The liberalization of the European telecommunications markets has on one hand lead to the creation of numerous national legal provisions aiming at the implementation of European telecommunications law. On the other hand, deregulation resulted in a rapid evolution of new telecommunication technology by private providers. Both developments have caused numerous legal issues and uncertainties which are illustrated in this essay using the examples of German telecommunications law.
Goals of the German Licensing Regime
Before full liberalization of the German Telecommunications market many unsolved legal issues regarding implementation and interpretation of the new telecommunications rules existed. Providers of telecommunications services frequently faced legal uncertainty concerning crucial terms used in the Telecommunications Act of 1996 (TKG). Telecommunication technology and the market development seemed to be ahead of legal regulation, and a considerable number of innovative prospective competitors of the recently privatized Deutsche Telekom AG applied for licenses to authorize their technology. The licensing authority felt pressure because some of the ordinances affecting licensing were not yet agreed upon. One of the reasons for hesitant development of German ordinances and even European telecommunications directives may have been the substantial economic and political implications of the regulations.
Although the main objective of the legislation is clear, i.e., the liberalization of the telecommunications market, disputes do arise on the question of how much regulation is necessary in an otherwise free market. The legislator has given a broad answer to this question in section 2(2) TKG: The goal of all telecommunications regulations should be:
- safeguarding the interests of users in the fields of telecommunications and radio communications as well as to maintain telecommunications secrecy;
- ensuring equal-opportunity and workable competition, in rural as well as urban areas, in telecommunication markets;
- ensuring provisions throughout Germany of basic telecommunications services (universal services) at affordable prices;
- promoting telecommunications services in public institutions;
- ensuring effective, interference-free use of frequencies, due regard also being paid to broadcasting requirements;
- and protecting public safety interests.
Implementing these goals into workable telecommunications regulations, however, has caused numerous legal problems.
Uncertainty usually looms when providers of telecommunications services have to decide whether they require a license for their intended activity or whether a simple notification is sufficient. Notifications and license applications were dealt with by the Federal Ministry of Posts and Telecommunications, but a special agency, the Bundesnetzagentur, has taken over these functions. While the notification requirement is simple to comply with, license applications are more complex. The TKG provides in section 6(1) that a license is required for any person who (a) operates transmission lines going beyond the limits of a property and used to provide telecommunications for the public, or (b) offers voice telephony on the basis of self-operated telecommunications networks.
Operating Transmission Lines
All licensing provisions of the TKG imply that only such providers of telecommunications service require a license who qualify as "operators" of transmission lines or networks. The term "operation" is defined in section 3, No. 1 and No. 2 TKG as the exercise of the de jure and de facto control (functions control) of all the functions that must necessarily be provided for the implementation of information transmission on transmission lines or networks. The definition of "transmission lines" in section 3, No. 22 TKG includes telecommunications systems in the form of cable or radio links with the associated transmission equipment and their network terminations. The term "telecommunications network" is defined in section 3, No. 21 TKG as the technical facilities in their entirety including transmission lines, switching equipment, and other equipment that is indispensable to ensure proper operation of the telecommunications network.
The discussion around the definition of the term "operator of transmission lines" mainly focuses on the term "functions control," which is vague and requires further interpretation. When the drafters of the TKG used the term "functions control," they had a concept in mind that was developed to define "operation" in the context of the old version of the Transmission Installations Act, abbreviated as FAG. It must be noted that the FAG regulates the construction and operation of cable-based transmission lines, and its definitions are therefore not directly transferable to other transmission lines such as radio-based transmission lines. Nevertheless, the case-groups developed under the FAG to define "operation" are helpful to understand which concepts the drafters of the TKG intended to refer to, when they used the term "functions control."
The old definition of "operator" under the FAG, given by the Federal Ministry for Posts and Telecommunications, includes persons who maintain, provide or use transmission installations on their own behalf. The further developments in the interpretation of the term "operator" were described in a study for the Ministry. According to this study, the modern meaning of the term "operator" under the FAG includes anyone who has control over the technical process which is conducted by the transmission installation. The person who has functions control would, in the context of cable-based transmission lines, usually be the carrier or the person in charge of maintaining the installation. It is not sufficient for an operator simply to use a transmission installation if someone else in fact runs the installation. This concept of "operator" also matches the common natural use of the term and later was written into law in the TKG.
From this concept it also follows that different sections of a transmission line can have different operators. The easiest example would be the use of a phone line. Even the user of a telephone can qualify as an operator, because he operates the terminal equipment "telephone," whereas the phone company operates the transmission line. The transmission line is used by the consumer, but it is operated by the phone company that is in charge of the transmission functions.
