1 By application lodged at the Court Registry on 17 April 2000, the Commission of the European Communities brought an action under Article 226 EC for a declaration that, by failing to comply with Article 4c of Commission Directive 90/388/EEC of 28 June 1990 on competition in the markets for telecommunications services (OJ 1990 L 192, p. 10), as amended by Commission Directive 96/19/EC of 13 March 1996 (OJ 1996 L 74, p. 13) (hereinafter Directive 90/388), and by failing to comply with Article 5(1), (3), (4) and (5) 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) (OJ 1997 L 199, p. 32), the French Republic has failed to fulfil its obligations under the EC Treaty and under those directives. Community legislation
2 The obligation to provide a universal fixed voice telephony service arises from Directive 95/62/EC of the European Parliament and of the Council of 13 December 1995 on the application of open network provision (ONP) to voice telephony (OJ 1995 L 321, p. 6), which was replaced by Directive 98/10/EC 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). Universal service is defined in Article 2(2)(f) of Directive 98/10 as a defined minimum set of services of specified quality which is available to all users independent of their geographical location and, in the light of specific national conditions, at an affordable price.
3 Articles 5 to 8 of Directive 98/10 list the services which must be included in every universal service. These include connection to the fixed public telephone network, directory services and public pay phones.
4 Article 1(6) of Directive 96/19 inserted into Directive 90/388 certain provisions concerning the establishment of a universal service, including a new Article 4c, which provides as follows: Without prejudice to the harmonisation by the European Parliament and the Council in the framework of ONP, 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. Member States shall allow their telecommunications organisations to re-balance tariffs taking account of specific market conditions and of the need to ensure the affordability of a universal service, and, in particular, Member States shall allow them to adapt current rates which are not in line with costs and which increase the burden of universal service provision, in order to achieve tariffs based on real costs. Where such rebalancing cannot be completed before 1 January 1998 the Member States concerned shall report to the Commission on the future phasing out of the remaining tariff imbalances. This shall include a detailed timetable for implementation. ...
5 Article 2 of Directive 96/19 provides that the Member States are to supply to the Commission, not later than nine months after the directive has entered into force, such information as will allow the Commission to confirm that points 1 to 8 of Article 1 have been complied with. The directive was published on 22 March 1996 and entered into force on 11 April that year. The period of nine months provided for in Article 2 thus expired on 11 January 1997.
6 Those provisions concerning universal service were supplemented by Article 5 of Directive 97/33, which reads as follows: 1. Where a Member State determines, in accordance with the provisions of this article, that universal service obligations represent an unfair burden on an organisation, it shall establish a mechanism for sharing the net cost of the universal service obligations with other organisations operating public telecommunications networks and/or publicly available voice telephony services. Member States shall take due account of the principles of transparency, non-discrimination and proportionality in setting the contributions to be made. Only public telecommunications networks and publicly available telecommunications services as set out in Part 1 of Annex I may be financed in this way. 2. Contributions to the cost of universal service obligations if any may be based on a mechanism specifically established for the purpose and administered by a body independent of the beneficiaries, and/or may take the form of a supplementary charge added to the interconnection charge. 3. 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). 4. Where justified on the basis of the net cost calculation referred to in paragraph 3, and taking into account the market benefit if any which accrues to an organisation that offers universal service, national regulatory authorities shall determine whether a mechanism for sharing the net cost of universal service obligations is justified. 5. Where a mechanism for sharing the net cost of universal service obligations as referred to in paragraph 4 is established, national regulatory authorities shall ensure that the principles for cost sharing, and details of the mechanism used, are open to public inspection in accordance with Article 14(2). National regulatory authorities shall ensure that an annual report is published giving the calculated cost of universal service obligations, and identifying the contributions made by all the parties involved. 6. ...
