Opinion of the Advocate-General



Opinion of the Advocate-General

1. The background to the case which gave rise to the present referral from the Verwaltungsgericht Köln (Administrative Court, Cologne) (Germany) may be summarised as follows: according to Community and national law, the former monopoly operator of a fixed telephone network is required to permit competing operators to use its local network. However, that operator is charging a price which a competing operator, as a beneficiary of access to the network, is disputing as being too high. This is the situation which prompted the Verwaltungsgericht Köln to submit to the Court wide-ranging and analytical set of questions which relate, directly or indirectly, to the interpretation of a key concept involved in the liberalisation of the provision of telecommunications services in Europe: namely the principle that the prices charged for unbundled access to the local loop (that is to say the copper wire pair circuits connecting subscribers to the nearest distributors), should be set on the basis of ‘cost-orientation’. These are the circumstances in which the Court has been called upon for the first time to consider the interpretation of Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop (2) (‘the regulation’).

I – The facts, the legal background and the questions referred to the Court for a preliminary ruling

2. Deutsche Telekom AG, (‘Deutsche Telekom’) is the notified operator within the meaning of Article 2(a) of the regulation. According to that Article, notified operator means ‘operators of fixed public telephone networks that have been designated by their national regulatory authority as having significant market power in the provision of fixed public telephone networks.’

3. Arcor AG & Co KG, (‘Arcor’) is a beneficiary within the meaning of Article 2(b) of the regulation. According to that provision, ‘beneficiary’ means ‘a third party duly authorised … or entitled to provide communications services under national legislation, and which is eligible for unbundled access to a local loop’. The concept of ‘local loop’ is defined by Article 2(c) of the regulation as ‘the physical twisted metallic pair circuit connecting the network termination point at the subscriber’s premises to the main distribution frame or equivalent facility in the fixed public telephone network.’

4. Arcor provides ISDN telephone connections to final customers, but these can only be used if it has access to the relevant local loop on the Deutsche Telekom telecommunications network.

5. Article 1 of the regulation, entitled ‘Aim and scope’, is worded as follows:

‘1. This Regulation aims at intensifying competition and stimulating technological innovation on the local access market, through the setting of harmonised conditions for unbundled access to the local loop, to foster the competitive provision of a wide range of electronic communications services.

2. This Regulation shall apply to unbundled access to the local loops and related facilities of notified operators as defined in Article 2(a).

3. This Regulation shall apply without prejudice to the obligations for notified operators to comply with the principle of non-discrimination, when using the fixed public telephone network in order to provide high speed access and transmission services to third parties in the same manner as they provide for their own services or to their associated companies, in accordance with Community provisions.

4. This Regulation is without prejudice to the rights of Member States to maintain or introduce measures in conformity with Community law which contain more detailed provisions than those set out in this Regulation and/or are outside the scope of this Regulation inter alia with respect to other types of access to local infrastructures.’

6. According to Article 3 of the regulation, entitled ‘Provision of unbundled access’:

‘1. Notified operators shall publish from 31 December 2000, and keep updated, a reference offer for unbundled access to their local loops and related facilities, which shall include at least the items listed in the Annex. The offer shall be sufficiently unbundled so that the beneficiary does not have to pay for network elements or facilities which are not necessary for the supply of its services, and shall contain a description of the components of the offer, associated terms and conditions, including charges.

2. Notified operators shall from 31 December 2000 meet reasonable requests from beneficiaries for unbundled access to their local loops and related facilities, under transparent, fair and non-discriminatory conditions. Requests shall only be refused on the basis of objective criteria, relating to technical feasibility or the need to maintain network integrity. Where access is refused, the aggrieved party may submit the case to the dispute resolution procedure referred to in Article 4(5). Notified operators shall provide beneficiaries with facilities equivalent to those provided for their own services or to their associated companies, and with the same conditions and time-scales.

3. Without prejudice to Article 4(4), notified operators shall charge prices for unbundled access to the local loop and related facilities set on the basis of cost-orientation.’

7. According to German law and in particular Paragraph 24(1) and (2) of the Telecommunications Law (Telekommunikationsgesetz) of 25 July 1996, (3) rates are to be based on the costs of efficient service provision and are to accommodate the requirements under Paragraph 24(2). According to that paragraph, rates must not: (1) contain surcharges which prevail solely as a result of the provider’s dominant position according to Paragraph 19 of the Law against Restraints of Competition in the relevant telecommunications market; (2) contain reductions which restrict the competitive potential of other undertakings on a telecommunications market or (3) confer advantages on certain operators compared with other operators using equivalent or similar telecommunications services on the telecommunications market in question, unless there is evidence of an objectively justifiable reason therefor.

8. On 30 September 1998, Arcor signed a contract with Deutsche Telekom – which was subsequently renewed with effect from 1 April 2001 – on access to the latter’s local loops. Under that contract, the rates approved by the regulatory authority applied as agreed.

9. Under Article 4 of the regulation, which is concerned with ‘[s]upervision by the national regulatory authority’:

‘1. The national regulatory authority shall ensure that charging for unbundled access to the local loop fosters fair and sustainable competition.

2. The national regulatory authority shall have the power to:

(a) impose changes on the reference offer for unbundled access to the local loop and related facilities, including prices, where such changes are justified, and

(b) require notified operators to supply information relevant for the implementation of this Regulation.

3. The national regulatory authority may, where justified, intervene on its own initiative in order to ensure non-discrimination, fair competition, economic efficiency and maximum benefit for users.

4. When the national regulatory authority determines that the local access market is sufficiently competitive, it shall relieve the notified operators of the obligation laid down in Article 3(3) for prices to be set on the basis of cost-orientation.

… .’

10. With regard to German national law, according to Paragraph 27(1) of the TKG 1996, the regulatory authority is to approve rates either on the basis of the cost of providing an efficient service for each type of service or on the basis of the average price, set by that authority, for a basket of services. Paragraph 27(4) empowers the Federal Government to issue regulations setting out the rules applying to different types of approvals and defining the terms and conditions under which the regulatory authority is required to decide which of the procedures listed in paragraph 1 is to apply.

11. According to Paragraph 2(1) of the Telecommunications Rates Regulation (Telekommunikations‑Entgeltregulierungsverordnung) of 1 October 1996, (4) the company which filed the application referred to in Paragraph 27(1) of the TKG 1996 must produce the following documents relating to the service in question in each case: (1) a detailed description of the service, including information on the quality of the service and a copy of the terms and conditions applying to it; (2) turnover figures for the last five years and also forecast turnover for the year of filing and for the next four years; (3) information on market shares and, if possible, on price elasticity of demand for the period referred to in point (2); (4) figures for the trend in the various costs referred to in Paragraph 2 (cost statements) and the trend in variable cost margins for the period referred to in point (2); (5) information on the financial impact on customers – in particular the structure of demand from private and business customers – and on competitors who receive the service as a preliminary service; and (6) in the case of differential rates, information on the effects on the user groups affected by the differential rates, as well as objective justification for the proposed differential rates.

12. According to Paragraph 2(2) of the TEntgV, ‘cost statements according to the fourth point of subparagraph 1 above shall comprise costs that can be directly allocated to the given service (direct costs) and costs that cannot be directly allocated to the given service (common costs). Statements relating to common costs shall set forth how the common costs are allocated to the given service. In such allocation, the filing company shall take account of the criteria of the Council directives issued under Article 6 of Council Directive 90/387/EEC of 28 June 1990 on the establishment of the internal market for telecommunications services through the implementation of open network provision (OJ 1990 L 192, p. 1). Also to be included in the cost statements according to sentence 1 above is an account of: (1) the method used to determine the costs; (2) the level of payroll costs, depreciation, cost of capital, costs in relation to materials; (3) target and actual capacity utilisation in the documentation period; and (4) the cost, on which cost accounting is based, of the individual factors employed to provide the service, including the relevant prices, and in particular the elements of the public telecommunications network ... and the cost of using those elements.’ According to Paragraph 2(3) of the TEntgV, ‘the regulatory authority may reject an application for rates approval where the company fails to produce the documents referred to in Paragraphs 1 and 2 in full.’

13. Lastly, Paragraph 3(1) of the TEntgV states that the regulatory authority is to examine the documentation submitted by the filing company with a view to establishing whether and to what extent the rates proposed are based on the cost of efficient service provision. According to Paragraph 3(2), these costs are derived from the long-term additional costs of providing the service plus an appropriate amount for volume-neutral common costs, both inclusive of an appropriate return on capital employed, to the extent that these costs are required to provide the offering. According to Paragraph 3(3), when examining the documentation supplied, the regulatory authority should, for the purposes of comparison, refer additionally to, in particular, the prices and costs of companies offering corresponding services on comparable markets. In doing this, the particular features of the reference markets must be taken into account. Lastly, Paragraph 3(4) states that where costs stated in Paragraph 2(2) exceed the cost of efficient service provision, they are to be deemed expenditure surplus to efficient provision. Paragraph 2(2) also states that this expenditure and other neutral expenditure will only be taken into account in the rates approval procedure if, and for such duration as, it derives from a legal requirement or the filing company evidences other proper justification therefor.

