Introduction and Background

Vertically integrated companies have the tendency of using their leverage to bully other operators in the industry, thus hindering competition and creating a monopolistic situation.

A provider of retail and wholesale services that is a vertically integrated incumbent operator has the urge to consider its own retail division to the disadvantage of new entrants or other operators. Such discriminating behaviours create an anti-competitive environment for other operators who depend on the incumbent operator’s wholesale infrastructures to provide their own retail products and services.

Monopolies mostly lead to price and non-price discrimination which is a detriment to the consumer. Competition is a key instrument in bringing consumer satisfaction in the sense that the consumer has several options to choose which keep operators on their toes and thus benefit the consumer ultimately.

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The liberalization of the telecom industry has encouraged competition and aimed at bringing enormous benefit to the consumer. To achieve this vision, regulation is critical.

Regulators are set to provide a fair playing field and thus when operators act to the detriment of competition which may lead to the penalizations of consumers the onus is on the regulator to encourage fair competition through sound regulatory practices.

Within the scope of the European Regulatory Framework, National Regulatory Authority (NRAs), are endowed with a broad set of remedies in order to provide a competitive environment and eventually to enhance the end–user benefits. However, according to some NRAs, these measures have proved ineffective or incapable of preventing discrimination of alternative operators by the incumbent operator in the long term.

A popular measure being adopted by many regulatory bodies is separation. This comprises, accounting separation, virtual separation, functional separation, structural separation etc.

Accounting separation requires separate financial reporting for each of the operator’s lines of business in its regulatory accounts. Because of different customer groups, operators may separate their business into a key accounting and an end-user segment. This separation does not necessarily entail anything about an independent management of the wholesale area and the prevention of discrimination.

Virtual separation requires a consistent structuring of the interface within the wholesale department, which comprise ordering, processing and billing for internal and external customers, but may not assume the physical separation of networks.

Functional separation involves the creation of a separate business unit along with operational rules to establish what is known as Chinese walls in literature between these new business units. This leads to a complete change of business practices with the intention to allocate assets and inputs to a particular unit, which then by using identical processes takes care of internal and external customers.

Structural separation is achieved either as a legal entity of its own or with a separated ownership structure. It involves making the new business unit into a separate subsidiary. Generally, it is assumed that adequate separation reduces regulation. The reduction of regulation, particularly refers to the so-called retail segment (end-user), because efficient regulation should prevent the end-user segment of the historical operator (on the wholesale level) from acting in a discriminatory manner, or be able to exploit benefits, which give way to leverage market power A regulation of the wholesale part remains necessary especially during the transition period.