7 Annex III to Directive 97/33 states how the costs of universal voice telephony service obligations are calculated. The annex provides: ... The cost of universal service obligations shall be calculated as the difference between the net cost for an organisation of operating with the universal service obligations and operating without the universal service obligations. ... The calculation shall be based upon the costs attributable to: (i) elements of the identified services which can only be provided at a loss or provided under cost conditions falling outside normal commercial standards. This category may include service elements such as access to emergency telephone services, provision of certain public pay telephones, provision of certain services or equipment for disabled people, etc. (ii) specific end-users or groups of end-users who, taking into account the cost of providing the specified network and service, the revenue generated and any geographical averaging of prices imposed by the Member State, can only be served at a loss or under cost conditions falling outside normal commercial standards. This category includes those end-users or groups of end-users which would not be served by a commercial operator which did not have an obligation to provide universal service. ... Revenues shall be taken into account in calculating the net costs. Costs and revenues should be forward-looking.
8 Under the first paragraph of Article 23(1) of Directive 97/33 the Member States were to bring into force the laws, regulations and administrative provisions necessary to comply with the directive by 31 December 1997 and immediately to inform the Commission thereof. French legislation
9 Under Article 22-II of Law No 96-659 of 26 July 1996 regulating telecommunications (hereinafter Law 96-659), telephony services between fixed points on the networks authorised pursuant to Article L. 33-1 of the Code des postes et telecommunications (the Postal Services and Telecommunications Code, hereinafter the Code), as amended by Law 96-659, could not be provided by organisations other than the traditional service provider France Télécom until 1 January 1998.
10 A mechanism for sharing the net cost of universal service obligations assumed by France Télécom has been in place in France since 1997. The relevant legislation was enacted following the completion in 1996 of the Champsaur report, a document drafted at the request of the French Government by a group of independent experts.
11 Paragraph II of Article L. 35-3 of the Code, as amended by Law 96-659, provides, inter alia, that the costs attributable to the universal service obligations shall be financed by undertakings operating public access networks and supplying telephony services to the public and that the methods for evaluating, compensating and sharing out the net costs associated with the universal service obligations shall be published not less than one year before they are implemented.
12 Article R. 20-31 of the Code, as amended by Decree No 97-475 of 13 May 1997 on the method of financing universal service adopted for the purpose of application of Article L. 35-3 of the Code (hereinafter Decree 97-475), provides that the net cost of universal service provision is to be broken down into three components: - component C1, being the net value of telephone charging rate deficits attributable to the imbalance in the current charging rate structure; - component C2, representing deficits arising from geographical averaging designed to avoid discrimination on the basis of geographic location; - component C3, which is designed to cover the net costs of the supply and liabilities associated with special charging rates for certain categories of customer aimed at guaranteeing access to the service, with the provision of telephone booths nationwide and with general telephone directories and related operator and information services.
13 In respect of 1997 alone, Article 3 of Decree 97-475 provides for a flat-rate estimate of the aggregate of the three components C1, C2 and C3 in anticipation of detailed methods of calculation specific to each of them.
14 Article R. 20-32 of the Code, inserted by Decree 97-475, states that, for 1998 and 1999, the component C1 is to be calculated using the following formula: C = 12 x (Pe - P) x N, where - Pe is the standard monthly line rental charge of reference, being FRF 65 net of tax; - P is the average monthly line rental charge for the year under consideration, including connection to the exchange, detailed billing and services which enable customers to restrict access to the telephone. In calculating P, account is taken of the take-up rate of those ancillary services; - N is the average number, in the relevant year, of customers of the provider of the universal service, excluding customers with special contracts and customers who benefit from charging rate options which reflect the absorption of charging rate imbalances.
15 Paragraph III of Article R. 20-33 of the Code, also inserted by Decree 97-475, provides that, until appropriate models and accounting procedures are established, the net cost of providing a service to customers located in profitable areas who would not be served by a commercial organisation under prevailing market conditions are estimated at 1% of the turnover generated from the public access telephone service between fixed points provided by the universal service provider.