14. By a decision dated 30 March 2001, and subsequently amended on 17 April 2001, the German regulatory authority partially approved Deutsche Telekom’s rates for access to the local loop (monthly licence fee for use of the line and a one-off provision and cancellation fee) from 1 April 2001 for numerous types of access charged at varying amounts. According to the referring court, the approval for the monthly licence fee expired on 31 March 2003, and, as for the rest, the approval expired on 31 March 2002 at the latest.

15. On 30 April 2001, Arcor brought an action seeking, inter alia, judicial annulment of the approval decision referred to above. Its argument in substance is that the approved rates are too high because, according to Arcor, the investment value of the local loop – on which they were based – was incorrectly determined. The capital costs and the depreciation life were calculated exclusively on the basis of the current cost entailed in setting up a modern efficient local network, with the result that, in its view, the rates exceed Deutsche Telekom’s true capital costs. Basically, the rates are in breach of the principle of cost-orientation contained in Article 3(3) of the regulation.

16. In those circumstances, the Verwaltungsgericht Köln decided to stay proceedings and refer to the Court for a preliminary ruling a lengthy series of questions which could usefully be reformulated to enable the Court to reply to them in a straightforward manner. Within the specific context of the present case, these questions take an extremely exhaustive and wide-ranging approach to a whole range of problems relating to and surrounding the concept of charges set on the basis of cost-orientation.

17. The questions are essentially seven in number. The first basically asks to what extent Article 1(4) of the regulation permits Member States, when adopting national legislation defining the concept of cost-orientation, to deviate from the concept of cost-orientation as laid down in Article 3(3) of the regulation, to the detriment of beneficiaries.

18. The second question concerns whether, under Article 3(3) of the regulation, the requirement that the rates charged for local loop access should be set on the basis of cost-orientation also includes imputed interest and cost-accounting depreciation. The referring court is asking about the basis used to calculate this depreciation and interest. Should it be exclusively the current replacement value, expressed in terms of current daily prices at the date of valuation, or should depreciation made prior to the date of valuation be deducted from the replacement value of the assets?

19. The fourth question is in substance asking whether the basis for assessment should always be complete cost statements supplied by the notified operator or whether it is permissible to use analytical cost models and, if so, what requirements need to be met.

20. The fifth question concerns the boundaries of the scope for evaluation allowed to the national regulatory authority when assessing whether rates have been set on the basis of cost-orientation and the boundaries of the judicial review to which such decisions must be subjected.

21. By its sixth question, the referring court is basically asking whether, even though a rates approval decision adopted by a national regulatory authority is not addressed to them, competitors as beneficiaries of access to the notified operator’s local loop must have the right to bring an action against such a decision, where they consider that the rates have not been set on the basis of cost-orientation.

22. The last question is, basically, asking where the burden of proof that rates have been set on the basis of cost-orientation should lie, both during the administrative procedure preceding the rates approval decision and during an action brought against the national regulatory authority’s decision by a competitor who has been affected by that decision.

II – Analysis

23. Let me begin with some preliminary comments on the regulation. These concern the adoption of the regulation within the context of the former Community regulatory framework for telecommunications, the essential features and aims of the regulation and the context within which it introduces the concept of cost-orientation. I shall then go on to analyse the referring court’s questions.

A – Preliminary comments on the regulation.

24. According to recital (15) of the preamble, the regulation was adopted to complement the former regulatory framework for telecommunications, in particular Directives 97/33/EC (5) and 98/10/EC. (6) Article 4(5) of the regulation even refers expressly to the first of these directives. (7) Although forming part of the former Community regulatory framework for telecommunications, the regulation remained in force after 25 July 2003. (8)

25. The rates approval decision at issue in the main proceedings is dated 30 March 2001. That decision approved Deutsche Telekom’s rates for access to its local loop for the period between 1 April 2001 and 31 March 2003 in the case of the monthly licence fee, and 31 March 2002 at the latest for the rest. However, according to Article 28(1) of the framework directive, the provisions of the new regulatory framework did not become applicable until 25 July 2003. (9) The provisions of the regulation must be interpreted within the context of and in conjunction with the legal instruments constituting the former regulatory framework for telecommunications. (10)

26. It is easy to comprehend how the regulation came into being in the context of the former regulatory framework. The conclusions of the Lisbon European Council of March 2000 established, as an objective, the development of a digital knowledge-based economy, by fostering access to an inexpensive high-quality communications infrastructure within Europe, and in particular the Internet. (11) The Community legislature was well aware that, at that time, the local loop was one of the least competitive segments of the liberalised telecommunications market, (12) and this was holding back the rapid development of the digital economy in Europe. As a result, when the European Council met in Santa Maria da Feira in June 2000, unbundling of the local loop was considered to be an immediate priority. The regulation thus became the legal instrument designed to implement uniform unbundling of the local loop in all the Member States. This unbundling of access was intended to enhance competition, ensure economic efficiency and bring maximum benefit to users. (13) It was introduced at a speed which it would have been difficult to achieve by adopting a directive. The regulation is dated 18 December 2000 and requires notified operators to provide competing operators with access to their local networks as of 2 January 2001.

27. Opening up the local loops of the former monopoly operators to competing operators was all the more necessary since, as recital (6) of the preamble to the regulation states, (14) it would not be economically viable in 2001 for new entrants to duplicate the incumbent’s metallic local access infrastructure, and the alternative infrastructures – such as cable television, satellite and wireless local loops – do not offer the same functionality or ubiquity. Moreover, it is also important to point out that the local loop infrastructures in Europe were largely built from earnings received from the monopolistic charges which customers have had to pay over the years during which the monopoly national operators were able to benefit from the exclusive rights granted them by the Member States. (15)

28. It was against this background that the regulation was intended to achieve its main aim: that is, to require notified operators to provide unbundled access to their local loop for new operators entering the market in order rapidly to introduce competition at local loop level where it was non-existent or very limited at the time. However, the Community legislature rightly wished to avoid the risk that such an obligation might give rise to a form of expropriation of the notified operators without compensation. According to Article 3(3) of the regulation, a notified operator will have the right to charge prices enabling it to cover the costs connected with the provision of access to its local loop, whilst at the same time obtaining a reasonable return from the operation. (16) That is precisely the concept of cost-orientation of rates which lies at the heart of the present case.

B – The first question

29. This question is basically asking to what extent Article 1(4) of the regulation permits Member States, when adopting national legislation defining the concept of cost-orientation – for example, by means of a more specific definition of the cost of providing an efficient service – to deviate from the concept of cost‑orientation as laid down in Article 3(3) of the regulation, to the detriment of beneficiaries.

30. Certain legal concepts promise much and appear to be very useful, but may, none the less, simply become words largely devoid of meaning and effect. There is a risk that the concept of cost-orientation, as provided for in Article 3(3) of the regulation, may be one of those concepts.

31. The concept of cost-orientation contains no reference to the law of the Member States for the purposes of determining its meaning and scope. (17) It follows from the requirements both of the uniform application of Community law and of the principle of equality, that it is, therefore, an autonomous concept of Community law which must be interpreted in a uniform fashion. (18) An autonomous and uniform interpretation of that kind must be sought taking account not only of the terms constituting the concept in question, but also of the context of the provision of which it forms a part and the aim of the regulations in question. (19)

32. The fact that the concept of cost-orientation is a Community concept with its own meaning and scope is confirmed, first of all, by two judgments in which the Court was called upon to consider the interpretation of that concept, again in the telecommunications sector. (20) The first is the judgment of 25 November 2004 in KPN Telecom . (21) In that judgment, the Court held that costs connected with gathering or supplying basic subscriber data should, in any event, be borne by the provider of a voice telephony service and that they are already included in the costs of and earnings from such a service. Under these circumstances, transferring the cost of gathering and supplying these data to persons requesting access to them, would result in unjustifiable overcharging for the costs in question and, therefore, would be incompatible with cost-orientation. According to the judgment in KPN Telecom , it is inherent in the concept of cost-orientation of charges that it prohibits a party whose charges are required to be set on the basis of cost-orientation to receive remuneration several times for providing the same service.

33. The other case in which the Court was required to give an interpretation of the concept of charges set on the basis of cost-orientation was the Mobistar case of 13 July 2006. (22) In its judgment, the Court confirmed in relation to prices charged for ensuring telephone number portability, that ‘Directive [2002/22/EC] does not preclude the adoption of a national measure such as that at issue in the main proceedings, which fixes in advance and on the basis of an abstract model of the costs, maximum prices which may be charged by the donor operator to the recipient operator as set-up costs, provided that the prices are fixed on the basis of the costs in such a way that consumers are not dissuaded from making use of the facility of portability’. (23) However, the Court pointed out that, in any event, it is important that ‘it is genuinely possible for new operators to contest the application of maximum prices by operators already present in the market by showing that those prices are too high in relation to their cost structure’. (24)

34. When it comes to determining the precise meaning and scope of the concept of cost-orientation, as provided for in Article 3(3) of the regulation, this is not immediately obvious, as the present case clearly shows. The regulation refers to the concept of costs, without going any further as regards its definition, and the concept of costs is not unambiguous: there are various possible costs, methods and models for cost calculation.

