Annual report 2013

ANNUAL REPORT 2013

CONTACT Auna 6 10317 Tallinn Tel: (+372) 667 2400 Fax: (+372) 667 2401 E-mail: info@konkurentsiamet.ee Webpage: www.konkurentsiamet.ee Director General Märt Ots E-mail: mart.ots@konkurentsiamet.ee Head of Competition Division – Deputy Director General Kristel Rõõmusaar E-post: kristel.roomusaar@konkurentsiamet.ee Head of Energy and Water Regulatory Division – Deputy Director General Külli Haab E-mail: kylli.haab@konkurentsiamet.ee Head of Communications Regulatory Division – Deputy Director General Margus Kasepalu E-mail: margus.kasepalu@konkurentsiamet.ee Head of External and Public Relations Department Maarja Uulits E-mail: maarja.uulits@konkurentsiamet.ee

TABLE OF CONTENTS FOREWORD ......................................................................................................... 5 ORGANISATION ................................................................................................... 7 Structure ......................................................................................................................... 7 Personnel and budget .................................................................................................... 8 INTERNATIONAL RELATIONS AND EVENTS........................................................... 9 2013 IN THE COMPETITION DIVISION ................................................................ 11

Changes in legislation ................................................................................................ 11 The analysis of the Competitive Situation in the Oil Shale Sector ........................... 12 Termination of the administrative proceeding concerning Forum Cinemas AS ...... 14 Percept to Ragn-Sells AS to reduce additional service fee ....................................... 17 The service price of Estonian Internet Foundation was too high ............................. 19 Declaration of restrictions on freedom of establishment of pharmacies unconstitutional by the Supreme Court................................................................................................. 21

Control of concentrations ............................................................................................ 24 The concentration of AS Forum Cinemas and Solaris Kino OĂœ ................................ 25

2013 IN ENERGY AND WATER SECTORS ............................................................. 29 The first year on the open electricity market .............................................................. 29 International projects ................................................................................................... 31 District heating ............................................................................................................. 34 District heating sector analysis ................................................................................. 35

Water pricing regulation ............................................................................................... 38 DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013....... 40 Electronic communications sector.............................................................................. 40 Data communication .................................................................................................... 43 Significant developments for the provision of broadband services .......................... 45 Cable television ............................................................................................................ 49 Mobile telephony service ............................................................................................. 50 Significant developments in the provision of mobile telephony services ................ 52 Wholesale market: Interconnection in the mobile telephony network ..................... 53

Telephone service ........................................................................................................ 53 Telephone service wholesale market: interconnection in the fixed network market55 Leased line service market ........................................................................................ 55

Market analyses and surveillance on the electronic communications sector .......... 56 POSTAL SERVICES AREA ................................................................................... 58 Unreasonably burdensome costs ................................................................................ 58 UPs payment rate ......................................................................................................... 59 Control posting ............................................................................................................. 59 Resolution of complaints ............................................................................................. 61

ILLUSTRATION INDEX Figure 1. Structure ..................................................................................................................... 7 Figure 2. Changes in the number of viewers and average price............................................. 26 Figure 3. Estonian bidding area electricity price..................................................................... 30 Figure 4. Agricultural biogas production scheme with substrate (source: B. Linke, Leibniz Institute for Agricultural Engineering Potsdam-Bornim) ........................................................ 35 Figure 5. Changes in price indices .......................................................................................... 40 Figure 6. Division of total turnover of electronic communications sector by services in 2013 .................................................................................................................................................. 41 Figure 7. Distribution by services of the total annual turnover of the electronic communications sector for the years 2012 and 2013 ............................................................ 42 Figure 8. The number of fixed broadband end users changed in the years 2008-2013 ........ 44 Figure 9. The number of end users of fixed broadband service in the years 2008-2013 ...... 44 Figure 10. The change in the number of end users of various technical solutions of broadband services during the years 2008-2013.................................................................... 46 Figure 11. The average speed of connections consumed by end users of broadband service across quarters of the year in 2012-2013 ............................................................................... 47 Figure 12. The number of mobile broadband service end users by service as of the end of 2013.......................................................................................................................................... 48 Figure 13. The number of end users of fixed broadband services and mobile broadband service by services from 2008 ................................................................................................. 48 Figure 14. The number of local loops with full access given to the use of other service providers during 2006-2013..................................................................................................... 49 Figure 15. Distribution of market shares of cable television service providers based on the number of end users in 2008 – 2013 ...................................................................................... 50 Figure 16. Change in the number of contractual end users and the end users using a calling card of a mobile telephony service and end user penetration per 100 inhabitants .............. 51 Figure 17. The share of end user initiated call volumes in the fixed phone and mobile phone networks in the years 2008 - 2013 .......................................................................................... 52 Figure 18. The volume of call minutes terminated in the mobile telephone networks for the years 2008 - 2013..................................................................................................................... 53 Figure 19. The share of end users and active local loops based on the population in fixed communication networks in the years 2008 – 2013 .............................................................. 54

Figure 22. The change in volume of the call minutes terminated in fixed telecommunications network during the years 2008–2013 .................................................. 55 Figure 23. Change in the number of leased lines from 2008–2013 ....................................... 56 Figure 24. The quality of delivery of ordinary items of correspondence ................................ 60

FOREWORD

Figure 20. The number of end users of a telephone service changed in the years 2008-2013 .................................................................................................................................................. 54 Figure 21. The volume of call minutes initiated by telephone service end users in 2008-2013 .................................................................................................................................................. 54

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FOREWORD Dear reader, We are glad to present another Annual Report of the Estonian Competition Authority. I share the view of those who believe that a strong economy and the well-being of the residents is one of the essential foundations of our country. The Competition Authority´s mission is to keep reminding that free competition is one of the main driving forces for the economy. Free competition does not necessarily depend on whether the Government has right, central or social orientation. Social orientation does not mean limiting free competition, hindering entrepreneurship or creating administrative monopolies. On the contrary, a social country may only benefit from good economic environment and instead of limiting the success of undertakings, it would be worth considering little higher taxes and then redirecting additional resources to strengthen the sociality.

In the light of activities of previous and this year, we can say that the Authority´s role of analysing various sectors and giving recommendations for improving the competitive situation is becoming increasingly important. The energy sector has always been in our focus, because the sector has a monopolistic image and it represents a relatively large share of consumer expenditure. It is rather common to say that oil shale is both our fortune as well as misfortune. Fortune, because it helps us to ensure our energy independence; misfortune, because the mining and processing of oil shale inevitably involves environmental impact. With regard to open electricity market and the completion of Estonian-Finnish connections we have been integrated into the Nordic electricity market since last year and also oil shale power industry has to compete with other resources of energy on equal terms. At the same time, however, the economic organisation of the oil shale sector has not considered these circumstances. Oil shale is a great challenge for our economy and the right organisation of the sector has enormous potential for achieving economic success. It is probably widely known that the majority of the liquid fuel resources are not in the form of oil, but in different types of solid oil such as tar sands, oil shale, etc. Estonia

FOREWORD

will certainly not strive for becoming a leading oil country, but we can surely contribute

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to the development of this sector. If so far the main use of oil shale has been electricity production, then in the conditions of high oil prices and open market, the economic trend is more on the oil production. Also, the sharing and direction of oil

shale has to follow such trend. The resource must go there, where it will be the most beneficial and ensure the highest efficiency.

The Supreme Court´s decision on the abolition of limitations in connection with the establishment of pharmacies can also be considered as an important event last year.

The Estonian Competition Authority and the Chancellor of Justice have been dealing with this issue for years. Of course, all the necessary services from medicine to public transportation need to be ensured for the residents of the rural areas. At the same time, it is not correct to restrict competition as a tool for achieving this. A large part of the price of prescription drugs is known to be funded by the State through the support of the Health Insurance Fund. Removing competition restrictions and designing more effective pharmaceuticals market would enable us to save costs and if necessary, support pharmacies in the rural areas at the expense of free resources. We can be absolutely sure that it would be more effective than the implementation of competition restrictions.

Important discussions are under way in the district heating sector. In Estonia, the local governments have the right to establish a region, where the only allowed type of heating is the district heating. The district heating sector is continuously over regulated and has too many administrative constraints. The Ministry of Economic Affairs and Communications has drawn up a draft act, which aims to implement free market rules more in the sector. Clearly, not all 200 district heating undertakings can be effective and free competition could be considered, when smaller undertakings are concerned.

With best wishes,

Märt Ots

FOREWORD

Director General

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ORGANISATION STRUCTURE The Competition Authority includes three field-based divisions, which are the Competition Division, the Energy and Water Regulatory Division and the Communications Regulatory Division. In addition to the Divisions, there is the External and Public Relations Department which is responsible for ensuring effective support services. The Director General is at the head of the Authority (Figure 1). Structural divisions are directed by the Heads of Divisions – Deputy Directors General.

DIRECTOR GENERAL

EXTERNAL AND PUBLIC RELATIONS DEPARTMENT

COMPETITION DIVISION

SUPERVISORY DEPARTMENT

MERGER DEPARTMENT

COMMUNICATIONS REGULATORY DEPARTMENT ELECTRONIC COMMUNICATIONS DEPARTMENT

ENERGY AND WATER REGULATORY DIVISION

DISTRICT HEATING DEPARTMENT

WATER DEPARTMENT

Figure 1. Structure

The functions of the Authority are divided between structural units as follows: The main functions of the Competition Division are exercising competition related supervision; control of concentrations in all economic sectors; analysing competitive

ORGANISATION

situations, counselling undertakings and raising competition related awareness.

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The main functions of the Energy and Water Regulatory Division are implementing price regulation and market supervision in the electricity, natural gas, district heating and water sectors.

The main functions of the Communications Regulatory Division are: regulating the electronic communications market; regulating the postal service market; settling disputes regarding airport fees; perform duties regarding railway regulation.

The main functions of the External and Public Relations Department are coordination of public and international relations; organisation of state assets and means in the possession of the Authority; personnel work and coordination of training; document management and administration of archives.

PERSONNEL AND BUDGET The Competition Authority employed 61 persons as of the end of 2013, 5 new employees joined the Authority and 12 people left the organisation during the year.

The division of personnel between the structural units was as follows: Competition division

19 persons

Energy and water regulatory division

20 persons

Communications regulatory division

11 persons

External and public relations department

5 persons

Officials with up to 10 years of public service experience were of the majority. Most staff members have higher education in economics (business administration, business management, finance, economics, etc.) or in law. The third group of officials consisted of those with higher education in other disciplines, such as radio electronics, telecommunications, thermal energy, public administration or other.

A new Public Service Act entered into force on April 1st 2013 and changed the definition of an official. According to the new Act, an official is a person who is in the public service and exercises official authority. The Competition Division consists of officials only. The External and Public Relations Department consists of employees only and the employment relationships are regulated by the Employment Contracts Act.

ORGANISATION

In 2013 the budget of the Authority was approx. 1.99 million euros.

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INTERNATIONAL RELATIONS AND EVENTS The event that may be considered to be the most important in terms of international relations in 2013 was the 12th ERRA Energy Investment and Regulation Conference held in Tallinn from 16-17 September. In addition, the Competition Authority hosted the Baltic Electricity Mini-Forum and Regional Competition Conference.

The Competition Authority routinely participates in the work of competition, energy, communications and railway related working groups and associations. The officials of the Competition Division attend meetings and discussions of the ECN (European Competition Network), the ECA (European Competition Authorities), OECD Competition Committee and the ICN (International Competition Network) working groups and subgroups. Energy and Water Regulatory Division officials participated in the meetings of the CEER (Council of European Energy Regulators) the ERRA (Energy Regulators Regional Association) and the ACER (Agency for the Cooperation of Energy Regulators, lüh ACER).

Communications Regulatory Division actively participated in the working groups of the BEREC (Body of European Regulators for Electronic Communications) for establishing mobile and fixed termination rates, cost accounting, transparency and an undertaking with significant market power.

