OPINION OF ADVOCATE GENERAL

GEELHOED

delivered on 2 June 2005 1( )

Case C-334/03

Commission of the European Communities

v

Portuguese Republic

(Failure of a Member State to fulfil obligations – Breach of Article 4d of Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services, as amended by Commission Directive 96/19/EC of 13 March 1996)

I – Introduction

1. In this case the Commission is bringing an action for a declaration by the Court that, by failing to ensure, in practice, the effective transposition into law of Article 4d of Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services, ( ) as amended by Commission Directive 96/19/EC of 13 March 1996 amending Directive 90/388/EEC with regard to the implementation of full competition in telecommunications markets, ( ) the Portuguese Republic has failed to fulfil its obligations.

II – Legal background

A – Community law

2. Under Article 2 of Directive 90/388, as amended by Directive 96/19, Member States are required to withdraw all those measures which grant

‘1. …

(a) exclusive rights for the provision of telecommunications services, including the establishment and the provision of telecommunications networks required for the provision of such services; or

(b) special rights which limit to two or more the number of undertakings authorised to provide such telecommunications services or to establish or provide such networks, otherwise than according to objective, proportional and non-discriminatory criteria; or

(c) special rights which designate, otherwise than according to objective, proportional and non-discriminatory criteria, several competing undertakings to provide such telecommunications services or to establish or provide such networks.

2. Member States shall take the measures necessary to ensure that any undertaking is entitled to provide the telecommunications services referred to in paragraph 1 or to establish or provide the networks referred to in paragraph 1.

…’

3. Article 4c of Directive 90/388, as amended by Directive 96/19, provides as follows:

‘Without prejudice to the harmonisation by the European Parliament and the Council in the framework of ONP [Open Network Provision], any national scheme which is necessary to share the net cost of the provision of universal service obligations entrusted to the telecommunications organisations with other organisations, whether it consists of a system of supplementary charges or a universal service fund, shall:

(a) apply only to undertakings providing public telecommunications networks;

(b) allocate the respective burden to each undertaking according to objective and non-discriminatory criteria and in accordance with the principle of proportionality.

Member States shall communicate any such scheme to the Commission so that it can verify the scheme’s compatibility with the Treaty.

…’

4. Article 4d of Directive 90/388, as amended by Directive 96/19, reads as follows:

‘Member States shall not discriminate between providers of public telecommunications networks with regard to the granting of rights of way for the provision of such networks.

Where the granting of additional rights of way to undertakings wishing to provide public telecommunications networks is not possible due to applicable essential requirements, Member States shall ensure access to existing facilities established under rights of way which may not be duplicated, at reasonable terms.’

5. Article 5(3) of Directive 97/33/EC 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), ( ) states:

‘In order to determine the burden if any which the provision of universal service represents, organisations with universal service obligations shall, at the request of their national regulatory authority, calculate the net cost of such obligations in accordance with Annex III. The calculation of the net cost of universal service obligations shall be audited by the national regulatory authority or another competent body, independent of the telecommunications organisation, and approved by the national regulatory authority. The results of the cost calculation and the conclusions of the audit shall be open to the public in accordance with Article 14(2).’

6. According to the recital (23) in the preamble to Directive 96/19, ‘... The telecommunications organisations in many Member States enjoy legal privileges to install their network on public and private land, without charge or at charges set simply to recover incurred costs. If Member States do not grant similar possibilities to new licensed operators to enable them to roll out their network, this would delay them and in certain areas be tantamount to maintaining exclusive rights in favour of the telecommunications organisation. ...’

B – National provisions

7. Article 12(1) of Portuguese Law No 91/97 ( ) describes the basic telecommunications network as a public network, which meets the telecommunications needs of citizens and of economic and social activities throughout the whole national territory, and which ensures international connections.

8. Under Article 12(2), as amended by Law No 29/2002, ( ) the basic telecommunications network comprises a permanent public telephone network, the transmission network and bundling, switching and processing components, which together provide a universal telecommunications service.