35. Where the Community legislature has not given any precise guidance regarding cost elements or the cost calculation methods or models to be used, I consider, as, basically, do the interveners in the present case, that the regulation leaves the Member States an inevitable margin of discretion in implementing this concept. That degree of latitude will, primarily, allow the national legislatures to determine which elements of the local loop provider’s particular costs are to be taken into account and, in particular, to define the relevant costs of the notified operator as being limited to the costs of providing an efficient service, as well as to define the methods and models to be used to calculate the costs connected with providing the local loop. Moreover, Article 1(4) of the regulation expressly states that Member States shall have the right ‘to maintain or introduce ... measures which contain more detailed provisions than those set out in this Regulation.’

36. It is, however, true, as the provision itself states, that this legislative discretion must be exercised ‘ in conformity with Community law ’. (25) The margin of discretion which the Member States have to introduce more detailed provisions in order to specify the cost elements, the methods and the models to be used will, of necessity, be defined by the limits arising from the interpretation of the Community concept of cost-orientation.

37. Apart from the general limits inherent in the general concept of cost-orientation revealed inter alia by the abovementioned judgments in KPN Telecom and Mobistar , and the obvious limit whereby that concept prohibits charges based on elements not forming part of costs, (26) there are other limits arising from the interpretation of this concept within the specific context of the regulation. The general structure and purpose of the regulation, which I have already mentioned, indicate what these limits are, thus revealing the importance of the principle of cost-orientation in achieving the Community legislature’s central aim, namely to ensure effective and immediate unbundling of local loop access and, as a result, the introduction and development of competition on the local access market. (27) The purpose of the principle of cost-orientation is precisely to prevent excessively high prices which, did that limiting factor not exist, the notified operators would naturally tend to charge in order to maintain their privileged position. (28) Consequently, this concept prevents the central aim of the regulation of fostering competition at local loop level from being jeopardised by the charging of excessively high prices. (29)

38. The interpretation of the Community concept thus shows that it lays down a substantial requirement which is designed to limit the prices charged by the notified operator, and a Member State may not depart from that requirement to the detriment of competing beneficiaries of loop access.

39. I therefore propose that the Court reply to the first question that Articles 1(4) and 3(3) of the regulation are to be understood as meaning that the concept of prices based on cost-orientation constitutes a requirement imposing a limit on the prices charged by the notified operator for access to its local loop which, notwithstanding the margin for discretion which it offers in terms of actual implementation at national level, may not be departed from to the detriment of beneficiaries of access to the local loop.

C – The second question

40. The second question asks whether, under Article 3(3) of the regulation, the requirement that the prices charged for local loop access must be set on the basis of cost-orientation also includes imputed interest and cost-accounting depreciation. The interveners in the case agree that the application of the principle of cost-orientation also includes depreciation and interest on invested capital, and that these, consequently, form part of the notified operator’s costs.

41. At issue here are capital costs, which play a central role in relation to telephone networks, which are, obviously, highly capital intensive installations. Apparently, depreciation of the assets deployed and interest on the capital invested actually account for the major part of the costs inherent in the provision of telecommunications services.

42. As regards depreciation, this consists of spreading the capital cost of fixed assets subject to wear and tear over time (costs which are generally committed in the form of an initial lump sum) over the economic lifetime of those assets. This cost spreading, expressed in annual amounts known as ‘depreciation charges’, is set against the income earned, obviously not in the form of an initial lump sum, but throughout the lifetime of the fixed assets used to provide the service in question. As regards interest, if a notified operator’s liabilities include finance in the form of loans used, for example, to invest in the local loop, the interest payable to the lenders will naturally form part of the notified operator’s costs.

43. There can be no doubt that depreciation and interest on capital invested are costs forming part of an undertaking’s normal business and, therefore, constitute elements of that undertaking’s costs. (30) It follows that they can be passed on and recovered by the notified operator by means of the prices charged to competing operators for access to its local loop.

44. I therefore propose that the Court reply to the second question submitted by the referring court, to the effect that where Article 3(3) of the regulation lays down a requirement that prices charged for local loop access must be set on the basis of cost-orientation, this also includes imputed interest and cost-accounting depreciation.

D – The third question

45. This question brings us to the central issue in this case. What basis should be used for calculating interest and depreciation? The current replacement value of the assets, expressed in terms of current daily prices at the time of valuation exclusively? Or should depreciation already made prior to the time of valuation be deducted from the replacement value?

46. The regulation is silent as to the method to be used for calculating costs in order to ensure that prices are cost-orientated. It is therefore no real surprise that the interveners in the case have widely differing views as to how this question should be answered.

47. Despite the absence of express guidance in the regulation concerning the method to be used to calculate costs, Annex V (concerning the cost-accounting system for interconnection) of Directive 97/33, which forms an integral part of the regulatory framework which the regulation is intended to complement, seems to allow, for the purpose of assessing prices, either the current replacement cost (that is to say ‘based on estimated replacement costs of equipment or systems’), or costs ‘based on actual expenditure incurred for equipment and systems’.

48. In addition, recital (13) of the regulation expressly refers to the Commission Recommendation 2000/417 and the Commission’s Communication of 26 April 2000, (31) stating that they give detailed guidance to assist national regulatory authorities in the regulation of local loop access. This reference may, properly, be considered as an indication that, when interpreting a central concept such as cost-orientation of prices, the Community legislature was recommending that reference should be had to the Commission’s position on these matters as set out in those two documents. For example, we find that paragraph 6 of Recommendation 2000/417 concerned with pricing, specifically with regard to capital costs, states that ‘[i]n principle, a forward-looking approach based on current costs ... will foster fair and sustainable competition and provide alternative investment incentives. However, if this could result in distortions of competition in the short term, for example where the notified operator’s tariffs remain unbalanced on the basis of current costs, it is recommended that the national regulatory authority ... specify the reasonable time period necessary for the gradual adjustment to current costs of the price of local loops.’ The recommendation also describes current costs as those which ‘are the costs of building an efficient modern equivalent infrastructure and providing such a service today.’ (32)

49. For its part, paragraph 6 of the Commission’s Communication of 26 April 2000 states that, with regard to prices and costs, the national regulatory authorities are required to abide by a series of rules. Firstly, the rules on costing and pricing should be transparent and objectively based. Secondly, pricing rules should ensure that the incumbent operator is able to cover its relevant costs plus a reasonable return. They should also be compatible with the aim of fostering fair and sustainable competition and providing efficient incentives for investment in infrastructure. On this point, in the same Communication, the Commission also states that, in principle, this aim can be achieved by adopting a pricing system based on current costs. This Communication uses the same concept of current costs, which was also used in Recommendation 2000/417. Lastly, the pricing rules must ensure that there is no market distortion, in particular margin squeezes between the prices of wholesale and retail services offered by the incumbent. Next, the Commission points out that, in some cases, these principles may conflict with each other. In those circumstances, national regulatory authorities may have to consider transitional measures that avoid distorting competition in the short term.

50. The evidential background which I have just presented shows that the national regulatory authorities have considerable discretion in selecting and applying the method for calculating the relevant costs of the notified operation which they consider to be most appropriate, depending on the specific circumstances of each Member State at the time when prices are being assessed. However, this same evidence and, first and foremost, the regulation considered in the light of the reasons for its introduction and its aims, also show that there are limits inherent in the concept of cost-orientation and those limits must, in any event, be respected.

51. Fundamentally, it is important to bear in mind that a decision such as that at issue here, which set rates for access to the notified operator’s local loop, must be reached by striking a balance between two conflicting principles. On the one hand, the essential purpose of the regulation is to ensure effective and immediate unbundling of local loop access and the consequent fostering of competition on the local access market. But, on the other, the approved rates must not be set at such a level that they might deter investment in infrastructure. When properly interpreted, the concept of cost-orientation laid down in the regulation thus sets as a limit the requirement that a decision approving rates for access based on cost-orientation must be reached as a result of the balanced and proportionate consideration of these two principles. (33)

52. By adopting a method of calculating the costs represented by depreciation and interest, which is based exclusively on the cost in terms of current prices of replacing the local network with an equivalent efficient modern network – that is to say based on the gross replacement cost of the assets – it is possible to achieve the necessary balance between these two principles. A situation could, for example, arise in which the existing network, although fully depreciated, was, at the time the obligation requiring unbundling of local loop access was imposed, very close to the end of its useful life and, therefore, of very low intrinsic value. In those circumstances, the fact that a national regulatory authority opts for a model based on gross replacement cost may be fully justified and proportionate, provided that creating incentives for investment in the building of new infrastructure is genuinely one of its prime objectives.

53. However, where, as seems to be the case here, we are dealing with a local network which is usable and is used in practice, and which still has significant intrinsic value and is already depreciated (at least partially), use of the calculation method based on gross replacement cost on the face of it attaches disproportionate importance to investment incentives. The Community concept of cost-orientation in fact requires equivalent consideration to be given to both of the principles described above.