16 Paragraph II(3) of Article 35-3 of the Code, as amended by Law 96-659, provides that any imbalance, in comparison with how the market would normally operate, in the telephone charging rate structure current at the time of the Law's enactment must be phased out, progressively, by the nationalised service provider by 31 December 2000 and that, once that imbalance has been phased out, that is, by 31 December 2000 at the latest, no further payment will be made by way of the component C1. The pre-litigation procedure
17 By letter of 4 June 1997 sent pursuant to Directive 96/19, the French authorities notified to the Commission Law 96-659 amending the Code and certain implementing decrees, including Decree 97-475.
18 By letter of 7 November 1997, the Commission put a number of questions to the French Government concerning, amongst other things, the timetable for rebalancing France Télécom's charging rate structure, the methods used to calculate the imbalance in that structure and the methods of financing and calculating the net cost of the universal service obligations. The French authorities answered those questions by letter of 4 December 1997.
19 The Commission formed the view that certain aspects of the measures adopted by the French Republic to transpose and implement Article 4c of Directive 90/388 and Article 5 of Directive 97/33, read together with Annex III to that directive, did not comply with those provisions. The Commission therefore gave the French Republic formal notice by letter of 24 July 1998 to submit its observations on the matter.
20 The French authorities replied to the Commission's letter of formal notice by letter of 4 November 1998. On 16 December 1998 they also sent the Commission a draft decree relating to France Télécom's hardship rates. The Commission took the view that that decree failed to bring the French rules into line with of Directives 90/388 and 97/33 and, on 8 July 1999, addressed a reasoned opinion to the French Republic pursuant to Article 226 EC.
21 By letter of 3 December 1999 the French authorities replied to the reasoned opinion, maintaining the arguments which they had already developed in response to the letter of formal notice, whereupon the Commission decided to bring the present action. The first head of complaint, concerning joint financing of universal service in 1997
22 By its first head of complaint the Commission submits that there is no legal basis for requiring France Télécom's new competitors to contribute to the financing of its universal service in 1997. In that year France Télécom enjoyed an almost complete monopoly in fixed voice telephone services, and that ought to have sufficed to fund its universal service. However, certain mobile telephone service providers were obliged to contribute to the financing of the universal service in 1997 in addition to paying interconnection fees for linking their networks to France Télécom's network. Universal service is nevertheless defined as being proper to the fixed telephone services market and is entirely distinct from the mobile telephone services market.
23 In its reply the Commission stated that, in any event, since the conditions laid down in Community law for sharing the financing of universal service had not been satisfied, there was no need for it to determine whether mobile telephone services providers could, as such, be called on to make a contribution.
24 The French Government argues that the essential question is whether the creation of the mobile telephone market has had repercussions on the net cost of universal service provision borne by France Télécom. It submits that it has indeed had such repercussions since 1997. Consequently, the contribution from mobile telephone service providers to the financing of universal service provision has, since 1997, been an economic necessity.
25 The first head of complaint thus concerns the question whether, in 1997, it was necessary to put in place a mechanism for sharing out the net cost of universal service provision, that necessity being the condition for cost sharing laid down by Article 4c of Directive 90/388.
26 In this connection it should be emphasised, first of all, that, as is clear from the fifth recital in the preamble to Directive 96/19, the purpose of extending until 1 January 1998 the monopoly of the established service providers in fixed voice telephone services was to protect their financial stability and to enable them to provide a universal service over the fixed telephone network.
27 Next, it must be observed that, with the exception of one or two experimental licences, France Télécom continued to enjoy throughout 1997 a monopoly in fixed voice telephone services, to which the duty to provide a universal service applies.
28 Lastly, it should be observed that the Commission submits that competition in the French telecommunications market in 1997 following the creation of the mobile telephone market was not such as to make it necessary for France Télécom to implement a system for sharing out the financing of the net cost of its universal service. In making that submission the Commission refers to the very fact that France Télécom enjoyed at the time an almost complete monopoly in fixed voice telephony.
29 In response to that argument, the French Government merely formulates some general remarks about the extent of the new mobile telephone market, without stating precisely how that event might have affected the net cost of its universal service.
