Our operations are subject to a number of industry-specific as well as general laws and regulations on the national and international level. The following section provides an overview of these regulations and describes their material effects on our business activities. In addition to general competition law at the European and national level, our business activities continue to be primarily governed by regulations specific to the telecommunications markets in each of the countries where we operate. For more information regarding these country-specific regulations outside of countries not discussed in this section, please see ‘‘Regulatory matters’’ for each of our business segments in ‘‘Item 4: Information on the Company.’’
European Union Regulation
EU legislation is generally applicable in Norway under the European Economic Area (EEA) Agreement, as well as in each of the EU Member States in which our subsidiaries operate. EU legislation can take a number of forms. Regulations have general application and are binding in their entirety and directly applicable in EU Member States. Directives are binding, but national authorities may choose the form and method of implementation.
The EU legislation on the telecommunications sector consists of five main directives, which were adopted in 2002. They intend to create a harmonized regulatory framework in the EU and the EEA for electronic communications networks and services, while at the same time reducing the overall level of regulation of the sector.
Under the EU/EEA framework, national regulatory authorities throughout the EU and EEA are to undertake a market analysis to determine markets without effective competition. As a consequence, certain preemptive remedies are to be imposed against companies that have significant market power (SMP) in such markets. The standard remedies provided by the directives are transparency, non-discrimination, accounting separation, access, and price control and accounting obligations.
The market analysis described above is conducted for 18 relevant markets according to a
recommendation by the European Commission. It will be undertaken on a regular basis and, therefore, new market developments could possibly lead to the imposition of new regulations or to the amendment or withdrawal of existing regulations. The obligations imposed are intended to be proportionate to regulatory need and to the policy objectives of the directives. Where the market analysis indicates that there is effective competition in a relevant market, no obligations shall be imposed, and competition law shall form the sole basis for regulation. The national regulatory authorities are given discretionary power with respect to regulation based upon their own market analyses, restricted only by the harmonization procedure of the directives.
In 2006, the EU will start reviewing the regulatory framework of the telecommunications sector. The review will include the directives and the recommendation including the list of relevant markets, and is expected to lead to a new recommendation on relevant markets by the end of 2006. Update and adoption of the revised directives is not expected earlier than 2009.
As it develops, EU legislation will continue to have a significant effect on our markets, including developments relating to the convergence of Internet, media and information technology.
WTO Obligations
Each of the countries in which we have invested or have subsidiaries is a member of, or is negotiating accession to, the World Trade Organization (WTO). Those that are already WTO members have also signed the Basic Telecommunications Agreement (BTA), which is administered by the WTO. The BTA obliges signatories to provide foreign telecommunications service suppliers with market access to some or all of their basic telecommunications services on a non-discriminatory basis. In addition, a number of signatories, including Norway and certain other countries in which we have investments or subsidiaries, agreed to abide by certain pro-competitive principles, including the prevention of anti-competitive behavior, interconnection, universal service, transparency of licensing criteria, independence of the regulator and non-discriminatory allocation of scarce resources. As a result, the regulatory frameworks of these countries, with respect to both telecommunication services and services in general, must be consistent with their obligations under the BTA. As our Norwegian and other European subsidiaries are already governed by EU regulations, the WTO rules are of particular importance to our non-European investments and subsidiaries
Norway
Although not an EU member, Norway is required, as a member of the European Economic Area (EEA), to adhere to the EU’s regulatory framework to the extent that the EU directives are adopted by the EEA pursuant to the EEA Agreement. As a result, Norwegian legislation, including the Norwegian Electronic Communications Act (ECA) of July 25, 2003 (which replaced the former Telecommunications Act of 1995), and the secondary legislation under this act, is in line with the European Union telecommunications
framework.
The telecommunications sector in Norway is regulated through both sector-specific and general laws and regulations, including the ECA, and the laws implementing the EU directives. Norwegian and EU/EEA competition laws also apply to our telecommunications activities and our other core activities in Norway. In addition, various other intellectual property and data and consumer protection laws govern our core activities. The Norwegian Broadcasting Act of December 4, 1992 (Broadcasting Act) and secondary legislation under this act are applicable to our cable television and terrestrial broadcasting network activities.
Regulatory framework and developments
The telecommunications sector in Norway is regulated by the ECA and the secondary legislation under this act, which implements the EU regulatory framework for the telecommunications sector. In accordance with the requirements of EU law, the Norwegian Post and Telecommunications Authority (PT) is currently conducting an analysis of the 18 telecommunications markets and expects to complete most of its review in 2006. To the extent the PT decides any of these markets to be subject to insufficient competition, it may impose certain preemptive remedies against companies that have significant market power (SMP) in any of these markets, as discussed under ‘‘Regulation — European Union Regulation’’.
For the period until the market analyses under the EU framework are finalized, we are subject to certain transition rules issued by the ECA. Under these rules, we are still considered to have SMP in the markets for voice telephony (both fixed and mobile), transmission capacity and interconnection (both our fixed and mobile operations) and, therefore, are required to comply with the specific regulatory provisions applicable to
operators with SMP. In addition to specific regulatory provisions on SMP operators, the government also addresses universal service obligations (USO) and special service obligations (SSO) by designating certain operators as USO providers and by entering into purchasing agreements with preferred service providers. For further information on our current USO and SSO, you should read ‘‘— Universal service obligations’’ and ‘‘— Special service obligations’’.