54. The adoption of such a method is likely to reduce the margin for new competing entrants to the market to offer consumers a significant price reduction which would persuade them to change their telecommunications services provider. In this connection, it is worth pointing out that, in Decision 2003/707/EC, the Commission took the view that the rates being contested in the present case, which were set by the decision of the German regulatory authority of 30 March 2001, had resulted in a margin squeeze contrary to Article 82 EC, committed by Deutsche Telekom over the period up to May 2003. (34) This Commission decision is currently the subject of an action before the Court of First Instance. (35) Without prejudging the merits of the decision, it may legitimately raise doubts concerning the extent to which the rates approval decision at issue secures investment in infrastructure in a balanced and proportionate manner in relation to the regulation’s primary objective of fostering competition on the market for access to the local metallic wire loop.

55. Where, with regard to access to an existing and usable local network such as the Deutsche Telekom network, a national regulatory authority uses gross replacement cost in order to determine the interest and depreciation which the rates must cover, the rates approval decision in question cannot leave any room for doubts as to whether a balance has been struck between creating investment incentives (which the adoption of such a method is clearly intended to achieve) and the fostering of competition on the market for local loop access. The lack of competition at local loop level in Europe, as at 1 January 2001, was precisely the reason why the regulation was adopted, and everything indicates that, at the time of the rates approval decision in question, 30 March 2001, competition on the local network market in Germany was very limited.

56. It must be acknowledged that the adoption of a calculation method based exclusively on current replacement costs means that, in order to gain access to the existing network, competing operators have to pay the same amount that they would have to pay in order to build a new equivalent network.

57. If a competing operator decides to invest in new infrastructure, it will have, initially, to bear the costs inherent in such a construction programme, before the infrastructure becomes operational. In the meantime, in order to benefit from the local loop unbundling provided for in the regulation, it will have to pay a sum broadly equivalent to the cost of investing in new infrastructure. The competing operator will, therefore, have to bear the cost of building its own network and, at the same time, pay the notified operator so that it can invest in its own new infrastructure.

58. To avoid such ‘duplicate’ costs, two options will be open to a competing operator. Firstly, it can start building its own network and decide not to request access to the notified operator’s local loop. This option is likely to help the notified operator to maintain its dominant position on the local access network, which is precisely the opposite of what the regulation is intended to achieve. Alternatively, the competing operator will have the option of deciding not to build its own network and to request access. In this case, it will be required to pay the notified operator a charge which, as it is based on gross replacement cost, is designed to enable the notified operator to build a new network. However, it is clear that the notified operator is obviously not obliged to do this, and is thus free to use the proceeds from the charges received for any other purpose.

59. The above considerations show that, unless the rates approval decision clearly demonstrates that the two principles referred to have been properly taken into account in a balanced manner, then, in circumstances in which the notified operator’s network is still operational and usable, the adoption of a method based on gross replacement cost is incompatible with the principle of cost-orientation and the aims of the regulation.

60. However, the argument put forward by Deutsche Telekom and by the Federal Republic of Germany disputes that conclusion: they maintain that approving rates based on a value below the current replacement cost, for example by deducting depreciation already made, would mean disregarding the regulation’s aim of providing incentives to invest in infrastructure.

61. In order to analyse this argument, it must be assumed that there is a distinction between incentives to invest in the construction of new local metallic wire networks parallel to the Deutsche Telekom network, and incentives to invest in alternative infrastructure, such as cable TV or other systems.

62. Regarding the first type of investment, the adoption of a method of calculating capital costs based on the gross cost of replacing the notified operator’s local network would, of course, be likely to create such an incentive. However, it would seem to be neither cost-effective nor efficient, not to say an aberration in terms of saving resources and the aim of ensuring lower prices for customers, to duplicate an existing local loop where that loop is still usable. (36) If this was the case at the time that the rates approval was granted in Germany, which it is for the national court to ascertain, the argument that it is justifiable to adopt a method based on gross replacement cost in order to create incentives to invest in new copper wire infrastructure parallel to the Deutsche Telekom network is completely undermined.

63. Regarding incentives to invest in alternative infrastructure, I should point out that setting charges for access to the existing local loop on the basis of the current cost of replacement with a new and equivalent local network does not necessarily reflect the costs inherent in the construction of this alternative infrastructure. Indeed, in addition to the fact that the technology in question has actually to be available, a decision to build a cable TV network, a local ‘wireless radio’ loop or any other type of system, would necessarily involve taking account, first, of an investment cost different from that which would be required to build a new local copper wire network and, secondly, of the fact that the functionality and economic potential inherent in the alternative infrastructure are different from the functionality offered by the local copper wire network (37) . Setting the charges below those that would result from using a method based exclusively on the current cost of replacing the local loop might not, therefore, act as a complete deterrent to investment in alternative infrastructure.

64. It will therefore be for the national court to ascertain whether the rates approval decision at issue in the present case contains elements justifying the adoption of the calculation method based on gross replacement costs and, thus, whether the decision in question shows that the two principles already discussed have both been taken into account in a balanced and proportionate fashion. In the absence of such justification, calculating the depreciation and interest which the charges have to cover using a gross replacement cost method is incompatible with the regulation.

65. To sum up, there are two possible justifications which could be put forward Firstly, as I mentioned above, (38) it is possible that the advanced age of the network could justify using a method based on gross replacement costs. Secondly, as I emphasised in point (63) above, it is possible that in the specific circumstances of Germany at the time of the rates approval decision, investment in alternative technologies available at the time, with functionality equivalent to Deutsche Telekom’s local copper wire network, would have been significantly discouraged if the charges had been set below the figure obtained using a calculation method based on the gross cost of replacing the network.

66. In neither of these two justifications applies, the conclusion must be that it would be contrary to the concept of cost-orientation to use as the exclusive basis for calculating costs the current replacement value of the assets, expressed in terms of current daily prices at the time of valuation.

67. Should the referring court conclude, in the light of the considerations set out above, that the adoption by the regulatory authority of a calculation method based on gross replacement costs is incompatible with cost-orientation, the question then arises whether this concept of cost-orientation requires depreciation already made to be deducted.

68. If the referring court concludes that this is the case, this means that the approved rates should have been set at a figure below that obtained by applying the calculation method based on the gross replacement cost of the assets. However, the way in which the concept of cost-orientation has been interpreted does not provide any indication of the specific cost elements which should be deducted in order to determine how precisely to change from a calculation method based on the gross cost of replacing the assets to a method based on the net replacement cost. Deducting the depreciation already made would undoubtedly provide a legitimate calculation method based on the net replacement. However, I would not rule out the possibility that other definitions of net replacement cost could also be acceptable. I am thinking, for example, of the concept of net replacement cost which is defined as the sum which has to be paid in order to replace the asset with another asset of similar age and characteristics. The value of the notified operator’s asset in terms of current costs, which would be used as a basis for calculating the interest and depreciation, could then be established on the basis of such net replacement costs or on the current intrinsic value of the network, depending on which of these is the lower figure. (39)

69. To sum up, it is my view that where rates calculated on the basis of the current replacement cost prove not to be balanced in the circumstances prevailing at the time of the approval decision, the rates should be set at a lower figure, either by deducting the depreciation already made or by another means which it is possible to define at national level, and which enables the rates for access to the local loop to be set at a figure below the figure that results exclusively from the use of the current replacement cost method.

70. Deutsche Telekom is opposed to the rates being set at a lower figure. On this point, it maintains that, because the existing network is already largely depreciated, deducting the previous depreciation would involve a risk that competing operators would be given free or virtually free access to its local loop, which would unlawfully prevent it from deriving full advantage from its ownership of that network. I do not share this view.

71. There is no doubt that the regulation accords the notified operator the right to a reasonable return for making the local loop available to competing operators. (40) Even if Deutsche Telekom’s local network were, possibly, to be fully depreciated, the regulation would preclude the rates being set at zero or at a level very close to free access.

72. However, contrary to what Deutsche Telekom is in substance arguing, the regulation does not imply that only approved rates obtained by applying a calculation method based on the current gross cost of replacing the network are capable of providing a reasonable return for the notified operator. There are several lower rates which, in the specific circumstances of the Federal Republic of Germany at the time of the rates approval decision, could have been capable of fostering competition at local loop level without decisively deterring investment in alternative infrastructure and would, at the same time, be likely to provide a reasonable return for the notified operator, in accordance with the regulation. Deutsche Telekom’s right to receive a reasonable return is simply a lower limit which the regulatory authority is required to respect when adopting an approval decision. It does not allow rates set on the basis of the gross replacement cost of the assets to be regarded as the only rates likely to ensure a reasonable return for the notified operator. In other words, the rate that provides the greatest incentive to invest in infrastructure is not the only rate which will give the notifi ed operator a reasonable return. There are other rates, set at a lower level, which are also capable of ensuring such a return.