From 4-5 June the Competition Authority hosted the annual meeting of the representatives from the Baltic and Finnish Competition Authorities – Regional Competition Conference, which was held in Tartu. The meeting was designed to focus on actual competition concerns, exchange information about developments and

INTERNATIONAL RELATIONS AND EVENTS

jointly find solutions. On the second day of the conference discussions between case-

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handlers took place in sectoral working groups.

From 16-17 September the Estonian Competition Authority and Lithuanian and Latvian energy regulators co-hosted the 12th ERRA Energy Investment and Regulation Conference in Tallinn. The conference covered relevant topics of energy regulation and investment opportunities while reflecting on the host region´s energy sector.

The conference offered a program with internationally recognized speakers and representatives from the ERRA-member regulators, European institutions, industry, and international organizations. 183 delegates from 38 countries participated in the conference.

ERRA is a voluntary organization of 36 autonomous energy regulatory bodies primarily from the Central European and Eurasian region, with Affiliates from Africa, Asia and the Middle East. ERRA was established in 2000 for the purpose of exchanging information and experience among energy regulators The Baltic Electricity Market Mini-forum took place in Tallinn on November 8th bringing together energy market regulators, market players, representatives from the European Commission and other interested parties to discuss developments and problems in the common electricity market in Baltic States.

Lisaks esinesid ametnikud aasta jooksul sageli loengu või ettekandega erinevatel Eesti-sisestel ja rahvusvahelistel üritustel ning vastasid nii Eesti kui ka teiste riikide ettevõtjate ja organisatsioonide arvukatele järelepärimistele.

The most important national event for the Authority was the Competition Day 2013, which took place in Tallinn on 5 December. The conference celebrating the 20th anniversary of the Authority brought together experts from various sectors of the economy and specialists active in competition matters.

dealt with very different sectors of the economy, analysed the problems and functioning of various markets. In this process, it is important to listen to the undertakings active in these areas on a daily basis. The main themes of the conference were banking, electricity, retail, real Illustration 1. Panel discussion, Competition Day 2013

estate, market trends for mobile

devices and the field of advertising.

Each year on 5 December, the competition authorities worldwide celebrate the World Competition Day, which seeks to draw attention to fair and free competition as an essential factor socially and in terms of human development. The conference of 2013 celebrated both the anniversary of the Estonian Competition Authority and the World Competition Day.

INTERNATIONAL RELATIONS AND EVENTS

Over the years, the Authority has

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2013 IN THE COMPETITION DIVISION Changes in legislation Starting from 15 July 2013 (partly also from 1 January 2014), a number of amendments to the Competition Act entered into force, expanding the competence of the Competition Authority according to the European competition rules and clarifying the existing regulation due to the problems encountered in practice.

The most important change is complementing the Competition Act with provisions which allow the Competition Authority to use the rights granted to the national competition authorities pursuant to Council Regulation (EC) No 1/ 2003 for establishing

interim measures

and

approve obligations.

According

to

the

amendments, the Authority may on its own initiative and in the case of urgency issue a precept to a natural or legal person to perform a required act or refrain from an illegal act if there is a risk of serious and irreparable breach of competition as set out in the Articles 101 and 102 of the Treaty on the Functioning of the EU (TFEU).

Activities of one or more undertakings affecting trade between Member States shall be subject to interim measure in case the Authority estimates on the basis of provisional data that there is an urgent need to protect competition.

With the

amendments to the Competition Act the Authority has been given a right to approve obligations proposed by an undertaking to remedy disturbance in the competitive situation when the previous activities of the undertakings might have violated ยง 4 or ยง 16 of the Competition Act or Articles 101 or 102 of the TFEU and the Competition Authority is considering to issue a percept to an undertaking to eliminate that

2013 IN THE COMPETITION DIVISION

disturbance. If the obligation proposed by the undertaking is appropriate for

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eliminating the potential harmful effects of the violation, the Authority will make the obligations binding for the undertaking and terminate the proceedings without taking a final position on whether the violation occurred or not.

The remaining changes mainly include the qualification and modification of the provisions of proceedings and liability set out in the Competition Act (for example, the grounds for issuing a precept and termination of supervision proceedings have been amended). Additionally, the concentration control provisions have been amended. The most important amendment is related to the determination of the term of validity of the permission to concentrate. It means that the parties to the concentration must, in general, implement the concentration within six months from the entry into force of the permission. The concept of special or exclusive rights was more clearly defined in

the Competition Act as well (exceptionally came to force as of 1 January 2014) and the restrictions on the activities of undertakings, also provided for in the sector specific acts were repealed.

Finally, an important amendment regarding the limitation period of competitionrelated misdemeanours in the Penal Code entered into force as of 15 July 2013. While previously the general two-year limitation period was applied to competition misdemeanours then as of 15 July 2013, § 81 of the Penal Code provides that competition-related misdemeanour expires after three years have passed from committing the offence until the entry into force of the decision imposing sanctions for that infringement.

The analysis of the Competitive Situation in the Oil Shale Sector The Competition Authority analysed the competitive situation of the oil shale sector and submitted its views about a number of problems associated with the sector to the Ministry of Economic Affairs and Communications and to the Ministry of Environment.

The Authority examined the current arrangement for sharing the oil shale resources and option for the future developments. Currently, the annual total amount of oil shale permitted to be extracted (20 million tonnes) is divided between four mining companies, and the largest part of the extraction permits belongs to the Eesti Energia group. Thus, it is not possible to introduce competitive situation in the access to oil shale resources in the foreseeable future. Probably even later than starting from year 2020 these permits will start to end in such a volume that there will be a considerable should be issued via a transparent auction and the preferences to the companies already possessing mining permits in the current Earth´s Crust Act § 301(2) should be invalidated. The state may enhance competition in terms of access to the oil shale resources also earlier, by changing the sales principles of oil shale in the state-owned Eesti Energia group.

Although in the conditions of free market economy, the oil shale should be used in the industry, where more added value is created as a general principle, giving preference to electricity generation may be justified with the objectives of security of supply and energy security. Clear principles for giving such preferences must be set out in legislation.

2013 IN THE COMPETITION DIVISION

opportunity to issue new permits. The Competition Authority found that new permits

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The current state development plan for the use of oil shale sets out the general direction for preferences to be given to electricity generated from oil shale, but does not contain specific measures that would explain how and in what manner to ensure the use of oil shale precisely for the electricity generation. These principles are neither set out in legislation nor are they explained in the energy sector development plan.

The contents of the security of supply and the role of oil shale in it are actually clearly undecided on political level, but such decisions must be made in the near future. The current development plan for the use of oil shale is valid until 2015 and reportedly preparations have started for drawing up a new development plan.

Specific legislative instruments for ensuring the objectives of security of electricity supply must be set out when giving preference to oil shale. The Authority’s analysis reveals that electricity generation from oil shale is not likely to be competitive in the long term compared to the production of shale oil. In such a situation clear legislative mechanisms must be determined to warrant the competitiveness of power generation. One way is the reservation of certain amount of oil shale for the electricity generation. At the same time, when deciding the access to oil shale reservoirs, it is particularly important to ensure that the principles of access comply with the state aid rules.

The Competition Authority used only publicly available data to analyse the pricing of oil shale in order to avoid obstacles to its disclosure. Until 1 January 2013, the Eesti Energia group sold the main part of oil shale at cost-based price co-ordinated by the Estonian Competition Authority. Quite a large profit was earned from the vertical chain of mining and the production of oil and electricity generation in 2011, however, the above-average profit concentrated rather on the industry and less on the mining.

2013 IN THE COMPETITION DIVISION

Fundamentally rather the opposite, where the mine as the provider of the limited

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resources earns the greatest profit, would be justified.

At current prices for oil and electricity, the oil industry is more profitable than the electricity generation, which is why it has a greater ability to pay for the oil shale.

According to the calculation made by the Authority, the price for oil shale is likely going to be higher on the free market than the previous regulated price (10,55 - 10,58 EUR/tonne). The calculation showed that the oil industry’s ability to pay for the oil shale was higher than electricity generation, respectively ca 28 EUR/tonne and 18 EUR/tonne. Although the corresponding figures depend on the market situation and may differ at various points in time, it is believable that the oil industry will pay more also in the long term. Based on the data of 2011 the revenue from the difference of

price would be 150.1 million euros. Thus, in the long run, the oil industry would be able to produce more revenues for the economy than electricity generation.

Complying with the principles of the free market, the price of oil shale should reflect the conditions of free competition and on an equal basis to both the electricity and oil production. In such case the power generation would rather perish gradually due to its inability to pay competitive price for the oil shale. The fact that oil industry is more capable to pay for the oil shale than power generation is contrasted by the objectives of energy security and security of supply. The goal of the analysis of the competitive situation in the oil shale sector was not to conclude whether these objectives are big enough to weigh up the possible distortions of competition and/or additional costs. It is a political choice to give preference to power generation from oil shale in order to ensure the security of supply. The aim of the analysis was to draw attention to the fact that such a selection may involve additional costs and that, if such a choice is made, clear legislative principles must be laid down in order to preserve the competitiveness of the electricity generation from oil shale.

On its own initiative the Competition Authority also carried out supervision proceedings, which aimed at analysing compliance of the activities of Eesti Energia AS as by far the largest undertakings in the oil shale sector with the Competition Act. The proceedings were initiated mainly due to the lack of certainty, whether the Eesti Energia AS sells oil shale to the Viru Keemia Grupp AS in the long term or not. In the course of the proceedings, in the summer of 2013, Eesti Energia Kaevandused AS (part of Eesti Energia Group), VKG Oil AS and Viru Keemia Grupp AS concluded a longterm sales contract for the oil shale concentrate. This ensures the supply of oil shale for Viru Keemia Grupp AS over the next several years.

therefore it was not appropriate to continue with the supervisory proceedings in the given circumstances. In this context, the Authority left open the final evaluation about the undertaking’s activities’ compliance with the Competition Act (including questions whether Eesti Energia AS has a dominant position in the production and sales of oil shale and if it has abused its potential position prior to concluding the long-term contract).

Termination of the administrative proceeding concerning Forum Cinemas AS The Competition Authority investigated whether Forum Cinemas AS (hereafter FC) has violated prohibitions provided in § 16 of the Competition Act, set for an

2013 IN THE COMPETITION DIVISION

With this, Eesti Energia AS improved the competitive situation in selling oil shale;

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undertaking in a dominant position for the public distribution of films in Estonian cinemas.

FC operates three cinemas in Estonia: Coca-Cola Plaza in Tallinn, Astri in Narva and Ekraan in Tartu. Until 2008, FC did not have competitors in operating cinemas in Tallinn and Tartu. In addition to operating cinemas, FC also distributes films to cinemas operating in Estonia. When the Competition Authority initiated the proceedings, FC was the sole distributor of films of six main Hollywood film studios (Buena Vista International, Columbia Pictures, 20th Century Fox, Warner Bros, United International Pictures, Sony Pictures) in Estonia. The studios mentioned produce films with large budget, meant for international distribution and belonging to the category of so-called mainstream films, i.e. films that are of interest for a large group of people.

For film distribution, the film studio usually concludes a license agreement with the local distributor, on the basis of which the distributor is granted the right to distribute films produced by the film studio in a specific geographic area (usually, the territory of a particular country). The local distributor, in turn, concludes license agreements with cinemas of the respective countries, who would like to publicly screen the films in their cinemas.

In August 2008, Cinamon Operations OĂœ (hereafter Cinamon) opened in Tartu a multiplex „Cinamonâ€? with five halls (a cinema with three or more screens is considered a multiplex) and wanted to start ordering film copies from FC for this cinema.

Cinamon found that several conditions of the license agreement offered by FC for ordering film copies contradict with the Competition Act and asked the Authority to determine whether FC has abused its dominant position in film distribution market, in order to protect its interests on the film exhibition market.