So far, the PT has issued consultative documents for all of the 18 relevant markets. We have been identified as an operator with SMP in 16 of these markets. The PT has issued decisions on special regulatory measures in two wholesale mobile markets and in two wholesale fixed broadband markets. Telenor has filed appeals with the Norwegian Ministry of Transport and Communication (the Ministry) regarding the market for mobile termination, the wholesale market for access to and call origination in mobile networks and the
market for the unbundling of access to the copper local loop. The final decisions are still pending. In the fixed retail markets, the PT has issued draft decisions in the fixed telephony markets and the market for leased lines up to and including 2Mbps. In the wholesale fixed markets the PT has issued draft decisions in all markets on the list. Before publishing the final decisions, the PT will notify the EFTA Surveillance Authority according to the consultation mechanism in the ECA. In the wholesale market for transmission of broadcasting signals to end-users and the wholesale market for international roaming, the PT proposes to refrain from sector regulation.
Regulations on the provision of networks and telecommunications services
Generally, the Norwegian regulatory regime poses few barriers to entry for new service providers. Its regulations establish general rules regarding, among other matters, registration, information on terms of subscription, interconnection, universal service obligations, special service obligations and appeal procedures and sanctions. Operators that are deemed to have SMP in markets that are susceptible to sector specific regulation may be subject to additional regulatory requirements in such areas as network access, transparency, non-discrimination, accounting separation and price control. These regulations also regulate number
allocation, number portability and carrier selection, which are important elements of the regulatory regime for telecommunications operators.
There is no maximum number of registrations or licenses that may be granted under the ECA. However, since the radio spectrum is a limited resource, the number of licenses that are granted may be limited as a practical matter. Before granting a mobile license, the Ministry is required to announce publicly that there are new licenses available.
Regulation of satellite, cable television, terrestrial broadcasting networks and television distribution Our satellite transmission activities are mainly governed by the provisions relating to technical
requirements and allocation of frequencies in the ECA and the secondary legislation under the ECA. Satellite activities are also governed by international rules issued by the International Telecommunications Union (ITU). The PT is formally responsible, on behalf of the Kingdom of Norway, for dealing with the ITU with regard to the international coordination process.
In the countries where we have satellite installations, we must have licenses to operate radio equipment and use frequencies from the relevant national regulators. We also must comply with technical rules, including rules for type approval, in the relevant jurisdictions. In addition, we follow the decisions and recommendations of the European Conference of Postal and Telecommunications Administrations and the ITU. We are also required to adhere to the general international space law principles and conventions on liability and registration.
Both the ECA and the Broadcasting Act, and secondary legislation under these acts, govern our cable television activities. The most important regulations relate to must-carry rules for public broadcasters, subscriber choice for programs /channels, re-transmission of broadcast channels with an unlawful content. Cable owners have a duty to retransmit the television broadcasts of the NRK, the broadcast company TV2, and certain terrestrial local public television services. Programs subject to obligatory retransmission must be transmitted via channels that are available to every subscriber to the network. The regulations in the Broadcasting Act with respect to transmission of unlawful content are also relevant for our satellite distribution activities.
In connection with our terrestrial broadcasting network, we have been granted, in accordance with the ECA, radio line and transmitter network licenses authorizing us to, among other things, sell or lease capacity to broadcasting companies and to transmit programs for broadcasting. These licenses are valid until
November 2006 and can be renewed after such date. The licenses may be withdrawn if numerous or substantial breaches of the terms of the licenses occur, subject to a fourteen-day notice period.
Universal service obligations (USO)
The regulatory framework for USO in Norway primarily covers the fixed public telephony service, leased lines (connections up to 2 Mbps) and certain data services. Our current USOs are set out in an agreement that we entered into with the government on September 1, 2004. Under this agreement, we are under an obligation to provide fixed public telephony services at an affordable price to all households and enterprises, while leased lines and data services must continue to be accessible for all enterprises. In addition, the agreement obliges us to provide consumers with cost control measures for their fixed telephony spending. Other services that are classified as USO include the provision of public pay phones, publicly available directory enquiry services and directories and services for the disabled.
In 1999, the Storting (the Norwegian Parliament) restated that we are obliged to satisfy our USO without compensation unless our obligations are extended, our market share decreases substantially or USO becomes concentrated on the least profitable parts of the market.
Special service obligations (SSO)
We have also entered into agreements with the Ministry, pursuant to the ECA, under which we are required to provide certain SSO, including special defense-related services, coastal radio services and services for the arctic islands of Svalbard. The government compensates us for the incremental cost of these services on a case-by-case basis. Under the ECA, we negotiated the scope of our SSO and our compensation for our SSO directly with the competent ministries and with the PT.