73. In the light of the considerations set out above, I propose that the Court reply to the third question as follows: the concept of cost-orientation provided for in Article 3(3) of the regulation should be understood as meaning that it requires a rates approval decision, such as the decision at issue in the present case, to be based on a balanced and proportionate compromise – depending on the circumstances prevailing at the time the decision is adopted – between the regulation’s central aim of fostering competition on the local loop access market and the need to ensure the necessary level of investment in infrastructure. In the light of those considerations, it will be for the national court to ascertain whether the rates approval decision at issue contains adequate justification for adopting the method of calculating the depreciation and the interest which the rates have to cover based exclusively on the current prices at the time of valuation. In the absence of such justification, the Community concept of cost-orientation of charges requires that charges for access should be set at a figure below that obtained by applying such a method of calculating capital costs, in particular by deducting depreciation already made before the valuation date.

E – The fourth question

74. The Verwaltungsgericht Köln is, basically, seeking to ascertain whether Community law requires the national regulatory authorities to work on the basis of complete cost statements produced by the notified operator or whether it is permissible to use analytical cost models and, if so, what requirements they have to satisfy.

75. As the referring court pointed out, the German regulatory authority considered that the cost statements submitted by Deutsche Telekom were incomplete and did not provide sufficient evidence. In the absence of adequate statements, the regulatory authority therefore used a ‘bottom-up’ analytical model to calculate the notified operator’s relevant costs and, in particular, the imputed interest and cost-accounting depreciation. In substance, this is a theoretical economic model which can be used to determine the level of investment currently required to build a modern, efficient local copper-wire network equivalent to the existing network. This model is, therefore, based on the costs which an efficient operator would have incurred in order to acquire the network and put it into operation. (41) A model of this kind differs from a ‘top down’ model, which is based on the notified operator’s actual costs. Although these costs can be verified from the point of view of efficiency using inter alia a forward-looking approach, such as long run incremental costs, it is, in any event, the notified operator’s costs which basically remain the decisive factor.

76. It is my view that neither the text of the regulation, nor the reasons for its introduction, nor the Court’s case-law concerning the concept of cost-orientation preclude the regulatory authorities from using theoretical cost models – bottom-up models, for example.

77. Such models can be used inter alia to apply an efficiency criterion to limit charges which, on the basis of the actual costs cited by the notified operator, would actually be higher. Recommendation 98/322 (42) shows precisely how using a bottom-up economic model can provide information on the inefficiencies which would result from the use of a model which includes assets in excess of requirements. This use of a bottom-up theoretical cost model accurately reflects the coordinated or hybrid use of a bottom-up analytical model together with a top-down model based on figures for the notified operator’s costs. (43)

78. The abovementioned judgment in Mobistar also tends towards the similar use of an analytical model. In that judgment, in relation to prices charged for ensuring the portability of telephone numbers, the Court accepted the advance setting of maximum prices which could be charged by the operator, using a theoretical cost model, provided that the charges were cost-orientated in such a way that consumers were not dissuaded from making use of the portability facility. The Court also emphasised that it was entirely possible that these maximum prices could prove to be ‘too high’ in relation to the operators’ cost structure. (44) In such cases, the charges would obviously have to be set, on the basis of the operator’s actual costs, below the figure obtained by applying the theoretical bottom-up cost model.

79. However, the question posed in the present case is not whether Community law permits the regulatory authorities to use such models. At issue is whether, where the regulatory authority finds that the statements submitted by the operator concerning the costs allegedly used as a basis for calculating interest imputed and depreciation, are incomplete and do not provide sufficient evidence, it may approve charges based on the alternative of ‘efficient’ costs obtained by applying a bottom-up theoretical model based on the cost of investment in building a new local network. It is, therefore, necessary to determine whether Community law imposes limits on replacing the notified operator’s statements of actual costs by a theoretical model of the costs incurred by an efficient operator and, if so, what those limits are.

80. There is a broad consensus amongst the interveners in this case to the effect that it would not be acceptable for any request for rates approval to be rejected where it is not 100 percent supported by cost statements from the notified operator. However, a minimum of evidence for the notified operator’s actual costs will, obviously, be essential to enable the national regulatory authority to ascertain whether the rates satisfy the cost-orientation requirement. The national regulatory authorities therefore have a margin of discretion in determining which statements of the operator’s actual costs are not essential and may be replaced by the use of a bottom-up analytical model. However, this margin of discretion is subject to limits under the regulation. Apart from the requirements of transparency, non-discrimination and objectivity, in exercising this margin of discretion, national regulatory authorities must also respect the limits arising from the interpretation of the concept of cost-orientated charges, with the autonomous significance and objectives already identified.

81. According to Article 4(2)(b) of the regulation, a national regulatory authority shall have the power to ‘require notified operators to supply information relevant for the implementation of this regulation.’ This information obviously includes the information needed, within a procedure for the approval of charges for local loop access, to provide evidence that these charges have been set on the basis of cost-orientation, as provided for in Article 3(3) of the regulation. The regulation does not contain any more precise provisions concerning the cost statements necessary to determine the costs relating to the provision of local loop access in line with which the charges must be orientated.

82. However, Article 7(2) of Directive 97/33 expressly states that ‘the burden of proof that charges are derived from actual costs, including a reasonable rate of return on investment’ lies with the notified operator. According to Article 7(5), second sentence of that directive, Member States are also required to ensure the adoption of cost accounting systems which are suitable for the implementation inter alia of the cost-orientation requirements and that they are documented to a sufficient level of detail, as indicated in Annex V. Annex V specifies inter alia the elements which must be included in the published information in order to ensure that the calculation of interconnection charges is transparent.

83. Operators’ cost accounting therefore plays a central role within the regulatory framework for telecommunications, (45) including, naturally, the legal requirements governing the unbundling of local loop access established by the regulation. The notified operator’s costs for making the local loop available, that is to say those costs which can be identified from its accounting documents, assume a central role when it comes to assessing whether charges for local loop access are cost-orientated. (46) On this point, I share Arcor’s view that the Community legislature’s concern to ensure the adoption of cost accounting systems supported by sufficiently detailed documentation would become meaningless if, where the notified operator only provides incomplete statements concerning its cost structure and, in particular, concerning depreciation and interest relating to its local network, the national regulatory authority simply used a theoretical model representing the costs of an efficient virtual operator in order to calculate this depreciation and interest.

84. The principle of cost-orientation refers first and foremost to the notified operator’s costs, that is to say its actual costs ‘connected with’ the provision of access to the existing local loop owned by that operator. (47) In order to assess whether the charges are consistent with the notified operator’s costs, the notified operator’s accounts provide the only possible starting-point for establishing those costs. It would be methodologically incorrect to take as the central basis for establishing the notified operator’s costs connected with the provision of access to its network, not its cost statements, but a bottom-up analytical model, which provides figures for costs connected with the provision of a modern, efficient local loop to be built from scratch by a virtual efficient operator. In fact, the actual costs connected with an existing local loop may be much lower than those calculated using a bottom-up theoretical model of that nature.

85. Where the existing local loop is already largely depreciated, even though it still retains a high intrinsic value, to take as the principal basis for calculating imputed interest and depreciation a bottom-up theoretical model and not the statements of actual costs, would produce an outcome incompatible with the objectives the principle of cost-orientation pursues. The charges approved on the basis of such a model would be higher than those resulting from taking account of the notified operator’s actual cost structure.

86. Consequently, using a bottom-up analytical model under those circumstances would not be likely to allow corrections to be made on the basis of efficiency criteria when calculating depreciation and interest based on taking into account the notified operator’s actual cost structure. Nor would using such a model serve to establish the value of the depreciation and interest currently borne by the notified operator in relation to its existing network, which has already been depreciated (or at least partially) and which is still usable.

87. I would also like to emphasise that, where a regulatory authority uses a bottom-up theoretical model in place of the statements of depreciation and interest which the notified operator has to bear in relation to its – largely depreciated and still usable – local network, this will encourage that operator to make a strategic selection of the cost statements to be submitted to the regulatory authority, with the result that, the charges will, in the final analysis, be approved either on the basis of actual costs or on the basis of efficient costs, depending on which figure is higher . The notified operator may decide on its own initiative not to provide certain statements concerning its cost structure, where the application of a ‘bottom up’ analytical cost model is likely to show higher capital costs and, consequently, produce higher access charges.

88. Admittedly, as I have already mentioned, the national regulatory authority has a margin of discretion with regard to documentation which it does not consider essential. However, the exercise of this discretion must not encourage notified operators to take a strategic approach when calculating the capital costs representing depreciation and interest relating to the specific local loop of the notified operator in question.

89. Lastly, I consider that the reply to this question is necessarily dependent upon the analyses which the referring court must make in connection with the previous question. If, in fact, in the light of the considerations which I have set out above in reply to the previous question, the rates approval decision provides adequate justification for adopting a method for calculating depreciation and interest based on the gross replacement cost of assets, I would, in principle, also consider the regulatory authority’s the use by of a bottom-up analytical cost model to be justified. (48)

90. However, where the adoption of a method of calculating depreciation and interest based on the gross replacement cost of assets proves not to be justified, the national regulatory authority’s use of a bottom-up theoretical cost model in place of the incomplete cost statements supplied by the notified operator in order to calculate that operator’s depreciation and interest, must be regarded as incompatible with the principle of basing charges for local loop access on the notified operator’s costs, where its local network is still operational and is already largely depreciated. This, basically, is the reply which I propose that the Court give to the fourth question.

