The Journal of Regulation n°1 by Mare-Anne Frison-Roche

TABLE OF CONTENTS

I-1.1 I-1.2 I-1.3

Calixto Salomão Filho ................................... Antitrust, Regulatory perspectives and Development

II-4.2

Béatrice Parance ............................................ The Act of October 28, 2009 (HADOPI II) establishes criminal sanctions for online copyright infringement, to be administerered by a regulatory authority the HADOPI

II-6.1

Marie Cullin .................................................... State aid: the European Commission approves the Swedish export-credit insurance scheme

II-6.2

Marie Cullin .................................................... A bill on Banking and Financial Regulation was registered with the Presidency of the Assemblée Nationale on December 16, 2009

II-6.3

Marie Cullin .................................................... The Autorité des Marchés Financiers approves the code of deontology for asset management

II-6.4

Marie Cullin .................................................... A A guidebook on preparing registration documents for listed securities has been published by the Autorité des Marchés Financiers

II-6.5

Margot Sève ................................................... A September 16, 2009 directive of the European Parliament and Council sets communitywide rules for the taking-up, pursuit, and prudential supervision of the business of electronic money institutions

II-6.6

Tatiana Jovanic .............................................. The Basel Committee on Banking Supervision: International Framework for Liquidity Risk Measurement, Standards and Monitoring - Consultative Document (issued for comment as of April 16, 2010), dated December 2009

II-6.7

Marie Cullin .................................................... The Ordinance of January 21, 2010 merges the regulatory authorities for the banking and insurance sectors

I: ARTICLES 10

A Neo-Structural Perspective

Marie-Anne Frison-Roche .............................. Protection of public health, control of healthcare expenditure, general competition law and the sector’s regulatory framework Antoine Fournier ............................................ What reference costs should be used to regulate access?

A commentary on the methodology to regulate access to electricity produced by the historic nuclear plants

I-1.4

Marie-Anne Frison-Roche ............................. What is a price in law?

I-1.5

Patrice Geoffron ............................................. Regulating the gambling market: quality-based versus price-based competition

From contract law to regulatory law

II: THEMATIC REPORTS 46

II-1.1

Béatrice Parance ............................................ The Law of December 8, 2009 organises the regulation of railway transport and establishes a new Regulatory Authority

II-2.1

Marie-Anne Frison-Roche ............................. The Law of February 9, 2010 transforms stateowned La Poste into a Public Limited Company and expands its public service obligations

II-4.1

Béatrice Parance ............................................ A Decree of December 23, 2009 appoints the members of the Hadopi’s College and of the Copyright Protection Commission

II.10.1

Béatrice Parance ............................................ Two decisions by the European Union’s General Court jeopardise the European Emission Trading Scheme

II-10.2

Béatrice Parance ............................................ The Conseil Constitutionnel publishes a December 29, 2009 decision on the 2010 Finance Act

II-11.1 Marie-Anne Frison-Roche ............................. Whistleblowing: the French Cour de Cassation reduces the scope of the unique authorisation II-11.2

Marie Cullin .................................................... A decree of December 16, 2009 establishes a Common National Repertory of social security information to reduce fraud. This Repertory is a huge compilation of Personal Data.

II-11.3 Marie-Anne Frison-Roche ............................. Decision of the European Parliament of February 11, 2010 II-11.4

Béatrice Parrance ........................................... A Partnership on the “loi informatique et libertés” has been signed between the CNB and the CNIL III. BIBLIOGRAPHICAL REPORTS

III-1.1 Tatiana Jovanic .............................................. Uncertain Risks Regulated

72 73

III-1.2

Tatiana Jovanic .............................................. Risk Regulation in the single Market: the Governance of Pharmaceuticals and Foodstuffs in the European Union

III-2.1

Marie-Anne Frison-Roche ............................. The European Commission publishes its Final Report on its competition inquiry into the pharmaceutical sector on July 8, 2009

III-3.1

Béatrice Parance ........................................... Speech delivered by Mr. Jean-Ludovic Silicani, the Chairman of the Arcep, on November 19, 2009, during the “Digiworld Summit”, organised by the IDATE

III-3.2

Marie-Anne Frison-Roche ............................. Speech by Joachín Almunia, the new Competition Commissioner, 9th Global Forum on Competition, OECD, Paris, February 18, 2010. Subsidies could be useful to avoid catastrophes in many sectors; the major difficulty being distorsions between different levels of regulation.

GENERAL INTRODUCTION

Regulation can be defined as a set of mechanisms, rules, institutions, decisions and principles that allow certain sectors of the economy to grow and maintain equilibriums that they could not establish solely via their own economic strength. A certain amount of regulatory framework is sometimes technically needed by the subject to which rules are applied. This is the case in sectors such as telecommunications or banking, sectors so complex that the Law is almost a technical consequence of these subjects. Regulatory systems may also be implemented based on a political will to voluntarily, or out of necessity, abandon a system of state-owned monopolies and attempts to achieve a balance between the way competitive markets operate, and the goals of public service (for example, universal access to health care or to security). Furthermore, regulatory mechanisms may also confront markets with issues typically beyond their concerns, such as the issue of the environment, by using market mechanisms to meet a general interest objective. The traditional approach to regulation has always been a sector-specific one, since rules and decisions are necessarily tainted by the nature of the concrete subjects to which they are applied. In this sense, Regulatory Law is different and often in opposition to Competition Law—which is more neutral—regarding the subjects’ technical characteristics and social functions. Moreover, a variety of regulatory institutions have been created to fit each and every specific sector, while an important economic and legal literature has flourished, also relentlessly devoted to one specific sector. These characteristics can be found in fields such as transport, telecommunication, media, energy, bank, finance, insurance, health, environment and personal data. Yet, even though some difficulties obviously occur repeatedly and similarly in all types of sectors, the idea of creating a transversal publication was surprisingly never put forth. Indeed, most sectors usually share similar problems when it comes to dealing with regulatory bodies, or when it comes to the relationship between regulatory law and other legal rules constructed on other principles (such as competi-

tion law, public law, contract law, torts, procedural law), or to the overlapping between geographical levels of regulation (national, supranational, global), or to the difficult articulation between different sectorial regulatory organisations. Moreover, within this abundant and lively, yet fundamentally incomplete legal field, many experts on specific sectors appeared, with an important amount of works at their disposal, research or reviews focused on one sector. Therefore, a transversal review was lacking, the type of review that would gather this scattered and sector-specific knowledge and synthesize it in order to provide an overall analysis and perspectives on common issues. Besides, a pre-existing solution in one sector can be of great help to analogously solve issues in other sectors, for instance in regards to information asymmetry, operators’ equality or equal access to the sector –whereas specialisation in one or two sectors does not allow for such transposition of practices. The mere fact that an important amount of valuable expertise is scattered among each specific sectors justifies the creation and implementation of a Journal of Regulation –the French title would be Journal du Droit de la Régulation, but it is preferable to adopt an English version and the English title has been favoured, since the review’s common language will be English. The Review is divided in three parts. Its first part gathers doctrinal articles dealing with issues mutual to all sectors (for example, issues regarding information, risk, access, tariffs, neutrality, etc.). Its second part aims at analyzing any important events or changes in each specific sector. Sectors being studied include: transport, telecommunication, medias, energy, bank, finance, health, environment and personal data. The third part will provide a detailed analysis of works published in all relevant fields. Each document referenced (books, articles or grey literature) will be summarized, explained, linked with other sectors, analyzed and criticized. The Journal of Regulation, directed, edited and published by Marie-Anne Frison-Roche, has two media: its website (www.thejournalofregulation.com), which is constantly updated, and where it is possible to sign up for the Review’s free newsletter. Furthermore, the Journal of Regulation is published in paper format six times a year. Each edition in-

cludes all material sorted by article, by theme, and by title of commented works. Additionally, subscribers will receive annually a bound volume containing all work published in the year, accompanied by a CD containing the same material. In order to receive the Journal of Regulation’s paper version and the associated materials, it is necessary to pay for a subscription on our website. Moreover, four special editions of Les petites affiches, a Lextenso publication, will be published each year: they will include selected excerpts of the Journal of Regulation in both French and English. Finally, the Journal organizes public conferences, the first of which was on the theme of The role of Supreme Courts in economic cases, and took place on January 25th 2010. Its proceedings will be published, in English, in the “Droit et Economie” [Law and Economy] series (LGDJ). The Journal of Regulation’s second event will be held in February 2011, and will be devoted to the theme of Neutrality in economic regulatory systems.

Marie-Anne FRISON-ROCHE

I PART I.

ARTICLES

ANTITRUST, REGULATORY PERSPECTIVES AND DEVELOPMENT A NEO-STRUCTURAL PERSPECTIVE Recommended citation: I-1.1

ANTITRUST, REGULATORY PERSPECTIVES AND DEVELOPMENT A NEO-STRUCTURAL PERSPECTIVE

by Calixto Salom찾o Filho

I-1.1

n the one hand, economic structures, i.e., the centers of economic power, are relevant data for the functioning of the economy, since, especially in the countries in the Southern Hemisphere, they account for important characteristics in the underdevelopment process. On the other hand, as we have observed, these structures are the only ones from which any kind of presumption can be made about the probable behavior of economic agents.

What has yet to be defined is the kind of instruments that can be used to define the orientation and behavior of these structures. Economic instruments are worth little as they do not supply concrete economic results that are susceptible to empirical verification. Standing in the way of the use of legal instruments, however, is the apparent difficulty in applying social policy to the economic sphere. For many years, decisions that have affected the economic order have been left primarily to economic theories to which the discussion of values is unfamiliar. It is time therefore, for a legal theory of economic behavior, based on legal procedural values and on the restriction of economic power structures.

INTRODUCTION

or decades, antitrust theory has been moribund and read like an obituary. New ideas have been few and far between, and what little has come on the scene takes pride in having mere practical application all foundational theories and justifications for antitrust having long since had their day. In fact, the strong tendency toward simplification and doc-

The Journal of Regulation n째 1 - April 2010

trinal negativism has a double origin. In the first instance, they are based upon a superficial analysis of the economic landscape that leads to the belief that the effects of private economic power in society are limited to the manufacturerconsumer relationship. Economic history, both in developing and developed countries, shows that the effects of monopoly power are much more pervasive than just the consumerproducer relationship, affecting development patterns and even distribution patterns in society. In the second instance, there is a powerful and again simplistic faith in the ability of economic theory to predict results and, consequently, in our ability to identify the most efficient result in the consumermanufacturer relationship. Adding these two simplifications together leads to a belief in the possibility of identifying one unique theoretical objective in antitrust law, which consists of obtaining a certain economic result. This analysis is, as will be demonstrated, too simplistic.

II.

ECONOMIC POWER AND ITS MULTIPLE EFFECTS ON THE SOCIAL AND ECONOMIC SPHERES

s a matter of fact, an analysis of the relationships and effects generated by economic power should originate not in mathematical assumptions about economic results but in the study of the economic history of countries in which this power is more structured and deeply rooted in social and economic structures. The reason is simple. As in all theoretical analyses, using examples with more differentiated characteristics helps to identify tendencies and demonstrate propositions. This does not mean that such results are invalid for countries in which economic power is less disseminated and less profound. It only means that the results obtained will likely be less intense.

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Recommended citation: I-1.1

The countries in which economic power is historically most concentrated and consolidated are former European colonies in South America and Asia. In those countries, economic power is a phenomenon which is historically part of society and, therefore, much easier to identify. This knowledge is not new, but its consequences for the economics and internal legal systems in place in developing countries were disregarded by the initial work of the structuralists and are still belittled. There is no doubt that in the former colonies, as contrasted with today’s developed countries, economic power was made up of economic relationships that were relevant factors even for the formation of the national states. The histories of most if not all of these countries are tightly intertwined with European colonization. This is an important element to be noted. The status of “colony”, far beyond external dependence, created internal power structures that marked and still influences all aspects of development (or underdevelopment) in these societies. This is why it appears possible to revisit the development process, starting from the structures of economic power and the structure of income distribution that follow them, which are important factors in the underdevelopment of such countries. The bonds of colonial dependence that motivated underdevelopment, even if the root cause, are not its ultimate cause. The explanation is simple, but must be well understood. The internal economic structures are what permit or inhibit, in the necessary moments, the breakthrough from dependency. As we all know, this rarely took place in the history of developing countries. Apart from rare and exceptional situations, in these countries, the bonds of dependency are rarely counter-attacked and even less frequently broken. This is due to internal power structures and income distribution that benefits, even if indirectly, from these bonds. It is therefore on these structures that the analysis should be focused. In addition, the relationship between economic power and income distribution must be addressed in the light of historic evidence. This relationship is intense and very different from that which prevails in developed countries. Traditional analysis tends to identify only certain superficial relationships between a monopolistic company and the