2013 IN THE COMPETITION DIVISION

In the beginning of 2009, the Competition Authority sent its preliminary opinion to FC,

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finding that FC has a dominant position in distributing films for their public screening at cinemas located in Estonia. The Authority noted that with the concentration of distribution rights of most popular Hollywood films to FC, the latter had significant market power on the relevant market, which enabled it to direct the conditions of competition on this market1. The market power of FC was further strengthened by the fact that it also operates cinemas in the largest towns in Estonia. This ensures it the

1

Until 01.11.2008, the market power of FC was further strengthened by holding the distribution rights of ACME films.

necessary distribution network in distributing films and thereby a considerable independence from non-related purchasers (i.e. the competing cinemas).

The Competition Authority found that conditions established in the license agreement

by FC for Cinamon may restrict competition. For example, during the first two weeks of cinema exhibition of a film, the cinema did not have the right to exhibit other audiovisual works (except for trailers and advertisements) in the cinema hall used for public exhibition of films without prior written consent by FC (the so-called “two-week rule”). The restriction forced an inefficient business practice on Cinamon, competing with FC in Tartu, because Cinamon could not re-arrange films between different halls according to its own preferences or divide movie halls between different movies.

According to the Competition Authority, this condition also restricted competition on film distribution market, since it restricted access of film distributors competing with FC to première cinemas2.

In April 2009, FC announced that they have analysed the preliminary opinion of the Authority and have decided to change license agreements offered to cinemas, excluding or specifying those points of the agreement that the Authority had considered harmful to competition. Among other issues, FC replaced the “two-week rule” described above with a principle that cinemas themselves can determine in which halls, with how many sessions a day and during which time they will screen the films. Also, FC established procedural rules for ordering premiere copies of films, which determine transparent ordering conditions and objective criteria for distribution of film copies in a situation where the number of premiere copies of films is limited.

The Authority found that with the above, FC significantly improved the competitive situation in distribution of films for public exhibition in Estonian cinemas.

market. If until 2011 distribution rights of films of six main Hollywood film studios belonged in Estonia to FC, then in the beginning of 2011, FC transferred distribution rights of film studios Warner Bros and Sony in Estonia to ACME Film OÜ, and since the beginning of 2013 the distribution rights of film studio 20th Century Fox were also transferred from FC in Estonia to Film Distribution OÜ. Thus, while until 2011, the selection of films, ultimately necessary for operating a cinema oriented at wider

2

Premiére cinemas include Coca-Cola Plaza and cinema Solaris in Tallinn, Cinamon and Ekraan in Tartu, Astri in Narva and Mai in Pärnu.

2013 IN THE COMPETITION DIVISION

During the proceedings, significant changes also occurred on the film distribution

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public, had concentrated in the hands of one distributor (FC), in the beginning of 2013, a situation had formed where the distribution rights of a particular selection of films were at the hands of several distributors. The Competition Authority found that in such a situation each distributor could possess market power, in case the distributor offers a film selection without which a cinema directed at wider public could not operate sustainably. Namely, a cinema oriented at wider public needs to show a particular reasonable selection of films that an average cinema visitor wishes to see; otherwise, the activity of a cinema is not sustainable. As a rule, a particular film is available for the cinema only from one distributor, who has the distribution rights of the respective film studio in Estonia. This means that in order to show a critical selection of films necessary for cinema activity, cinema has to receive licenses from different distributors. Substitution of different films is rather limited, since a cinema visit is usually planned with the aim to see a particular film (not just to look at some film in the cinema), and thus an average cinema visitor is not likely to go and see another film at the same cinema in the absence of the selected film, but chooses a cinema which does screen the film selected. This, in turn, means that the competitive pressure exhibited by different distributors on each other is rather modest.

Percept to Ragn-Sells AS to reduce additional service fee Based on the application of TÜ Madara, the Competition Authority analysed the validity of costs related to opening the locked gate established in the Lasnamäe area of Ragn-Sells AS (hereafter Ragn-Sells). According to the application, the fee for opening the barrier of Ragn-Sells by telephone was unreasonably high – 2.68

2013 IN THE COMPETITION DIVISION

euros/time.

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In 2011, Tallinn City Government gave Ragn-Sells the exclusive right for providing waste transport service in Tallinn waste transport region No. 10 (Pae-Ülemiste) for three years. The carrier had the right to apply an additional fee if the waste holder would like to have an additional service (e.g., opening the gate). In Lasnamäe region, Ragn-Sells established the fee of 2.68 euros/time for opening the gate (incl. the barrier).

During the period of exclusive right, no other undertaking can provide waste transport service on this territory, as Ragn-Sells is the undertaking in a dominant position, providing waste transport service in this region. In this case, the Competition Authority limited the goods market as a gate opening service, which differs from the service of organised waste transport. The gate opening service, however, is related to waste

transport. As other carriers cannot operate in the respective region, it is not possible to provide the service of gate opening. For these waste holders who would like to keep their gates shut during the main part of the day, there are no reasonable alternatives to the service provided by Ragn-Sells. Therefore, Ragn-Sells is an undertaking in a dominant position in terms of gate opening service in areas where it has been given the right to provide organised waste transport.

According to the Competition Act, an undertaking in a dominant position is forbidden to abuse its position directly or indirectly on the goods market. The Act forbids the undertaking in a dominant position to directly or indirectly establish unfair purchase or sales price or any other unfair business conditions.

In case No. 3-3-1-66-02, clause 26, the Supreme Court has provided: /…/ “The fee established by an undertaking in a dominant position, which is not in reasonable correlation with the economic value of a service, is unfair. The economic value of a service, in turn, is related to the costs necessary for providing the service”. As the economic value of the service is related to the costs necessary for providing the service, the costs related to the service had to be determined as well as in what extent the service cost is covered with them. During the procedure, Ragn-Sells presented the costs related to opening the gate, but according to the Authority all costs were nevertheless not related to the service. Some costs were also much more extensive than the observations and calculations conducted by the Authority. Therefore, the Authority concluded that the gate opening service by Ragn-Sells is not in reasonable correlation with the economic value of the service. The fee for opening the gate forms a significant part of the waste transport fee for the waste holder, and the unreasonably high cost of the service damages the interests of consumers.

Lasnamäe regions to 1.90 euros/time (without value-added tax), Ragn-Sells did not submit all inclusive and transparent calculations. Thus, it was impossible for the Competition Authority to evaluate in what extent the price reduction moved the fee for gate opening closer to the level allowed by the Competition Act. The Competition Authority issued a precept to Ragn-Sells to terminate the demand for fee from waste holders for opening the gate in Tallinn waste transport region No. 10 (Pae-Ülemiste) in the extent of unreasonable costs as at February 1, 2014. Also, the undertaking was obliged to compile by February 1, 2014 transparent, all inclusive and controllable calculations for the service of gate opening; this included measuring the concerned temporal and monetary costs, based on which the unreasonable costs for the service of gate opening could be determined.

2013 IN THE COMPETITION DIVISION

Although during the proceedings, Ragn-Sells lowered the fee for opening the gate in

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Although the proceedings were conducted for Tallinn waste transport region No. 10 (Pae-Ülemiste), the statements submitted by the undertaking indicated that similar calculations have not been conducted for other waste transport regions either, where Ragn-Sells also provides the service of gate opening. The Competition Authority obliged the undertaking to refrain from the fee demand from waste holders for gate opening in other waste transport regions in the extent of unreasonable costs as at February 1, 2014.

Ragn-Sells AS observed the precept of the Competition Authority, and as at 01.02.2014, the fee for opening client lock, incl. a gate or a barrier in Lasnamäe region is 1.04 euros/time (with value-added tax).

The service price of Estonian Internet Foundation was too high The Competition Authority detected that the price provided by the Estonian Internet Foundation for registering domains was too high during the financial years of 20112012 and therefore it contradicted with the Competition Act. Based on the inquiry of the NGO Estonian Internet Community, the Competition Authority studied the cost-orientedness of domain administration fees applied by the Estonian Internet Foundation (hereafter EIF). Based on the application, the fee for domain name established by EIF was 18.21 euros a year in 2011, while until 2009, the cost of the service – administered by EENet – was 2.88 euros a year.

EIF is an organisation that represents the Estonian Internet Community and domain names with Estonian state traits; among other issues, its task is registration of the domain .ee and imposition of fees. Since 2009, the domain .ee registration undergoes

2013 IN THE COMPETITION DIVISION

in Estonia a two-level registration. This means that the servicing of end-users is

19

delegated by on EIF to accredited registrars (e.g. ZONE, Elion, etc). The final price of the registration service is formed in the competition between registrars. Accredited registrars forward the data to EIF, who registers the domain names. The Competition Authority studied the fee that EIF takes from the registrars. The Authority found that EIF – who is the only one to provide the registration and administration service of .ee top domain – owns 100% market share and thus a dominant position on the goods market of .ee top domain registration and administration. The Competition Act forbids an undertaking in a dominant position to directly or indirectly establish unfair purchase or sales price or any other unfair business conditions.

When evaluating the price-formation of EIF, the Competition Authority followed from the fact whether the profitability of the undertaking is in reasonable correlation with

the economic value of the service provided by EIF. For this purpose, it had to be explained whether EIF has earned profit which it would otherwise not gain in ordinary and sufficiently efficient competitive conditions. When analysing the information collected during the proceedings, the Competition Authority reached a conclusion that in 2011 and 2012, EIF received too high profit in the sense of the Competition Act, because EIF would not be able to earn such profit on a competitive market. The Authority also highlighted the high costs of EIF and recommended EIF to consider establishing budget limits for their costs.

The Competition Authority found that in order to meet the Competition Act, EIF has to lower the price of the .ee domain and when changing the price in the future, it must be seen that the profit does not extend the profit calculated by the methodology described in the decision of the Competition Authority. During the supervision proceedings, the Authority was convinced that EIF has applied measures for saving on costs and has started to lower the price for domain registration onto the legally recognised level. Above all, the Authority noted that as of 01.03.2013, the price for domain registration has been reduced from 17 euros to 15 euros, and the price was said to drop even further. On September 13, 2013, EIF made a decision to reduce since January 1, 2014 the registration fee for .ee domain name in the amount of 12 euros for one-year registration period. Also, during the proceedings, EIF approved the priceformation bases of the domain .ee. According to this the planned budget of EIF is generally in balance, taking into account both investments and reasonable reserve; the total net gain does not extend 7% a year of the budget, and the reserve is up to 80% of the budget expenditure.

The Authority terminated the supervision proceedings due to the significant domain registration and establishing the price-formation bases for the domain .ee.

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improvement of competition by EIF, which was expressed in reducing the price of

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Declaration of restrictions on freedom of establishment of pharmacies unconstitutional by the Supreme Court Since 2009, the Competition Authority has made several proposals for abolishing restrictions on issuing and changing an activity license of a general pharmacy, established in the Medicinal Products Act (hereafter MPA), in order to improve the availability of medicinal products, functioning of the market and lower the cost of medicinal products. Due to similar reasons, the necessity for the abolition of restrictions on freedom of establishment of pharmacies has been also suggested by the Chancellor of Justice.

Based on the application of the Chancellor of Justice, the Supreme Court en banc declared with its decision No. 3-4-1-2-13 of 9 December 2013 subsections 1-3 of ยง 421 of the MPA unconstitutional and invalid, as they restrict the freedom of establishment of pharmacies.

The Supreme Court en banc found that pharmaceutical service performance belongs to the area of freedom of business, pursuant to the constitution. According to the Medicinal Products Act, general pharmacy services can be provided only by having an activity license, while the receipt of the activity license is restricted with contested provisions. Thereby, already existing pharmacy licensees can also establish a new pharmacy only on the conditions of restrictions on freedom of establishment of pharmacies. The regulation prevents from establishing pharmacies in the amount and places foreseen by the undertaking so that it would be easier for the customer to buy medicinal products. In a situation where the establishment of pharmacies is restricted and a large extent of existing pharmacies have formed a so-called chain, being related to existing wholesalers, it is probably also difficult for a new wholesaler to find

2013 IN THE COMPETITION DIVISION

sufficient number of wholesale customers. The contested provisions therefore also

21

indirectly prejudice the freedom to conduct business.