F – The fifth question

91. This question concerns the boundaries of the margin of discretion which the regulatory authorities are allowed when assessing the cost-orientation of charges and the parameters of the judicial review to which such decisions must be subjected.

92. Article 4(1) of the regulation states that the national regulatory authorities are to ensure that charging for unbundled access to the local loop fosters fair and sustainable competition. Consequently, Article 4(2) provides that they are to have the power to impose changes, inter alia in the prices charged by notified operators for unbundled access to the local loop. (49) Such changes in the prices for access charged by the notified operator will, naturally, be justified where the national regulatory authority finds that the prices are incompatible with the principle of cost-orientation laid down by Article 3(3) of the regulation.

93. The reply to this question is closely linked to the analysis of the previous questions. That analysis showed that the national regulatory authorities have an indisputable margin of discretion when implementing the principle of cost‑orientation, both when deciding which of the cost elements supplied by the local loop provider to take into account and when deciding on the method to be used to calculate the costs connected with provision of access to the local loop. In the light of the considerations set out in the analysis of the previous questions, I see no reason why this discretion should not also extend to determining imputed interest and the setting of reasonable periods for depreciation. As Arcor states in its observations with regard to the latter, the fact that a depreciation period is based on an estimate of the future useful life of the asset inevitably involves an element of prediction and, consequently, the exercise of discretion.

94. In any event, such powers of discretion on the part of the regulatory authorities must comply with the requirements I have already mentioned concerning transparency, non-discrimination and equal treatment, and must respect the limits arising from the interpretation of the Community concept of cost-orientation, with the particular significance and scope it enjoys within the context of the regulation. In particular, the rates approval decision must strike a balanced compromise between the essential aim of fostering competition on the local loop access market and that of ensuring the necessary level of investment in infrastructure.

95. We come now to the question of the powers of judicial review the national courts should exercise over decisions adopted by the national regulatory authorities where they have exercised this power of discretion.

96. Neither the regulation nor the relevant directives constituting the former regulatory framework provide for any harmonisation of the national systems relating to judicial procedures and, more specifically, the determination of the scope and extent of judicial review of decisions by the national regulatory authorities, particularly those in which they have exercised a margin of discretion. The reply to this question is primarily a matter for the national procedural law.

97. Generally speaking, the national procedural rules defining the extent and scope of the judicial review of decisions by regulatory authorities are required to comply with the principles of equivalence and effectiveness. Where they protect rights derived from Community law, these rules may not be less favourable than those applying to similar remedies within domestic law. Nor may they make it virtually impossible or excessively difficult to exercise rights conferred by Community law. (50)

98. More specifically, Community law explicitly provides that Member States are required to provide remedies against decisions by regulatory authorities in the telecommunications sector. An obligation of this kind was already imposed under the former regulatory framework. In fact, Article 5a(3) of Directive 90/387 as amended by Directive 97/51/EC of the European Parliament and of the Council of 6 October 1997, (51) provided that ‘Member States shall ensure that suitable mechanisms exist at national level under which a party affected by a decision of the national regulatory authority has a right of appeal to a body independent of the bodies involved.’ (52) This is an example of the general principle of Community law whereby Member States have the responsibility of ensuring effective legal protection for the rights derived from Community law. (53)

99. But the judicial review which Community law requires the national courts to exercise in order to provide effective legal protection for the rights derived from Community law is not required to be more extensive than the forms of judicial review which the Community courts carry out in similar cases. On this point, the Court has indicated that where judicial review of decisions by Community authorities which have made complex assessments is at issue, those authorities enjoy a wide measure of discretion, the exercise of which is normally subject to a limited judicial review. (54) This limited judicial review is justified by practical reasons connected with the economic or technical complexity of assessments made in certain fields which, moreover, may frequently be capable of rapid evolution. (55) In any event, the fact that the applicable national procedural law applicable restricts the extent of the judicial review cannot have the effect of decisions by the regulatory authorities not being subject to effective judicial review. On this point, the Court has emphasised that any national procedure for judicial review of a decision by a regulatory authority must, in any event, enable the court or tribunal seised of an application ‘effectively to apply the relevant principles and rules of Community law when reviewing its legality.’ (56)

100. When considering an appeal against a rates approval decision, as in the present case, the competent national judicial bodies must, therefore, have the opportunity to assess whether, when exercising the margin of discretion which it enjoys, the national regulatory authority has respected the limits arising from the interpretation of the Community concept of cost-orientation and whether the rates approval decision has satisfied the criteria and objectives laid down in the regulation. In this connection, it is important to distinguish between exercising a margin of discretion and interpreting the relevant legal criteria determining the precise limits of that margin of discretion. It follows that the competent national judicial bodies must conduct a judicial review enabling them to assess whether, depending on the specific national circumstances prevailing at the time the decision was adopted, a rates approval decision issued by a national regulatory authority has struck an appropriate balance between the essential aim of fostering competition within the local network and the aim of ensuring the necessary level of investment in infrastructure.

101. I therefore propose that the Court reply to the referring court to the effect that, when assessing whether charges have been set on the basis of cost-orientation, the national regulatory authority has a margin of discretion with regard, in particular, to the method used to calculate the costs and also to issues relating to the determination of imputed interest and reasonable depreciation periods. Effective judicial review of a rates approval decision must make it possible to ascertain whether or not the rates approval decision in question is in breach of the aims of the regulation and the criteria of non-discrimination and equal treatment. It must also make it possible to ascertain whether the limits arising from the interpretation of the Community concept of cost-orientation have been respected and, in particular, whether the decision shows that an appropriate balance has been struck between the essential aim of fostering competition within the local network and the aim of ensuring the necessary level of investment in infrastructure.

G – The sixth question

102. By this question, the referring court is, basically, asking whether, although a rates approval decision adopted by a national regulatory authority is not addressed to them, competitors as beneficiaries of access to the notified operator’s local network, must have a right of appeal against such a decision where they consider that the rates approved have not been set on the basis of cost-orientation.

103. In my Opinion of 15 February 2007 in the Tele2 UTA Telecommunication case, (57) I had occasion to consider an issue in connection with the procedure for market analysis within the new regulatory framework, which is broadly equivalent to the problem forming the subject-matter of this question. For further discussion of this, I would, therefore, refer to my Opinion in the Tele2 UTA Telecommunication case, cited above. (58)

104. I already pointed out in that Opinion that, according to Article 5a of Directive 90/387, which constituted part of the former regulatory framework for telecommunications which the regulation is intended to complement, Member States must ensure ‘that suitable mechanisms exist at national level under which a party affected by a decision of the national regulatory authority has a right of appeal to a body independent of the parties involved.’ (59) In its judgment in Connect Austria , cited above, when reviewing the latter provision, the Court pointed out that Member States bear the responsibility of ensuring that, in every case ‘individual rights derived from Community law’ (60) are effectively protected and that Article 5a(3) of Directive 90/387 requires that ‘Member States shall ensure that suitable mechanisms exist at national level under which a party affected by a decision of the national regulatory authority has a right of appeal to a body independent of the parties involved.’ The Court then concluded that ‘in order to ensure that national law is interpreted in compliance with Directive 90/387 and that the rights of individuals are effectively protected, national courts must determine whether the relevant provisions of their national law provide individuals with a right of appeal against decisions of the national regulatory authority which satisfies the criteria laid down in Article 5a(3) of Directive 90/387.’ (61)

105. Article 5a, like Article 4(1) of the framework directive, is an expression of the general principle of Community law whereby Member States have the responsibility of ensuring effective legal protection of the rights which individuals are accorded under Community law. (62) A decision by a national regulatory authority, such as the decision at issue in the main proceedings, setting the rates which the notified operator is entitled to charge competing operators as beneficiaries, is a decision against which, according to Community law, there must be a right of appeal before an independent judicial body. The question which has been posed in this case is, however, more specific and asks whether, although the rates approval decision is not addressed to them, competitors as beneficiaries of access, such as Arcor, must have the right to bring an action to contest the rates for access on the grounds that they have not been set on the basis of cost-orientation, in breach of Article 3(3) of the regulation.

106. It is, first of all, important to recall that, at the time of the rates approval decision of 30 March 2001, Deutsche Telekom and Arcor were parties to a contract. According to the referring court, the rates approved by the national regulatory authority in the present case were set by agreement between Deutsche Telekom and Arcor in their contract. Consequently, where the national regulatory authority sets the rates in accordance with the regulation, it in effect establishes the price which Arcor is required to pay for access to Deutsche Telekom’s local loop. Whatever price Arcor has to pay to Deutsche Telekom is the result, not of negotiations between Deutsche Telekom and Arcor, but of the decision by the national regulatory authority, which is deemed to have complied with the cost-orientation requirement laid down by Article 3(3) of the regulation.

107. Contrary to what Deutsche Telekom, the German Government and the Federal Republic of Germany, as a party to the dispute before the referring court, maintain, it is my view that Community law confers upon competitors as beneficiaries of access to the local loop, such as Arcor in this case, the right to bring proceedings to contest rates which have not been set on the basis of cost-orientation.