9. Under Article 13 of Law No 91/97, operators of basic telecommunications networks are exempted from paying fees and from the charges for the installation of the telecommunications infrastructure or for access to the various parts of the installation or to the apparatus necessary for the operation of the network concerned.

III – The facts

10. On 20 March 1994 the Portuguese State and Portugal Telecom signed a concession agreement in the area of fixed telephony, for a period of 30 years, for the delivery of communication services that are regarded as a public service. This contract grants PT Comunicações, which, as a subsidiary of Portugal Telecom, is responsible for providing network-based telecommunications services, the exclusive right to install, to control and to operate the infrastructure of the basic telecommunications network. The concession also entrusts the property of the infrastructure to PT Comunicações. PT Comunicações is consequently under an obligation to expand the infrastructure qualitatively and quantitatively and to maintain it in good condition, particularly with regard to the functioning, the security and the maintenance of the network, so as to ensure the provision of telecommunications services for general usage, as a universal service, throughout the entire territory. In return for the concession, PT Comunicações must pay the State, as grantor of the concession, an amount equivalent to 1% of the gross operating income earned from providing the services. The net costs associated with the obligation of universal service provision are deducted from this amount.

11. On 17 February 2003, by means of Law No 31/2003, ( ) a new concession contract was approved, under which the obligations of the network operator did not effectively change. PT Comunicações is required to perform the services that are the subject of the concession, in terms of which interoperability, continuity, availability, durability and quality must be assured.

IV – Pre‑litigation procedure

12. On 2 May 2002 the Commission sent the Portuguese Republic a letter of formal notice in which it stated that, in comparison with other operators, PT Comunicações was being treated more favourably, since PT Comunicações, in its capacity as sole operator of basic telecommunications networks, is exempted, in terms of Article 13 of Law No 91/97, from the payment of fees and other levies, while all other operators are obliged to pay these charges. Following the Portuguese Government’s reply on 2 July 2002, the Commission sent the Portuguese Government a reasoned opinion on 19 December 2002. As the Portuguese Government did not reply to the reasoned opinion, the Commission brought the present action on 30 July 2003.

13. The Commission claims that the Court should:

– declare that, by failing to ensure, in practice, the effective transposition of Article 4d of Directive 90/388, as amended by Directive 96/19, the Portuguese Government has failed to fulfil its obligations, and

– order the Portuguese Republic to pay the costs.

14. The Portuguese Republic claims that the action is unfounded and asks the Court to order the Commission to pay the costs.

V – Arguments of the parties

15. According to the Commission, the exemption provided for in Article 13 of Law No 91/97, together with Law No 31/2003 and Law No 40/95 ( ) which preceded it, which states that PT Comunicações is responsible for the installation and operation of the basic network, means that, in comparison with other operators, PT Comunicações is being treated more favourably. As there is no justification for this, it constitutes a breach of Article 4d of Directive 96/19.

16. As PT Comunicações with its basic telecommunications network provides services which compete with the services provided by other operators, PT Comunicações has a direct competitive advantage over the other operators. The fact that the new operators are burdened with levies that do not have to be paid by the existing operator may result in delays in the development of their networks.

17. The Commission takes the view that this difference in treatment cannot be objectively justified.

18. The exemption cannot be justified by the obligation on PT Comunicações to pay an annual amount of approximately 20 million euros in compensation for the concession. This after all is a consideration for the use of the basic telecommunications network belonging to the Portuguese State. Nor can the exemption be considered to be compensation for the duty on PT Comunicações to provide a universal service. Article 4c of the Directive unequivocally excludes exemptions from charges that are not directly linked to the provision of universal services.

19. The Portuguese Government, in its defence and rejoinder, has given a detailed response to the Commission’s allegations. The essence of its defence can be summarised in three assertions.

20. In the first place, the difference in treatment between PT Comunicações, on the one hand, and the other suppliers of network-based telecommunications services, on the other, can be traced back to the fact that PT Comunicações is bound to universal service provision and its competitors are not. This means that PT Comunicações has to expand its telecommunications network if this is required by its obligation to provide a universal service, even where this expansion is not in itself economically attractive. Its situation is therefore not comparable with that of other operators which, when it comes to the development of network infrastructure and the provision of services, can allow their policy to be dictated exclusively by considerations of profitability. The exemption from the payment of fees for the utilisation of the public domain is therefore intended to eliminate obstacles to the development of the infrastructure required for universal service provision.