Although the restrictions on the establishment of pharmacies apply for everyone in the same way when establishing a new pharmacy, these enterprises which established pharmacies before the restrictions did have a priority. Enterprises who would now like to establish pharmacies cannot establish them to whatever place foreseen due to the restrictions on establishment. As they are in a worse situation than pharmacy licensees, already on the market, their fundamental right for freedom has been infringed.

According to the estimate of the Supreme Court, the aim of the contested restrictions on establishment is to ensure the consistent availability of the pharmacy service in

the entire country. However, the requirement of availability should not be understood so that every Estonian village should have a pharmacy. Considering the population concentration of Estonia, it cannot be considered sufficient if the pharmacy service is available only in areas of as large demand, where pharmacy keeping is clearly profitable.

The Supreme Court consents to the claim of restriction supporters that the independent legitimate aim of restrictions is to protect existing pharmacies from too excessive competition. Restricting excessive competition can be an independent aim if the availability of pharmacy service would not be ensured without it. In a situation where there is sufficient demand for pharmacy service and the market can be entered, there are very likely always undertakings who would like to provide the service.

The Supreme Court finds that restrictions on establishment of pharmacies are not suitable for ensuring the availability of pharmacy service in regions with large demand. The legislator has established a limit for the establishment of pharmacies in towns as one pharmacy per 3000 residents, presupposing that in case of such number of residents the demand is sufficient for keeping a pharmacy that is profitable or at least not in loss. Almost as many pharmacies have been established in towns as enabled by the restrictions on establishment. This indicates that undertakings are interested in providing a pharmacy service also in case of a relatively small number of residents.

The Supreme Court also noted that both the demand for pharmacies and the return of pharmacies have increased during years. These circumstances exclude the situation where the provision of the service would be economically possible or worthwhile only if the service were consumed by a very large number of people, and the state would competition does not create a situation in an area with wide demand that all pharmacies would terminate their activity there and the pharmacy service would become unavailable.

In the estimate of the Supreme Court, restrictions on establishment of pharmacies are not suitable for continuing pharmacy service or commencing with it in areas with small demand. The specifics of the pharmacy market do not indicate in any way that the pharmacy service should be initiated or continued in a place where there is not sufficient demand, if there are no measures for alleviating the absence of demand.

The data of the State Agency of Medicines also indicate that undertakings wish to open pharmacies above all in profitable town areas with large demand.

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have to intervene to ensure this. The Supreme Court also marks that allowing free

22

The Supreme Court tacitly accepts that contested restrictions may have some effect on ensuring the availability of the pharmacy service in areas with small demand. After abolishing restrictions on establishment, new pharmacies could be established in towns, which would also cause a need for additional qualified workforce. The increasing lack of workforce, in turn, would highlight the need for wage increase, which could motivate pharmacists in the countryside to move more from the countryside to towns. A significant wage increase, however, cannot be probably enabled by pharmacy licensees, due to the regulated price of pharmaceutical products and the restricted sales of other goods at pharmacies.

The Supreme Court proposed alternative measures in its decision, which would help to promote the availability of the pharmacy service in the areas with small demand as well or equally as the restrictions on the establishment of pharmacies, because the former are less burdensome. The availability of the pharmacy service could be, for example, ensured with the obligation of the pharmacy licensees in areas with large demand to provide pharmacy service also in areas with small demand (e.g. a permanent pharmacy or a pharmacy bus). The obligation to keep a pharmacy in an established location with small demand could be entailed either with obtaining a license for keeping a pharmacy in an area with particularly large demand or be related to return in a particular pharmacy or the pharmacies belonging to the group of undertakings. The solution described restricts freedom to conduct business less than a situation where a pharmacy cannot be kept at all. This infringes only the freedom for business of these undertakings, which have had an advantage for the right of keeping a pharmacy in a place with large demand. This would harmonise the conditions for competition and undertakings would be treated equally.

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A similar effect on the freedom to conduct business could be found in a measure,

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which would provide a requirement for the payment of benefits to pharmacies located in areas with small demand; this would be ensured through a support fund, which would be financed by pharmacies in areas with large demand. If the support would be of a proper size and only for places where the pharmacy service would otherwise not be economically feasible, there would be no competitive advantage or unequal treatment.

It would be also possible to establish support for pharmacies in areas with small demand. The support would be paid by the state, local government, or a support fund, to which pharmacies in areas with large demand would pay either a fixed fee or a part of their return. Thereby, the legislator should decide whether ensuring the availability of the pharmacy service is the task of the state or local governments. The support

would help to increase the availability of the pharmacy service in areas with small demand better than the restrictions on establishment. Taking into account limits on support, established in the legislation on state aid rules, and the annual turnover of pharmacies, the support would be allowed according to the Supreme Court. However, the Supreme Court also emphasised that as paying support would mean additional costs for the state or local governments, this would entail other negative impacts.

In conclusion, the Supreme Court found that the restrictions on establishment of pharmacies are not necessary, suitable or proportional for ensuring the availability of the pharmacy service in the entire country.

The Supreme Court deferred the decision’s entry into force by six months, so that the legislator could develop the measures necessary in a regulation.

CONTROL OF CONCENTRATIONS The aim of the control of concentrations is to maintain and develop the competition and

to

prevent

concentrations

distorting

the

competition,

namely

these

concentrations that may cause substantial rise in prices due to lack of competition.

The Competition Authority grants permission to these concentrations, which affect economic development and competition in a positive way.

In 2013, 29 notices of concentration were submitted to the Competition Authority and two cases were brought over from 2012. The Authority made 27 decisions to grant permission to concentration, in one case the proceeding was ended because the parties to the concentration decided not to concentrate and in one case the Competition Act. In two cases the decision was postponed to 2014. In three cases a decision was made to initiate a supplementary proceeding.

26 decisions to grant permission to concentration were made in the first phase of the proceedings, i.e. within the 30 calendar days prescribed by law. In five cases the proceedings were suspended in connection with the elimination of deficiencies in the notice.

The breakdown by types of concentrations was as follows: 

An undertaking acquired control of the whole or a part of another undertaking in the case of 24 concentrations (Competition Act § 19 (1) p 2);

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proceeding was ended because it was not a concentration within the meaning of the

24



Undertakings jointly acquired control of the whole or a part of another undertaking in the case of 6 concentrations (Competition Act § 19 (1) p 3);



Several natural persons already controlling at least one undertaking jointly acquired control of the whole or a part of another undertaking in the case of one concentration (Competition Act § 19 (1) p 5).

Majority of concentrations (23) took place among Estonian undertakings, in two cases both of the parties to the concentration were foreign undertakings and in six cases the parties to the concentration were both domestic and foreign undertakings.

It could be observed in 2013 that the share of concentrations of Estonian undertakings, whose concrete impact on the Estonian product market is particularly important, has increased and constitutes 74% of the total number of concentrations.

Foreign investors are continuously interested in the acquisition of Estonian undertakings; the share of such concentrations was 19% of the total number of notified concentrations. 2% of the notified concentrations took place outside of Estonia, but due to the turnover criteria the parties to the concentrations also notified to the Estonian Competition Authority.

In 2013, concentrations took place in the following product markets: passenger transportation; sale of medical devices and accessories; retail and wholesale of fuel; development and rental of real estate; sale of developed real estate; manufacture and sale of paints; import and sale of electrical household appliances; pharmacy services, gas turbines and generators; sale of household goods; security services; telecommunications services; sale of sporting goods; construction services; sale of bunker oil; generation and sale of heating and electricity; IT services; production and sale of soft drinks, beer, cider and mineral water; showing films at cinemas; collection

2013 IN THE COMPETITION DIVISION

and transport of municipal waste; newspaper and magazine publishing; production

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and sale of wood chips.

The concentration of AS Forum Cinemas and Solaris Kino OÜ From July 25 to December 19, the Competition Authority processed a concentration, as a result of which AS Forum Cinemas would have started to operate the cinema complex at the Solaris Centre in Tallinn, belonging to Solaris Kino OÜ. The concentration would have had an impact on two product markets: showing films at cinemas and the distribution of films. In case of the first product market, the Authority analysed the competitive conditions in Tallinn and its near vicinity, and in case of the other market, the conditions on the entire territory of Estonia.

During the proceeding, there were also other active cinemas in Tallinn, in addition to the two multiplexes owned by the merging parties (Coca-Cola Plaza and Solaris Cinema), such as cinema Artis, cinema Sõprus, Rooftop Cinema and the cinema hall „SuperNova cinema“ of the Baltic Film and Media School of Tallinn University. The Competition Authority compared the conceptions; size and selection of films of the cinemas named and found that the closest competitors are the merging cinemas. To some extent, competitive pressure can also be exhibited by cinema Artis, as their overlap in film selection with Coca-Cola Plaza and Solaris Cinema has increased year by year.

There is the total of 18 screens and 3508 seats at Coca Cola Plaza and Solaris Cinema; 2 halls and 253 seats at cinema Artis. As a result of the concentration, AS Forum Cinemas would have gained 90% market share in showing films at the cinemas in Tallinn and its vicinity.

Both Solaris Cinema and cinema Artis started their activity in the end of 2009, when the Solaris Centre was opened. The market entry of these cinemas was a good example on the formation of competition and its positive effect on the consumers – the prices of cinema tickets dropped drastically and the number of visitors increased significantly. The graph on Figure two illustrates the percentage change in the number of viewers and the average price of cinema tickets compared to previous years. The graph draws together the data on Coca Cola Plaza, Solaris Cinema and cinema Artis.

The largest divergence in 2010 coincides with the market entry of Solaris Cinema and cinema Artis.

Changes in the number of viewers and the average price 40,00% 20,00% 0,00% 2007

2008

2009

2010

-20,00% -40,00% number of viewers

average price

Figure 2. Changes in the number of viewers and average price

2011

2012

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60,00%

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As a result of the concentration, the positive effect resulting from the the competition would have been lost. It also became evident that Solaris Cinema has grown quicker than Coca Cola Plaza, occupying increasingly more of the market share of Coca Cola Plaza. The concentration would have therefore resulted in eliminating basically the only competitor who exhibited increasingly growing competition pressure.

The concentration would have also damaged competition on the goods market of film distribution. Such an adverse effect would have been arisen as a result of having a dominant position on the market of showing films at cinemas, i.e. through a vertical integration. The purchasing power of AS Forum Cinemas on the market of showing films at cinemas, (which is the downstream market for the market of film distribution), would have enabled the company to change the license fees agreed with film distributors and other conditions in a direction beneficial for themselves. Also, as license fees are based on box-office revenue and on dividing the revenue between the distributor and cinema exhibitor, the merger would have automatically resulted in a loss in the financial situation for other film distributors. Hereby it has to be considered that AS Forum Cinemas is also one of the largest film distributors in Estonia.

In order to convince the Competition Authority to approve the concentration, the parties of the concentration emphasised the existence of a strong potential competition. As the future competitors, AS Forum Cinemas mentioned the following cinemas that would enter the market: IMAX cinema in the rooms of the former cinema Kosmos, the cinema of the Ăœlemiste Centre, the cinema of the shopping centre on the Peterburi Road, the cinema of Viimsi Spa, and the cinema of Mustamäe Centre. The Competition Authority confirmed that the new cinemas very likely to be opened in the near future are the cinema of Viimsi Spa and the IMAX cinema. The realisation of

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other planned cinema projects remained unclear. It became also evident that the

27

concentration would hinder above all larger multiplexes to enter the market. According to the assessment of the Authority, the claimed benefit from potential competition does not eliminate the significant lessening of competition.

