The game of 3G

9.2.1 The PTA and the operators

One of the important relations in the game lies between the State and the licence holders, between the PTA and the operators. This refers mainly to the big difference between the design of the so called beauty contest and the implementation of the licence conditions.

The mantra of the operators can be said to have been: Apply, appeal, delay! The PTA stressed several times, especially after the operators failed to reach the coverage in time, the importance of not changing the licence conditions, which the operators so eagerly tried, and applied for. From a formal perspective the licence conditions where only changed to a lesser degree, in the lowered requirements on the pilot signal in some areas, in favour for the operators striving towards the promised high coverage. The EU Commission statement from 2002 stressing the importance of a “predictable environment” were cited in multiple PTA decisions and reports (3.1 of COM(2002) 0301), the PTA turned down several applications from the operators to change the licence conditions based on the importance of the competition on the market. From an informal or practical point of view, the licence conditions may not have been more than slightly formally changed but practically they were. The operators received licenses based on the promises to reach full coverage by the end of 2003.

Three out of the four had reached it by 2007. The fourth pulled out of the infrastructure construction in Sweden, and was allowed to do so by a PTA decision in November 2004, without any sanctions, no matter the “importance of the competition in the market”.

Prior to the PTA decision of 21 Oct 2005 the PTA wanted a technical investigation, referred to in the decision. In the decision, turning down the Vodafone and Hi3G request, regarding the WCDMA technique competitive aspects of the construction are once again stressed:

“The investigation shows – in spite of the societal economic downside of constructing parallel UMTS nets – that stable set of rules is a prerequisite for investments and a well functioning, long-term competition. A change in the licence conditions can on the contrary distort competition” (p 8, author’s translation).

This is nothing out of the ordinary, but when it can be argued that the conditions have not remained unchanged, from a practical point of view, the content of the statement is a bit thin.

In fact, it is hard to argue that the conditions have not been changed, given that the operators reached the coverage in 2007, and the conditions state that it should be reached by 31 December 2003. To lean on formally legitimate grounds, operators appealing for instance, supporting that a change has not been done in the conditions does not change the fact of the delayed construction. And from a competitive point of view, it makes little difference if the licence conditions are being changed or if they stay formally the same, but practically delayed. The sum would then be that the PTA repeatedly formally pronounces the importance of competition, but practically looks the other way when it comes to sanctioning licence breaches. From this point of view the competition has been distorted. If the applicants would have understood the lack of PTA sanctions when applying for the 3G licenses the promises of the applications would most likely have been different.

The sum of all the postponement of time limits, both from the PTA and the operators, which also appealed PTA decisions further delaying the sanction from the PTA, is that the contracted licence conditions, in fact, never applied to the operators. It is in this perspective one can argue that the licence conditions were renegotiated, not formally, but factually. The coverage was to be reached by 31 December 2003, but was still three years later not fully reached. No sanctions where ever addressed to the operators, and one of the operators, Orange, was relieved from its duties along the way (fall 2004). From a contractual perspective

this is not a “predictable environment” when it comes to competitive aspects, especially from the perspective of the other applicants that never received the licence. The ones that received the licences were not the ones promising the most reasonable and rational time limits and coverage levels, based on the resources of the operator, and the manifest formal rules of the contract and the PTA powers.

The ones receiving licences were simply the ones promising the most, either guessing that there would be a possibility to delay the time limits without sanctions, or perhaps foreseeing the chances to avoid sanctions, or just taking a chance, based on the strong belief in the 3G market’s future, present at the time.

A report from the Regulation investigation (Regelutredningen) states that inefficiency on the markets connected to the Electronic Communications Act can come from:

•• Deficiencies in the consumer position on the market.

•• Risk for worsened market efficiency due to many appeals.

•• The occurrence of dual nets, meaning that parallel and competing nets are developed (SOU 2005:4, p 614 ff.).

The consumer perspective has been emphasized by the PTA every time an operator has applied for a change in the licence conditions. Given the fact that the reach of coverage was delayed with more than three years (more than double the agreed time) the consumer position has de facto been degraded in relation to how the development was presented before the roll out. In the 3G case the operators’ appeals has postponed the deadline. This is an example of

“worsened market efficiency”. A clearer regulatory impact analysis could have been made – or perhaps should have been, which also has been discussed elsewhere (SOU 2007:29, p 216 f.), in order to more clearly paint the picture of pro’s and con’s when it comes to the design of the beauty contest for instance. The statement of competing nets is a two-sided issue with competition aspects on one side and environmental aspects on the other. Remember here that no environmental authorities where given the chance to comment on the provisions of the beauty contest, meaning that the competitive side was the only side emphasized, prior to the infrastructure roll out (Emmelin & Söderblom 2002, p 48-50).