30 Given the Commission's arguments, general remarks of that kind are not sufficient to render plausible the French Government's argument that it was necessary to put in place a mechanism for sharing out the net cost of the universal service, that necessity being the condition for cost sharing laid down by Article 4c of Directive 90/388.
31 That being so, it must be held that the first head of complaint formulated by the Commission and developed in its reply is well founded. The second head of complaint, relating to the rebalancing of charging rates
32 In the context of its second head of complaint, the Commission makes the following points: - The third paragraph of Article 4c of Directive 90/388 introduced a requirement that the Member States authorise their operators to rebalance tariffs, the purpose of that exercise being to correct imbalances between charging rates (or tariffs) which allowed certain charging rates in the Member States, in particular, domestic line rental charges and the cost of local calls, to be kept artificially low, whilst the costs of other services, such as distance and international calls were kept high. - Under Article 4c, if the rebalancing exercise cannot be completed before 1 January 1998, the Member State concerned must report to the Commission on its plans for gradually phasing out the remaining imbalances and must include in its report a detailed timetable for so doing.
33 According to the Commission, since the French Republic's rebalancing exercise was not completed before 1 January 1998, it ought to have complied with its obligations in that respect and should, in particular, have sent a timetable. It failed to do so. In this regard, the Commission emphasises that paragraph II(3) of Article L. 35-3 of the Code, as amended by Law 96-659, did not require the rebalancing exercise to be completed until 31 December 2000.
34 In its rejoinder, the French Government asserts that revenue from line rentals was not covering the costs of providing lines, albeit that the deficit was made up by means of the rates charged by France Télécom for local calls. The French Government thus acknowledges that, according to the Commission's definition, which requires that rates be rebalanced for each and every service, the rebalancing exercise had not been completed by 1 January 1998. As regards the timetable, the French Government stresses the difficulty of drawing up a timetable that included intermediate stages and maintains that setting a realistic completion date satisfied the objectives of Directive 90/388 and guaranteed new market entrants the requisite transparency.
35 Since it is established that the rebalancing of charging rates contemplated by the third paragraph of Article 4c of Directive 90/388 was not completed by 1 January 1998 and that the French Government has not sent the Commission a report on its plans for the gradual phasing out of the remaining imbalances, or a detailed timetable for so doing, it must be held that the French Republic has failed to fulfil the express obligations laid down in Article 4c. The requirement of a detailed timetable cannot be satisfied by simply mentioning a completion date, such as that given in paragraph II(3) of Article L. 35-3 of the Code, as amended by Law 96-659.
36 It must be held, therefore, that the second head of complaint formulated by the Commission is well founded. The third head of complaint, relating to the principle and method of calculating C1
37 The Commission points out that Annex III to Directive 97/33 provides, inter alia, that the calculation of the net cost of universal service provision must be based on the costs attributable to end-users to whom services can only be provided at a loss or at prices falling outside normal commercial standards. Directive 97/33 thus calls for selectivity in determining which customers form the basis of the calculation of the net cost of universal service provision. It does not, according to the Commission, authorise the inclusion in that basis of assessment of all residential customers irrespective of their situation. The Commission argues, under the first limb of this head of complaint, that, by including in the formula for calculating component C1 the costs of profitable residential accounts, the French Republic has included in the net costs of universal service provision costs which, under the directive, should not have been included.
38 By profitable accounts the Commission means those customers who use voice telephone services to such an extent that, after account has been taken of the fixed costs inherent in providing their lines and of the variable costs associated with the telephone traffic they generate, the revenue generated by the operator from line rental and telephone calls is sufficient to result in a profit margin.
39 The French Government argues, essentially, that its formula for calculating component C1 is justified by the second item mentioned in Annex III to Directive 97/33, namely the cost of services which cannot be provided except under conditions falling outside normal commercial standards. Until charging rates were rebalanced it was, the French Government maintains, impossible to identify which customers received services under those conditions and impossible, therefore, to know which customers to include in the calculation of the net cost of universal service provision.