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consumer, to wit, essentially identifying it as the value of the monopolist’s extraordinary profit, which is extracted from consumers through the imposition of monopolistic prices. As has been shown in empirical studies, this value may not be dismissed and accounts for a relevant portion of income concentration. The fact is that this relationship is much deeper and extensive. This is especially true of structurally concentrated economies such as the former colonies. On the one hand, the relationship is greater in the product market, affecting industrial organization itself. As well as the imbalance in relations between consumers and manufacturers, with the consequent inefficiencies in allocation and distribution, it leads to an absolute disproportion amongst economic sectors. The dynamic sector of the economy is generally concentrated in primary products or low-technology manufactured goods for export and in the durable consumer goods to be consumed internally by the high income segment of the population. These two sectors, monopolized or oligopolized, concentrate inversions and productivity gains. They therefore drain resources from the economic system either directly, through monopolistic profits obtained from suppliers, or indirectly via the siphoning of investments that would otherwise be invested in other sectors (hereafter called peripheral economic sectors). The effects are also deeper. As well as the consumer market and peripheral economic sectors, there is also strong interference in the labor market. Thus, in many if not most of these countries, income concentration ends up becoming a fundamental condition for economic growth. This is precisely because, based on the production of primary products and simple raw materials, be it for the domestic or foreign market, productivity gains in these economies cannot be obtained only through technological improvements (which are at times insufficient in such low technology sectors). Gains in productivity that are fundamental for economic growth should be based on an increase in workforce productivity, which can be achieved through reducing real salaries or through an effective reduction in the workforce (source of the first so-called economies of scale achieved with economic concentration). This movement is only made possible, however, via a high level of monopolization in the economy, which also makes possible great monopolistic conglomerates in the labor market. As previously mentioned, this state

The Journal of Regulation n° 1 - April 2010

ANTITRUST, REGULATORY PERSPECTIVES AND DEVELOPMENT A NEO-STRUCTURAL PERSPECTIVE Recommended citation: I-1.1

of affairs is explained not only by the fact that competitors in the relevant sector are scarce and hardly relevant, but also because in underdeveloped economies, the colonial-monopolistic standard ensures that there is a lack of competition between economic sectors. Sectors with real economic dynamism, capable of accumulating capital and absorbing the labor force, are few and concentrated. Only through such an absolutely concentrated growth standard is it possible to have capital accumulation and therefore productive investment that leads to growth. That said, such a growth standard requires for its own existence inverse income redistribution, with impoverishment (relative for employed workers and absolute for those who lose their jobs) of lower income groups and relative impoverishment of peripheral economic sectors. Placing the spotlight on structures also implies that predominant sociological-individualistic explanations for underdevelopment are not accepted. These justifications are frequently incorporated into neo-institutional reasoning to explain underdevelopment and suggested solutions. Hence, with the individual motivation of colonizers of Latin America and Asia, colonial exploitation, different from that of immigrants to North America and Oceania, was reflected in the entire institutional structure of society. This kind of statement errs in being an under and overstatement at the same time. On the one hand, it exaggerates the differences in the individual spirit of colonizers. Interesting studies demonstrate that the colonial experience is richer than this distinction appears to suggest. Within the same colonies, there coexisted regions of mere exploitation with regions where colonizers considered settling and remaining. Both situations happened in colonized countries in Latin America, Asia and even Africa (South Africa, for example). In these countries, be they Argentina, Australia or India, the capitalist colonial spirit was similar1. On the other hand, what these sociologic-individualistic theories fail to consider is precisely the study of economic

structures created by exploitive colonization. These structures, and not individual motivation, are the main factors that lead to differences between economies based on exploitive monopoly and societies in which these structures do not prevail. They end up determining economic cycles and influencing the whole of a society’s socio-economic system, superimposing the differences that regions which experienced the definitive settling of populations, as opposed to those where populations were merely exploited, could have from the point of view of the motivations of explorers. Thus, regions of similar colonial spirit like Buenos Aires in Argentina and Sydney in Australia result in countries and regions of social and economic development levels that are absolutely different. The main hypothesis in this paper is, therefore, that structural concentration of economic power produces effects on the entire system, concentrating income between industrial sectors and between social strata. This concentration of power and income also causes economic growth patterns to change substantially. The increase is strongly based, among other factors, in productivity gains resulting from the inverse redistribution of income from workers (both employed and surplus) to the great conglomerates (and their small number of shareholders)2. It is important to observe as of now that this hypothesis, once explained, can help solve two apparent paradoxes of contemporary economic history, which are, in fact, directly correlated. The first consists of reproducing underdevelopment (with absolute or at least relative deterioration of the main social and income distribution indicators) even in countries that have had important economic growth rates. The hypothesis presented here can help explain this apparent paradox. If the hypothesis for concentration of economic power as a generator of inverse income distribution in the consumer, work and inter-industrial markets in the developing countries is admitted, it is possible to understand the reason

See D. Denoon, Settler Capitalism: the Dynamics of Dependent Development in the Southern Hemisphere, Oxford, Clarendon Press, 1983, p. 18, et seq For an econometric analysis of the relationship between market concentration (monopolies) and poverty in Brazil during colonial times see. C. Salomão Filho, B. Ferrão e I. C. Ribeiro, Concentração, estruturas e desigualdade – as origens coloniais da pobreza e da má distribuição de renda, Grupo Direito e Pobreza, 2.009. 2

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Recommended citation: I-1.1

for economic growth with deterioration of social indicators. This happens precisely because of inverse income distribution, in other words, due to the fact that gains in productivity result from a loss in real salaries. The final result is the existence of constantly underdeveloped economies, in which the more economic aggregations grow, more poverty and social inequalities are produced. The second apparent paradox is in the convergence of relative prices between developed and developing countries identified in recent empirical studies3. According to this research, it is possible to show a positive correlation between international convergence in prices of commodities and convergence of relative prices of production factors (principally wages and land prices, the wage-rental ratio). This convergence is followed, and thus the apparent paradox, by an increase in differences in living standards in the developed and developing worlds. Obviously it is not sufficient, as is done in these studies (see note 4), to identify technology gains to explain these results. The approximation of prices of commodities followed by an approximation in wage-rental ratios should also lead to smaller and not greater differences in living standards, even with various technologies. After all, commodity and land prices account for much of what is required to improve social and economic indicators of a region. Even with other important factors influencing these indicators, the full discrepancy can only show that there is a particular segment of the population taking advantage of the best wage-rental ratios. In relation to different and successive economic phases typical of developing countries in which the primary products and raw materials industries are substituted for a rural economy, these results are in reality indicators of economic concentration and inverse redistribution of income and not improvements in quality of living. In these economies, in this particular historic moment of industrialization, the reduction of land prices is more than proportional to the reduction in

real wages that, however, still exists. This is because the demand for land drops more in periods of industrialization than the demand for workers and also because during this period, union organization begins in most developing countries, avoiding an even greater deterioration of real wages levels. What is actually happening is a concentration of wealth in the top segments of society, which can accumulate even more capital through the purchase of land. In addition to the association of better wage-rental ratios and worse social indicators, this also explains another peculiar characteristic of developing economies. It is a fact that fifty years after the start of the industrialization process in the majority of the developing countries, we are witnessing a re-concentration of agricultural property in the hands of large landowners and the marginalization of farm workers in such countries. The accumulation of capital, having happened in an unbalanced manner, is such that only the top layers of society can take advantage of reductions in land prices. For the working classes, employed or even unemployed, there is no access to agrarian property. This explains the prevalence and endemic character of the agrarian conflicts in these economies, in spite of the relative abundance of land. What we are saying, in fact, is that the opposing positions of the classic theory of comparative advantages and the structural theory (in the initial version by Prebish) should be revised. Even with an approximation between the values of the production factors (in a certain period of time4), this approximation is not relevant for the economic development of these regions. This is because the central problem of colonialism is not in the structures of international commerce, but in domestic structures of economic power (related or not to foreign economic and trade issues) whose establishment and implementation were very much favored by colonialism. Furthermore, as mentioned above, the history of colonialism and the monopolistic structure deriving from it impacts

See J. Williamson, Land, Labor and Globalization in the Third World, 1870 – 1940, in The Journal of Economic History, n. 62 (1), March 2002, p. 55 (68), see also previous work by the same author, Globalization, Convergence and History, in The Journal of Economic History, n. 56 (2), June 1996, p. 277, et seq.B. Ferrão e I. C. Ribeiro, Concentração, estruturas e desigualdade – as origens coloniais da pobreza e da má distribuição de renda, Grupo Direito e Pobreza, 2.009. 4 Approximation not completely shown. There is relevant data in the opposite sense – see on this issue J. Love, Economic Ideas and Ideologies in Latin America Since 1930, in Cambridge History of Latin America, Vol. VI, 1, Cambridge, Cambridge University Press, 1994, p. 393 (p. 423, especially note 91).

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The Journal of Regulation n° 1 - April 2010

ANTITRUST, REGULATORY PERSPECTIVES AND DEVELOPMENT A NEO-STRUCTURAL PERSPECTIVE Recommended citation: I-1.1

the societies of the Southern Hemisphere profoundly, to the point of constituting social and economic structures that will affect the entire future economic development of such societies. It is for this reason that this book begins with a recapitulation of the economic history of developing countries. Mention of social and economic structures is intentional. It is not correct to start from a unilateral predefinition of human behavior, to wit, that people are moved exclusively by economic rationality as defined by G. Becker5 or by predominantly social motives, as was so passionately and effectively defended by K. Polanyi6. The definition between these two tendencies when studying development (underdevelopment) is therefore unnecessary. Both are inferred in the process and should thus be examined more deeply. In fact, colonization deeply affects not only economic structures but also social structures. Attachment to the cultures and living standards of developed countries and a certain contempt nurtured by the upper and even middle classes for their own civilization is a common characteristic in these countries. More importantly, the monopoly of economic knowledge introduced by the colonial monopolies roots itself in social structures, creating tension amongst the classes and worsening cooperation. These beliefs and structures create great impediments to development. In the economic field, the effect of such structures is even greater. It affects, as seen above, the accumulation of capital and the distribution of its gains. Analysis of the means of addressing such serious economic structural problems should be more detailed. It demands analysis of the structures and economic behavior present in the economic order of developing countries resulting from monopolistic structures, as well as a legal proposition capable of offering a way out of the vicious circle of underdevelopment caused by them.

A last and very important point must be made. The central importance to underdevelopment of the monopolistic structure created in the colonies does not imply that it is always the opposite of what we are looking for, i.e., the generalized existence of decentralized economic structures in the economy. It is a common and perhaps intentional mistake among neoclassic theoreticians: opposing the great monopolies with an economic structure of (inefficient, according to them) small and medium-sized enterprises. Not even from the logical point of view are there only two alternatives. In fact, the real alternative to centralized economic power “is a balanced economic structure” (in terms of information and bargaining capacity) between supply and demand. To address the correct organization of supply and demand and not only the best configuration of the industrial structure is the real objective of an economic system and the laws that aim to protect it. This also does not imply that fighting monopolies is enough, on its own, for economic development. In particular, it should be emphasized that economic structures affect structural characteristics in society and not quantitative data. Therefore, singling out monopolies is not a very effective way to explain why, amongst the developing countries, there are differing degrees of relative growth. For this, there are other decisive factors such as population growth, the importance and relative value that each country’s main product has in the international market7, and also, if to a lesser degree, varied institutional configurations.

See G. Becker, The Economic Approach to Human Behavior, Chicago, The University of Chicago Press, 1976. K. Polanyi, The Great Transformation, Boston, Beacon Press, 1957, esp. p. 46. 7 On this subject, see the interesting description of the many levels of growth obtained by Latin American countries in the 19th Century due to commodity lottery – Victor Bulmer – Thomas, The Economic History of Latin America Since Independence, Cambridge, Cambridge University Press, 1994, esp. p. 43, et seq. 6

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Recommended citation: I-1.1

III.

ECONOMIC RESULTS AS LEGAL GUIDELINES

riticism of the current simplified rationale for antitrust law is not and cannot be solely internal. It is not only the understatement of the importance of economic structures for the society as a whole that should be criticized, but also the search for economic results itself must be regarded with reservations. The problem is not in the search for these results, but in the belief that these results may be correctly anticipated. At this juncture, it is helpful to revisit the classic discussion on the possibility (or not) of theorizing economic knowledge. The initial step for this discussion is given by Hayekian

“

The correct transmission of information through price is, therefore, a consequence and not the cause of equilibrium.”

studies on economics and information. Here, many of the neoclassic constructions on equilibrium are, in effect, tautologies, i.e., mere results of the presuppositions from which one started8.

Market equilibrium (and not only individual balance) would only exist where individuals’ expectations corresponded to real data. This correspondence, however, would exist only where information is transmitted between market agents. Note that this statement implies a denial of something Hayek himself would come to say years later. Price cannot be the factor in the transmission of this information because it is a product of the information and not of its creator9. In other words, stating that price is the instrument for solving the information problem means a return to the tautology. In fact, price is only considered an information transmitter in a market in equilibrium or tending to equilibrium (in which price, therefore, cannot be necessary to reach it). The same can be said in different words. In order for price to be a perfect information transmitter, everyone’s evaluations (evaluations that make up the price) on use, relative value and usefulness of the products would have to converge and adhere to reality. The fact is that in this situation, equilibrium would already have been achieved. The correct transmission of information through price is, therefore, a consequence and not the cause of equilibrium. More recently, these statements have come to be confirmed by research undertaken by theoreticians in economics and information. These models show that information is intrinsically poorly distributed in the majority of markets, which, in many of them, purely and simply renders its functioning impossible. Being so, the great difficulty is found in the means for transmitting information. The search for answers, here brought to light by the conclusions of information economics, should be more realistic: the issue is not believing or searching for a perfect manner of information distribution, but rather, it is about doing exactly the opposite, specifically, to ascertain that information is imperfectly distributed and that individuals know and take this fact into consideration in their analysis. There is not and cannot be, therefore, perfect correspon-

The best stated theoretical construction of the criticism is in the original article by F. Hayek on Economics and Knowledge, in Economica – New Series, v. 4, n. 13 (February 1937), p. 33, et seq. 9 This statement will be made by Hayek in a later article, better known however theoretically less consistent The Use of Knowledge in Society, in American Economic Review, v. 35, n. 4 (Sept 1945), p. 519, et seq.