The PTA could have put more pressure on the operators, all within the legal provisions of the Electronic Communications Act and the principle of legal security. By not being able to have a parallel readiness for supervision actions, such as issuing sanctioned orders, at the same time as investigating an operator application for a change in the licence conditions, the PTA opens up for the operator strategy of delaying the coverage deadline through applications and appeal. The former CEO of the PTA, Nils Gunnar Billinger, said in retrospect:

“The operators have deliberately delayed the development by applying for changes in the licence conditions and through appeals of the PTA decisions. It is fully legal and a way to reduce the costs and to benefit the owners. But we consumers suffer as a consequence of the late development.” (Interview in Affärsvärlden 16 Oct 2006, author’s translation).⁸⁹

89 ”Operatörerna har medvetet fördröjt utbyggnaden genom att begära tillståndsändringar och genom att överklaga PTS beslut. Det är helt lagligt och ett sätt att minska kostnaderna och gynna ägarna. Men vi konsumenter blir lidande på grund av den sena utbyggnaden”.

What the former head of the PTA neglects to address is the soft treatment the operators received from the PTA in the handling of the failure to fulfil the licence conditions. The PTA puts the blame on the operators, while the operators put the blame on the municipal permit handling and the radiation fearing public.

The delayed full reach of coverage was in the interest of the operators. An interesting question regards the operators’ awareness of the time aspects. When did they realize they needed more time to reach the coverage? How clear was the strategy of pushing the deadline in the first year, when only a relatively few mast building permits where applied for? How clear was the picture before the so called beauty contest? The conditions regarding the fast reach of almost full coverage was a result of the design of the beauty contest, and this design was referred to the operators, as well as others, for consideration prior to the contest, in early 2000.

Telenordia considered the proposed selection process to be a “qualitative auction”, a process that “risks leading to considerable promises that later can be hard to fulfil”. It is also Telenordia that in its consideration states:

“Environmental care, both regarding worry for electromagnetic radiation as well as the aesthetic environment, means that the Post and Telecommunications Agency ought to stimulate a sharing of resources.” (PTA 13 Mar 2000, p 13, author’s translation).

This is written in February or March 2000, long before the mast sharing debates and changes in the Electronic Communications Act, and long before the radiation was debated in national newspapers, and long before the roll out struck the municipal context. This shows that the awareness of what the so called beauty contest would mean was high, at least by some applicants.

Telenordia is one of the five applicants that passed the first test (the one Telia failed, regarding “technical feasibility”), but the only one of the five that did not receive a 3G licence, because it promised a lower coverage and a slower roll out rate (8 651 521 by 31 Dec 2003 instead of the 8 860 000 of the winning four). The difference between the operators is extremely small, but in retrospect Telenordia was the applicant that at least suggested the most realistic roll out speed of the five, in relation to the actual. For this they did not receive a licence.

Another interesting comment comes from Europolitan (later Vodafone, now Telenor), one of the 3G licence winners, which asks for clear and apparent sanctions for the operator that does not reach the promised coverage in time, in order to prevent from too high bids (PTA 13 March 2000). This shows that the operator knew that the design of the licence allocation could stimulate too high bids, and perhaps feared that other applicants would bid higher.

Bearing in mind that Europolitan actually made the highest possible bid regarding coverage and time limit, just months later, this may have been a tactical manoeuvre, or perhaps became a strategy the moment the company realized that no heavy sanctions would be clearly stated in the conditions, even though the company had asked for it. This operator later fulfilled the coverage conditions by 1 June 2007 instead of the promised 31 December 2003 (PTS fact sheet of 1 June 2007, PTS-F-2005:5, p 6).

This can – all in all – be interpreted as that the operators must have been quite aware of the consequences the so called beauty contest would bring. Perhaps due to the lack of clear sanctions Europolitan saw no hindrance in promising as much as possible as a strategic

manoeuvre in order to receive a licence rather than making a reasonable pledge in contact with what Europolitan could invest in the infrastructure development in the three years to come. Had the sanctions been clearer, perhaps the promises would have been more in line with investment capabilities and a reasonable development. And, again, no environmental authorities criticized the design because no environmental agencies were consulted (PTA 13 March 2000, Emmelin & Söderblom 2002, p 48f.).

Had not the 3G project in Sweden been such a heavy investment burden by the time Orange withdrew their participation in the infrastructure development it is likely that the other operators and consortia, that did not get a licence, with a louder voice would have criticized the fact that Orange, and later the other three operators, failed its duties under the licence conditions without any sanctions from the PTA. The only sanction for Orange came from the breach of agreement within the 3GIS collaboration between the operators. It cost Orange 1 billion SEK to get out of the contract (Björkdahl & Bohlin 2003, p 16). This in a way shows the difference in how contracts have applied to the situation between the market actors themselves and between the market actors and the State.

The unsanctioned operators’ lack of coverage according to what had been agreed upon illustrate a lack of transparency in the governmental steering of a billion dollar project, which shows the incrementalist approach; where the way is made up as it is walked. The question is to what extent not only the operators but also the PTA were, informally, comfortable to find ways out of the formal statements and pressured time limits of the year 2000. Formally, the PTA in any case has to refer to legitimate delays. When focusing on the appeals and new operator applications, this can speculatively be seen as a method for not putting too much pressure on the operators, and to make up for the mistakes made in the so called beauty contest that became obvious a little too late.

9.3 Non legal aspects in legally regulated decision