40 It is common ground that the French Republic included in the formula for calculating component C1 the cost of all residential customers, including, therefore, profitable accounts. On this point the French Government merely makes the general argument that it was impossible for it to distinguish between customers in accordance with the criteria set out in Annex III of Directive 97/33. It must be concluded, therefore, that the French Republic included in the cost of universal service provision costs which did not satisfy the criteria set out in the annex.
41 Under the second limb of its third head of complaint, the Commission argues that the formula for calculating C1 specified by Article R. 20-32 of the Code, whilst possibly justified in principle, does not employ objective criteria in allocating to each of the relevant undertakings the costs of universal service provision, as is required by Article 4c of Directive 90/388. Furthermore, according to the Commission, the formula takes no account of the principle of transparency as it must under Article 5(1) of Directive 97/33.
42 The Commission points out in this connection that the formula in question rests upon the difference between the actual average line rental charge (P) and the theoretical line rental charge after rebalancing (Pe), which is calculated by means of comparison with other countries that have reputedly rebalanced their charging rates. Nevertheless, two flaws in the formula become apparent when it is applied in practice: first, there is no clear justification for the reference value Pe, and, secondly, the values P and Pe are not comparable.
43 In so far as concerns the first of those flaws, the Commission argues that it is clear from the figures for the reference value Pe supplied by the French Government that the manner in which that value, which influences components C1 and C2, was arrived at lacks transparency. As regards, first of all, the method adopted in the Champsaur report, the rates used in the report varied considerably, ranging from FRF 55 to FRF 75 - a spread of 30%. That is a result in particular of the fact that the so-called rebalanced line rental charges of the various countries used for the purposes of comparison cover different - and therefore not comparable - packages of services. Furthermore, the Champsaur report indicated that it had been drafted at a time when the results of the investigation into and auditing of interconnection fees to the universal services and to France Télécom's accounts [were] as yet unknown. The report was therefore merely a guide and should be revised in the light of those results.
44 Moreover, in so far as concerns the question whether the value Pe is consistent with France Télécom's accounting figures, the Commission points out that it has no information on the results of any accounting exercise. Should any such accounting information exist, which would make it possible to establish the degree to which line rental charges were balanced, then actual values should be used for reference, rather than the Pe value resulting from imprecise international comparisons. The Commission also observes that the French authorities' revenue figures and figures for the average costs of connection to the exchange and of local calls show that, once all of those items are combined, there is no deficit. There is, however, no precise statement of the methodology used. The information provided thus offers insufficient evidence that the Pe value is justified.
45 As regards the second flaw in the formula for calculating C1, the Commission submits that a key factor in determining the net cost of universal service provision is the difference between the value P and the value Pe. That difference cannot be calculated unless P and Pe have a comparable basis, which, according to the Commission, they do not in this case. First, detailed billing is included in the calculation of Pe, whereas, in the calculation of P, it is treated as an option which must be paid for. That inconsistency leads to artificial inflation of the value for Pe. Secondly, Pe includes the costs associated with maintaining the ex-directory list for customers who do not want a directory listing, whilst P does not. Thus, even if the formula for calculating C1 were objectively justified, it does not comply with the principle of transparency.
46 The French Government, which does not deny that the principle of transparency must be observed, merely argues that Pe was set at FRF 65 as a result of an international comparison between the countries where the charges of the established service providers are regarded as balanced. That figure falls within the FRF 55 to 75 spread given in the Champsaur report. Furthermore, Decision No 99-120 of 9 February 1999 of the telecommunications regulatory authority makes it clear that increasing the telephone line rental charge to FRF 64.68 had the effect of almost entirely removing the charging rate imbalance. As far as the French Government is concerned, the Pe value is therefore sufficiently transparent.
47 The Commission argues in its reply that the French Government has provided no convincing explanation of how it arrived at the flat rate of FRF 65 for Pe and that it merely asserts that that figure arose from international comparisons without explaining in what way line rental charges in the various countries have been harmonised. The Commission emphasises that, whilst the figure settled on does fall within the spread given in the Champsaur report, that spread is very broad, the report itself intimating that more precise calculations would subsequently need to be made.