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The Journal of Regulation n° 1 - April 2010

ANTITRUST, REGULATORY PERSPECTIVES AND DEVELOPMENT A NEO-STRUCTURAL PERSPECTIVE Recommended citation: I-1.1

dence between subjective expectations and objective data. There is not and cannot be, therefore, equilibrium. What can and does exist is a constant state of friction and contrast between expectations and reality that leads to an also constant change in expectations. Evidently what is set out for discovery here is what can be found that is constant and not relative. What is meant is that there must be something on which individuals base their decisions. This something, which helps them make forecasts of possible behavior patterns, is the existing economic structures, which are the only elements indicating how the market works from which it is possible to reach conclusions. There is a rather simple reason for this. There is today a theoretical consensus around the fact that it is possible to predict behavior patterns in certain economic structures. Monopolistic or oligopolistic rationality is well known and does not arise necessarily from predefinitions of equilibrium situations. It simply comes from the fact that there is no economic power that is not exercised – as this would imply denying the situation of power itself. With equilibrium being unobtainable and information rare and badly distributed, it is not to be supposed that a definition focused on results is to be trusted. In this sense, its use as a parameter for applying antitrust law cannot have a technical justification, as it is an economic policy decision – the political roots of the Chicago neoclassic theory applied to antitrust law are, in fact, very well known.

IV.

THE LEGAL APPROACH: ANTITRUST LAW AS AN ECONOMIC PROCEDURE MODEL

he considerations above lead to an interesting conclusion. On the one hand, economic structures, i.e., the centers of economic power, are relevant data for the

functioning of the economy, since, especially in the countries in the Southern Hemisphere, they account for important characteristics in the underdevelopment process. On the other hand, as we have observed, these structures are the only ones from which any kind of presumption can be made about the probable behavior of economic agents. What has yet to be defined is the kind of instruments that can be used to define the orientation and behavior of these structures. As we have seen, the economic instruments are worth little as they do not supply concrete economic results that are susceptible to empirical verification. Standing in the way of the use of legal instruments, however, is the apparent difficulty in applying social policy to the economic sphere. For many years, the decisions that have affected the economic order have been left primarily to economic theories to which the discussion of values is unfamiliar. It is time therefore, for a legal theory of economic behavior. That topic will be discussed next. Legal scholars view knowledge in a different way than social scientists. While knowledge in the social sciences is something that is eminently empirical, whether theoretical as perceived by dogmatic Marxists and neoclassical scholars, or practical as viewed by Hayek, knowledge for law scholars is something that is eminently constructed around values10. The moment for addressing values, if well understood and used, is precisely what gives the law its distinctive character and capacity for social change. According to the concept as defined here, political-institutional change is only possible through a profound political discussion of norm-protected values. The transformative and propelling force of the law is found in the fact that, more than a form of defining values, it can itself be an instrument of knowledge for society. To postulate that knowledge is value-related is nothing more than stating that the values of a certain society may influence – and they do – in a determinative manner the knowledge we have of it. This relationship of values/knowledge in a society is relati-

See on this issue E. J. Mestmäcker, “Markt, Recht, Wirtschaftsverfassung”, in Zeitschrift für das gesamte Handelsrecht und Wirtschaftsrecht 137 (1973), p. 101. 10

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vely clear in the economic field. Protecting competition and allowing choice leads to the discovery of the real utility of products and better choices for the consumer. The value of competition, therefore, influences reality, allowing every individual to know it. Once generalized, this statement on the cognitive force of the law implies a transformation in economic law itself. It is a necessary transformation, as the law has an important cognitive role. A judicial system that foresees the right of society to correct itself must necessarily allow this society to know itself. In a legal system so conceived, legal rules in the economic field necessarily change their nature. It is no longer possible to admit that there are only, on the one hand, rules protective of individual economic rights and, on the other, only aims-oriented norms, defining aims and objectives of the economic process. An example of the first, property law (as it is typically known in a capitalistic state), is insufficient to meet the needs of society as a whole as it currently exists. The latter, strongly being dependent upon a mediation of interests that are at times ideologically opposed (as is the case, for example, with the principles of free initiative and social justice), frequently lack practical application.

There is an urge, therefore, to acknowledge norms that incorporate values and to state that they are not merely an extension of individual rights. For such, it is necessary to admit the pluralistic origin of values from the state and the inter-individual and social relations themselves, which is the principal institutional character of these norms. Other than that, such norms must work as a way of acquiring knowledge about society and the objectives and fundamental value of economic norms, as seen above. It is normally the case, on the other hand, that this kind of norm is instrumental for the proper functioning of an economic and social system. Only as such is it possible, on the one hand, to discard the ideological political impasse and allow its practical application, and, on the other hand, to ensure its cognitive character. When the equilibrium of economic interaction is guaranteed, individuals or social groups will “discover” their economic preferences. Therefore, these rules have to assume a clear procedural character, of real due process in the economic sphere11. Rules defined by these parameters contain values that are democratically established and debated. On the other hand, they do not predefine the most convenient solution. At the same time that they give the system stability and the citizens assurances, they allow for social and institutional expe-

Here an analogy may be made to the reasoning of the more progressive lines of thinking in judicial realism which, when faced with the problem of the foundation of the judicial norm, suggest a procedural rule, which would lead to a fair judicial solution and not a material rule that would not escape political and ideological discussions Note that in the realistic line, the procedural thinking is so accentuated that it is taken for granted, where the discussion is about the best institutions in which to apply it. This is what happens with the two main lines – the Yale School and the Harvard School. The former sees in the activity of the judiciary system a political evaluation of opposing interests, and takes up again, therefore, former ideas of the interests of case law (see H. Sasswell and M. Mc Dougal, “Legal Education and Public Policy: Professional Training in the Public Interest” in 52 Yale Law Journal 203, n. 52 (1943); see also B. Ackerman, Reconstructing American Law, Cambridge, Harvard University Press, 1984). The Harvard School, which is more original, centers the discussion of law on the issue of which institution is more apt to apply it (see H. Hart and A. Sacks, The Legal Process, New Haven, Tentative Edition, 1958). More recently, the progressive realism school questions, in a way that joins the Yale and Harvard concepts set forth above, how judicial decisions may influence the public and private spheres that hold power, improving them (see O. Fiss, “The Social and Political Foundations of Adjudication” in Law and Human Behaviour n. 6 (1982), p. 121, et seq.). This procedural method approaches also the reasoning developed by J. Habermas in the political field, which places a minimum procedure (“prozeduralistischeS Minimum”) at the centre of democracy, without which it could not exist. In this minimum procedure, evidently influenced by the individualist liberalism that features the most recent phase of his scientific work, is included the principle of the egalitarian and ample participation of all citizens (Faktizität und Geltung- Beiträge zur Diskurstheorie des Rechts und des demokratischen Rechtsstaats, Frankfurt, Suhrkamp, 1998, p. 368). Note that proceduralism in the economic field is very different from that of the political field, since while equal participation could be just a formal element in the latter, any procedural idea in the former depends, to maintain a minimum level of effectiveness, on a real re-equilibrium of forces, i.e., of effective redistributive measures.

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ANTITRUST, REGULATORY PERSPECTIVES AND DEVELOPMENT A NEO-STRUCTURAL PERSPECTIVE Recommended citation: I-1.1

rimentalism. The law thus established leads “to” and does not derive “from” the fairest solution. It is a safer system – as it has safe institutions – and more flexible, as it allows for its own improvement. It is important to observe that such a rule has a very specific character. It is not enough to ensure the correction of procedures. It is fundamental to ensure balance between the interacting parties not only in legal processes, but also in economic ones. Thus understood, the institutional rule of due process in economics is the basis of explicit redistributive principles in the regulatory sense, such as, for example, the universalization of services for the public interest. For the principle to be truly effective, it is necessary to include a multitude of citizens who have been jettisoned from the economic process. As is well defined by the theory of the legal process itself, the rule for the right legal process implies ample participation in the process. This idea may and should be extended to economic relations and its procedures. This concept, as applied to the field of competition, demands a redefinition of the notion of competition itself. It is this notion from now on that will be referred to as “neo structural concept of competition”. Antitrust law, in its neo structural concept, does not impose a result or economic result, but ensures that the relationship between competitors is fair and that competition exists effectively, not being substituted for by relationships among the powerful that are typical of free markets. In this way, it aims to ensure that economic agents discover the best options, and orders economic relations in the fairest and most balanced way possible.

Effective institutional competition (and not market competition) is thus the central value of antitrust law. In its application, the State should act energetically so as to ensure the existence of competition12. Confronted with such a definition of antitrust law, it is not surprising that this theory opposes the neoclassical approach. The neoclassical model assumes that it is possible to know the utility for each consumer of every product before that product is used, i.e., that a product is purchased because it has use rather than a product has use because it is purchased. According to the theory here defined, this last statement – and not the first – is correct. It seems rather obvious, and that is exactly what competition means as a discovery process, that the more product alternatives the consumer can examine and discard, the more his choice will be full of information relative to his preferences. Thus, if there is no alternative to the choice of a product, it is not possible to know how much utility the non-chosen alternative would bring to the consumer. And even if the alternative exists, it is only possible to know the level of utility for the consumer when this alternative is chosen13. This theoretical premise is accepted by the new institutional economics itself (which, as has been seen, does not represent a total rupture with the neoclassic tradition). The limited rationality and opportunistic conduct only make the utility become more uncertain and dependant upon empirical verification13. Being so, the only instrument capable of fulfilling the consu-

This interventionist competition position, as it is institutional and procedural, may even be considered super-ideological. The historic experience corroborates this point of view. Much of the consensus around the immediate post-war German model of social capitalism is attributed to the political-ideological consensus formed around the ordoliberal ideas on competition and State interventionism achieved through antitrust law. It is in the fight against monopolies that the German democratic socialists identified the social element in antitrust law (see J. Gotthold, Neuere Entwicklungen der Wettbewebstheorie - kritische Bemerkungen zur neo-liberalen Theorie der Wettbewerbspolitik in ZRH n. 145 (1981), p. 286. 13 See F. Denozza, who, confronted with this issue, uncovers a flaw in the neoclassical thesis and concludes: “In un impostazione che pone al centro i desideri del singolo individuo e l'utilità (o i dollari) che il singolo guadagnerà in conseguenza di certe decisioni, il valore delle cose non può essere stabilito a priori (è ben noto che esistono impostazioni diverse, le teorie c.d. oggetive del valore, come la marxiana teoria del valore lavoro, ma è altretanto noto che essi conducono verso lidi assai lontani da quelli prediletti della scuola di pensiero in esame) - Chicago, l'efficienza e il diritto antitrust, cit., p. 23.

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merâ&#x20AC;&#x2122;s need for information is the existence of competition. Only an economic system based upon competition is sensitive to variations in consumer tastes and can transform itself in response to these changes. Only competition is capable of fulfilling the great information vacuum caused by the market. Consequently, the possibility of choice has a social value that cannot be denied and must necessarily be acknowledged by the law. The market, on the other hand, does not necessarily lead to this result. That is where the State should interfere, ensuring the former and not the latter. On the international level, this theory finds its greatest rebuttal in the configuration of antitrust rules of the common markets. Common markets are nothing more and nothing less than forms of overcoming the States, based on the blind trust of the legal principle of knowledge dilution. The basis of existence of a common market is exactly in the belief of a positively applied antitrust law, in the sense of effective intervention in business structures in such a way as to avoid the existence and/or advantage of use of economic power in the market. Competition assurance happens before market conformation precisely because it is believed that competition is capable of assuring equilibrium in economic relations.

CONCLUSION: THE MEANING OF ANTITRUST

duction of exact economic results. Consequently, it is not feasible to set forth, as intended by the Harvard structuralist line of thinking in the 1960s, a structure-conduct-performance model. The study of structures does not aim to ensure results, but rather the access of all to information and choice. Consequently, the structural study of antitrust will focus on ensuring choices and not on predetermined models of business dimension or economic dilution. From here derives another characteristic. Talking about antitrust in the legal-structural perspective implies finding a balance in the relationship between supply and demand and not searching for predefined economic results (as neoclassical economists would want). This is not only a theoretical point. Both characteristics have an important influence on the interpretation of fields of antitrust law currently overlooked, such as vertical integration and the analysis of strategic behavior such as predatory pricing. Finally, such an analysis is also deeply important for the correct understanding of development processes, since economic concentration has profound and negative impacts on wealth distribution and dynamic economic functioning, as the economic history of developing countries demonstrates. Calixto SalomĂŁo FILHO

University Professor Member of the Editorial Committee of the Journal of Regulation

hat meaning of antitrust is being suggested? What structures allow access to individual and social choice?