However, the definition of functional control over the transmission line as maintaining or technically controlling the line, is often insufficient to determine whether in practice a particular provider of a telecommunications service requires a license as an operator or not. The term "functions control" can be further specified by analogy to the description of the traditional network monopoly. In this context, operators of cable-based transmission lines were defined as providers of the cable technology and at least those functional entities which are technically and physically necessary for the transmission of information.
In contrast, a person who uses the transmission technology provided by the operator, and additional equipment of his own for the service specific transmission of information is not an operator but simply a user. Even the clarity of this definition blurs in cases, which frequently occur in practice, in which the owner of a transmission line and the user of the line are not the same person. This is especially true when the technical and physical functions are exercised both by the owner and the user of the installations. In some cases the installation of the users may in fact exercise enough control to also make them "operators."
In such cases, the licensing agency under the TKG might often refer to distinction criteria which are implied in the old text of the FAG, which are:
- responsibility for control over type and extent of activities; and
- interest in the operation.
It follows that a user becomes an operator if he is granted control over the transmission line to such an extent that the previous operator of the line does not have any influence on whether or not transfer of information takes place. Crucial for this determination is the legal and factual control over the transmission line in relation to the consumer. The person who decides whether information transfer via the transmission line takes place is the operator. Evidence for such control over the transmission lines can also be access to the technical transmission installations at any time. It is sufficient if these installations are under the legal and technical control of the operator.
The operator's control over the installations cannot be diminished by contractual obligations to provide transmission services for the users, which means that liability or other economic aspects are not considered for the determination of who has control over the transmission line. It is enough that the operator has the possibility to decide whether the transmission line goes into operation, stays in operation or ceases operation in his own responsibility. If the cease of operation results in civil liability for the person who stopped the transmission in relation to the users, this is further evidence for the status of such person as operator. As far as the subjective criterion of the interest of the operator in the operation is concerned it is sufficient that the operator is responsible for his performance. In most cases, his interest also includes a compensation from the user and liability for bad performance.
The possession or factual power over the transmission line by itself is not sufficient to establish the functional control of the operator of a transmission line. On the other hand, it is not necessary for the operator of a transmission line to own, to rent or to have any other right of use in the assets on which the transmission installations are located. The operator can also be a person that has no legal relation to such assets at all.
The question who is the operator of a transmission line has to be determined according to all the legal, economic and other factual circumstances in each particular case. Crucial is the factual and legal control which empowers the operator to make all the necessary decisions about the installation. Further, the economic position must be considered. The operator usually benefits, not insignificantly, from the use of the transmission installation, and at the same time also is burdened with at least part of the costs. He usually is the person in whose name and on whose account the installation is managed. Who owns the installation is usually not decisive, but rather who gives instructions and who is responsible for the management the installation.
The licensing authorities might object, if the functions control of the licensee appears to be artificial and seems to be a "front man". Such a circumvention of the TKG may be suspected if a transmission line is used by several persons or corporations, who qualify as operators, whereas the licensee only makes small contributions to the operation of the transmission lines and therefore may not be regarded as an operator. A typical "front man" constellation occurs if several economic or corporate entities cooperate on an equal basis in order to operate a transmission line, or if the real operators contract a licensee who himself does not have any functional control over the operation of the transmission line.
The distinction becomes more difficult if several entities form a corporation whose sole purpose is to operate a transmission line and the shareholders are users themselves or benefit in other ways. For example, similar cooperations, like the "German Net AG," aiming at the common use and marketing of the commodity "net-infrastructure" have been discussed among major German providers such as Viag and RWE. While it remains crucial who has functional control it cannot generally be said that such forms of economic activity are always a circumvention of the licensing provisions of the TKG. This would only be the case if the functional control lay with the shareholders.
When determining whether the shareholders have functional control in such cases, the criterion of the interest in the operation of the transmission line is not very helpful, because the shareholders of such an "operation-corporation" of course always have an interest in the operation of the transmission lines. However, in such cases the shareholders will not be deemed to have functional control if the operation corporation also has an interest in the operation of the transmission lines.
As elaborated above, the compensation the operation corporation receives for its services and the operation corporation's legal and factual responsibility for such services can be evidence for its interest in the operation. This is also true if the compensation derives from the operation company's shareholders.