48 In this connection, it must be observed that Article 5(1) of Directive 97/33 provides that, when establishing a mechanism for sharing out the net cost of the universal service obligations, Member States must take due account of the principles of transparency in setting the contributions to be made.
49 Since the reference values chosen will have an impact on the amount of any contribution demanded of new market entrants, it is important that those values are set in accordance with objective criteria and that like is compared with like so as to ensure transparency; this will enable new entrants to calculate their probable costs and income. Any factor that makes that calculation more difficult is likely to discourage them from entering the market.
50 Whilst international comparison may, as the Commission acknowledges, provide an adequate method of calculating the net cost of the various components of universal service, given the differences between the Member States, the results of any such comparison must be considered with caution, particularly where services which are optional in some of the countries used for reference are not optional services in the Member State for which the comparison is being made. The method cannot, therefore, be used to calculate the net cost of universal service provision unless it is first refined by specifying the range of services included in the basic line rental charge used for reference and attempting to recalculate, on the basis of that list of services, the cost of a matching line rental in the various countries concerned so as to arrive at a range of comparable charges.
51 In the present case the French Government does not dispute the fact that its calculation of C1 relies on a comparison of parameters (P and Pe) that have different bases. P does not include the charges relating to detailed billing whereas, in the countries referred to in calculating Pe, basic line rental includes that. Furthermore, even if revenue relating to ex-directory listing is not included in either P or Pe, the French Government has failed to say how, when calculating Pe, it adjusted line rental charges which do include automatic entitlement to ex-directory listing. P and Pe cannot, therefore, be compared.
52 That being so, even if it is accepted that the individual calculations for P and Pe rely on objective criteria, the fact that their values cannot be compared means that the calculation of C1, which relies upon such a comparison, cannot be regarded as transparent within the meaning of Article 5(1) of Directive 97/33.
53 Consequently, the French Republic has failed to comply with the obligation of transparency in its calculation of the cost of universal service.
54 It must, therefore, be held that the third head of complaint formulated by the Commission is well founded. The fourth head of complaint: insufficient justification of the values ascribed to certain components of the net cost of universal service provision
55 In the context of its fourth head of complaint the Commission reiterates that Article 5(3) of Directive 97/33 provides that, in order to determine the burden, if any, which the provision of universal service represents, organisations which are under universal service obligations must calculate the net cost of those obligations in accordance with Annex III of the directive. The calculation of the net cost of universal service obligations must be audited by the national regulatory authority or other competent body, independent of the telecommunications organisation, and approved by the national regulatory authority.
56 The Commission maintains that, under the French rules, certain components of the net cost of universal service provision have been fixed on a flat-rate basis, contrary to the obligation to make specific calculations which arises under Article 5(3) of Directive 97/33. First, it argues that, under paragraph III of Article R. 20.33 of the Code, inserted by Decree 97/475, the component representing the net costs for 1997 and 1998 of unprofitable customers located in profitable areas is fixed at 1% of the turnover derived by the universal service provider from public access telephone services between fixed points. Secondly, Article 3 of Decree 97/475 fixes the net costs for 1997 of the various components of universal service on a flat-rate basis. Thirdly, the calculation of the contribution paid to France Télécom by way of compensation of the costs attributable to certain hardship rates is imprecise.