108. Where it requires that charges for access must be set on the basis of cost-orientation, Article 3(3) of the regulation protects not only the interests of the notified operator, by ensuring that it is able to cover its costs, but also the interests of competitors as beneficiaries of access to the notified operator’s local loop. (63)

109. Both Deutsche Telekom and Arcor are contracting parties whose contractual relationship is affected by the decision by the regulatory authority setting the rates. (64) They must both have the right to bring proceedings to contest that decision on the ground that it approved rates incompatible with the cost-orientation requirement laid down in Article 3(3) of the regulation.

110. The aim of the regulation is to foster competition on the local access market. The requirement that charges must be set on the basis of cost-orientation is instrumental in achieving that aim and, as Article 4(1) of the regulation expressly recalls, the national regulatory authorities are required to ensure that charging for unbundled access to the local loop fosters fair and sustainable competition. In the light of those aims, it would not be tenable for the notified operator to be granted the right to bring proceedings to contest rates on the ground that they are incompatible with the cost-orientation requirement, whereas competing operators, as new entrants to that market who are required to pay the charges set by the regulatory authority, do not have that same right. (65) It therefore follows that, where a competing operator has a contractual relationship with a notified operator for access to the latter’s local loop, with rates set by an approval decision of the national regulatory authority, the operator benefiting from that access must have the right of appeal against such a decision in order to contest the rates set, on the ground that they fail to satisfy the cost-orientation requirement laid down by the regulation.

111. I further consider that, in view of the aims of fostering competition set by the regulation and of the instrumental role which the requirement that charges for access must be set on the basis of cost-orientation plays in connection with this, even operators which are competitors of the notified operator but do not have a contractual relationship with the latter must also effectively have a real possibility of bringing an action to contest access charges which have not been set on the basis of cost-orientation. Such competing operators, who do not yet have a contractual relationship with the notified operator, are also the direct beneficiaries of the provisions of the regulation, which are designed to foster competition in the segment of the telecommunications market comprising the local access network. (66) In other words, it is not necessary to have any kind of contractual relationship with the notified operator in order to be classed as a ‘beneficiary’ of the unbundled local loop access introduced by the regulation. (67)

112. Where a rates approval decision imposes rates which have not been set on the basis of cost-orientation, that decision will also have a negative impact on those competing operators who might wish to obtain access to the notified operator’s local loop. In fact, where a competitor is faced with a rates approval decision which makes it more difficult for it to establish a proposed contractual relationship with the notified operator, it must also have the possibility of bringing proceedings to contest the fact that those rates have not been set on the basis of cost-orientation, where appropriate. Consequently, those competing operators must also have the right of appeal, in the same way as operators which already have a contractual relationship with the notified operator.

113. I therefore propose that the Court reply to the referring court to the effect that Community law requires that competitors as beneficiaries of the right of access to the notified operator’s local loop have the right to bring proceedings to contest rates for access approved by a national regulatory authority, on the ground that they were not set on the basis of cost-orientation.

H – The seventh question

114. The referring court is, basically, seeking to ascertain where the burden of proof that rates have been set on the basis of cost-orientation lies, both during the course of the administrative procedure preceding the rates approval decision and during an appeal lodged against the regulatory authority’s decision by a competitor affected by it.

115. The regulation contains no provision stipulating where the burden of providing proof of the costs on which the charges must be based lies. It is Article 7(2) of Directive 97/33, which forms part of the regulatory framework for telecommunications that the regulation is designed to complement, which expressly states that ‘[t]he burden of proof that charges are derived from actual costs including a reasonable rate of return on investment shall lie with the organisation providing interconnection to its facilities.’ (68)

116. In view of the fact that the concept of cost-orientation relates to the notified operator’s costs, that is to say the costs ‘connected with’ the provision of access to an existing local loop owned by that operator, it is obviously the notified operator that is best placed to provide information concerning its costs. In the context of the supervision of charge-setting, which, in accordance with Article 4 of the regulation, is to be carried out by the national regulatory authority, it is, therefore, for the notified operator to provide evidence of the costs connected with the provision of access to its local loop on the basis of which the prices which it charges competitors must be orientated.

117. As regards the problem of ascertaining where the burden of proof that charges are cost-orientated lies, in the context of legal proceedings consequent on an appeal against a rates approval decision, neither the regulation nor the other legal instrument within the former regulatory framework provide any guidance on this point. As a result, Community law does not require that the rule which places upon the notified operator the burden of providing evidence of the costs in line with which the prices it charges for access must be orientated, during the administrative stage preceding the national regulatory authority’s decision on those rates, must also apply during any subsequent legal proceedings. Consequently, it will be for the relevant national procedural law to determine the evidential rules applicable, including where the burden of proof lies as between the national regulatory authority which gave the rates approval decision and the party affected by that decision which has brought proceedings to contest whether the approved rates are orientated in line with the notified operator’s costs.

118. In deciding where the burden of proof lies, national law must, in any event, respect the Community principles of effectiveness and equivalence. Member States must, therefore, ensure that evidential rules – and, in particular the rules on where the burden of proof applicable to actions relating to a breach of Community law lies – are, firstly, not less favourable than those that apply to similar domestic actions and, secondly, that they do not make it impossible or excessively difficult in practice for individuals to exercise rights conferred by Community law. (69)

119. I therefore propose that the Court reply to the seventh question to the effect that the regulation should be understood as meaning that, during a procedure for the supervision of charge-setting conducted by a national regulatory authority in accordance with Article 4 of the regulation, it is for the notified operator to provide evidence of its costs connected with the provision of access to its local loop, those costs having to be used in the cost-orientation of the rates which it charges its competitors. It will be for the national procedural law to determine, in accordance with the Community principles of the effectiveness and equivalence of legal protection, where the burden of proof lies in the context of legal proceedings contesting the cost-orientation of rates for access set by a decision of the national regulatory authority.

III – Conclusion

120. On the basis of the arguments set out above, I propose that the Court reply as follows to the questions referred for a preliminary ruling by the Verwaltungsgericht Köln:

(1) Articles 1(4) and 3(3) of Regulation (EC) No 2887/2000 of the European Parliament and of the Council of 18 December 2000 on unbundled access to the local loop must be interpreted as meaning that the concept of prices based on cost-orientation constitutes a requirement imposing a limit on the prices charged by the notified operator for access to its local loop which, notwithstanding the margin for discretion which it offers in terms of actual implementation at national level, may not be departed from to the detriment of beneficiaries of access to the local loop.

(2) Where Article 3(3) of the regulation, in laying down a requirement that prices charged for local loop access must be set on the basis of cost-orientation, must be interpreted as meaning that the concept of costs also includes imputed interest and cost-accounting depreciation.

(3) The concept of cost-orientation provided for in Article 3(3) of the regulation must be interpreted as meaning that it requires a rates approval decision, such as the decision at issue in the present case, to be based on a balanced and proportionate compromise – depending on the circumstances prevailing at the time the decision is adopted – between the regulation’s central aim of fostering competition on the local loop access market and the need to ensure the necessary level of investment in infrastructure. In the light of this, it will be for the national court to ascertain whether the rates approval decision at issue contains adequate justification for adopting the method of calculating the depreciation and the interest which the rates have to cover based exclusively on the current replacement value of the assets, expressed in terms of current daily prices at the time of valuation. In the absence of such justification, the Community concept of cost-orientation of charges requires that charges for access should be set at a figure below that obtained by applying such a method of calculating capital costs, in particular by deducting depreciation already made before the valuation date.

(4) If, in the light of the reply to the previous question, the national court concludes that the adoption of a method of calculating depreciation and interest based on the gross replacement cost of assets proves not to be justified, the national regulatory authority’s use of a bottom-up theoretical cost model in place of the incomplete cost statements supplied by the notified operator in order to calculate that operator’s depreciation and interest, must be regarded as incompatible with the principle of basing charges for local loop access on the notified operator’s costs, where its local network is still operational and is already largely depreciated.

(5) When assessing whether charges have been set on the basis of cost-orientation, the national regulatory authority has a margin of discretion with regard, in particular, to the method used to calculate the costs and also to issues relating to the determination of imputed interest and reasonable depreciation periods. Effective judicial review of a rates approval decision must make it possible to ascertain whether or not the rates approval decision in question is in breach of the aims of Regulation No 2887/2000 and the criteria of non-discrimination and equal treatment. It must also make it possible to ascertain whether the limits arising from the interpretation of the Community concept of cost-orientation have been respected and, in particular, whether the decision shows that an appropriate balance has been struck between the essential aim of fostering competition within the local network and the aim of ensuring the necessary level of investment in infrastructure.

(6) Competitors as beneficiaries of the right of access to the notified operator’s local loop have the right to bring proceedings to contest rates for access approved by a national regulatory authority, on the ground that they were not set on the basis of cost-orientation.

(7) Regulation No 2887/2000 must be interpreted as meaning that, during a procedure for the supervision of charge-setting conducted by a national regulatory authority in accordance with Article 4 of the regulation, it is for the notified operator to provide evidence of its costs connected with the provision of access to its local loop, those costs having to be used in the cost-orientation of the rates which it charges its competitors. It will be for the national procedural law to determine, in accordance with the Community principles of the effectiveness and equivalence of legal protection, where the burden of proof lies in the context of legal proceedings contesting the cost-orientation of rates for access set by a decision of the national regulatory authority.