Another factor that might weigh against illegal circumvention is the position the operation corporation takes with regard to third party contracts. The operation corporation is unlikely to be just a front man if it appears as contracting party in work contracts with subcontractors or in contracts with users. If, however, the bills of subcontractors who might provide technical work in order to maintain the transmission line, are paid not by the operation corporation, but by one of the users, the operation corporation might be considered a mere front man and not the real operator. However, there is no clear distinction between a legitimate operation corporation and an illegal front man corporation that would be considered as a circumvention of the TKG. Considering the circumstances of each individual case will be crucial until clearer categories are developed by future litigation.
The Concept of a Closed User Group
Another term that has shown to be very problematic when defining the scope of the licensing provisions of the new TKG is the concept of a Closed User Group (CUG). Section 6 subsection 1 number 1 TKG determines that only those operators of transmission lines require a license that provides services for the public (section 3 number 19 TKG). Services that are only provided for a CUG are not services for the public and therefore do not require a license. Although the notion of a CUG has been discussed for a long time, the issue is not settled under German law and is likely to raise further legal disputes.
It is generally acknowledged that vague statutory terms, such as the term CUG, have to be interpreted in a European legal context. CUGs are defined as "those entities, not necessarily bound by economic links, but which can be identified as being part of a group on a basis of a lasting professional relationship, among themselves or with another entity of the group, and whose internal communication needs result from the common interest underlying this relationship. In general, the link between the members of the group is a common business activity." As examples for activities of CUGs the Commission names fund transfers for the banking industry, reservation systems for airlines, information transfers between universities involved in a common research project, re-insurance for the insurance industry, inter-library activities, common design projects, and different institutions or services for inter-governmental or international organizations. It shows that the European notion of CUG is broader than just corporate networks.
On a domestic level, the only definition of the CUG is included in the outdated Telecommunications Granting Ordinance 1995 (TVerleihV). The definition of a CUG under the TVerleihV is probably more narrow than it will be under the new TKG, but so far it is the only basis for a definition of a CUG under German law. According to this definition in section 4 number 1 TVerleihV, CUGs include groups of corporations, partnerships, sole proprietors and legal persons under public law, if among those enterprises there is a control agreement according to section 291 of the Stock Corporation Act (AktG). An enterprise that is under control of another enterprise by means of a control agreement is considered to be linked to other controlled enterprises as well as to the controlling enterprise. The same is true for controlling and controlled enterprises which are integrated companies according to section 319 AktG or which are subsidiary-parent companies according to section 16 AktG.
More importantly, section 6 subsection 2 TVerleihV determines that CUGs also include participants who are in long-lasting corporate or contractual relationships with each other or who maintain permanent relations with each other in order to pursue common professional, economic or governmental goals. The permanent relationship must be existing among each of the enterprises or between each enterprise with the same identical participant of the group. Controlled and controlling enterprises, as described above, are only considered as one participant of the group.
However, if the sole or at least predominant purpose of the user group is to provide transmission services for others, the group would not be regarded as a CUG. At least with this part of the definition of a CUG the TVerleihV goes further than the definition of the European Commission. From the text of the European definition it appears sufficient that the communication needs of the group derive from their common business activity. German law, however, seems to develop an even more restrictive approach to the CUG. For example, it is currently being discussed that even one single user, who is offered a telecommunications service by a commercial provider, might not necessarily qualify as a CUG. This approach tends to emphasize the commercial nature of a provider-user relation instead of the quantitative limitation of users. If the German definition of CUGs further develops this way, it would not only narrow down the significance of the exception of CUGs from licensing requirements, but it could ultimately also undermine the deregulation which was intended by the German TKG.
Once it has been established that the telecommunications service provider intends to operate transmission lines or offer voice telephony, it must be decided which class of license the applicant requires. The TKG distinguishes four classes of licenses. These are licenses for:
- mobile radio;
- satellite services;
- telecommunications services, not covered by classes 1 or 2; and
- voice telephony on the basis of self-operated telecommunications networks.
However, it is not always easy to determine which type of telecommunications service falls under which category of a license class. This is especially true regarding license class 1, as the text of the TKG does not take into proper account the various radio devices that were recently developed and can be used as mobile sources as well as stationary sources. Innovative technology of this kind may fall under license class 1 or license class 3. The German licensing authorities currently seem to assign license classes to particular services according to the predominant use of the relevant device. However, in case of doubt it is also possible to bundle different license classes into one composite license.