Non-discrimination, transparency and objectivity requirements
Under the transition rules of the ECA, as an operator with SMP, we are required to offer our services in a manner that avoids discrimination between the buyers of our services, unless different conditions can be justified on objective grounds. The PT has increasingly focused on the non-discrimination requirement, with respect to both external services providers’ access to networks and special discounts for certain segments of our markets. We expect that, following completion of the PT’s market analysis under the ECA, these requirements will continue to apply in the relevant markets where it is determined that there are operators with SMP. In all decisions and in draft decisions on remedies, the PT has imposed non-discrimination clauses.
On June 6, 2005, the PT issued a decision barring us from providing ‘‘win-back’’ and ‘‘welcome’’ offers to new end user customers without providing the same offers to existing customers. In addition, the PT required us to publish all of our offers and discounts on our website under it transparency requirements. We have implemented both of these requirements.
Cost accounting and price regulation
Under the transition rules of the ECA as an operator with SMP, we are required to follow certain principles for pricing, accounting and reporting on public telephony service, interconnection and transmission capacity. We are responsible for specifying, implementing and maintaining cost accounts as a basis for monitoring that our prices for regulated services are cost-oriented, objective and non-discriminatory. The PT continuously evaluates our compliance with cost-orientation with respect to our regulated services. According to the PT, a strict interpretation of ‘‘cost-orientation’’ requires prices to be calculated based on costs, plus a reasonable rate of return. With regard to any special offers in the market, we are further required to furnish to the PT documentation relating to the relevant cost savings upon request. Furthermore, the PT also evaluates discounts from the point of view of non-discrimination.
We submit the historic cost accounting information to PT on an annual basis in the ONP (Open Network Provision) report. The report contains financial and other required information about our regulated services for the previous fiscal year based on fully distributed historical costs (FDC). In practice, the PT reviews our compliance with the requirements for costing, pricing, non-discrimination and transparency through its review of our ONP report in addition to specific requests for more detailed information in selected areas. In
considering whether our rate of return for our regulated services in a certain year is reasonable, we believe that other factors should be duly taken into account, including, without limitation, the characteristics of the relevant market, the long-term perspective of our underlying investments, and the risks associated with such investments.
In December 2004, the PT decided that the ONP report should continue to be prepared in accordance with the principles of the former regulatory regime. We expect our ONP report for the fiscal year 2006 to be the first report required to be prepared pursuant to the principles of the new regulatory regime introduced by the ECA.
The following table sets forth our operating profit and average capital employed for our regulated services as reported in our ONP reports for 2002, 2003 and 2004. We expect the PT to set forth guidelines for a new reporting system following completion of the market remedies decision for the relevant markets as required under the EU regulatory framework.
2002 2003 2004
(NOK in millions) Fixed telephony
Operating profit****************************************************** 2,184 2,607 2,660 Average capital employed********************************************** 11,735 10,281 8,747 Mobile telephony
Operating profit****************************************************** 2,221 2,222 2,369 Average capital employed********************************************** 3,431 2,932 2,938 Leased lines
Operating profit****************************************************** 295 316 469 Average capital employed********************************************** 3,287 3,259 2,934
Under the former Telecommunications Act, the regulatory authorities had no legal basis to retroactively adjust our prices. However, in connection with the enactment of the ECA, the Storting requested the Ministry to assess whether it would be appropriate to give the regulatory authority a legal basis to decide that prices could be adjusted retroactively. The outcome of that assessment from the Ministry is still pending.
Accounting separation and review
Under the transition rules of the ECA, we are required to keep our accounts for the provision of public telephony services, public networks, transmission capacity and interconnection separate from our accounts for other business activities. We are obliged to supply information to that respect in our annual ONP report to the PT. The accounts are subjected to a limited review by an external accountant and must be made publicly available.
Interconnection and access — General
As an SMP operator, we are required to offer interconnection services and access to our fixed and mobile networks to our competitors in the wholesale market in a manner that avoids discrimination between our competitors and our business units, unless different conditions can be justified on objective grounds. Our current obligations with respect to interconnection and access will be evaluated as part of the PT’s market analysis of relevant markets under the ECA.
Fixed network interconnection
Under the transition rules of the ECA, we are required to have cost-oriented interconnection tariffs for fixed network interconnection services. The PT has the authority to investigate whether the interconnection tariffs applied by operators with SMP are cost-oriented and to mandate that tariffs be changed if they do not satisfy the cost-orientation requirement. Fixed network interconnection tariffs are also calculated on the basis of forecasted costs and volumes.
On March 24, 2006, the PT issued decisions under the ECA framework designating us an operator with SMP in the wholesale markets for call origination, call termination and transit services in the fixed network. In addition, the PT also notified twelve other operators as having SMP for call termination on fixed networks. The special obligations imposed on us in these three markets include price regulation according to a
maximum price in accordance with our current prices, until the PT makes a new price decision. In addition, wholesale inputs related to the basic interconnection products like co-location and port charges are subject to price regulation according to cost orientation (fully allocated historical cost). Obligations for cost accounting, non-discrimination and standard offers and transparency also apply for origination, termination and transit.