57 As regards the net costs attributable to unprofitable customers located in profitable areas, the French Government states, in its defense, that it is clear from the Champsaur report that there was, at the relevant time, still no reliable method for calculating those costs. The report concluded by suggesting a range of values on which the flat-rate percentage provided for by paragraph III of Article R. 20-33 of the Code, inserted by Decree 97/475, could be based. The French Government doubts that the costs in question can be calculated retroactively. As regards the net 1997 cost of universal service, the French Government states that the geographical element of that cost, estimated at 3% of turnover, resulted from an international comparison. It claims that it adopted a pragmatic approach and takes the view that, even if a complex calculation for the year 1997 were to be carried out a posteriori, it would result in only a very marginal adjustment. In so far as concerns hardship rates, the French Government refers to Decree No 99-162 of 8 March 1999 on universal telecommunications service and amending Articles R. 20-34 and R. 20-40 of the Code and Article R. 251-28 of the Social Security Code (Journal officiel de la République française of 9 March 1999, p. 3512), which introduced a new system. That system provided for a telephone subsidy for persons on low incomes and war invalids of FRF 27.60 per month in 2000. The subsidy is financed through the universal service fund, to which telephone service providers make a contribution in proportion to their turnover.
58 In its reply the Commission argues, first of all, that in 1997 and 1998 flat-rate contributions towards the net costs attributable to unprofitable customers located in profitable areas were much higher than in 1999 and 2000, for which years the calculation was made using a model. Secondly, with regard to the net cost of universal service provision for the year 1997, the Commission observes that, whilst the French Government gave some explanation for the items which were taken into account, it failed to explain in what way those items influenced the final result. Thirdly, it points out that, although the system for hardship rates has been improved in so far as concerns the future, it nevertheless remains the case that there was an infringement in 1997 and 1998.
59 In its rejoinder the French Government maintains that the method used in 1997 and 1998 for calculating the net costs attributable to unprofitable customers located in profitable areas, albeit necessarily imprecise, was the only feasible method. In any event, the impact of that method on new entrants was very slight, given the small market share they enjoyed at the time. The French Government accepts, moreover, that it would be technically possible to calculate retroactively the net cost of universal service provision for 1997 using the model subsequently employed, but it maintains that doing so would change little and that applying any results would be a sensitive matter because it would require the disclosure by France Télécom of a significant amount of information.
60 Article 5(3) of Directive 97/33 provides that the net cost of universal service provision is to be calculated in accordance with Annex III of that directive and thus only those costs that are a direct consequence of the provision of universal service may be taken into account. Establishing a level playing field for telecommunications providers requires an objective and transparent costs structure. It is therefore not permissible under Directive 97/33 to ascribe flat-rate or imprecise values to the components of the net cost of universal service provision, rather than carrying out specific calculations. However, the French Government does not dispute that it set the net cost of universal service provision, or elements of the net cost, approximatively or on a flat rate basis, to the degree indicated in paragraph 56 of the present judgment.
61 It must, therefore, be held that the fourth head of complaint formulated by the Commission is well founded. The fifth head of complaint, relating to the methods used to calculate the net cost of certain aspects of universal service provision
62 By its fifth complaint the Commission argues that certain components of the net cost of universal service provision have been defined in such a way as to artificially inflate the total cost.
63 Under the first limb of this complaint the Commission maintains that the method used by the French authorities to establish which areas are unprofitable omitted to take into account a certain number of revenue items, such as those derived from ex-directory listing and so-called comfort services, which include services such as call diversion, call waiting and caller number display.
64 In its defence, the French Government acknowledges the need to take into account net income from comfort services in establishing which areas are unprofitable. It concedes that costs and income relating to those services were taken into account only from the 1999 financial year onwards. On the other hand, it maintains that it is not possible to separate the ex-directory listing service from general telephone directory provision and thus, according to the French Government, the ex-directory list is not a distinct item for inclusion in the calculation.
65 In its reply the Commission argues that a distinction must be drawn between maintenance of the ex-directory list and the creation of printed or electronic directories. It follows from Article 6(2) and (3) of Directive 98/10 that every service provider must make ex-directory listing available to its customers. The customer is billed for such listing and the service thus falls outside the costs and revenue associated with the provision of annual telephone directories.
66 In this connection it may be remembered, first, that Annex III to Directive 97/33 states that revenue must be taken into account in calculating the net cost of universal service provision.
67 Secondly, Article 6(2) and (3) of Directive 98/10 provides that every service provider must assist in the creation of telephone directories by providing the relevant information, that is to say, information about those of its customers who do not object to being listed.