Although the parties of the concentration said that the concentration would entail only positive developments for cinema visitors, AS Forum Cinemas submitted a package of behavioural remedies to the Competition Authority. Namely, the Competition Authority may approve the concentration if the parties of the concentration assume obligations to prevent the restriction of competition. The obligations proposed included: (i) the obligation not to raise the price of cinema tickets more than the increase in consumer price index; (ii) the obligation to operate Solaris Cinema at least with the same number of screens and as extensive film selection as it was before the concentration; also, the

obligation to make the necessary investments to cinemas; (iii) the obligation to refrain from opening new cinemas; (iv) the obligation to implement the same loyalty programme in both cinemas; (v) the obligation to offer more beneficial screening conditions for Estonian films; (vi) the obligation to continue the equal treatment of cinemas as a film distributor as well as (vii) the obligation to ensure that the volume of films distributed by AS Forum Cinemas at the Solaris Cinema does not exceed the market share of AS Forum Cinemas on the distribution market. According to the Authority, the obligations indicated above were not suitable for eliminating the restriction of competition, related to the concentration. The remedies were not suitable substantively as well as for the fact that the need for their long-term validity significantly hinders the freedom of action of merged undertakings; it also makes the monitoring of performance of obligations complicated.

The proceeding of concentration was terminated, as the parties of the concentration decided not to concentrate. Otherwise the Competition Authority would have

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prohibited the concentration.

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2013 IN ENERGY AND WATER SECTORS THE FIRST YEAR ON THE OPEN ELECTRICITY MARKET Since the start of the year 2013, the electricity market in Estonia has opened for all consumers. Everyone who has entered into a network contract with a network operator is in a position to choose an electricity supplier. On an open electricity market, all electricity producers have equal opportunities for access to the power grid and to the cross-border network connections of the European Union.

For the consumer, opening of the market means the opportunity to choose the most suitable electricity supplier regardless of the network operator with whom they have a network service contract. The undertaking however is in a situation where it has to work harder to get customers. Electricity prices form on the equal market in equal conditions of competition.

The full opening of the electricity market attracted many new electricity suppliers. As at the end of 2013, there were 15 electricity suppliers and 34 network operators in Estonia, owning an activity license for electricity supply and were ready to sell electricity.

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Due to the new situation, consumers’ enquiries to the Competition Authority on the electricity price, universal services as well as on contracts have increased.

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If the consumer has not concluded an agreement with an electricity supplier or in case the agreement has expired, the network area operator (or a supplier appointed by the latter) shall supply the consumer with electricity within the context of a universal service. The Estonian Competition Authority shall monitor the price formation of a universal service ex-post facto. The price of a universal service is formed based on the monthly weighted average of multiplying the hourly amount of providing a universal service and the hourly rate of the energy exchange (Nord Pool Spot), to which justified selling expenses and reasonable profit are added. The weight of selling expenses and reasonable profit in the monthly price of electricity as a universal service depends on the amount of energy consumed by users of the universal service (the higher the consumption, the lower the additional cost per kWh will be). Within a year, consumers of universal services decreased significantly.

In February 2013, the Competition Authority initiated supervision proceedings against the universal service prices of Eesti Energia AS, as it was higher (0.60 eurocents/kWh

in January 2013) than the margin of universal services of other enterprises. In the view of the Competition Authority, the margin of the universal services of Eesti Energia AS was unreasonably high. During the proceeding, Eesti Energia AS has lowered the margin of universal services – in January 2014, the price was 0.38 eurocents/kWh. Thus, compared to the price of the previous year at the same time, the margin of universal services of Eesti Energia AS decreased by 37 %.

The exchange price depends on many factors such as cross-border transmission capacity, accidents in the electricity system as well as the water levels of hydroelectric power plant reservoirs in Nordic countries, Latvia and Lithuania. The average exchange price in 2013 in Estonia’s price area was 43.13 euros/MWh, the highest being in June with 53.36 euros/MWh and the lowest in December with 36.84 euros/MWh. The highest daily rate in the price area of Estonia was 103.85 euros/MWh on 25 June 2013. Thus, the exchange price still fluctuates and strongly depends on the season as well as the water levels of the hydroelectric power plant.

Estonian bidding area electricity price 55,00 50,00 45,00 40,00

2011

35,00

2012

30,00

2013

Figure 3. Estonian bidding area electricity price

The Competition Authority analysed the disclosed electricity price list of the largest market share-owning supplier Eesti Energia AS. The average price of electricity with a 12-month fixed package was 4.94 eurocents/kWh and the average margin with of exchange price package was 0.25 eurocents/kWh and the price of electricity 4.57 eurocents/kWh. The average margin of general services of Eesti Energia AS was 0.66 eurocents/kWh and the price of electricity 4.98 eurocents/kWh. As a result of a simple comparison, it appeared that the best package for small consumers, based on the average prices of 2013, was the exchange price package and the general service

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25,00

30

proved to be the most expensive. On low consumption (approximately 100 – 200 kWh per month), the price gap between various electricity exchange packages and universal services are barely perceptible.

INTERNATIONAL PROJECTS To ensure the competitiveness, sustainability, and security of supply of energy, developing an integrated energy network in Europe is essential.

The European Union’s energy and climate policy focuses on developing the internal market for energy and on ensuring the security of supply of electricity, gas, and petroleum. The goals set for 2020 are decreasing greenhouse gas emissions by 20 %, increasing the energy produced from renewable energy resources in final consumption to 20 % and increasing energy efficiency by 20 %. To reach certain goals, it is essential to update the current energy infrastructure and accelerate the process of implementing a new one. This allows the consumers to benefit from the new technology and wise energy consumption, and it is also necessary for a competitive low-carbon economy.

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The European Parliament and the Council by Decision No 1364/2006/EC established the guidelines for trans-European energy networks (TEN-E). The goal of these guidelines is to support the development of the internal market for energy of the European Union and to encourage reasonable production, distribution, and use of energy supplies to decrease the energy isolation of less favoured regions and islands, and to ensure the energy supply, energy resources, and supply routes of the European Union. Cooperation with third countries is also essential.

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The estimated investments to be made in trans-European electricity and gas networks amount up to 200 billion euros. The significant increase in the level of investments and the need to quickly implement priorities require, in particular, amendments to legislation and financing.

On 26 March 2010, the European Council agreed with the Commission’s proposal to launch a new strategy “Europe 2020,” where one of the priorities is achieving sustainable economic growth. The strategy puts networks in the centre stage of the flagship, stresses the need for quickly updating European networks, and connects them throughout Europe to integrate renewable energy resources.

Diversifying gas supplies is essential to keep a member state from solely relying on one supplier. It is also necessary to increase the flexibility of the gas system and its durability in a short to medium term to increase the important role of gas as a reserve fuel of producing energy from multiple sources, keeping in mind the EU’s long-term goal of decreasing CO2 emissions. In addition, the development of the market for liquefied natural gas, biogas, and unconventional types of fuel, mainly in the US, should also be utilised.

The Baltic Energy Market Interconnection Plan (BEMIP) was launched with the goal of uniting the existing “island regions” in Europe with the rest of the European electricity and gas market. The Baltic States region was also defines as an “island region.” The goals of the project is choosing new connections for the functioning of the common electricity and gas market in the Baltic Sea region, the harmonisation of market codes, and the integration of energy markets. On 17 June 2009, the President of the European Commission and Prime Ministers of Estonia, Latvia, Lithuania, Finland, Sweden, Denmark, Norway, Poland, and Germany signed the respective plan.

On 17 April 2013, the Regulation No 347/2013 of the European Parliament and of the Council on the guidelines for the implementation of a trans-European energy

On 14.10.2013, the European Commission published a notice “Long term infrastructure vision for Europe and beyond,” establishing the priorities in the field of electricity and gas. The priorities of the Baltic Sea region are launching the plan on interconnecting the electrical systems of the region and synchronising the electrical system with the network system of Europe’s transmission system operators. In addition, Baltic Energy Market Interconnection Plan in gas ("BEMIP Gas") has also been highlighted to end the isolation of the three Baltic States and Finland and their single supplier dependency as well as to increase diversification of supplies in the Baltic Sea region and reduce their independence on a sole supplier, to improve internal networks and increase the security of supply in the Baltic Sea region.

Article 12 of Regulation No 347/2013 states that as soon as such a project has reached sufficient maturity, the project promoters, after having consulted the TSOs from the Member States to which the project provides a significant net positive impact, shall submit an investment request. That investment request shall include a request for a cross-border cost allocation and shall be submitted to all the national regulatory authorities concerned.

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infrastructure entered into force.

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Within six months of the date on which the last investment request was received by the national regulatory authorities concerned, the national regulatory authorities shall, after consulting the project promoters concerned, take coordinated decisions on the allocation of investment costs to be borne by each system operator for the project, as well as their inclusion in tariffs. The national regulatory authorities may decide to allocate only part of the costs, or may decide to allocate costs among a package of several projects of common interest.

The project promoters included in the first list of the Union were obligated to submit the request by no later than 31 October 2013. Seven requests on projects of common interest in the area of gas and one request on a project of common interest in the area of electricity were presented to the Competition Authority.

The request on a project of common interest in the area of electricity includes group No 4.2 project between Kilingi-Nõmme and Riga, comprising the following projects of common interest: 

the connection between Kilingi-Nõmme (EE) and the substation of Riga’s 2nd CHP (LV);



the internal line between Harku and Sindi (EE).

The submitted requests on projects of common interest in the area of gas include the following projects: 1. group No 8.1 includes the cross-border Estonian-Finnish pipe-connection

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“Balticconnector” and one competing LNG terminal:

33



Finngulf LNG terminal (FI);



Paldiski LNG terminal (EE);



Tallinn LNG terminal (EE).

2. group No 8.2 comprises the following projects of common interest:



increasing the power of the pipework of Klaipeda-Kiemenai;



Modernising and widening the underground storage facility in Inčukalns.

3. Group No 8.5 includes the Polish-Lithuanian cross-border pipe-connection (also

known as GIPL).

The energy regulators of each state must make a decision on submitted requests by no later than 30.04.2014.

Where the national regulatory authorities concerned have not reached an agreement on the investment request within six months of the date on which the request was

received by the last of the national regulatory authorities concerned, they shall inform the Agency without delay. The Agency (ACER) shall make a decision on the requests in three months.

DISTRICT HEATING The keywords for 2013 in the sector of district heating were the initial approval of price caps in the cogeneration process on heating produced from biogas and compiling a comprehensive analysis of the sector.

For the first time, the Competition Authority approved the price caps in the cogeneration process on heating produced from biogas for three enterprises – Aravete Biogaas OÜ, Oisu Biogaas OÜ and Vinni Biogaas OÜ. The biogas necessary to produce heating is produced from renewable resources, using manure, slurry and silage as substrate.

Before the necessary amount of biogas to produce heating is available, the production of biogas (regardless of the equipment being used) can be divided into four different

1.

the transporting, storage, pre-processing and insertion of the substrate;

2.

emission of biogas;

3.

storage and use of digestate;

4.

storage, cleaning and use of biogas.

The four named stages are mutually dependent. Stages two and four are especially linked, because the heat produced in stage four shall be utilised in stage two. The following figure gives an overview of the single-step agricultural biogas-plant (with components), where other biodegradable waste in need of pasteurisation is used.

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stages:

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Figure 4. Agricultural biogas production scheme with substrate (source: B. Linke, Leibniz Institute for Agricultural Engineering Potsdam-Bornim)

The equipment used in the different stages of biogas production is the following: the

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equipment used in the first stage (storage, pre-processing, transporting and insertion) is the slurry pre-storage facility (2), storage tank (3) and pasteurisator (4). The process in the second stage (biogas emission) takes place in the reactor (5). The third stage of the process is concluded in the disposal site (8) after which the digestate is taken to the field. In the fourth stage (storage, cleaning and use of biogas), the storage facility (6) and gas burning device (7) are needed. The final device may be the CHP device, central heating boiler or combustion engine of the means of transport.

