions and authorizations will disappear

in the face of two unique items: individual licences and general authorizations, in keeping with the community legislation.

The concept of dominant operator, de¢ned as the operator who has a

market share of over 25% in any geographic area, will be associated

with several obligations. Telefo ¨ nica has been named as initial

dominant operator, holding this title until the year 2006.

Interconnection is a right and an obligation ofany operator.This is subject

to negotiation between the parties involved. The TMC will only

intervene if an agreement cannot be reached. The principle of costguidance in interconnection prices is established.

In this area, the Order of Tari¡s and Conditions of Network

Interconnection states that the basic public telephone service

developed by the dominant operator to provide the ¢nal and carrier

service which is its support (Order of 18 March 1997) constitutes

the key legal reference, as it ¢xes, subsidiary by default under the

agreement, the technical and economic conditions of the

interconnection operations until 1 December 1998. To this end,Telefo ¨ nica and Retevisio ¨ n signed an interconnection contract dated

30 December 1997 in which price, physical and legal conditions to

support the start-up of the second operator were ¢xed.8

These charges were considered excessive by the European

Commission and it recommended that they be lowered to be more in

line with the interconnection tari¡s in other countries. However,

given that the tari¡ ranges proposed were not obligatory, but merely a

point of reference, the Ministry of Development did not accept them.

In fact, the interconnection rates deviate from the `best current

practice' by 51% for local, by 62% in double transit (interprovincial)

between ¢xed and ¢xed, and by 408% in double transit

(interprovincial) between ¢xed and mobile.

The radio-electrical spectrum continues to be de¢ned as a scarce resource

whose use is managed by the state who, as we have already pointed out,

will limit the use of the licences which make use of it. This reinforces

governmental control over services which have growth potential and

are of interest to new entrants, such as mobiles and local wirelessaccess.

&CIRIEC 1999

8 This interconnection agreement is added to those that have already been

concluded between Telefo ¨ nica and Airtel.

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A group of charges to ¢nance transaction costs derived from the

application of the system of licences, authorizations, planning, controland management of Public Numeration Space, issuing certi¢cates, etc.,

is established.

The possibility of the government ¢xing maximum and minimum prices,

as well as a transportation surcharge on interconnection prices due to the

inequality of the tari¡s is established.

During 1997 and 1998 the system and procedures for the

authorization of telecommunications service tari¡s established in

the Royal Decree 7/1996 has been maintained. In this area, thegovernment, through the Commission for Economic Issues, though it

is subject to informing the TMC, is quali¢ed to approve the structure

and level of the rates which the dominant operator applies to basic

telephone service.

In the area of mobile telephone service rates, these may be freely

¢xed by the operators, the government having reserved the authority

to establish price ranges for these services.

As for the prices of interconnection services between networks andto guarantee that the services are inter-operational, the system

currently in force establishes the principle of free agreements between

the operators involved in the interconnection transactions. However,

this includes the guarantee of `maximum authorized prices' by the

Ministry of Development for certain basic services provided by the

dominant operator. This authority will be transferred to the TMC on 1

December 1998.

Numeration is considered to be a public resource and responsibility for

the this is divided between the TMC and government.

The principle of separation of accounts is established to prevent and

intervene in situations where the dominant position is abused. By

virtue of this principle, the operators which are considered to

be dominant in public telecommunications networks and

telecommunications services accessible to the public will have to

present the TMC with separate and audited accounts.

Separation between operators and regulator

Together with the liberalization-regulation process in the

telecommunications sector, the Spanish government has advanced to

privatization (understood to be the sale of its stake) of the

telecommunications operators which government has a stake in.

&CIRIEC 1999

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In this area, the state has proceeded to sell its stake in Telefo ¨ nica

de Espan¬ a, S.A. through a Public Bid in two phases. In October 1995 it

sold 12% and in January 1997 it disposed of the remaining 21% of its

stake.

Nevertheless, it reserved the right to its previous administrative

authorization, for a period of 10 years, over the adoption of certaincompany agreements (dissolution, split, or merger, change of business

objective, . . . or the acquisition of a stake in the company of 10% or

more).This authorization appertains to the Ministry of Development.

With respect to its stake in Retevisio ¨ n, S.A., the Ministry of

Development sold 70% of its stake in 1997 and plans to get rid of the

remaining 30% before December 1998.

4 Conclusions

The introduction of competition into the Spanish tele-

communication market has resulted in the market distribution

shown in Table 1.

&CIRIEC 1999

Table 1 ± Public voice telephone operators in Spain (July 1998)

Fixed voice telephone Mobile voice telephone

Local/provincial Analogical

Dominant:

Telefo ¨ nica de Espan ¬ a, S.A.

Telefo ¨ nica de Espan ¬ a, S.A.

Alternative operators:*

Retevisio ¨ n

TV cable operators (11)

Lince

GSM-900

Dominant:

Telefo ¨ nica de Espan ¬ a, S.A. (74% of the market)

Alternative operators:

Interprovincial/International

Airtel (26% of the market)

Dominant:

Telefo ¨ nica de Espan ¬ a S.A. (90% of the market)

DCS-1800

Operators:{

Alternative operators:{ Retevisio ¨ n Mo ¨ vil

Retevisio ¨ n (10% of the market) Telefo ¨ nica Mo ¨ viles

TV cable operators (11) Airtel

Lince

*These companies do not yet operate on a local level. Only Retevisio ¨ n is planned to do so from

September1998.{None of these are operational. Retevisio ¨ n Mo ¨ vil will be operational for December 1998 or the first

trimester of1999, whilst Telefo ¨ nica and Airtel will not be able to provide a service until six months after

the signing of the concession contract of the licence to Retevisio ¨ n Mo ¨ vil (June1998).{Only Retevisio ¨ n operational, from January 1998.

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As we have already pointed out, one of the most noticeable e¡ects

of the privatization process has been the reduction in prices.The pricesthat Retevisio ¨ n is o¡ering are 25% less expensive than Telefo ¨ nica's in

interprovincial calls and 16% in international calls. To that we may

add promotions (between one third and one half price in some time

periods) and billing by seconds, which means an additional reduction

(by avoiding the rounding up to units).

The dominant operator,Telefo ¨ nica, has reacted by beginning to bill

by seconds, from August 1998, and discounting their prices by 5% for

provincial calls, 15% for interprovincial and 12% for international,

while the cost of local calls will rise.

Appendix ^ Telecommunications market in Spain in ¢gures

Per capita at current market prices 1997 76.9 (EU:100)

Telecoms services market value1997 ECU10.585 million

Per capita telecoms expenditure 1997 ECU 269 (EU media: 376)

Telecoms services market value growth 9 8/97 8.6 0% (EU media: 8.2%)

Cellular mobile subscribers p er 10 0 habitants 19 97 11 (EU media: 13)

Telephone lines per 100 habitants 1996 40.75

Source: COM (1998) 80 and final COM (1998) 101.

&CIRIEC 1999

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