Evidently the answer can only be correctly arrived at when the subject of antitrust and its interpretation are properly analyzed. For the time being, two characteristics can be mentioned. On the one hand, it must be clear that legal structuralism, contrary to economic structuralism, does not trust the pro-

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PROTECTION OF PUBLIC HEALTH, CONTROL OF HEALTHCARE EXPENDITURE, GENERAL COMPETITION LAW AND THE SECTOR’S REGULATORY FRAMEWORK Recommended citation: I-1.2

PROTECTION OF PUBLIC HEALTH, CONTROL OF HEALTHCARE EXPENDITURE, GENERAL COMPETITION LAW AND THE SECTOR’S REGULATORY FRAMEWORK by Marie-Anne Frison-Roche

Professor Managing Editor and Director of the Journal of Regulation

I-1.2

his article examins the balance between competition rules and administrative regulation on pharmatical production, based on the sectorial report of the European Commission published last july 2009

1. Whilst this is a very general study, its timing and context are also very specific, since the European Commission published its report on the pharmaceuticals market on July 8th 20091. The Commission plays two roles in this field. Unlike ordinary markets for goods and services, it is the European regulator for the sector, in particular via the authorities that issue marketing authorisations for the European market. However, in this report, it is reasoning as a competition authority seeking to open up the market is if through a liberalisation process, whereas for reasons that will be explained below, the pharmaceuticals sector is a wholly regulated one. In its report, the Commission, as both the sector’s administrator and competition authority, fails to strike a balance between regulatory and competitive issues. 2. The report focuses on the relationship between pioneer and generic medicines from this standpoint, using a market model deemed to be effective if cheaper products for those requiring medicines can reach the market freely and without transaction costs and compete with goods already present there. The latter, if more expensive, must either disappear or be offered at a lower price, thereby increasing overall wellbeing.

3. Thus, the main idea and assumption behind the quantifications put forward is that more generics on the pharmaceuticals market is a good thing per se because they are cheaper, and all other considerations, such as the incentive to discover new medicines, are secondary. With this approach, the European Commission is behaving like a competition authority, assuming, in accordance with underlying economic theory, that competition between technically substitutable products - the very definition of generics versus pioneer medicines - is sufficient to meet the general interest. It believes that it should “force” the market into reaching full competition. 4. Consequently, those pharmaceutical companies that produce pioneer medicines and fight to prevent generics reaching the market are preventing things from running smoothly. For this alone, the European Commission’s report of July 8th 2009 holds them responsible for a regrettable situation (high prices, little generic entry, too few new medicines discovered), thereby meriting a presumption of fault that the pioneer companies can only rebut by demonstrating their innocence, i.e. that what they are doing is not only legitimate but also beneficial for wellbeing. 5. This brings to mind one fundamental question: what is a “sector inquiry”? It is supposed to be a sort of snapshot of a sector that the competition authority is seeking to understand better. First of all, this turns it into a supervisory authority acting more as an ex ante regulatory authority than an ex post body. Secondly, because it is acting ex ante, the idea is to prepare possible ex post action by means of prosecution for uncompetitive behaviour. Far from being a snapshot, this resembles more a preliminary inquiry prior to sanctions.

This article has been published in french as an introduction for the book : Concurrence, Santé publique, innovation et medicament, collection Droit et Economie, LGDJ, 2010, pp1-14

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6. Most of the European Commission’s other sector inquiries have resulted in this. The comparison with other inquiries is particularly useful here as a way of foreseeing the direct and indirect repercussions of the Commission’s report. 7. The objective of the banking sector inquiry published on January 31st 2007 was to demonstrate uncompetitive practices in this sector. Here too we have an inquiry into a regulated sector2, as with the one discussed here, rapidly followed by legal action against the banks at the European and national levels and the implementation of the highly complex trans-European interbank payment system in which regulatory law loses ground against competition law. 8. Likewise, the sector inquiry report on energy markets published on January 10th 2007 points to what it calls serious shortcomings in terms of competition on these markets. From a political standpoint, a parallel can be drawn between this report and the third packet of European energy Directives. Not that they are the same in substance (what claims to be a mere snapshot of a sector is quite different from the political construction designed to reorganise a sector), but the sector inquiry points to foreseeable legal action and sanctions, which alone constitutes solid political grounds for negotiating liberalisation directives with national governments. 9. Above all, sector inquiries are weapons used not so much to defend competition as to force it. On July 27th 1999 the Commission launched a sector inquiry into leased lines in the telecommunications sector. Then, on December 11th 2002, noting that prices had since dropped by 40% and deeming that this was thanks to the inquiry itself, which had detected an unjustifiable gap between costs and prices, the Commission decided to close the inquiry without

a conclusion. Thus, sector inquiries are weapons in their own right that can be aimed at obtaining satisfactory prices, which is precisely what a regulatory body would do by setting prices correlated to costs. Here however, the Commission gives the appearance of basing its actions on competition law. This is a huge source of confusion3. 10. Furthermore, the economic theory underlying the report on the pharmaceuticals sector holds that pioneer companies whose patents are about to expire, foreseeing that they will be unable to compete with the price of the new generic equivalent, will mobilise their strength to come up with patentable innovations, launching new products that will enrich the market or even create new ones, thereby indirectly contributing to public health, which after all is not their primary goal4. 11. However, the very concept of approaching the economics of medicine through Competition Law alone is problematic. This is not to say that the sector is entirely exempt from it. Uncompetitive behaviour that does not result from the sector’s regulatory framework must be sanctioned. In this respect, Competition Law is not “taboo”5. Contrary to the frequent affirmation that economic law is a “concrete” form of law on the pretext that it addresses reality without looking at legal forms or qualifications, competition law is an abstract form of law whenever it concerns markets, because markets make all things interchangeable for money. As such, the technical or political substance of the goods in question is no longer taken into account. The goods become abstract. 12. Competition Law has rendered the legal concept of goods more abstract and erased the characteristics of “things”, for example, of medicines. Thus, since competition is deemed good for all markets, any obstacle is either prohibited or must at the very least be justified. Regulation

See, for example, M.-A. Frison-Roche (dir.), Les banques entre droit et économie, coll. “Droit et économie”, LGDJ, 2006. See, in general, M.-A. Frison-Roche, Regulation et régulation en droit européen, Revue Lamy Concurrence, Jan.-March 2008, no 14, p. 154-155. 4 This complies with Adam Smith’s market theory, according to which it is the confrontation of specific interests and the will of players to achieve their own ends that, by both addition and confrontation, produces the general interest. 5 To use the same term as the French Competition Authority’s “Competition Symposium” of November 16th 2009, The Healthcare Sector: Is competition law taboo? Putting the questions in these terms not only steers implicitly towards a negative answer, which is self-evident, but also suggests that competition law comes first, which is disputable, because competition should interfere in administratively regulated economies only where it produces beneficial effects. 2 3

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PROTECTION OF PUBLIC HEALTH, CONTROL OF HEALTHCARE EXPENDITURE, GENERAL COMPETITION LAW AND THE SECTOR’S REGULATORY FRAMEWORK Recommended citation: I-1.2

must bring demonstrable benefits, and any behaviour on the part of stakeholders that deviates from the principle of free competition between suppliers must also be justified. Thus, the European Commission’s report of July 8th 2009 makes numerous recommendations to States for improving public healthcare systems in order to curb healthcare spending, encourage fair competition and incite research into new medicines, all with a view to the general interest which, unlike the simple law of the market, is no longer just the sum of all the different special interests competing on the market and which can be placed in the State’s hands. 13. However, if we are no longer dealing with a simple market, how can the European Commission as a competition authority legitimately address these questions, presume that the behaviour of some players is questionable and instruct States to adopt certain behaviours? The European Commission is at times the regulatory authority for medicines, in particular because by rights it is the author of many texts on healthcare and on marketing authorisations. Here however, the sector inquiry relies on ordinary Competition Law whilst referring to such regulatory concerns as public health or balancing the public accounts, things to which market law should be blind. The question of the speed at which generic medicines enter the market is a concern for a regulator, not for a competition authority. The law on medicines takes both viewpoints and the Commission is at times a regulatory authority and at others a competition authority. However, the fact that in the same analysis, it is concerned with regulatory issues under the guise of a competition authority is open to criticism.

invoking a mechanism that blocks this competitive confrontation between suppliers, for example as a result of a patent or national regulation, can only make it acceptable by proving that the exception is good for the general interest. 15. We can see that taking Competition Law as a starting point as the Commission does here, results in an entire mode of reasoning where all that remains is to discuss how to measure, quantify and detect various behaviours. But the original premise, to give priority to competition, is not questioned. And yet, pharmaceuticals are quite plainly a sector that does not come first and foremost under Competition Law but under Regulatory Law, because certain balances must be struck, political balances for which the States are responsible (Section I). Competition is only welcome when it fits into Regulatory Law and when it can be proved to be beneficial for overall wellbeing. The burden of proof is reversed. The pharmaceuticals sector comes under Regulatory Law in the name of the right to health, requiring that the burden of proof be the opposite of that under competition law. (Section II). 16. Moreover, there is a fundamental contradiction in the European Commission’s approach, as it claims that it is legitimately entitled to make use of its powers as a competition authority whilst at the same time behaving as a regulatory authority, a role it occupies only in other circumstances, notably via Commission departments other than the one responsible for competition. This latter department is adopting a strictly political approach, whereas a political Europe has not yet been built.

14. Because the Commission has chosen to invoke Competition Law and not Regulatory Law, anything that complies with market organisation is “normal” in the evidentiary sense of the word, and observing, naming and demonstrating it is enough to prove it. Conversely, an “abnormal” situation i.e. one that differs from the ordinary competitive situation where any item on a market is accessible to anyone with the financial means to acquire it, must be justified. This is an exception, bringing with it a burden of proof, irrespective of the place the party invoking this situation holds in the proceedings. This question of burden of proof is key: anyone invoking the competitive mechanism is not required to prove its merit and, among other things, this results in a natural right to enter the market; anyone

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MEDICINES ARE NOT A MATTER FOR SPECIALISED COMPETITION LAW BUT FOR REGULATORY LAW AND LAWS DESIGNED TO ENSTATE BALANCE §1. THE CONCEPT OF MEDICINES IS RENDERED NEUTRAL BY GIVING PRIORITY TO COMPETITION LAW 17. The European Commission, apparently producing its report as a competition authority and not as a regulatory authority, approaches medicines as if they were abstract goods exchangeable on a market (§1), but in reality it is behaving like the sector’s regulatory authority by stating from the outset in its Pharmaceutical Sector Inquiry Report of July 8th 2009 that its concern is the health of European citizens and its goal is to provide them with safe, effective and affordable medicines whilst creating a favourable environment for research. However, it is also taking over the Member States’ role by making political choices that it does not have the legitimacy to make. It is overstepping its technical regulatory jurisdiction and claiming to build the sector in the name of competition. In fact, medicines are specific economic objects because there is political agreement that, for reasons of distributive justice, they are public goods to which everyone must have access by dissociating the person who needs them from the entity that pays for them. This political dimension extracts medicines from competition law and places them under regulatory law, making the national normative level legitimate. Although this does not mean that competition law entirely disappears, it does become secondary (§2). 18.Competition law is based on the premise that goods

are exchanged on markets between buyers and sellers, and that these transactions must occur massively and without impediment from monopolies or market entry barriers for example, in order to produce a fair price. This assumes that buyers have enough power, information and mobility to place multiple suppliers in competition against each other. Whether the market itself transforms the object into a good is another matter. For example, the labour market exists because the workforce is something that can be bought. However, since such economic value is inseperable from the individual, the labor market is highly regulated and specialists in this field of law are generally highly critical of any intrusion of Competition Law into labour law. This criticism is not expressed in detail but rather by massively and preemptively condemning a failure to grasp the human dimension. 19. This opens the way to what has been called the “imperialism” of Competition Law, i.e. the fact that it places itself first. What makes this possible is its abstraction, because everything and anything becomes a good whenever it is desired by an economic player, thereby creating a price6. In this approach, a “sector”, like the pharmaceutical sector, is nothing more than a group of markets. It may be specific, because all pharmaceuticals markets allow the circulation of this type of goods, but it is no different from the general market model. Thus, a sector inquiry performed by a competition authority, which is what the European Commission is, amounts to nothing more than taking the pulse of a set of markets at a given point in time, which is not the same as supervising it, which is what a regulatory authority would do. 20. Competition Law’s abstract approach makes it quite the opposite of Regulatory Law. The latter is not restricted to administrative regulations7, but is composed of a coherent set of rules, principles, decisions and specialised institutions, all justified by the fact that a specific object is at stake.

Thus, although Roman law never asserted that a slave was not a person, they were persons whose bodies were made available on the market. Because their bodies were objects, they became goods. 7 A misinterpretation caused by the fact that the meaning of the English term regulation is restricted to the idea of rules (“réglementation” in French), i.e. the part that is applicable to the whole (V. M.-A. Frison-Roche, Regulation et régulation en droit communautaire, préc.).

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PROTECTION OF PUBLIC HEALTH, CONTROL OF HEALTHCARE EXPENDITURE, GENERAL COMPETITION LAW AND THE SECTOR’S REGULATORY FRAMEWORK Recommended citation: I-1.2

Regulatory Law can be said to emanate from its object8. This is why Regulatory Law is concrete and governs a sector for substantive reasons, because sectors cannot build and maintain a balance purely through competition. 21. Here, it is the object that comes first and determines which branch of law applies9. For example: certain key infrastructures require ex ante organisation that only Regulatory Law can perform10; certain imbalances of information must be avoided or corrected; and competition can increase rather than prevent certain systemic risks. In all of this, Competition Law is too abstract to be either legitimate or effective. Consequently, whilst its repulsion for monopolies and restrictive practices is legitimate in its own field, here it can no longer take priority. The burden of proof is reversed. 22. What about medicines? Firstly, medicines are inseparable from the healthcare sector as a whole, which is subject to State regulatory control. This results in ex ante technical regulatory mechanisms, in particular administrative marketing authorisation processes and monopolies for the professionals who prescribe or handle medicines. 23. This then is a purely technical regulatory framework, as is the case in other sectors whose regulatory mechanisms stem from the technical characteristics of the objects involved, making a regulatory approach quite natural, as for example with transport networks, which from an economic standpoint are natural monopolies. In that case, it could be argued that the pharmaceuticals market is freely competitive and produces a fair price, as long as there is no uncompetitive behaviour, which would be sanctioned ex post by the competition authority. The sector inquiry has provided it with ample information to make this possible11.