After the TKG passed in 1998 private parties became able to apply for voice telephony licenses (class 4). Voice telephony is defined as the commercial provision to the public of the direct transmission and switching of voice in real-time to and from the network termination points of the public switched network such that any user can use the terminal equipment connected to one network termination point to communicate with another network termination point. While services for CUGs are also exempted according to this definition, emphasis lies on the criterion "switching of voice in real-time." That means that the transmission of recorded voice signals and other transmission of voice signals with delay are not subject to licenses of class 4, but possibly to other classes.
This criterion gains practical relevance for services like voice-transmissions via the Internet, sometimes connected to the public network. For transmission, the voice becomes digitalized, compressed, sent to a server and then sent on to the reception server, which in turn sends it to the receiver equipment. At the termination point, the data are assembled for delivery as voice via the loudspeaker. Usually, such Internet communications do not enable users at both termination points of the transmission line to establish a connection by directly dialing the communication partner's number. Rather, it is necessary that the communication partner must simply happen to be "online" at the time of the communication. Some internet-voice service providers also envision using local switchboards to arrange the connection of internet voice communications, sometimes also using leased phone lines to establish the last-mile connection to the communication partner. Another use of internet voice communications lies in the "store and forward" function. All of these strategies, which have the effect that the voice is not transferred directly without further "switching," are likely to establish that the voice is not switched in "real-time" according to current German law. In this case, voice telephony through the Internet would not be regulated under the class 4 license provisions. However, with the evolution of new Internet solutions, including available software and bandwidth, a new legal assessment of the technology may become necessary.
It must be noted, though, that the exact definition of "real-time" under German law is still unclear, especially with respect to Internet voice telephony. The reason why Internet voice telephony arguably falls into a regulatory loophole of the TKG can be found in the historic development of the statute. Unlike in jurisdictions of other countries where all types of telecommunication services are subject to licensing, the German TKG was developed mainly to regulate only those areas of telecommunication that were formerly covered by the state monopoly. The state owned postal service only provided traditional voice-telephone services, so there appeared to be no need for a detailed interpretation of telephony in "real-time." Additional confusion about the regulation of voice telephony through the Internet derives from the difficulties in identifying an "operator" of the Internet who could be subject to licensing. The Internet is more likely to qualify as a service for data transfer, which would not be subject to a class 4 license.
The European and German legal approaches to Internet services seem to reach similar results. According to a Commission notice concerning the status of voice on the Internet, pursuant to Directive 90/338/EEC, Internet communications can only be considered voice telephony if certain criteria are met. First of all, these criteria clarify that the Internet service must connect two network termination points on the switched network at the same time. This would not be the case, if access to the Internet is obtained via leased circuits. However, communications may fall within this definition if access is gained via the PSTN. Still the crucial criterion is the "switching of voice in real-time." Internet services in the early stage of their technological development do not fall under this definition, since the time required for processing and transmission precludes the transmissions from being regarded as a real-time service.
Despite numerous doubts with regard to licenses classes as described above, in most cases it is clear which class of license is required.
Once it has been established that a service provider intends to engage in an activity that falls under the scope of the TKG, therefore requiring a license, the service provider must meets certain requirements to receive that license. To receive a license it is required that (1) granting a license does not interfere with the purposes of the TKG and (2) none of the mandatory grounds for denial of a license are present. According to the TKG, grounds for denial include:
- Lack of any usable frequencies which could be assigned to the applicant seeking to operate radio links;
- The applicant does not possess sufficient reliability, efficiency and a specialized knowledge and hence it must be expected that such license rights will not be exercised on a lasting basis; and
- Grant of a license resulting in a threat for public safety or order.
The standards set forth in the grounds for denial are open to interpretation, but the Federal Ministry for Posts and Telecommunications did give some guidance on formal application requirements in an order it released to the public. According to the order, an applicant's reliability may be insufficient if there is evidence that the licensee previously broke the law, especially with respect to telecommunications provisions. If there is doubt about the efficiency of an applicant, the order suggests that the applicant submit a medium term investment plan along with financing agreements in written form. Regarding specialized knowledge of the personnel which will operate the transmission lines is concerned, descriptions or documents about his knowledge or experience may be requested.
It is also unclear whether the annex that the license rights must be expected to be exercised on a lasting basis has only declaratory character or constitutes an additional requirement. In this context, it will be up to the courts to materialize in which cases it must be expected that license rights will not be exercised on a lasting basis just because of lack of reliability, efficiency or specialized knowledge.