(1) .

(2) – OJ 2000 L 336, p. 4.

(3) – BGBl. 1996 I, p. 1120, ‘the TKG 1996’.

(4) – BGBl. 1996 I, p. 1492, hereinafter ‘the TEntgV’.

(5) – Directive of the European Parliament and of the Council of 30 June 1997 on interconnection in telecommunications with regard to ensuring universal service and interoperability through application of the principles of Open Network Provision (ONP) (OJ 1997 L 199, p. 32).

(6) – Directive of the European Parliament and of the Council of 26 February 1998 on the application of open network provision (ONP) to voice telephony and on universal service for telecommunications in a competitive environment (OJ 1998 L 101, p. 24).

(7) – Article 4(5) in fact states that ‘[d]isputes be tween undertakings concerning issues included in this Regulation shall be subject to the national dispute resolution procedures established in conformity with Directive 97/33/EC and shall be handled promptly, fairly and transparently.’

(8) – According to Article 27 of Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services (the ‘Framework’ Directive) (OJ 2002 L 108, p. 33) (‘the framework directive’), ‘[o]perators of fixed public telephone networks that were designated by their national regulatory authority as having significant market power in the provision of fixed public telephone networks […] shall continue to be considered “notified operators” for the purposes of Regulation (EC) No 2887/2000 until such time as the market analysis procedure referred to in Article 16 has been completed. Thereafter they shall cease to be considered “notified operators” for the purposes of this Regulation.’ Recital 43 in the preamble to the framework directive also states that the Commission may, when appropriate, present a proposal for the repeal of the regulation. The obligations laid down in the regulation are therefore to remain in force for the period of time necessary to assess competition and to decide, on the basis of that assessment, whether or not the obligations in question need to be retained. See also recital 12 of Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities (Access Directive) (OJ 2002 L 108, p. 7).

(9) – See also Cases C‑392/04 and C‑422/04 i‑21 Germany and Arcor [2006] ECR I‑8559, paragraph 24, in which the Court pointed out that the framework directive applies only to legal situations arising from 25 July 2003.

(10) – See the similar argument put forward by the Court in Case C‑33/04, Commission v Luxembourg [2005] ECR I‑10629, paragraphs 81 and 82.

(11) – See recital (1) of the regulation.

(12) – See recital (3) of the regulation and the Proposal for a Regulation of the European Parliament and the Council on unbundled access to the local loop (COM(2000) 394 final, OJ 2000 C 365 E, p. 212).

(13) – See recital (2) of the regulation.

(14) – Almost exactly reproducing recital (8) of Commission Recommendation 2000/417/EC of 25 May 2000 on access to, and interconnection of, electronic communications networks and associated facilities (Access Directive) (OJ 2000 L 156, p. 44).

(15) – This situation is expressly mentioned in recital (3) of the regulation which emphasises that the marked absence of competition at local loop level was due to the fact that these operators rolled out their local access networks over significant periods of time protected by exclusive rights and were able to fund investment costs from monopoly rents.

(16) – See recital (11) of the regulation. Article 7 of Directive 97/33, which was in force at the material time, adopts a similar approach. It provides that charges for interconnection are to be based on actual costs, including a reasonable rate of return on investment.

(17) – This concept first appeared in the Community regulatory framework for telecommunications in Annex II to Directive 90/387, paragraph 4, first subparagraph, according to which charges must be based on objective criteria and ... in principle be set on the basis of cost-orientation.

(18) – See, to that effect, the similar concept of ‘equitable remuneration’ in Case C‑245/00 SENA 2003 ECR I‑1251, paragraphs 23 and 24. See also, in particular, the Opinion of Advocate-General Tizzano in that case, at points 32 and 45 to 48.

(19) – See, to that effect, also SENA , cited above, paragraph 23 and the case-law cited therein. And, more recently, Case C‑156/98 Germany v Commission [2000] ECR I‑6857, paragraph 50; Case C‑373/00 Adolf Truley [2003] ECR I‑1931, paragraph 35; Case C‑497/01 Zita Modes [2003] ECR I‑14393, paragraph 34; Case C‑53/05 Commission v Portugal [2006] ECR I‑6215, paragraph 20, and Case C‑306/05 SGAE ECR I‑11519, paragraph 34.

(20) – Apart from Case C‑146/00 Commission v France [2001] ECR I‑9767, paragraph 60.

(21) – Case C‑109/03 [2004] ECR I‑11273.

(22) – Case C‑438/04 [2006] ECR I‑6675.

(23) – Ibid, paragraph 37.

(24) – Ibid., paragraph 35.

(25) – Emphasis added.

(26) – See, on this point, Commission v France , cited above, paragraph 60, on the method of calculating the net cost of a universal service under Directive 97/33. The Court also found that, for the purpose of calculating the net cost of a universal service, Directive 97/33 prohibited the ascribing of ‘flat-rate or imprecise values to the net cost of universal service provision, rather than carrying out specific calculations.’

(27) – The link between the central aim of the regulation, which was to foster competition in the short term and the requirement that prices should be set on the basis of cost-orientation is shown by Article 4(4) of the regulation, which expressly provides that when the national regulatory authority determines that the local access market is sufficiently competitive, it is to relieve the notified operators of the obligation for prices to be set on the basis of cost-orientation.

(28) – Recital (10) of the preamble to the Regulation in fact states that although commercial negotiation is the preferred method for reaching agreement on ... pricing issues for local loop access, experience shows that in most cases the imbalance in negotiating power between the new entrant and the notified operator means that such a market solution cannot be relied on.

(29) – See Nihoul, P., and Rodford, P., EU electronic communications law: competition and regulation in the European telecommunications market , Oxford, 2004, p. 396 and p. 417, highlighting the strategic importance of prices. In fact, notified operators try to maintain their advantages by charging high prices without formally denying access to their networks.

(30) – Paragraph 4 of Annex V of Directive 97/33 shows how depreciation and capital costs are to be included in the cost-accounting system.

(31) – Recommendation 2000/417 of 25 May 2000 on unbundled access to the local loop: enabling the competitive provision of a full range of electronic communication services, including broadband multimedia and high-speed Internet (OJ 2000 C 272, p. 55).

(32) – See footnote 15 of the recommendation (emphasis added). In the annex to a previous Recommendation – Commission Recommendation 98/322/EC of 8 April 1998 (OJ 1998 L 141, p. 6) which was adopted on the basis of Directive 97/33 – we find a different interpretation of current costs. The current cost is described either as the intrinsic value of the asset or the net replacement cost, depending which of these is lower. The current cost of the asset is limited by the net replacement cost and the latter is described as ‘the cost of replacing the asset with another asset of similar characteristics and age. ’ Emphasis added. It is on this 1998 recommendation that Arcor has essentially based its position.

(33) – See, in the same vein, the position adopted by the Court in SENA , cited above, paragraph 36 and, more recently, Case C‑192/04 Lagardère Active Broadcast [2005] ECR I‑7199, paragraph 49.

(34) – Decision of 21 May 2003 relating to a proceeding under Article 82 of the EC Treaty (Cases COMP/C-1/37.578, 37.579 – Deutsche Telekom AG) (OJ 2003 L 263, p. 9). See, in particular, recitals (24), (199), (207) (211) and Articles 1, 2 and 3 of that decision.

(35) – Case T-271/03 Deutsche Telekom v Commission .

(36) – The regulation itself confirms this when it states in recital (6) of the preamble that ‘[i]t would not be economically viable for new entrants to duplicate the incumbent’s metallic local access infrastructure in its entirety within a reasonable time.’ In addition, Article 4(3) expressly highlights the central nature of the aim of ensuring ‘economic efficiency and maximum benefit for users.’

(37) – Recital (6) of the Regulation in fact states that ‘[a]lternative infrastructures such as cable television, satellite, wireless local loops do not generally offer the same functionality or ubiquity for the time being, though situations in Member States may differ.’

(38) – See point 52 above.

(39) – See, for example, the method for calculating the value of assets in terms of current costs provided for in paragraph 1 of the annex to Recommendation 98/322.

(40) – See, specifically, recital (11) of the regulation.

(41) – See the fifth recital of Recommendation 98/322, which specifically mentions bottom-up economic/engineering models, which are becoming highly sophisticated, although they are as yet imperfect. Paragraph 5 of that recommendation also expressly mentions that these bottom-up models give an indication of efficient costs.

(42) – See point 5, footnote 1.

(43) – Commission Recommendation 2005/698/EC of 19 September 2005 on accounting separation and cost accounting systems under the regulatory framework for electronic communications (OJ 2005 L 266, p. 64) – recital (8), paragraph 3 and footnote (3) – is clearly in favour of such coordination. The European Regulators Group Common Position ERG (05) 29 of 2005 ‘Guidelines for implementing the Commission Recommendation C(2005) 3480 on Accounting Separation & Cost Accounting Systems under the regulatory framework for electronic communications