24. However, once we concede this, it is technically possible to argue that only the law of the market should apply. Indeed, the first law of the market is not a positive one where the buyer chooses the seller that can offer him the best product at the best price, but a negative one, i.e. those buyers without sufficient financial means to pay said faire price and acquire the good are excluded. The law of the market is one of selection, destroying weak sellers and excluding impecunious buyers. Competition Law protects market exchanges and fights against artificial and organised entry barriers, not as barriers but because they are the sign of uncompetitive behaviour, for example predatory pricing policies designed to eliminate competitors. Competition Law is a safeguard. It does not organise market entry, to which it is indifferent. It does not have the power to impose liberalisation, and it tolerates monopolies and only sanctions them when they are abused. 25. In order to take the opposite approach, i.e. to require that market entry be as broadly accessible as possible, or even to organise it as in a liberalisation process, the competition authority would have to use its status as a pretext and transform itself into a regulator, which can be criticised as a breach of the separation of powers. Thus, the Commission is claiming that the initiative first launched on January 15th 2008 and that led to the sector inquiry report stems from Competition Law, as if regulating a sector were nothing more than a part of general Competition Law, a sort of special, secondary part of the whole, thereby giving the competition authority special jurisdiction because it has overall jurisdiction. 26. The report asserts that it is essential for generic medicines to enter the market as quickly as possible in order

Cf. M.-A. Frison-Roche, Le droit de la régulation, D. 2001, chron., p. 610-616 ; Définition du droit de la régulation économique. D. 2004., chron., p. 126129 9 M.-A. Frison-Roche, Dialectique entre concurrence et régulation, in Actualité du droit de la régulation, Revue Lamy Concurrence, 2007, p. 168-174. 10 M.-A. Frison-Roche, Le couple Ex Ante-Ex Post, justification d’un droit spécial et propre de la régulation, in Les engagements, coll. Droit et Économie de la Régulation, vol. 4, Presses de Sciences-Po/Dalloz, 2006, p. 33-48 11 This is not in itself criticisable, but would suggest that the competition authority, since it is not a regulator responsible for supervising a technical sector and addressing “dominance”, is in reality launching an inquiry to provide material for possible future legal proceedings. This would mean that, from a legal standpoint, it should not be qualified as a mere sector inquiry but as a preliminary investigation in which the rights of the defendant should be respected, which is not the case here.

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for competition to function, leading to a drop in prices and relieving state budgets. Who could possibly disagree with the substance of such an assertion? But there is a major legal problem regarding the source of law. The European Commission, following Article 17, § 1 of Council Regulation 1/2003, justifies the sector inquiry itself by pointing to indications suggesting that the ban on uncompetitive behaviour has somehow been breached. It therefore refers exclusively to Competition Law. If Regulatory Law is nothing more than a special form of Competition Law sanctioning uncompetitive behaviour in a given sector, then what applies to the whole also applies to part of it, and what gives authority for the whole also gives authority for part of it.

based on Article 17, § 1 of Council Regulation 1/2003, the Commission is entirely legitimate in the field of Competition Law but not at all in that of Regulatory Law, since these two fields of law are different or even opposite in nature. Competition law has at times thwarted unwarranted behaviour by companies and there have been sanctions for concerted practices or abuse of dominant position, because the sector is not exempt. However in some of these aspects, medicines come under Regulatory Law and not Competition Law because politicians refuse to allow the law of the market to effect exclusion, which is what abstract Competition Law is designed to preserve. With social security, society has chosen to dissociate the person who needs medicines from the entity that pays for them, and, since a political Europe still does not exist, the States remain free to use their public finances as they wish, even if this means managing scarcity or increasing the collective burden according to national choices in the field of public health.

The entire unstable art of Regulatory Law lies in this balance. Consequently, it is inaccurate to say that Regulatory Law is part of Competition Law.”

29. In fact, “mistake” is the wrong word. To speak more severely, this inquiry could be described as a “strategic” manoeuvre, because the report expressly states that whilst “the inquiry’s main focus is company behaviour”, to the extent that the entire sector is regulated, it is also appropriate to assess, for example, the entire patent system, marketing authorisations and pricing and reimbursement, in short, the sector’s entire regulatory framework.

“

27. But Regulatory Law refers to something other than Competition Law. The goal may be to forcibly introduce competition law once the end of a monopoly has been declared, or to organise zones of competition within more or less integrated economic chains, or else to balance competition with another principle. The entire unstable art of Regulatory Law lies in this balance. Consequently, it is inaccurate to say that Regulatory Law is part of Competition Law. 28. This is a fundamental mistake because, in a report

30. Moreover, the report states that the objective of Competition Law is the “promotion of innovation and driving economic growth” which, according to the Commission, aligns it with industrial property law, thereby justifying its entire approach. There are approving statements about intellectual property’s link to innovation. This brings us back to the fundamental question raised above: what is a sector inquiry?12 It is an exercise designed to describe the situation of a given sector, but in fact, like a regulator, the Commission is at the least declaring a competition policy, and at the most declaring a policy for the optimum, fair economic organisation of the pharmaceuticals market. A sector inquiry is meant to be scientific, describing a state of affairs, and not political, i.e. laying down what the future state of

V. supra n°5

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PROTECTION OF PUBLIC HEALTH, CONTROL OF HEALTHCARE EXPENDITURE, GENERAL COMPETITION LAW AND THE SECTOR’S REGULATORY FRAMEWORK Recommended citation: I-1.2

affairs should be. The Commission does not appear to be respecting this definition. 31. In addition, and the two are linked, “driving economic growth”, which could be put more plainly as “economic policy” but such a term would be too transparent, is a matter for the State and not for European institutions, of which there may be several but which do not yet add up to one. 32. We can note with equal severity that, when arguments unrelated to the organisation of market exchanges are raised, such as the issue of the scientific challenges involved in discovering new molecules, the Commission recalls that “the legal basis for launching a sector inquiry is European Competition Law” and therefore the argument was not analysed, because the companies raising said argument have not provided any direct evidence. This kind of two-faced behaviour is open to criticism, as the Commission is behaving at times as a regulator, at others as a competition authority, to serve its own ends, i.e. to open up markets to generics. This is not its legitimate role, because it deliberately refrains from analysing the overall issue of medicines in its totality, something that can only be legitimately done by politicians, who alone have the legitimacy to make choices within that totality. §2. HEALTHCARE, A POLITICAL OBJECT REMOTE FROM COMPETITION LAW 33. Indeed, only politicians can legitimately make fundamental choices regarding life in society and the future of their populations. Politicians can decide that healthcare is a political object, unlike bread for example, because contrary

to bread, they deem the former to be a common good that is not easy to access13. The object in question does have economic value and also a cost, but it does not enter the market solely at the discretion of an economic player. Chairman Jean Marimbert, for example, firmly stated that “the role of a health agency like Afssaps is resolutely non economic”14. This is a matter of political and technical choices that depend not just on the country but on each country’s history, since the social or economic dimension through which the State reasons in this field varies15. 34. Thus, politicians have deemed that people must have access to medicines according to their needs and not their ability to pay, which law translates through the concept of public service, often referring healthcare law to public law by means of a technical translation. 35. Furthermore, in order to give everyone access to medicines as a way of guaranteeing health, the community pays on behalf of the individual. Thus, the model of health and social protection (the two are inseparable) is completely different from the competitive one, since the person requiring the medicine is dissociated from the entity paying for it. The intermediary between the two, the prescriber, is usually deemed to be the holder of blank cheques. 36. These are political choices which the community could decide to give up by abandoning social security. This is out of the question in France, a country that accords particular importance to distributive justice16, something that is foreign to the market, which is based on commutative justice. As long as taxpayers accept this redistribution by electing those who implement it, this is legitimate and must hold competition law at bay.

Because it is a political object it can vary between States and over time. Thus, housing used to be no more of a political object than bread until French politicians decided to create an enforceable right to housing. 14 Régulateur et sécurité sanitaire des produits de santé, in La régulation de la santé, Annales de la régulation, Th. Revet and L. Vidal (di.), vo. 2, 2009, p. 285-293, p. 285. Among other things, the Chairman underlines the fact that the Authority acts “within the context of general public health policy and the plans or initiatives that translate it” (p.289). 15 On this dimension, see the remarkable cognitive sociology study by Daniel Benamouzig, La santé au miroir de l’économie, coll. “Sociologies”, PUF, 2005. 16 On the issue as a whole, referring in particular to the work of John Rawls and Amartya Sen, Cl. Schneider-Bunner, Santé et justice sociale. L’économie des systèmes de santé face à l’équité, Economica, 1997.

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37. Furthermore, Europe is the right level at which to exert normative legal power when it comes to markets for abstract goods or for technical regulatory mechanism, as applicable to the telecoms sector or to financial markets for example. But, as long as there is no federal Europe, or, in the words of the German constitutional court in a recent ruling of June 30th 200917, because a “European people” does not yet exist, EU institutions do not have the legitimacy to make political choices in the Member States’ place. 38. Thus the State, because it pays in consideration for the political choice of redistributive justice, is entitled to keep European law at bay, since it has made global financial choices in which competition law has no place (the following examples are political choices: health for all rather than education for all; or the opposite, the reimbursement of all medicines or a graduated system depending on how necessary the medicine is). 39. Thus, pharmaceutical law only comes under General Competition Law in a secondary way as applied to a restricted sector, and comes mainly under Regulatory Law, which is specific here for political reasons, because this is a choice for the community as a whole to redistribute wealth in accordance with collective preferences.

II.

LAWS CONCERNING MEDICINES COME UNDER REGULATORY LAW 40. The organisation of the market circulation of medicines is a matter of political choice. As long as no “European people” exists for which the European Commission could legitimately make choices, medicines are subject to Regulatory Law, i.e. national law. Competition law applies within the scope of Regulatory Law only when market mechanisms

are beneficial. This prevalence of Regulatory Law over competition law imposes a system of burden of proof that the Commission does not respect, leaving it open to criticism (§1). This political and administrative regulatory approach is justified by the fact that legal systems can be rendered subjective, in this case in the name of the right to health that is at the foundation of public policy (§2). §1. THE BURDEN OF PROOF ARISING FROM THE PREVALENCE OF REGULATORY LAW OVER COMPETITION 41. Over and above the fact that the European Commission is acting as a regulator by seeking to organise the forcible entry of medicines onto the market something that it does not have the normative means to do as the mere competition authority that it should remain until there is a federal Europe the Commission is making competition the rule. Even if it should only be the guardian and not the organiser of competition, it refers to this as a principle, resulting in a system of burden of proof based on the idea that this principle is the norm. 42. Indeed, the Commission is attempting to remain within its only legitimate role which is that of a competition authority, without claiming to forcibly organise competition by means of a kind of liberalisation, which is a regulatory prerogative, and to do so it is using the burden of proof as a technique. Thus, competitive situations that comply with the (“normative”) principle and are therefore the “norm” need no justification. Conversely, non-competitive or uncompetitive situations, e.g. monopolies created either by statute or by the administrative decision to issue a patent, are allegedly “abnormal” because they do not comply with the principle. Here, the Commission avoids venturing into the field of substance by claiming that they are illegal per se, but uses the burden of proof, suggesting that those who

F. Chaltier, Le Traité de Lisbonne devant la Cour constitutionnelle allemande : conformité et démocratie européenne, Les Petites Affiches, July 23rd 2009, p.4s. See also, A. Supiot, L’esprit de Philadelphie, la justice sociale face au marché total, Le Seuil, 2010, 173 p. 18 Executive summary of the inquiry report, referring to the position of consumer representatives, the generics industry and the health insurance sector, p. 7