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The production of biogas in Aravete Biogaas OĂœ, Oisu Biogaas OĂœ and Vinni Biogaas OĂœ is also based on this general scheme, and the produced biogas is burned in a CHP plant. Therefore, these enterprises produce heating in the CHP process and sell heating to network operators for resale to consumers.

District heating sector analysis The Competition Authority analysed the feasibility of the national regulation in small network regions of district heating (with an annual sales volume of less than 10 000

MWh)3. The analysis was drawn up with the goal of presenting views on multiple issues concerning the district heating sector to The Ministry of Economic Affairs and Communications and The Economic Affairs Committee of the Riigikogu (the Parliament of Estonia). In the last year, the Competition Authority has made essential observations in the heat price approving process, mainly on the sustainability of network areas of the district heating sector.

The goal of district heating is mainly the implementation of the CHP potential of using fuels, which are impossible or difficult to use in the consumer’s individual boiler (mainly oil shale, peat, wood chips, and waste). If neither goals are met, the feasibility of district heating is questionable. It is questionable, for example, to use natural gas in district heating to produce heating which is produced by using a water heating boiler, because gas can be very easily used locally. In district heating, however, compared to local heating, the district heating pipeline losses also apply, which means that producing gas without losses directly to the consumer may be more efficient. In addition, one prerequisite for efficient district heating is sufficient consumption. The goals of district heating are also stated in the District Heating Act, according to which district heating must comply with the principles of objectivity, equal treatment and transparency in order to ensure a secure, reliable and effective heat supply which is

The district heating systems of Estonia are mainly from former Soviet Union times, where effective small boiler technology was unavailable and district heating was the preferred heating type. District heating was established in almost all populated areas.

This aspect is the reason behind the large number of district heating areas in Estonia – at the moment an estimated 230 areas exist. Most likely, district heating would not have been established in all populated areas under the market economy conditions, as the sales volumes and consumption were too low. In some areas, local heating would have been a better option. However, many smaller populated areas still have inefficient district heating systems.

As at 1 June 2013, the Competition Authority has approved the price caps in 89 network areas of 122 i.e. 73 % of smaller regions, where annual sales volume is less than 10 000 MWh. In 56 network areas the annual sales volume is below 3 000 MWh.

Analysis “On the feasibility of national regulation in small network regions of district heating (with an annual sales volume of less than 10 000 MWh) available on the Authority's website (only in Estonian) 3

2013 IN ENERGY AND WATER SECTORS

provided at a justified price and complies with environmental requirements and the needs of the consumer.

36

In smaller network areas, the price is generally higher than in larger network areas. As at 1 June, the weighted average price cap in 89 small network areas was 70.99 euros/MWh, whereas the weighted average price cap in 33 larger network areas (with an annual sales volume is over 10 000 MWh) was 57.96 euros/MWh. The reason for this is the fact that in small network areas, the main fuels are oil shale (50.6 %) and natural gas (23.6 %) which are, however, rather expensive resources. In addition, small network areas are also characterised by low sales volume and consequentially low consumption; the old age of production equipment, in turn, is the cause of low efficiency of heat production and large pipeline losses.

2013 IN ENERGY AND WATER SECTORS

Therefore, the state has to intervene to alleviate the situation of consumers in small network areas. Although one option for small and inefficient district heating networks would be to modernise production biofuel reconstruction pipelines etc.), it is highly debatable whether these investments would prove to be reasonable with such low sales volumes. The important question to ask is whether continuing district heating and its modernisation process is reasonable or would local heating be more economic. With this aim in view, it should be considered whether it is more reasonable to use national investments to modernise district heating or switching to local heating.

37

According to the District Heating Act, the local government has the right to appoint a heating district where district heating shall be preferred over other heating systems i.e. local heating. Although the market forces of the district heating network would be large even without establishing district heating areas, the opportunity of switching to local heating would exercise competitive pressure or in. Local heating would definitely be a viable alternative for consumers in smaller areas, where the district heating network uses oil shale or natural gas to produce heat and is less effective due to the lack of economies of scale. According to the Competition Authority, the price of local heating would be lower than the price of district heating, ranging from 58 to 61 euros/MWh in the case of pellet heating with state aid.

In the Competition Authority’s view, to provide a reasonably-priced service for consumers, district heating in small network areas should be discontinued. In that case, consumers could decide upon the best heating system for them, which, in turn, would give way to switching to a more effective local heating system. In view of current high buying-in prices of oil shale and natural gas, consumers would be more reasonable to find alternative means of heating. Therefore, the District Heating Act must be amended in a way that district heating areas would discontinue during a reasonable transition time and in an organised manner. Along with the discontinuation

of district heating areas, the price regulation of the Competition Authority in respective district heating areas would also cease.

In many of our neighbouring countries (e.g. Finland, Sweden), the price of district heating is not state-regulated. District heating is seen as a market-based competition for all other alternative means of heating. If the price of district heating is lower than of any other alternative means of heating (incl. local heating), then there is no need for state regulation. For example, in Finland as of 01.07.2013, the weighted average price of heating without state-regulation for large tower blocks was 66.27 euros/MWh (without VAT), which is 7 % lower than the weighted average cap price of heating in small network areas in Estonia 70.99 euros/MWh.

WATER PRICING REGULATION As at the end of 2013, more than half (40) of the total water undertakings regulated by the Competition Authority (70) have approved the prices of water services. The Competition Authority also approved the prices for larger water undertakings AS Narva Vesi, AS Emaj천e Veev채rk and AS Rakvere Vesi.

As at 2013, eight water undertakings have submitted their application to set prices to the Competition Authority on two occasions. The need for coordinating the prices of water services in a very short period is due to the fact that water suppliers start making large investments and progressively including the investments, maintenance and administrative costs into the price of water services to cushion the increase in prices for the consumers.

The Competition Authority was also presented with applications to set prices for water services, which were left unapproved, as small water suppliers are not costeffective. For example, many highly qualified specialists on water economy have been employed, regardless of the fact that employing full-time specialists in small water enterprises, keeping in mind the workload, is not reasonable. However, according to the water undertakings, part-time employers are hard to find, and one employee

2013 IN ENERGY AND WATER SECTORS

The main reason for the application to set prices submitted to the Competition Authority has been the investments made with assistance from Cohesion Fund finances distributed by the Environmental Investment Centre. The price of water services has been included to the extent of cost-sharing of the water supplier, which is a prerequisite for obtaining investment support and additional costs related to managing the investments.

38

cannot be assigned too many various tasks due to the lack of competence. Therefore, water undertakings employ full-time highly qualified specialists who only have a couple of effective working hours per day. One solution for the cost-effectiveness issue of small water undertakings would be creating a regional water company.

Working in many regions will ensure the employment of personnel as well as allow allocating costs between a larger consumer base. Water companies, whose price has been left unapproved due to cost-efficiency, should negotiate with local governments and water undertakings in the area to establish a regional water company.

Establishing a regional water undertaking not only ensures higher competence in water economy but also a lower price compared to the one water suppliers would be able to offer when operating separately.

The first time that the Competition Authority made a decision on the discontinuation of public water services of a water supplier (AS Emajõe Veevärk) was in 2013, in the arch hangar area of Meeri Village in Nõo Parish. The request of the water undertaking, which was based on the development plan for the Nõo Parish public water and sewerage services for 2013-2024, established the aforementioned area to be left out of the area covered by public water services. According to the responses from the Environmental Board, the Health Board and the Nõo rural municipality government,

2013 IN ENERGY AND WATER SECTORS

the Competition Authority reached a conclusion that consumers shall be supplied with water even after the water supplier is no longer operational.

39

DEVELOPMENTS IN THE COMMUNICATIONS MARKET IN 2013

ELECTRONIC

ELECTRONIC COMMUNICATIONS SECTOR Estonian electronic communications market developments were in 2013 influenced by increased competition in the retail markets and significant increase in the consumption of mobile data services. The sector’s turnover decreased by 8%

The data of 2013 shows that in a number of electronic communications markets regulatory interventions are still necessary and the sector-specific measures applied on telecommunications operators have contributed to the improvement of the competitive position and supported the stability of communications prices in the retail market.

210 200

Consumer price index

190

Communication services price index

180 170 160 150 140 130 120 110 100 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

The Consumer price index and communication price index (1997=100%)

Figure 5. Changes in price indices

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

compared to the prior year. Increased competition resulted in the decline in total retail (voice service and fixed broadband service) sales; when the prices of telecommunications services decrease, the total turnover is reduced. However, the turnover rose in cable, mobile data and other services.

40

The electronic communications market for the year 2013 was characterised by: 

decline in the sale of interconnection service, fixed data service, telephony and mobile voice service;



growth in mobile data services and other revenue;



stabilisation of cable service and roaming revenue.

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

However, it must be noted that since the end consumers consume services in the form of so-called packages (ca 79-96%, depending on the service), the distribution by specific services provided within the package may be estimated.

41

The estimated turnover of communication services provided by market operators was 675 million euros, which compared to year 2012 decreased by 8%. The turnover was affected by the fall in the sales of interconnection service, fixed broadband service, access service and voice service. However growth in the volume of data service, cable television service and electronic communications auxiliary services had a positive impact on the total turnover of the sector.

The electronic communications market can be divided into eight market segments: phone, mobile phone, data connection, fixed lines, interconnection, access, cable television service communications.

and

other

services,

including

broadcasting

and

radio

Mobile telephone 33,53%

37,11%

Telephone Interconnection Data communication

5,33% 4,43% 0,09% 2,54%

3,93% 12,62%

Cable television Leased lines Access Other services

Figure 6. Division of total turnover of electronic communications sector by services in 2013

40% 35% 30%

2013

25%

2012

20% 15% 10% 5%

Figure 7. Distribution by services of the total annual turnover of the electronic communications sector for the years 2012 and 2013

In comparison to the year 2012 the share of total turnover in the electronic communications market for telephone services decreased nearly by 2%; and the service revenue decreased by 32%. In the telephone service market, the major service providers were Elion EttevĂľtted Aktsiaselts (Elion), STV AS (STV) and AS Starman (Starman). The number of telephone service end users decreased by almost 22 thousand.

Retail mobile telephone service was characterised by significant decline in the turnover of voice service (ca 24%) the roaming turnover remained on the same level as in 2012. Mobile voice services revenue decreased by 24% and the number of end users decreased by 0.7% (by active SIM cards, excl. active SIM cards of Top Connect OĂœ).

The mobile service market can be characterised by redistribution of an existing client base between service providers. In comparison to the year 2012 the share of mobile services in the total turnover of the electronic communications market rose by 0.4% and total services revenue decreased by 7%. The turnover was affected by the increase in the numbers of high-speed mobile broadband customers and of data volumes consumed by customers. The turnover of auxiliary mobile services (including mobile data service) increased by 18% compared to previous year.

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

0%

42

Interconnection service market includes interconnection services rendered on the basis of both fixed and mobile networks. In the total turnover of electronic communications market the share of interconnection service market decreased by 6.7% compared to the previous year and the interconnection turnover decreased by 66%. The reduction of the interconnection turnover was contributed to by the decline of mobile network call termination rates and call volumes terminated in the fixed communications network.

In 2013, the access service market formed a minimum share of total market turnover of the electronic communications market, amounting only to 0.1% and was virtually unchanged compared to 2012.

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

In the data service retail market the number of end users of broadband services increased nearly by 3%. At the same time, the data service revenue decreased by 7%.

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Compared to previous years, the increase in the number of end users has stopped.

The growing provision of mobile broadband/data services has a significant pressure on competition. More consumers have begun to consume higher speed data connection broadband services.

In the electronic communications sector, the market for fixed line service accounts for the smallest market in terms of turnover, but across the year the consumption showed a slight increase.