Allocation of Frequencies
Another reason to deny a license for providers of radio-based telecommunications services is the unavailability of frequencies. The licensing authority can, according to section 8(3) No. 1 TKG, deny a license if it does not possess any usable frequencies which could be assigned to the applicant seeking to operate radio links. While the case is very rare that the agency does not posses any usable frequencies at all, the allocation of scarce frequencies cause more practical concern. In the case of limited availability of frequencies, the agency may limit the number of licenses to be granted for the relevant type of telecommunications service according to section 10 TKG, or initiate proceedings for the assignment of frequencies according to section 47 TKG.
In order to ensure an effective and interference-free use of frequencies the TKG provides that a table of frequency band allocations shall be stipulated by ordinance and the regulatory authority shall draw up a frequency usage plan specifying the band allocations. On a European level, the Conference of the European Posts and Telecommunications agencies (CEPT) makes efforts to harmonize frequency uses, for example by using the standards of the European Technical Standardization Institute (ETSI) in Nice.
An example for problems with the availability of frequencies are applications within the 2400 to 2483,5 MHz spectrum, which is reserved for industrial, scientific and medical (ISM-band) purposes. Although availability of a frequency in this range had never been a problem, and it is used for automatic doors and other technical applications, the licensing authorities have to consider scarcity if an application uses this frequency extensively and not only in a limited location, but nationwide. The availability of a frequency can differ according to the region for which the frequency shall be assigned.
It must be noted that the decision about the availability of a frequency for the radio devices is also a decision about easy market access for the radio devices. The economic implications of allocations of frequencies have gained importance in light of the WTO Telecommunications Agreement reached in 1997. The new WTO agreement, formerly known as GATT, includes, among other anti-protectionist provisions, the prohibition of abusing technical standards as trade barriers.
Another requirement for the allocation of a frequency is that the intended use of the frequency does not interfere with other radio applications. In practice, the licensing authority often requires an expert opinion from the Federal Office for Posts and Telecommunications to cover that aspect. Theoretically, it is possible that an applicant has obtained a license to operate a radio device that uses frequencies within the scope assigned by the usage plan, but can not operate the system, because the Federal Office for Posts and Telecommunications denies the interference-free use of the frequency.
Another area of the TKG in which the delay in promulgating the relevant ordinances has led to significant uncertainty is that of license fees. Section 48 TKG provides for the regulation of license fees and frequency usage fees by an ordinance. Whereas the annual contributions for reimbursement of expenditure on frequency management is less controversial, the ordinance on license fees is the focus of concern. The first draft ordinance of 1996 provided for a fee of up to DM 40 million for the issuing of a nationwide license for voice telephony (class 4) or other telecommunication services (class 3). A draft administrative provision further determined that the fees should be determined within this range according to a formula that takes into account the number of inhabitants in the licensed area and the number of employed persons in that area.
One of the major points of concern about such a method of calculating the fee is that it tries to reflect the potential economic value of the license. However, the German Administrative Costs Act, which lays down general principles for charges in the area of administrative actions, provides that all fees have to be in reasonable proportion to the economic value of the administrative act and to the actual expenses.
The Directive on authorizations and licenses for the provisions of telecommunications services in the European Union, which was formally approved by the Telecommunications Council in March 1997, states that the fees must be based on the administrative costs of the license. Not surprisingly, the German delegation raised a last minute objection claiming that license fees should be based on the value of the license and not only on the administrative costs. Other delegations did not share this approach and the directive was passed with only Greece and Germany voting against. The Commission did, however, make an additional declaration providing that fees could include both the costs incurred at the time that the license is issued and an amount anticipating future administrative costs incurred in the management, control and enforcement of the individual license concerned.
Until the disputes about the German license fee are settled, the licenses issued leave the determination of a fee for a later point in time, or the licensee reaches an agreement with the agency.
The legal situation with regard to many aspects of the German telecommunication licensing regime is unclear for several reasons. The TKG replaces the state monopoly in the telecommunication sector. Accordingly, it focuses on the regulation of the market that previously was covered by the monopoly of the state postal services. However, the liberalization of the telecommunication market leads to rapid innovations in the telecommunication technology. Either the TKG has loopholes with regard to regulating such technologies, or the definitions of statutory terms such as "operator of transmissions lines," "closed user group" or "voice telephony in real-time" create problems when applied in new circumstances.
Another challenge for the licensing authorities is the responsible and efficient distribution of scarce resources such as radio frequencies, especially in the light of the considerable economic implications licensing decisions have for the market access of telecommunications service providers. Some regulations the German rule makers suggested, such as those concerning license fees or frequency band allocations, have raised legal concerns considering the goals of the TKG and even in the light of EU policies. Since workable solutions will have to be found, many of the legal issues will wait to be finally solved by future litigation.