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PROTECTION OF PUBLIC HEALTH, CONTROL OF HEALTHCARE EXPENDITURE, GENERAL COMPETITION LAW AND THE SECTOR’S REGULATORY FRAMEWORK Recommended citation: I-1.2

organise and/or benefit from these situations must prove that they are legitimate, and explain the goal that justifies deviating from the principle of competition and the proportionality of the means versus the ends. 43. This provides a comfortable basis for the report, because the Commission refers to “concerns”18 that generic entry is not occurring quickly enough and that innovation is slowed, without demonstrating blame for these phenomena. This is contrary to the rules of enforcing law, of which Competition Law is a part, because a person or category of persons (in this instance the originator companies) cannot be held responsible for the mere observation of a regrettable phenomenon such as the lack of innovation, without proving a causal connection. 44. But in fact, the relevant legal grounds for organising the entry and circulation of medicines on a market do not lie in Competition Law but in Regulatory Law, for the technical and political reasons explained above. Consequently, the system of burden of proof is reversed, because the benefits of competition will be welcome as long as they do not contradict the public good for which the State is responsible and for which it has powers it can enforce against the competition authority. 45. Thus, it is up to the competition authority to demonstrate that, despite the fact that it is Regulatory Law that is involved, competition is beneficial because it also contributes to the State’s objective of the common good. For example, if the patents office issues a patent to a pharmaceutical company, thereby giving it a monopoly to encourage it to pursue more research without the need for State financial support, the competition authority is not entitled to see this as an exception. 46. Indeed, it is important to remember that Competition Law exists at the very instant of market exchanges, and it is this instantaneousness, this lack of actual duration, that allows the emergence of a fair, mobile price. Contrary to this, Regulatory Law is long term. We can even put this in the

other way around and say that Regulatory Law exists when there is a need for long term economic action, in particular investment. 47. Competition Law is blind to that. This again is part of its abstract view described above: it sees neither the objects themselves being exchanged on markets, nor time because the moment, the instant the exchange occurs, is not part of the notion of time. 48. Regulatory Law, in particular as applied by means of patents and ex ante administrative organisation, takes a long term view of the creation and circulation of medicines. The competition authority must demonstrate that, in a specific case, this is abnormal because of the existence of restrictive practices or abuse of dominant position. However in itself, this is “the norm”, in particular because patents - a weapon that the State has normative power to use to create objects of ownership - encourage research i.e. risky investment over time. For this reason, the authority cannot find fault with it without providing more proof, whereas those who act within regulatory processes e.g. within public health or patent policies, do not have to justify this because it is the norm. §2. THE SECTOR IS SUBJECT TO REGULATORY MECHANISMS IN CONSIDERATION OF THE THE RIGHT TO HEALTH 49. Dean Carbonnier reproachfully described the way in which, under the French 5th Republic, Law had “pulverised” the legal system that in the past was built around objective rules laid down by Law, transforming it into one built around subjective rights invoked by the individual19, rights that become human rights whenever natural subjective law is involved. Law, which is objective, has become a tool at the service of subjective rights, whose concretisation is supervised by judges20. 50. Today, healthcare law exists to fulfill the right to health.

J. Carbonnier, Droit et puissance du droit sous la Ve République, Flammarion, 1995. For a more approving presentation, V. H. Motulsky, Principes d’une réalisation méthodique du droit privé. La théorie des éléments générateurs des droits subjectifs, P, Sirey, 1948, reprint Dalloz 2002. 20

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It is difficult to define this “right to health” and the role of medicines in it. Thus, the distinction between pioneer and generic medicines has no place because the holder of the right to health is the person looking for the products on the market (including the potential or already sick patient), and because replacing an pioneer product with a generic benefits the payer (i.e. Public Social Security organisations), and ultimately the taxpayers. 51 .Thus, because we are functioning on the basis of distributive justice and this is a political choice made by the national community, the right to health is guaranteed by the system’s administrative regulatory framework. This national regulatory system, concerned with controlling public healthcare expenditure, has created regulatory mechanisms such as the pharmacists’ power to substitute products. 52. Furthermore, the right to health includes access to the healthcare mechanisms where medicines are found, in particular access to hospitals. This access will be more or less free depending on how necessary the medicine is, which is again determined by complex rules of Public Law that organise the degree of reimbursement according to different illnesses. In this instance, the way in which hospitals are organised and the power of doctors to prescribe medicines are subject to regulatory mechanisms.

der that the individual has a kind of “right to innovation”. 55. Competition Law is foreign to all of this. Although it has been said that it created a “right to competition”, since competition is nothing more than the ability of a buyer who can afford it to acquire available goods by paying a fair price set moment by moment as transactions occur (which is why financial markets are the purest form of market), it does not necessarily serve the right to health, which is based on everybody having access to the good and a common effort to encourage investment in research whenever there is political agreement to do so and to collectively carry the financial burden that comes with it. Marie-Anne FRISON-ROCHE

Professor Managing Editor and Director of the Journal of Regulation

53. The principle of the individual’s right to health can be contested on the grounds that market mechanisms are more relevant or that public finances cannot support the wieldy protection system required to render this right concrete (this is a political choice). We can also say that this right does not only concern available treatment, but also those still to come. In fact, Competition Law manages the present because it is in the present, and Regulatory Law manages the future, because it is long term. 54. If we adopt an extensive understanding of the right to health, the individual is entitled to the medicines available on the market but also to medicines that could cure him or her but that are not yet available because they have not been discovered. This brings us back to the importance of research as more than just public policy, whether it is internalised within State laboratories funded by the taxpayer, or externalised via patents that encourage private companies to pursue a profitable line of research. We could thus consi-

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The Journal of Regulation n° 1 - April 2010

WHAT REFERENCE COSTS SHOULD BE USED TO REGULATE ACCESS?

A COMMENTARY ON THE METHODOLOGY TO REGULATE ACCESS TO ELECTRICITY PRODUCED BY THE HISTORIC NUCLEAR PLANTS

Recommended citation: I-1.3

WHAT REFERENCE COSTS SHOULD BE USED TO REGULATE ACCESS?

A COMMENTARY ON THE METHODOLOGY TO REGULATE ACCESS TO ELECTRICITY PRODUCED BY THE HISTORIC NUCLEAR PLANTS

by Antoine Fournier Partner - TERA Consultants

I-1.3

he Champsaur report assesses how to regulate access to electricity produced by French electricity incumbent, EDF. This regulated access concerns electricity produced by EDF’s historic nuclear plants and destined for other suppliers. Granting access to these plants has been acknowledged and the current issue focuses on which reference costs to use to set access prices. The various cost evaluation methods yield different results. The chosen methodology will depend on if the consumer benefits or not from the historic nuclear plants’ competitive advantage. The solution will uphold fair and long term competition for France’s electricity markets.

WHAT PROPOSALS DOES THE CHAMPSAUR REPORT PUT FORTH TO REGULATE ACCESS PRICES?

efining how to organise the French electricity market, the Champsaur report focuses on the best interest of French consumers. This organisation aims to establish long term competition in the production of French electricity, which will remain nuclear produced.

PROTECTING FRENCH CONSUMERS

The Champsaur report states that EDF benefits from a competitive advantage since France’s historic nuclear plants provide EDF with low cost nuclear-produced electricity versus thermal-based electricity (gas, coal, fuel). As the French have accepted to house one of the European Union’s most developed nuclear plants, they should in turn benefit from these nuclear plants’ price advantage1. With the French electricity market opening to competition, electricity suppliers (EDF and competitors) should all access national nuclearproduced electricity at the same price. More, each supplier should access a quantum of EDF nuclear electricity based on the pro-rata of their French client base. The price of electricity should be cost-based, with costs factoring in present and future production, as well as “existing historic nuclear plants in condition”. This will benefit consumers. Regulation applies to wholesale prices with the price set below free and non-regulated European markets. To ensure that all consumers benefit from the nuclear advantage, the report advocates temporarily maintaining regulated retail tariffs2. FORESEEING THE DEVELOPMENT OF SUSTAINABLE COMPETITION TO PRODUCE FRENCH NUCLEAR ELECTRICITY

In the long term, the Champsaur report foresees fostering competition in production activities with the construction of new nuclear plants. Indeed, electricity available via regulated access only targets electricity produced by historic

Champsaur report, page 5 (third public policy objective). In economic terms, this is a monetary compensation stemming from the negative externality of the proximity of a “polluting” good (NIMBY issue). 2 An attractive price for basic electricity can be accompanied by containing electric consumption. This means that retail prices factor in peak electricity production. In line with the French government’s ecological policy (Grenelle environment policy), the Champsaur report underlines “price signal”, as a key issue for the cost and impact of producing peak electricity. The government would like end consumers to be more responsible in their energy consumption.

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French nuclear plants—to be closed over time. Regulated access will initially constitute the main source of electricity suppliers’ MWh, but will decrease over time. Electricity suppliers will consequently find new sources of basic electricity production to replace regulated MWh. The report underlines the pivotal aspect of opening competition to new investments to produce nuclear electricity. Building permits for French nuclear production should respect fair competition so that the reduction of available volume via regulated access is accompanied by competitive production of nuclear-generated electricity. If steps are not taken to promote competition, the historic monopoly will last.

“

Since each regulatory-based pricing case upholds aspecific method, there are myriads of cost-oriented methods. The pertinence of a cost-oriented method depends on the context and regulatory objectives.

WHY DOES THE PRICE OF COST-BASED ACCESS VARY WITH THE CALCULATION METHOD?

While the Champsaur report clearly lists the costs to include in the regulated access price, it does not calculate the result. As the seller, EDF logically advocates a calculation method with a high MWh regulated price. Called “Current Economic Cost method”, EDF does not use the methods described in the Champsaur report. The debate therefore focuses on the methodology. In economic-based price regulation, the key issue is to adopt a price signal which concomitantly accounts for the current and forward-looking structure of the market to be regulated. Since each regulatory-based pricing case upholds a specific method, there are myriads of cost-oriented methods. The pertinence of a cost-oriented method depends on the context and regulatory objectives.

THE COST-ORIENTED METHOD DESCRIBED IN THE CHAMPSAUR REPORT

To set the basic electricity access price for historic nuclear plants, the report refers to “Current Economic Costs”. The costs mentioned in the report are current and forward-looking operating costs, cost of maintaining the historic nuclear plants in condition and the activity’s residual debt. The report, however, does not refer to past investments to build existing historic nuclear plants. Based on external sources3 our estimates use the described method, and point to a regulated access price which is two times less than the EDF price. This difference stems from the near reimbursement of the debt financing historic nuclear plants. Between the end of the 80’s and 1997 (see graph 1), EDF’s long term debt contracted by more than

Sources: “Bataille” report (1999), EDF presentation to UFE (September 2009), TERA Consultants analysis. In 1997 EDF debt started rising because of its international expansion. This point was highlighted in the Roulet Commission report on EDF’s industrial and financial project – Volume I “EDF’s net debt totalled 24 billion euros at June 30, 2004 after having peaked at close to 27 billion euros in 2002, after five years of international expansion”. 5 In general, investment financing requires shareholders’ equity (shareholder/investor role) to leverage debt (role of the banker). 6 “investment was primarily financed by outside debt”, rapport Galley-Bataille, 1999, Volume II, Chap. 1, Part 1 3 4

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The Journal of Regulation n° 1 - April 2010

WHAT REFERENCE COSTS SHOULD BE USED TO REGULATE ACCESS?

A COMMENTARY ON THE METHODOLOGY TO REGULATE ACCESS TO ELECTRICITY PRODUCED BY THE HISTORIC NUCLEAR PLANTS

Recommended citation: I-1.3

40%. With EDF’s international expansion4, tracking the debt has become more difficult and current debt for the historic nuclear plant activity is minimal. From an investor’s point of view, this price is calculated on residual debt rather than on the accounting value. This accounting method omits contributions to shareholders’ equity5. Historic nuclear plants were almost fully financed by debt6. Until the 1980’s, EDF’s average medium-long term debt increased parallel to investments in nuclear plants (see graph 2). In this specific context, it is economically legitimate to retain prices based on residual debt rather than on the asset’s accounting value. Otherwise, the regulated price would not cancel the regulated player’s competitive advantage.

Graph 2 - Cumulative nuclear investment financing by medium to long term debt

Graph 1 - Value chain of physical and virtual networks

Source: “Bataille” report (1999), TERA Consultants analysis COMMONLY USED ECONOMIC REGULATORY METHODS TO SET COST-BASED PRICES

Source : “Bataille” report (1999), Roulet report (2003), TERA Consultants analysis.

Calculating a 46 €/MWh for historic nuclear electricity7, EDF drew on a method used by French regulator, ARCEP, to regulate the access price to France Telecom’s network8. Via this method EDF factors in the identical renewal of its nuclear plants. The Champsaur report, however, only refers to the value to “maintain historic nuclear plants in condition”. The EDF method consequently results in a much higher price. Two other cost-based methods point to regulated MWh prices between 30 and 40 €/MWh: - First, the Current Cost Accounting (CCA) method9, used to bill the good or the service produced by a monopoly with no competitors in its business (as in the case of essential facilities); - Second, the building from scratch method10, to find a tariff to incite competition among producers. The objective in choosing a calculation method lies in foste-

Source: EDF presentation to the French Energy Association (UFE) (September 2009) To set unbundling tariffs, ARCEP created a method called “Current Economic Costs” (decision 05-0834). This method corresponds to Current Cost Accounting, (CCA) with an economic depreciation instead of an accounting depreciation 9 Sources: Report “Galley-Bataille” (1999), EDF presentation to the French Energy Association (UFE) (September 2009), TERA Consultants analysis 10 Source: “synthesis of the reference costs to produce electricity”, DGEC 2008, TERA Consultants analysis 8

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ring competition, by imposing a regulated tariff (cf. Table 1) in a lower range price. This objective can only be fulfilled if the cost-based price aligns with retail regulated tariffs (implying that there is no margin squeeze for alternative electricity suppliers). Regulating access when the price is too high is incompatible with a retail price which will be maintained at a very low level. In short, the higher the regulated access price, the higher the price increase for retail prices (to prevent electricity suppliers from being subject to a margin squeeze), meaning EDF retains its historic nuclear site advantage. This also means that the advantage which was destined to trickle down to consumers doesn’t trickle down. Different cost valuation methods corresponding to different principles of cost valuation

Regulating the access produced by historic nuclear plants translates to instilling fair and lasting competition across the French retail and wholesale electricity markets. While a high access price (regulated retail tariffs which remain unchanged) doesn’t spur fair competition on the competitors from investing in basic electricity production, and impede competition on the wholesale market. Given the complexity of the debate and the issues at stake, there are technical and economic prerequisites to carry out before taking political and regulatory decisions. The Champsaur report recommends setting up an independent Authority to oversee the market between suppliers and producers (namely regulated access tariffs) and the retail market for end-clients (namely regulated tariffs). This authority will, above all, organise debates around fundamental questions for the electricity sector, and more generally for the energy sector. This article contributes to the collective reflection. Antoine FOURNIER Partner - TERA Consultants

Source: TERA Consultants analysis

CONCLUSION

he method retained to set the regulated access price must solve two problems. The first focuses on equal sharing of the nuclear advantage between clients and producers. The second focuses on equal distribution of the historic nuclear plants’ competitive advantage to be shared among all suppliers on the French market. If the price is too high, the French citizens who have accepted nuclear plants on their territory receive no compensation. More, via the government, they have guaranteed the economic risks linked with the construction of nuclear plants. If the access price is too low, it may upset the incumbent’s economic equilibrium.

