Federal government plans to improve the legal protection of network operators

The legal protection of regulated telecommunications companies is to be improved. This is the likely outcome of a draft bill published last month by the German Federal Ministry of Economics and Energy ("Fourth Act to Amend the Telecommunications Act"), which revises the provision laid down in section 35 (5) sentences 2 and 3 of the German Telecommunications Act (TKG). By drafting the bill, the federal government attempts to comply with a demand from the Federal Constitutional Court. The judges in Karlsruhe had already ruled in November 2016 that the current regulation was no longer in line with the constitution and asked the legislative to amend the TKG by 31 July 2018.

Context: regulation of mobile network operators

The bill was drafted in the context of the regulation of charges raised by telecommunications companies under the TKG. These may be obliged by the German Federal Network Agency to grant competitors access to their networks in return for charges. Especially the level of the termination charges, which (mobile) network operators collect from each other as compensation for their call termination services,  is scrutinized and approved in advance by the Federal Network Agency.

If the Federal Network Agency approves network charges that fall short of the level the regulated company applied for, the company can subsequently have an administrative court examine whether it is entitled to higher charges. In case of services already rendered, section 35 (5) sentences 2 and 3 TKG in its current form stipulates that the company may only demand higher charges retroactively from its customers if the administrative court already ordered the higher charges in a prior expedited procedure. This concept of restricted retroactivity is intended to protect network operators from potentially substantial additional payments, which they themselves are not allowed to pass on to their end consumers.

Federal Constitutional Court: TKG no longer compatible with the Basic Law

On 22 November 2016, the Federal Constitutional Court declared sections 35 (5) sentences 2 and 3 TKG to be no longer constitutional (decision 1 BvL 6/14 et al.). It reasoned that in view of a changed market situation in the telecommunications sector, there was no longer a comprehensive need to protect all competitors in all subsectors of the market. The legislative could therefore no longer maintain its initially correct assessment of the market position of regulated companies and the financial weakness of its competitors. The regulation therefore does not sufficiently differentiate, as competitors of a certain size – in contrast to small and medium-sized enterprises – are now able to build reserves for contingencies. In this respect, the concept of restricted retroactivity infringes the guarantee of effective legal protection under article 19 (4) of the Basic Law. The Federal Constitutional Court therefore obliged the legislative to amend the TKG by 31 July 2018 at the latest.

The proposed solution

The draft bill published on 14 June 2018 is intended to re-establish the TKG’s compliance with the Basic Law. The draft pursues a competitor-focused approach. Another option to focus on submarkets, also mentioned by the Federal Constitutional Court, is not taken into account. Upon coming into effect, the new regulation will differentiate based on the vulnerability of competitors. The non-retroactivity clause in section 35 (5) sentences 2 and 3 TKG thus will privilege competitors with an annual turnover of up to 100 million euros that can be classified as financially weak companies.

While this threshold is based on existing procedures for defining small and medium-sized enterprises on the EU level, it is not aligned with the definition the European Commission employs to define small and medium-sized enterprises – in its Recommendation 2003/361/EC of 6 May 2003, the European Commission set a threshold of EUR 50 million.

The draft bill justifies this higher threshold with the argument that companies which fall below it can typically not be expected to build reserves for subsequent payments to the same extent as larger competitors. It should be noted however that the calculation of turnover in the draft bill only includes sales generated in telecommunications markets. This method of calculation does not take into account the fact that any turnover of an entire company is decisive in assessing its financial strength.

Lastly, in view of the German parliament’s current summer recess, it seems highly unlikely that the federal government will comply with its obligation to amend the regulation within the given time limit.

Draft bill of 14 June 2018 (German) 

Decision of the Federal Constitutional Court of 22 November 2018 (German) 

 Recommendation 2003/361/EC by the European Commission of 6 May 2003