21. Moreover, a clear distinction must be made between the charges associated with the installation and maintenance of the network infrastructure and the charges resulting from the utilisation of that network. The fee exemption has repercussions for the first category of charges, but not for the second. In regard to its utilisation of the infrastructure as a provider of communication services, PT Comunicações therefore does not profit from the fee exemption.

22. In the second place, the Portuguese Government derives one of its arguments from the nature and scope of the exemption. This is very closely linked to the fact that PT Comunicações uses the public domain for the purpose of providing public services in the general interest, whereas its competitors utilise that domain primarily in the pursuit of their individual interests and are therefore subject to a levy as compensation for this.

23. In the third place, the Portuguese Government contends that even if the payment of the municipal levy were to be seen as an expenditure on the part of PT Comunicações – thus as a cost item – within the framework of general service provision, the exemption from the payment of this levy would not outweigh the specific costs associated with the fulfilment of the obligation to provide universal services. The Portuguese Government refers in this regard to the Altmark judgment. ( )

24. The Portuguese Government concludes its defence with the statement that, for the purpose of implementing Commission Directive 2002/77/EC of 16 September 2002 on competition in the markets for electronic communications networks and services, ( ) which replaced Directive 90/388/EEC, it intends to add certain provisions to the current Portuguese legislation which will guarantee to all operators of telecommunications networks the use of the public domain and which will provide for transparent, non-discriminatory and proportional levies on such use.

VI – Appraisal

25. In the 1990s the Community legislature energetically pursued the liberalisation of national telecommunications markets in order to create the conditions for the establishment of a single Community telecommunications market. This endeavour was facilitated by the rapid technological progress in the area of computerisation and telecommunications. As a result, the technical and economic arguments for the operation of telecommunications networks by those with exclusive or special rights became obsolete.

26. The Community legislature did not venture into totally unknown territory with its initiatives. By the beginning of the 1980s the telecommunications market in the United States was already largely liberalised. Certain countries in Europe had already preceded it. ( )

27. One of the core problems in the transition from a system of telecommunications provision organised and controlled along the lines of a public utility entrusted to a public service or public enterprise with exclusive or special rights was the organisation of the transformation of services produced and delivered by the public sector into services that are produced and distributed in a market-related way. On the one hand, there had to be the assurance that these services, which are of great economic, social and cultural importance to everybody, remain available: the duty of so-called universal service provision. On the other hand, despite their dominant positions in the emerging markets, the original holders of exclusive rights in the market, now mostly in privatised form, had to be prevented from excluding potential newcomers to the market, with either the overt or the covert support of the national authorities.

28. This twofold preoccupation is evident in the preamble to and enacting terms of Directives 90/388, 96/19 and 97/33 quoted above. On the one hand, these provide generous transition periods for telecommunications services the availability of which is vitally important to all citizens, such as the voice telephony service, ( ) and set standards for the calculation of the particular costs associated with the mandatory provision of universal services. ( ) On the other hand, these guidelines contain numerous provisions designed to ensure that new candidates for the production and delivery of telecommunications services receive the same treatment as the undertakings already operating in the relevant markets. Article 4d of Directive 90/388, as amended by Directive 96/19, which is central to this case, is an example of such a provision.

29. The facts that form the basis of this case, as set out in points 10 and 11 of this Opinion, are characteristic of the briefly described problems encountered in the transformation of a service under exclusive control to one that operates on the open market. One of these facts deserves particular attention in judging this action for failure to fulfil obligations: PT Comunicações is entitled to deduct in full the net costs associated with the obligation to provide a universal service from the amount owed in respect of the concession.