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The Journal of Regulation n° 1 - April 2010

WHAT IS A PRICE IN LAW? FROM CONTRACT LAW TO REGULATORY LAW Recommended citation: I-1.4

WHAT IS A PRICE IN LAW? FROM CONTRACT LAW TO REGULATORY LAW by Marie-Anne Frison-Roche

Professor Managing Editor and Director of the Journal of Regulation

I-1.4

aradoxically, Price is not substantially controlled by Law. In Civil Law, Price is controlled regarding the will of the parties. In competition Law, Price is controlled only if it is different from the adequation between offer and demand. This “fair price”, which we must prefer to name the “exact price”, is inequitable, for example when the good is essential and everybody must have access to it. Public law organises special price, a tariff, by regulation. Finally, in regulatory law, a regulated price is a new combination of every previous approach, in order to obtain efficient prices in a mix between regulation, competition, and contract, resulting in substantial control by regulators and courts, ex ante and ex post.

and services. There can be goods without a price, common goods for example, but there is no price without a corresponding thing offered for sale to a potential buyer. This is why a contract is formed whenever there is agreement on the thing and the price.

1. Price is a very mysterious element in law, because it is a matter left to the free will of the contracting parties, left to the State when it has regulatory powers, or to none of the above when it is simply dependent on changes in market supply and demand. Thus, from a substantive perspective, price is not something controlled by Law.

6. Today, the normative nature of Law, i.e. its ability to control nature, is waning because borders are disappearing (erasing the normative aspect because it relies on borders) and because technology is making things more and more powerful. Consequently, just as the issue of the body must be addressed, so must the question of price as compared to the value of things. Law can no longer turn a blind eye to these questions.

2. Admittedly, any observer will point to the abundance of case law and studies on the qualities that a price must have in order to be lawful, determined or determinable, and there are as many debates as to the legal consequences of a defect in the price that creates a flaw in the contract, e.g. does it render the contract void or lead to termination, does the contract become absolutely void or merely voidable…? 3. However, if we look head-on at the question of what a price actually is in Law, we simply find the trivial idea of a certain sum of money that must be paid in order to obtain tangible or intangible goods or services. Thus, it is established that price is always tied to something because price is inseparable from money, which gives access to goods

The Journal of Regulation n° 1 - April 2010

4. This is a very simple definition, enclosed in Civil Law with very little connection to Public Law and no role for the economy. Indeed, just as Law uses the concept of the “person” as a way to cleverly ignore the human body, it uses price as a way to ignore the value of things. 5. This is how Law has become powerful because, since Roman law, it has created its own reality based on persons and goods, where material reality is merely at the disposal of the normative power of the Law, unless we adhere to the traditional philosophy of natural law.

7. Thus, price was and remains the object of the agreement between the parties, based on their free will and informed consent, supported by rationality and expressed by the normative nature of the contract and then that of the legal system (I). However, for an economist, price is not so much something that is agreed but something that is produced or caused by the market, thereby referring legal matters to the branch of Competition Law (II). Moreover, the sum of money in exchange for which people can access goods may prove to be unsuitable when set by the contract or market, either because it cannot or will not be paid. This is when prices are set by a regulatory framework under Public Law

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(III). Administered prices are often contrasted with so-called “free-market” prices, when in fact market mechanisms can impose just as many constraints on the parties seeking to free themselves of them. This implies two oppositions: that of Private Law versus Public Law; and that of market economy versus a controlled economy. Such oppositions are increasingly difficult to uphold, as demonstrated by Regulatory Law and its outcome, “regulated prices” (IV).

PRICE IS WHAT THE CONTRACTING PARTIES HAVE AGREED UPON AND WHAT IS EXPRESSED BY THE NORMATIVE NATURE OF THE CONTRACT 8. The Contract Law gives a subjective definition of a contract as a set of obligations stemming from an agreement between at least two parties. What is the most important thing then? As regards the time, it is the moment when the contract is formed rather than the moment of its performance. In terms of quality, it is the quality of the will of the parties that matters. They must have really wanted that price for that particular good. 9. Of course, Contract Law has evolved a great deal and can never be reduced to such a blunt statement, but ultimately this is the most important thing: the price is what the contracting parties wanted. As such, the price is no different from the other elements of the contract and comes under the same 19th century reasoning. People are rational and free, in particular they are free not to contract. They know the benefits of owning the desired good. Consequently, as long as the other potential party, i.e. their economic enemy, has not offered a price that represents the exact sacrifice by corresponding to the satisfaction the buyer will obtain from the good, they do not contract. 10. Thus the most important thing about the contract, which is basically a pact between economic enemies, is information and the freedom not to contract. If both parties are protected or organised there is no need for any restrictions nor to oblige one party to help the other (this is in opposition to the concept of market price, which by definition is an arena where different interests and economic enemies collide). As a result, price alone is sufficient. It is “fair” as long as it is “exact”, which is a more appropriate term, and

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this is the notion implicitly referred to in the statement “Qui dit contractuel, dit juste” (if it is contractual, it is fair). 11. This explains the importance the French Civil Code and case law attach to sanctioning defects of consent, either those that distort understanding (mistake or fraud) or impede freedom (violence). If the judge restores the required quality to the will of the parties, the contract recovers its balance. This would imply that declaring the contract void is not the appropriate consequence when the price has been reached without sufficient negotiation (based on the freedom not to contract) or information (as was the case in the great case law “saga” regarding indeterminable prices). This adjustment became possible in 1996, when case law developed a mechanism to replace the absolute voiding of the contract by giving the courts jurisdiction to modify the price. 12. Similarly, when civil case law decides that unfairness on the part of one of the parties during negotiations constitutes “improper price setting”, this again demonstrates that it is the quality of information and rational will that have the power to generate exact prices i.e. that correspond to the sacrifice proportionate to the benefits obtained by the contracting party. 13. Thus, Consumer Law, whose philosophy is creeping into Contract Law and is expressed through its own key principles, has the same foundations. First and foremost, the consumer must be informed. This supposes that the consumer is rational. Economic law, and in particular Competition Law, have the same approach. However the more realistic Consumer Law often organises this information ex ante. Thus, with prospecting, the consumer is “cheated” of his consent by the sales talk and attractiveness of the object and thus has a right of withdrawal, quite simply because it only takes him a few days to realise he has no use for the good or that he has paid too much for so little. 14. Thus, Contract Law gives the price a particular place, at once central and hidden, because legislation, case law and doctrine all create demands regarding price but always through the narrow approach of the quality of consent. Yet, first of all, law very rarely cares about whether the money paid to acquire the good is in line with its economic value, apart from some marginal concepts like that of the absurdly low price.

The Journal of Regulation n° 1 - April 2010

WHAT IS A PRICE IN LAW? FROM CONTRACT LAW TO REGULATORY LAW Recommended citation: I-1.4

15. Secondly, lawmakers and case law have created a plethora of duties to inform, leading to dozens of pages that the contracting parties never read. As long as there is no shift, like the one the French Constitutional Council made regarding statutes, from the concept of information to the more concrete and thus more effective notion of intelligibility, contract law will continue to work against itself without grasping the fact that one way to mislead is to inundate with information. This is the case with variable rate loans, whose catastrophic effects are not understood despite providing the consumer with vast quantities of information.

II.

THE PRICE: WHAT THE MARKET PRODUCES AND COMPETITION LAW REPAIRS IF IT IS UNFAIR 16. If we look at price through market mechanisms, we again find this invisibility but this time, quite to the contrary, it is the will that is invisible, if we refer to the concepts of the invisible hand and the auctioneer. In this respect, the financial market is the purest of all markets. The parties, because they are rational, informed and wish to maximise their own interests (even if they are not economic), seek to profit from the force generated on both sides by the confrontation of all of supply against all of demand. This is how the equilibrium price works, also known as the “exact price”. 17. What produces the exact price is the mobility of economic players and their atomiocity. In this respect there are connections with Civil Law, because the mobility of economic players, which allows the seller to win over a competitor’s customer by offering him better quality or cheaper products, and which allows the buyer to make these sellers compete against each other, is based on the freedom not to contract. Thus, if a company is powerful enough or if there is an agreement not to exercise the freedom not to contract or to choose another product or partner, then the market does not function and the price is no longer adjusted. This means there is no more “fair price” in the event of abuse or restrictive practices, which is the most common and most serious form of anticompetitive behaviour. 18. On a market, the fair price is the one produced by the elasticity of supply and demand. Thus, Adam Smith points out that the highest price for a glass of water could be that

The Journal of Regulation n° 1 - April 2010

of a diamond if the buyer has been in the desert for days with no oasis or caravan in sight. He will pay the exact price. In economic terms however, we cannot claim that this price is fair. The amphibology of the term “fair” has proved to be disastrous: we should say that the price is exact, if the adjustment of supply and demand has been allowed to run its course (here, very little water available and a very strong desire for water), and not necessarily that it is fair or morally just that this particular mechanism should determine price.

“

We should say that the price is exact, if the adjustment of supply and demand has been allowed to run its course, and a very strong desire for water), and not necessarily that it is fair or morally just that this particular mechanism should determine price.

19. If we are on a market with sufficient supply and demand, otherwise known as a liquid market in the financial sector, the market usually functions with contract law, private property rights, and courts in the event of a problem. The price is exact without the need to construct a specific ex ante legal apparatus for the market in question or instate permanent supervisory authorities because the law of the market, which like the contract is based on the opposition of interests, and the natural will of the players to protect their own interests, are enough to produce exact prices in a balanced manner. In this way, ordinary markets are selfregulated. 20. This supposes that operators do not become so powerful that they use that power through restrictive practices or abuse of their position on the market to obtain some kind of advantage, in particular as regards prices, which they could not have obtained on a freely functioning competitive

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Recommended citation: I-1.4

market. Thus, the competition authorities intervene to sanction players with business activities who act in this manner when their behaviour has this intent or effect.

competition impossible) or permanently (e.g. because there are energy or telecommunications networks that are natural monopolies from an economic standpoint).

21. This is the core of Competition Law, i.e. sanctioning uncompetitive behaviour, and it places the price at the heart not only of the analysis but also of the sanctions, also known as “remedy”, which is appropriate as the goal is to cure the market, a concept to which Civil Law still pays little heed.

26. In this case, the State can challenge the market for two possible reasons. First, there will never be a market for natural monopolies and so the State can deem that it has the legitimate power to act unilaterally and that this is effective wherever the market cannot function. The second reason is both deeper and more contingent: the exact price is not the fair price.

22. Firstly, when analysing a situation, a price will be deemed “unfair” not so much because it was unfairly set – Competition Law, the economic law that guards the market, may be there to sanction but it is objective – but because the price observed on the market is unjustifiably higher or lower (predatory pricing) than the one that would have been produced by the adjustment of supply and demand. 23. However, while it may be easy to determine that prices are too high compared to a theoretical market price, this is much more difficult when it comes to prices that are considered to be “too low”. In fact, unless it can be demonstrated that these prices are not only lower than the theoretical price but that they are designed to eliminate competitors and then increase prices later on, which would be harmful to consumers in this second phase, unless they are predatory, low prices are in the consumer’s favour. 24. Indeed, it was generally accepted that the purpose of consumer law was to protect the consumer, the goal of Competition Law is to protect the competitive market. Today, competition authorities, starting with the European Commission and the Federal Trade Commission, claim that the purpose of Competition Law is to protect consumers’ interests. Consequently, at what point does a price become “too low”?

III. THE PRICE THAT POLITICIANS PRODUCE THROUGH RULES AND REGULATIONS

27. In fact, there are many situations where supply and demand exist but the criterion is no longer the need to drink water for the price of a diamond if necessary as the market would have it, but the right to drink water even when the person in question’s pockets are not filled with diamonds. If his or her pockets are empty, the “fair price” should be equal to zero, as with free access to healthcare, education and justice, which are nevertheless only market services. 28. Here, the fair price takes on a moral definition. It is guaranteed by the State, which is there to protect the social pact that gives it legitimacy and to allocate public finances to this task, no matter how bad a state they are in. 29. The price, set unilaterally by a political authority, for example for electricity, gas, university fees, hospital stays etc., is a regulated price that comes under Public Law and is subject to discretionary authority. 30. Competition law sits beneath the distinction between Public and Private law, and competition authorities do not appreciate it when States use excuses in order to protect their own territory. This is true as regards the organisation of the public domain, public corporations etc. Administrative case law has skilfully limited this by including the full application of Competition Law and the prices practiced by public operators in the administrative courts’ jurisdiction.