Compared to 2012, the turnover of cable service grew by 6% and the number of customers grew by 2%. This was mainly due to an increase in the number of consumers of the IPTV service provided by Elion.

DATA COMMUNICATION In comparison to the year 2012, the number of customers in the fixed data services retail market grew by 3%. As of the end of the year 2013 there were 44 active service providers in the data services retail market, the largest of these were Elion, Starman and STV (collectively accounted for 88% of the market shares). Most of the communications operators, who have left the market, have sold their communications networks or connected them to the networks of major communications services providers. Thus, in the case of data service, market concentration is taking place.

Over the past three years the number of broadband customers has grown minimally.

Increasing competitive pressure lies in the fact that end-users tend to use data

services rendered via mobile networks. Compared to 2012 the number of end users in the data service market grew by 3%.

400 350

thousand

300 250 200 150 100 50 0 2008

2009

2010

2011

2012

2013

On the basis of the number of end users of the broadband market, the majority of the market (89%) has concentrated into the three largest service providers: these are Elion, Starman and STV. 400

thousand

350 300 250 200 150 100

Other

50

STV

Starman

Elion

0 2008

2009

2010

2011

2012

2013

Figure 9. The number of end users of fixed broadband service in the years 2008-2013

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

Figure 8. The number of fixed broadband end users changed in the years 2008-2013

44

SIGNIFICANT DEVELOPMENTS FOR THE PROVISION OF BROADBAND SERVICES In the broadband market are mainly competing businesses that own network infrastructures. As a major service provider Elion offered primarily xDSL service via optic cable networks and Starman and STV provided broadband services via cable modems or a fibre-optic cable network. The broadband of Elion, Starman and STV was consumed by 89% of the end users and on the basis of the number of end users, within a year the market share of these service providers has increased by the total of 1%.

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

Mobile broadband service provides increasingly more competition to fixed data services, as the service rates and connection speeds of the mobile broadband service rates are comparable or occasionally even better. Complete replacement of fixed data services with a mobile broadband service is also prevented by restrictions on the data volume and problems related to the assurance of connection speed quality.

45

As mobile broadband service packages (regarding Data SIMs) have become much more comparable with fixed broadband packages, they are compared with broadband products supplied via fixed communication networks.

In 2013, the growth of the number of end users of mobile broadband services slowed and by the end of the year the service had a total of more than 221 thousand users.

Compared to the previous year the number grew by 13 thousand users and now there are eleven times more users than those of the services provided via radio communication technology.

Compared to the year 2012 the number of end users using xDSL technology decreased by 1%, based on the total number of end users of broadband services. The share of end users of a cable modem remained almost on the same level than in 2012. However, due to fibre optic cable based solutions, the number of fixed broadband service consumers increased nearly by 9%.

In 2013 the number of end users of broadband services provided via WLL technology continued to decrease – compared the previous year, the number fell by 6%. The share of xDSL, cable modem and fibre optic based broadband service consumption was 58% and the share of consumption of mobile broadband connection based services was 38%.

700 600

thousand

500 400 300 200 100 0 2008 xDSL

2009 Cable modem

2010 Fibre optic

2011 WLL

Other solutions

2012

2013

Mobile Broadband

Telecommunications end users consume more and more various services in a package (broadband service, phone service, cable service, mobile phone service). In the case of integrated telecommunications solutions, a single monthly fee includes at least two telecommunications services.

At the end of the year 2013, an estimated 58% of Estonian households used a fixed broadband service and nearly 72% of the broadband end users used a similar integrated solution; in comparison to individual solutions the integrated solutions offered by telecommunications operators are generally more attractive in terms of price and conditions.

Market developments show that more and more consumers prefer higher-speed broadband services and waive small and limited bandwidth services. The fastest decline concerns the part of the segment with low data transfer rate, the number of connections with a 2-10Mbit/s transfer rate has also begun to decrease. The number of users of connection services with speed over 10Mbit/s has grown more than two times compared to the previous year, accounting for 49% of the total number of broadband connections.

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

Figure 10. The change in the number of end users of various technical solutions of broadband services during the years 2008-2013

46

60% 50% 40% 30% 20% 10% 0% 2012 I kv

2012 II kv 2012 III kv 2012 IV kv

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

from 144 Kbit/s to 2 Mbit/s

47

2013 I kv

from 2 to 10 Mbit/s

2013 II kv 2013 III kv 2013 IV kv 10 Mbit and faster

Figure 11. The average speed of connections consumed by end users of broadband service across quarters of the year in 2012-2013

In addition to the above described mobile broadband (called Data SIMs) mobile network operators also provide broadband services for consumption in mobile terminals. These consumers fall into two distinct categories: customers who have entered into a contract for mobile broadband consumption and mobile broadband customers who use broadband services in addition to voice services and who pay for the broadband service according to the volume of consumed data.

At the end of the year 2013, the previously described first type of mobile broadband was used by nearly 330 thousand customers and the second type of mobile broadband was used ca by 654 thousand customers. Mobile broadband services were used by an estimated 1 206 000 consumers, but this number could include consumers that simultaneously used a variety of mobile data service products via active SIM cards.

SIM small data

600

SIM with data

thousand

500

Data SIM

400 300 200 100 0 EMT

Tele2

Elisa

To characterise the rapid growth in the consumption of mobile data services and competitive pressure on fixed broadband services, the following figure shows the comparison and the growth of consumers of various data connection services.

However, it has to be added that if fixed data services are generally consumed by the whole family, mobile data services are related to personal consumption. Therefore the fixed broadband services and mobile data services are not comparable on a one-onone basis.

700

654

600

540

500

thousand

400 300

316 317

339 306

348

200 100

22

349

406

70

269 144 150

350

361 330

208 224

221

0 2008 Data SIM

2009

2010

SIM with data

2011 Fixed broadband

2012

2013 SIM small data

Figure 13. The number of end users of fixed broadband services and mobile broadband service by services from 2008

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

Figure 12. The number of mobile broadband service end users by service as of the end of 2013

48

Data connection wholesale markets are divided into two parts: the local loop and the broadband access wholesale market. Regulation established by the Competition Authority in 2009 applies to those wholesale markets, under which access, nondiscrimination, transparency and price control obligations have been imposed on Elion, a company which has significant market power in those markets.

10000

Elion Other

8000 6000 4000 2000

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

0

49

2006

2007

2008

2009

2010

2011

2012

2013

Figure 14. The number of local loops with full access given to the use of other service providers during 2006-2013

Compared to 2012 the number of local loops provided for the use of other service providers decreased by 15%. The number of broadband access connections (bitstream access) fell by 3%. The monthly fees of access to copper loops fell by 5% each. Some monthly fees of broadband access services depending on the broadband connection speed rose respectively up to 15% and some fell by up to 6%.

CABLE TELEVISION In 2013, 13 carriers operated in the market of cable television services (incl IPTV service), the major ones being Starman, STV and Elion. Compared to the year 2012 the number of end users increased by about 7 thousand (2%). As a result, the market shares of service providers changed.

2013 2012 2011 2010

2009 2008 0%

20%

40%

Starman

STV

60% Elion

80%

100%

Teised

MOBILE TELEPHONY SERVICE In 2012, the retail market of mobile telephony services remained relatively stable. The retail market of mobile telephony services is a market with intense competition between three major operators, AS EMT, Tele2 Eesti AS and Elisa Eesti AS So-called virtual mobile service provider Top Connect OÜ is also operating in the market.

Compared to 2012, the total number of the end users of mobile telephony services decreased by 1% and the density of end users in the population remained at the level of 160%. The number of calling cards issued by Top Connect OÜ is not included here, because the operator has no overview of the number of the calling cards (ca 3 million) that are active and in real use Estonia. In comparison to the previous year, the number of contractual end users increased by 9% and the number of end users of a calling card4 decreased by 22,5%.

The calling cards issued by Top Connect have been excluded from the statistics, because the company sells cards internationally and the number of cards active in Estonia is very small.

4

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

Figure 15. Distribution of market shares of cable television service providers based on the number of end users in 2008 – 2013

50

1800

1,56

1600 1400

1,42 1,21

1200

thousand

1,56

1,17

1,2

1000

1,0

800

0,8

600

0,6

400

0,4

200

0,2 0,0 2008

2009 Post-paid

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

1,6 1,4

1,23

0

51

1,8

2010

2011

Pre-paid

2012

2013

Active SIM cards

Figure 16. Change in the number of contractual end users and the end users using a calling card of a mobile telephony service and end user penetration per 100 inhabitants

The volume of call minutes started by end users in the mobile network increased by 8% and at the same time the volume of call minutes started in the fixed communications network decreased by 16%. Thus, the preferred way to use a voice service by end users remains to be the use of a mobile telephony service. The calls initiated from the mobile network constitute 85% of all initiated calls and only 15% calls are initiated via the fixed communications network.

90% 80% 70%

69,2%

71,5%

74,1%

77,5%

80,9%

60%

Mobile Call

50%

Fix Call

84,8%

40% 30% 20%

30,8%

28,5%

10%

25,9%

22,5%

19,1%

15,2%

0% 2008

2009

2010

2011

2012

2013

Significant developments in the provision of mobile telephony services In 2013, the development of the speedy 4G network and the installation of so-called new generation base stations were continued. As a result of the investments, 4G coverage will cover 97% of the Estonian territory.

The mobile operators brought to the market new and more affordable 4G Internet packages based on customer usage needs. Packages are differentiated on a speed rate basis, which allows customers to choose a package meeting their usage habits and needs.

The sales turnover of mobile internet services grew particularly fast (including the sale of devices). The number of users and the volume of mobile data communications both grew substantially.

More and more data communications, voice communication as well as M2M solutions are used (technological solutions designed for gate opening automatics, transmission of security alarms, tracking vehicles, using as a communication channel in various mobile data communications terminals).

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

Figure 17. The share of end user initiated call volumes in the fixed phone and mobile phone networks in the years 2008 - 2013

52

Wholesale market: Interconnection in the mobile telephony network Compared to the telephone network interconnection markets, market shares of interconnection in the mobile phone networks are divided more evenly between the operators, due to intense competition in the retail market of mobile phone services.

In comparison to the previous year the volume of call minutes terminated by mobile telephone operators increased by 11,5 % (except for on-net calls).

1400

53

million minute

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

1200 1000 800 600 400 200 0 2008

2009 Other

2010 Elisa

2011 Tele2

2012

2013

EMT

Figure 18. The volume of call minutes terminated in the mobile telephone networks for the years 2008 - 2013

From 01 January 2013, the upper limit price of 0,0147 euros/min for the termination of a call in the mobile telephone network was set by the Competition Authority (the upper limit price in 2012 was 0,0632 euros/min) and from 01 June 2013 the upper limit price is 0,0129 euros/min.

TELEPHONE SERVICE In 2013, the major service providers in the telephone service retail market were Elion, STV and Starman. Market developments were characterised by a 7,5% decrease of the number of end users and a decrease of the number of loop counts in use by 5%.

50% 40%

37%

37%

36%

29%

28%

27%

36%

34%

32%

25%

23%

21%

30% 20% 10%

Customers

Access lines

0% 2008

2009

2010

2011

2012

2013

thousand

450 400 350 300 250 200 150 100 50 0

Other

2008

2009

2010

Starman

Tele2

Elion

2011

2012

2013

Figure 20. The number of end users of a telephone service changed in the years 2008-2013

The telephone service market is a long term declining market, thus the volume of call minutes initiated on the telephone networks decreased by nearly 16%.

1 200

million minute

1 000 800 600 400 Other

200

Starman

Elisa

Tele2

Elion

0 2008

2009

2010

2011

2012

2013

Figure 21. The volume of call minutes initiated by telephone service end users in 2008-2013

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

Figure 19. The share of end users and active local loops based on the population in fixed communication networks in the years 2008 – 2013

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Telephone service wholesale market: interconnection in the fixed network market The fixed network interconnection market means (telephone) networks, via which are provided the interconnection service necessary for the operation of voice communication.