30. The exemption enjoyed by PT Comunicações under Article 13 of Law No 91/97 from charges relating to the granting of rights of way in the public domain for the purpose of the installation of infrastructure must undoubtedly be seen as a privilege that is in principle forbidden in regard to new telecommunications operators.

31. Indeed, if during the transformation period market penetration by newcomers is made more difficult by imposing on them greater financial burdens and/or other impediments compared with the operators of the existing infrastructure, this would be detrimental to the outcome envisaged by the Community legislature, and could result in the exclusive rights of the ‘old’ telecommunications organisation becoming de facto entrenched. The creation of a common market for the organisations concerned would also be effectively frustrated. Recital (23) in the preamble to Directive 96/19/EC, quoted in point 6 of this Opinion, addresses this expressly undesirable result.

32. The grounds advanced by the Portuguese Government as justification for the preferential treatment afforded to PT Comunicações, which is prohibited under Article 4d of the amended Directive 90/388, are contrived. They could hardly be anything other than contrived, because that justification cannot directly be found in the particular costs associated with the obligation to provide a universal service. After all, PT Comunicações can deduct those costs in full from the amount owed in respect of the concession.

33. The Portuguese Government therefore does not justify the more favourable treatment of PT Comunicações compared with other operators by invoking the costs directly associated with the obligation to provide a public service, but by citing its special role as a universal service provider. This special role, it argues, brings with it correspondingly onerous obligations to build and expand new network infrastructure, obligations against which the other operators are safeguarded.

34. It seems to me that this argument is untenable. In the first place, it completely ignores the fact that, as holder and owner of the basic telecommunications network, PT Comunicações already has an infrastructure at its disposal that newcomers have yet to create entirely at their own cost. In these circumstances, the granting of an exemption from levies which, however, burden the ‘new’ operators serves particularly well as an effective obstacle to market penetration by newcomers. In the second place, the justification provided is unsustainable because it ignores the fact that many, if not most, of the projects undertaken by PT Comunicações to expand the network infrastructure must comply with economic profitability requirements. In all these cases, the general exemption from the levies in question grossly distorts competitive conditions in favour of PT Comunicações.

35. The second ground of justification rests on a line of reasoning which is per se incompatible with the intended objective of the Member State that all providers of telecommunications services should be able to operate in the relevant market segments under equal conditions. It follows from this that undertakings that have an obligation to provide a universal service are entitled to compensation for the specific costs resulting directly from this obligation, nothing more and nothing less. Any particular privilege that it might additionally derive from that obligation, regardless of the label used, such as ‘public service’ or ‘collective interest’, distorts competitive conditions in favour of the original telecommunications organisations. That is precisely the result that the Community legislature sought to avoid with its directives.

36. Finally, the third argument in defence, which proceeds from the previously rejected hypothesis that the exemption from the levy is ostensibly a ‘compensation’ for the specific costs arising from the obligation to provide a universal service, is patently untenable in the light of the fact that PT Comunicações is already entitled to claim compensation. The exemption is, moreover, inappropriate as a method of compensation for those specific costs because it also applies to projects which have no connection whatsoever with the obligation to provide a universal service. In conclusion, a general exemption from the levy for future activities is eminently unsuitable for the purpose of establishing equivalence between the extent of the benefit granted and the extent of the costs arising from universal service provision. Moreover, the Portuguese Government has not put forward any facts or circumstances from which it might become apparent that it has tried to comply with the provisions of Article 5(3) of Directive 97/33 covering such compensation.

37. On the basis of the foregoing, I would suggest that the Portuguese Government has failed correctly to fulfil its obligations under Article 4d of Directive 90/388, as amended by Directive 96/19.

VII – Conclusion

38. In the light of the facts and circumstances set out above, I propose that the Court should:

(a) Declare that, by failing to adopt the laws, regulations and administrative provisions necessary to give effect to Article 4d of Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services, as amended by Directive 96/19/EC amending Directive 90/388/EEC with regard to the implementation of full competition in telecommunications markets, the Portuguese Republic has failed to fulfil its obligations under those directives;

(b) Order the Portuguese Republic to pay the costs pursuant to Article 69(2) of the Rules of Procedure.