68 As the Commission has pointed out, that implies a principle that every service provider must maintain a list of its own customers who do not wish to be listed in the general directory and not disclose the names of those customers to the body which prepares the general telephone directory. Every service provider will, therefore, have its own ex-directory list, the maintenance of which falls within the scope of the management of its own customer accounts, rather than within the scope of the universal service. The fact that customers of a new market entrant must pay to be included in the ex-directory list maintained by the new entrant has no bearing on the costs of or revenue derived from the creation of telephone directories by the established service providers themselves.
69 Accordingly, the French Government ought to have taken into account revenue derived from comfort services and from ex-directory listing in calculating the net cost of universal service provision in order to identify unprofitable areas.
70 Under the second limb of its fifth complaint the Commission argues that the French authorities failed to comply with the rules laid down in Annex III to Directive 97/33 inasmuch as the accounting costs used to calculate the net cost of universal service provision for 1998 included historic costs rather than purely forward-looking costs.
71 In its defence the French Government asserts that it substantially adjusted its depreciation figures for switching and communications equipment, taking replacement costs as the basis and allowing for the sharp fall in prices for certain pieces of equipment. Once those figures had been revised, the equipment costs taken into account were admittedly historic, but were properly adjusted. According to the French Government it is difficult to forecast costs without taking previous financial years and earlier estimates - useful guidelines in themselves - as a basis. In light of the difficulties of application which would arise if the methodology implemented in 1999 had to be applied in respect of 1998, the French Government has no particular plans to correct the figures for 1998.
72 In this connection it may be remembered, first, that Annex III to Directive 97/33 states that the costs and revenue items that are to be taken into account in calculating the net cost of universal service provision should be forward-looking.
73 Yet the French Government acknowledges that the accounting costs used to calculate the net cost of universal service provision for 1998 included historic costs, contrary to the rules laid down in Annex III to Directive 97/33.
74 Under the third limb of its fifth complaint the Commission submits that, contrary to the rules laid down in Article 5(4) of Directive 97/33, the method used by the French authorities to calculate the net cost of universal service provision took no account of the non-tangible benefits associated with the provision of universal service, except in providing telephone booths nationwide and providing telephone directories.
75 The French Government acknowledges, in its defence, that it failed to comply with Article 5(4) of Directive 97/33 in that it neglected to take into account the intangible benefits associated with universal service provision. It adds that it would be difficult to make an a posteriori assessment of that aspect of universal service provision.
76 It may be recalled in this connection that Article 5(4) of Directive 97/33 requires the Member States, in calculating the net cost of universal service provision, to take into account the market benefit, if any, which accrues to an organisation that offers universal service.
77 The French Government acknowledges that no account was taken of that advantage in the calculation, contrary to the obligation laid down in Article 5(4) of Directive 97/33.
78 That being so, it must be held that the fifth head of complaint formulated by the Commission is well founded. The sixth head of complaint: failure to publish the contributions made by service providers
79 By its sixth complaint the Commission points out that the second subparagraph of Article 5(5) of Directive 97/33 requires the Member States to publish an annual report setting out the calculated cost of universal service obligations and stating the contributions made by all the parties involved. However, the report prepared by the French authorities for 1997 makes no mention of the contributions to the net cost of universal service provision made by the service providers concerned.
80 The French Government acknowledges, in its defence, that the reports for 1997 and 1998 do not fully satisfy the obligations imposed by the second subparagraph of Article 5(5) of Directive 97/33
81 Given that the report for 1997 does not fully satisfy the obligations imposed by the second subparagraph of Article 5(5) of Directive 97/33, it must be held that the sixth head of complaint formulated by the Commission is well founded.
82 In the light of the foregoing, it must be held that, by failing to comply with Article 4c of Directive 90/388, and by failing to comply with Article 5(1), (3), (4) and (5) of Directive 97/33, the French Republic has failed to fulfil its obligations under those directives.