In 2013, ten SMPs operated in the interconnection market, for which obligations (including interconnection access and price control) were established in 2009 by the Estonian Competition Authority. The largest operators in the market were Elion, Starman and STV. The total number of call minutes terminated in the fixed telecommunications network fell by 4%.

55

million minute

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

400 350 300 250 200 150 100

Other

50

STV

Elisa

Starman

Elion

0 2008

2009

2010

2011

2012

2013

Figure 22. The change in volume of the call minutes terminated in fixed telecommunications network during the years 2008–2013

Compared to the year 2012, the prices of initiation and termination of a call in the telephone network of Elion grew at the national and local level by about 10%. The upper price limit of call termination of other communications operators is, according to the Competition Authority´s decision of 18.03.2010 No 8.3-11/10-001 the national call termination price of Elion.

Leased line service market Leased line service market is one of the smallest, taking into account the volumes of the services of the electronic communications market. In 2013, the turnover of leased line services grew by 5%. However, the number of leased lines fell by 4%. Leased line service was provided by ten undertakings. Larger businesses operating in this market were Elion and Televõrgu AS.

2013 2012 2011

Elion Televõrgu

2010

Other

2009 2008 0%

20%

40%

60%

80%

100%

Figure 23. Change in the number of leased lines from 2008–2013

ON

THE

Pursuant to the Electronic Communications Act, the Competition Authority regularly conducts analyses competitive situation in the telecommunications markets, in accordance with the principles of the EU competition rules of the European Union. The Competition Authority has the right to determine operators with significant market power in those markets and subject them to the measures provided by law.

In 2013, the Competition Authority determined Elion as SMP in the markets of access to fixed electronic communications network and broadband access and subjected it to access, non-discrimination, transparency and price control obligations.

The imposition of these obligations was preceded by a complex dispute (“level II proceeding”) with the European Commission, following the EC Directive on a common regulatory framework for electronic communications networks and services. If the European Commission has doubts about the compatibility of the Estonian Competition Authority´s draft measures with EU law, the Commission may suspend the Authority´s decision. If the Competition Authority finds that this measure of the Commission is justified, it may withdraw the draft sent for international consultation.

In May 2013, the Estonian Competition Authority sent a draft decision on the determination of SMP in the market for wholesale network infrastructure access at a fixed location and the market for wholesale broadband access in Estonia to the European Commission who suspended the implementation of the proposal for three months. The European Commission expressed doubts that it is not excluded that lower

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

MARKET ANALYSES AND SURVEILLANCE ELECTRONIC COMMUNICATIONS SECTOR

56

access prices of copper and broadband services based on the method of calculation established by the Authority would hamper investments in new generation networks and thereby competition. The European Commission also found that the Estonian Competition Authority should withdraw the proposal sent for international consultation.

DEVELOPMENTS IN THE ELECTRONIC COMMUNICATIONS MARKET IN 2013

In the course of the proceedings, in which the BEREC´s (Body of European Regulators for Electronic Communications) experts were also included, the Competition Authority maintained the position that the withdrawal of the proposal is not justified. Considering the competitive situation prevailing in these markets and the remarkably low volume of access to copper and broadband services (which is constantly declining), the rise of

57

prices for these services would have caused an even faster decrease in volumes. That may, in turn, lead to the disappearance of the service and harm the interests of consumers. It is also important that compared to other Member States, Estonia is remarkably above average in terms of the development of next generation networks.

Therefore, it cannot be said that the method of calculation, which is currently valid and will be implemented in the future in the markets of wholesale network infrastructure access and wholesale broadband access in Estonia would impede the interest of entrepreneurs to invest in next generation communications networks.

The Competition Authority supplemented the choice of the calculation method and informed the Commission about the adoption of the decisions regarding these markets In 2013, market analyses in the market of access to the telephone network for private and business clients at fixed location and in the voice call origination and termination market were started. In addition, the Authority carried out inspections on the performance of the field specific obligations established for the communications operators, including seven price inspection proceedings. During the inspection, no violations were detected.

POSTAL SERVICES AREA As in previous years, there were two licensed providers of postal services in Estonia in 2013. AS Eesti Post (hereinafter Eesti Post), to which the Competition Authority has issued five licenses (license of universal postal service [UPS], licenses of forwarding of domestic and international items of correspondence and forwarding of domestic and international postal parcels) and AS Express Post (hereinafter Express Post), to which the Authority has issued one license (forwarding of domestic items of correspondence).

The licence of Express Post expired in July 2013. The undertaking filed an application for the extension and the Authority extended the license for postal service for five more years (until 2018). All five licences of Eesti Post will expire in 2014, which means that in order to continue its activity the undertaking must file applications for extensions of the licenses. The Competition Authority will organise a public competition for finding a UPS provider. The winner of the competition will be issued an activity license for a period of five years.

UNREASONABLY BURDENSOME COSTS In 2013, the proceeding on unreasonably burdensome costs of Eesti Post in 2012 caused by the obligation of providing UPS was completed. According to the request of Eesti Post, in 2012 the unreasonably burdensome costs of UPS were 4518351 euros and the UPS payment was 4239168.15 euros. This means that according to the request, the net payment would have been 279182.85 euros. After the Authority´s recalculation, the final unreasonably burdensome cost for 2012 was 4333425.13 euros. After the deduction of the UPS payment made by Eesti Post, the Authority

Requests on the compensation for the unreasonably burdensome costs for the first half-year and the third quarter of 2013 were also resolved. The Competition Authority found that the requests submitted by Eesti Post were justified. Unreasonably burdensome costs of the UPS for the stated period (I-III quarter) were 1453166.80 euros. The UPS payment made by Eesti Post for the same period was 2705891.36 euros. For the first time since 2009, the UPS payment made by Eesti Post exceeded the UPS compensation for the same period. This means that for the I-III quarters of 2013, the net amount of the UPS payment of Eesti Post was 1252724.56 euros.

POSTAL SERVICES AREA

disbursed a net payment of 94256.98 euros.

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The proceeding on the compensation for unreasonably burdensome costs for the fourth quarter of 2013 will be carried out in 2014.

UPS PAYMENT RATE The unreasonably burdensome expenses of UPS are reimbursed by the collected UPS payments. UPS payments are the payments paid for licensed postal services by the provider of a postal service for each postal item. A payment rate per postal item is established by the Regulation of the Government of the Republic by the proposal of the Minister of Economic Affairs and Communications. Upon submitting the proposal, the Minister of Economic Affairs and Communications considers the proposal of the Competition Authority.

Since proceedings conducted in 2013 showed that the UPS payment significantly exceeds the need for compensation, the Authority carried out an analysis on UPS payment rates at the end of the year. As a result, it appeared that if payment rates remain the same, then in years to come, this trend would continue. Based on the results of the analysis, the Authority submitted a proposal to the Minister of Economic Affairs and Communications for lowering the rates of UPS payment rates.

According to the proposal the payment rate for delivery of UPS ordinary items of correspondence would be lowered from 0.14 euros to 0.08 euros and the payment rate for delivery of registered and insured items of correspondence would be lowered from 1.00 euro to 0.40 euros. The payment rate for postal parcels shall remain at 0 euros. New payment rates will take effect from 1 April 2014.

POSTAL SERVICES AREA

CONTROL POSTING

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In November 2013, the Competition Authority assessed the quality of the delivery of UPS ordinary items provided by Eesti Post. The aim was to monitor the collecting and delivery of ordinary items of correspondence in cities and in the countryside and the estimated delivery time.

Pursuant to the Postal Act ยง 37, the UPS provider must ensure collection and delivery of postal items to the recipient on all working days and no less than on five days a week and once a day for the entire territory of Estonia. At least 90 % of the ordinary correspondence items handed over to the UPS provider for a domestic postal service via a letterbox or a post office before the latest collection time of must be delivered to the recipient on the following consecutive day.

A total of 1200 ordinary correspondence items addressed to different recipients were posted during the assessment period. The recipients participating in the assessment returned 1195 letters to the Authority, 1171 of these letters were the basis for the quality assessment. Out of the 1171 that were the basis for assessment, 1001 letters (85,5 %) were delivered to the recipient on time (on the consecutive day following the day of the handing over of the item). 170 letters (14,5 %) reached the recipients with a delay. 144 letters reached the recipient´s letterboxes with a delay of one day. 26 letters reached the recipient with a delay of two or more days (figure 24).

Figure 24. The quality of delivery of ordinary items of correspondence

Table 1 shows the number of items of correspondence delivered on time, the number of posted items of correspondence and the quality percentage by counties. The delay may not have been caused by the collection of items correspondence carried out in

Table 1. Quality of the delivery by counties

County

On time

Delay

Total

Quality

Valga

90

2

92

97,8%

Võru

68

4

72

94,4%

Põlva

51

5

56

91,1%

POSTAL SERVICES AREA

different counties. The source of delay could have also been the Tallinn sorting centre or the delivery in the recipient´s county (which may not have been the same as the posting county).

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Hiiu

60

7

67

89,6%

Viljandi

82

11

93

88,2%

Pärnu

67

9

76

88,2%

Tartu

62

9

71

87,3%

Lääne-Viru

53

8

61

86,9%

Rapla

31

5

36

86,1%

Lääne

45

8

53

84,9%

Ida-Viru

77

14

91

84,6%

Saare

43

9

52

82,7%

Harju

191

49

240

79,6%

incl Tallinn

105

32

137

76,6%

Jõgeva

33

10

43

76,7%

Järva

48

20

68

70,6%

Total

1001

170

1171

85,5%

The assessment revealed that the quality of delivery of UPS ordinary items is 4.5 % below the required level. The Authority issued a warning of percept to Eesti Post, drawing attention to the urgent need to raise the quality of delivery of UPS ordinary items. The proceeding shall be continued in 2014.

RESOLUTION OF COMPLAINTS

POSTAL SERVICES AREA

Issues related to postal services are partly related to the fact that users of postal services are inadequately informed. One of those issues has to do with ordinary item

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services meant for less valuable items, as these items are not traceable and there are no guarantees resulting from quality requirements, damage, or loss. Due to the low prices, the ordinary item service is a widely spread option used for national as well as international items and often, valuable items are also sent through the ordinary item service. However, it is more appropriate to use a registered item or insured item service for these kinds of items, as the respective services have been developed for this specific purpose.

In addition, the postal service provider is not liable for damages if the recipient has claimed the item without any claims. On receiving registered, insured or express mail items, the recipient confirm by his or her signature the receiving of the item and

absence of claims. Upon subsequent detection of deficiencies or damages to the item (after receiving the item and leaving the postal service provider), the postal service provider is no longer liable for the damages, as it is then impossible to prove, whether damages occurred during the delivery or after the transfer of the item to the recipient.

Therefore, the item should be opened for assessment and, if necessary, fixate the state of the item upon receiving the item in the presence of the service provider (upon receiving an item from Eesti Post Post24 parcel point, immediately contact the nearest Eesti Post office). This mainly concerns items known to contain delicate or valuable items.

According to different postal service standard terms, the recipient is liable for the packaging of the item and in case of inadequate or insufficient packaging, the service provider is generally not liable for damages. However, if the damages detected are identified as resulting from the non-conventional handling of the item, the postal service provider shall be liable for damages.

Often problems are caused by the notice of arrival of the parcel, the delivery of which into the mailbox cannot be accurately verified afterwards. At the same time Eesti Post enables the sender to specify whether a paper notice of the arrival of the postal parcel

POSTAL SERVICES AREA

is delivered to the recipient or whether it will be sent to the recipient´s e-mail address or mobile phone, which increases the probability of receiving the notice. Replacement of paper notice by SMS and/or e-mail is for free.

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Š Competition Authority 2014

Cover photo: M. Heinsaar