25. Moreover, the market is not everything, in two respects. Firstly, the market can malfunction, either temporarily (e.g. because the State has just liberalised a sector and the continued existence of a very powerful historic operator renders

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The Journal of Regulation n° 1 - April 2010

WHAT IS A PRICE IN LAW? FROM CONTRACT LAW TO REGULATORY LAW Recommended citation: I-1.4

IV. REGULATED PRICES STEMMING FROM THE TRIANGLE BETWEEN LAW, THE ECONOMY AND POLITICS 31. We are probably in the process of overcoming the oppositions described above through the concept of “regulated prices”. If we take the above-mentioned example of natural monopolies for energy transportation or telecommunications, companies that wish to obtain access to these networks sign contracts with the network managers. The access price is not set ex ante by a regulation. Rather, it uses the civil model where price is set by a discussion between the two parties. However, the freedom not to contract no longer exists because the company wishing to transport or receive its energy or electronic signals has no alternative technical solution other than going through the network managers. 32. This is why lawmakers have organised a system for settling differences, another word for dispute resolution, a role given to the regulatory authorities. This has forced network managers to not only provide information but also to be “transparent” in order to allow the regulatory authority and the contracting party to assess whether the price is fair, i.e. economically founded in this context.

supervision, they merely set the boundaries of a contractual process on which they leave their mark through the principle of transparency. 36. In the years to come, contracts will be increasingly used to set the boundaries of acceptable individual and collective behaviour, particularly for prices. However, once we have the system, “more than a market” but without being “State dominated”, we will be in a regulated system where prices are set jointly between politicians, the market (as the objective and collective crystallisation of the contractual mechanism) and the economy (goods and the desire to own them). 37. Regulated prices evoke a technocratic vision of the world because regulatory authorities are at the heart of the system, which mitigates the major difficulty caused by the gradual disappearance of borders. In addition, the ideology of free goods and an end to property rights that is emerging on the Internet has not yet found a solid business model. However the concept of fair price, in the moral sense of the word, persists, and is the responsibility of public institutions. Marie-Anne FRISON-ROCHE

Professor Managing Editor and Director of the Journal of Regulation

33. In addition, the network manager’s budget is controlled by the regulatory authority and through that, so are the prices it practices. This is the object of discussion, and a balance is sought between the investments required, the risks to be prevented and what constitutes a reasonable margin. 34. Generally speaking, national and European legislation uses the expression “cost oriented pricing”, which in economic terms means nothing because cost control is practically impossible and, even if it were possible, we know that this is not a good solution because it pushes companies to increase their costs. 35. In a wiser approach, since regulatory authorities tend to behave like judges, (which may be because case law has imposed many procedures on how they act, such as respecting the rights of the defendant and the due process), regulatory authorities do not impose prices. Under the courts’

The Journal of Regulation n° 1 - April 2010

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REGULATING THE GAMBLING MARKET: QUALITY-BASED VERSUS PRICE-BASED COMPETITION Recommended citation: I-1.5

REGULATING THE GAMBLING MARKET: QUALITY-BASED VERSUS PRICE-BASED COMPETITION by Patrice Geoffron

Associate Director TERA Consultants Professor at the University of Paris Dauphine

I-1.5

n mid-2010, France will open market competition to online gambling and casinos. The market is opening as European law evolves and reacts to the growing number of illegal Internet sites. The ensuing new legal scope targets quality-based competition versus price-oriented competition, especially to contain addictive behaviours, and more specifically, money laundering. Concomitantly, the game market is creating new value chains, including media and telecommunications groups. In the short term, the historic players (Française des Jeux and PMU) are key players in the new landscape, with the long-term horizon pointing to major changes.

OPENING TO COMPETITION A SINGULAR MARKET By the summer of 2010, French legislation will have defined the guidelines to open competition for online games and betting. This is not the end of “just another” public monopoly. As underlined in the bill, “betting and games are neither an everyday business, nor everyday service”, falling under the aegis of “public law and order, public security and health protection” 1.

Negotiation and fine-tuning will have taken four years (defining the scope of games involved, tax laws, etc.,) to adopt a law accounting for the following specificities : • The market is only partially opening to competition, covering online horse-race betting, sports bets and poker. The law does not cover offline bets and games, lotteries or scratch cards (which remain under the aegis of the Française des Jeux-FdJ), and casino-based games other than poker (namely slot machines). • New entry players will receive a license, renewable for a five-year period, from the ARJEL (Regulatory Authority on Online Games, a recently created instance to this end). A licensed player of a European Union country will not automatically be accredited in France (French nationals playing on a non-French accredited site will be deemed as engaging in illegal play). In the same token, a French casino license holder is not automatically accredited for online gaming. • The payout rate, or players’ gains are limited to 80% -85%. Illegal sites currently post rates topping 90% (as do slot machines in casinos), while legally accredited sites (FdJ and PMU who have the monopoly) offer payout rates between 50% and 75%. • Taxes will be about 2% for poker, 8.5% for sports bets, and 15.5 % for horse-racing bets, with the amount of the bet serving as the basis for tax versus the payout.

Legislative kickoff dates back to 2003, when the CJCE (Court of Justice of the European Communities) believed that Italy had violated the principle of free circulation of services by prohibiting online bookmaking (the Gambelli decision). In 2006, the European Commissioner of the Internal Market and Services warned France (as well as Austria and Italy) that the sports betting market should be opened.

Project of bill, p.3.

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The Journal of Regulation n° 1 - April 2010

REGULATING THE GAMBLING MARKET: QUALITY-BASED VERSUS PRICE-BASED COMPETITION Recommended citation: I-1.5

Figure 1: Scope of gambling and betting games open to competition

technological transition. Anchored in fundamental and irreversible evolutions, new technologies seek to reduce costs and vary the game offer (namely by having players interact more with one another in poker games), more households now have the technology to play (computers, mobile phones …), and users are more proficient in using their mobile phones. Given this context, the regulatory monopoly status is not a pass/safety net for tomorrow, since the ensuing rent creates an economic area for new competitors (the payout rate for the FdJ and the PMU is low compared to the scrub sites). One of the legal objectives is to instill quality-based competition rather than price-based competition.

“Technology” is more likely the force pushing the opening, rather than the “European pressure”. Recently created instances, such as ARJEL and HADOPI, could pursue the same objective: setting up coherent regulatory instances to police traditional lines of business upset by the Internet and other electronic communication networks (namely the mobile phone). In France, the forces prying these markets open are linked to the Internet rather than European injunctions. Proof lies in the number of Google’s online gambling links. Excluding the FdJ and PMU sites, most sites are illegal (try playing from a French IP address). The online player is on the threshold of scrub comprising myriads of sites offering various quality levels and guarantees (namely those based in or outside the EU), to which the player is more often than not oblivious. By definition, revenues for an online game are difficult to estimate, but the FdJ underlines a 3 G€ figure representing an illegal online bet from a French-based site FdJ2. Current regulatory problems are not in line with public targets (especially in terms of controlling addictions). Technological evolutions are already pushing problems to the fore. Applied to online games this phenomenon epitomizes the classical

2 3

Since it will be impossible to entirely prohibit illegal sites3, the law pushes licensed players to use quality-based critieria as marketing rationale. This orientation stems from legal obligations (transparency, containing fraud and money laundering, reducing excessive gaming, etc.,). But just as fundamentally licensees will not be as competitive on a pricebasis compared to the illegal sites which are exempt from paying all types of taxes, or (most often) have no external pressure (as they are hosted in European zones which have low tax rates). Generally speaking, legal sites offer a payout rate which is at minimum less than 10% and based solely on price, legal sites would lose this war. The strategy, therefore, lies in building a brand to make players confident: sponsoring deals with sports’ companies or with specific media could be key to implement this strategy. Enhanced quality was perceived even before the law passed. In October 2008, the Nantes University Medical School inaugurated the first center of addiction for betting and games, partnering with the FdJ and PMU. Why didn’t the incumbents take this type of action earlier? Today, in light of the new market competition, their action appears as a means to further anchor the public’s perception of the FdJ and the PMU as responsible players.

www.francaisedesjeux.com/generated/media/PRESSE/presse_pdf_157.pdf Although illegal, up to 2 million German play online games.

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Recommended citation: I-1.5

This dimension is key since French authorities believe that online players will pay a 10% premium (linked to the more modest payout of licensed French players) for State certification, respect of specifications requested by licensees and the efforts sites make to provide quality services. The French are not compulsive players. As a game-playing nation, France is averagely intense: households dedicate 0.9% of their budgets, which is below the EU average, and lags behind countries like Finland (1.9%) or Spain (2%) and even the United Kingdom (1.2%)4. Although there is no average national figure, the French do not seem to be compulsive players (in line with the Germans at 0.8%). The current situation stems from sustained long term growth. In the beginning of the 1980’s, game playing raised an average 3% a year, exceeding average household growth (2%) (INSEE). Growth is linked to two key innovations. First, the creation of a National Lottery in 1976, and ensuing offshoots, include the Euro Million. Second, as of 1988, the progressive authorization of slot machines in casinos. Further, both the FdJ and the PMU have innovated: the FdJ launched new types of scratch cards or sports lotteries, while the PMU has diversified types of wagers. In 2008, wagers totaled 37 billion euros (50% for casinos and 25% for FdJ and PMU), bringing in 8.2 billion euros in gross revenues (2.5 billion euros for casinos, 3.5 billion euros for the FdJ and 2.5 billion euros for the PMU). A number of factors, however, show that the industry is losing wind, with no growth relays in sight. Since 2003, wager growth has grown less than spending on leisure, and according to INSEE is even stagnating under 10% (and has not been impacted by the economic crisis). Until now France’s traditional offline game offer has met players’ expectations, but the under-30 set will be more tempted by an online version, via a computer or mobile phone. It is also probable that the frontier between video

4 5

games and gambling will become fuzzier. So, redefining the rules for online gaming also means anticipating tomorrow’s gameplay. Today’s Internet offer may not suffice demand, and new Internet-based services may lead to higher household outlays, especially since the French market shows room for growth, and market competition will not lead to mere cannibalization (for either online or offline game offers). Looking forward to the medium term, the incumbents have the required assets to keep the ball in the market’s new segments. Indeed, market competition will not impact the offline core businesses of the FdJ or PMU, since the current sociological structure of their client base is mainly offline. More, since this client base is neither attracted by the Internet nor by mail-order, they are not likely to turn to online games when competition opens. Finally, popular games like lottery drawings are not included in the proposed law, so new market players will not be able to offer lottery games5. Another key advantage for the incumbents is that their offers have been online for a number of years (reaping highlevel wagers, totalling 5% of all bets placed with the FdJ and PMU). Both market players already have the required economic assets to develop an online offer which meets the legal scope in the new market competition. The PMU’s ambition is to move outside of its current field to sports bets (especially in light of the World Soccer Cup), while the FdJ is seeking to move into poker (via a partnership with the Barrière casino group). The situation is trickier for casinos, since the industry is already highly comepetitive and casinos can not provide the online offers that the FdJ and PMU provide. More, online poker is biting into the cake that casinos were eyeing to offset the erosion of their slot machines.

Besson D. (2005), In 25 years, the French have doubled the level of their wagers, Insee Première, n° 1016, Mai. Cf Annual reports reports of the FdJ and PMU.

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The Journal of Regulation n° 1 - April 2010

REGULATING THE GAMBLING MARKET: QUALITY-BASED VERSUS PRICE-BASED COMPETITION Recommended citation: I-1.5

Towards the redefinition the value chain.

European Union reorganizes the game industry.

While the first part of this brief focused on the retail market, the law has spawned an industrial reorganization. Technically speaking, analyzing the value chain underlines the differences between the physical network as a monopoly profiting the physical distribution network and the virtual network which includes : • Developers of landline and mobile handsets involved in the design and production of TV sets, set top boxes, mobile phones, TV over IP and game consoles. • Telecommunication operators, as they are a prerequisite to transfer content and games to a terminal. • The platform’s service offer enhances as software developers further the interface.

Given this backdrop, the reorganization of the French market as it opens to competition is the accomplishment of complex arbitrage...and will likely be difficult to implement. Organizing fair competition among market players with different interests and business scopes will be pivotal.

Value chain of physical and virtual networks

Another bone of contention will be how to allocate costs for the same concern, given that part of its business is run as a monopoly and another part is run as a competitive business. More, the legal climate is unstable. This reorganization also brings to light possible partnerships, between telecommunications operators and the media in the gaming arena. For both parties the appeal is strong. First, because of the wagers. Second, because game content drives traffic over networks and thus brings audiences (the number of shows dedicated to poker is proof enough). It is key to underline the platform’s strategic position, since it does not appear in the value chain of a physical game, yet it is the crux of the online game. Bet aggregators and client accounts are key players, as they link to various online poker sites, pushing the concentric rings farther out, and bring in bets and potential payouts (thereby underpinning network externalities). Aggregators are dividing up the pie: some are focusing on the wholesale business (Playtech, Ongame), while others do both retail and wholesale business (888). These aggregators are the game’s backbone and are well-positioned to reap the market’s most likely royal flush: poker6. Patrice GEOFFRON

CONCLUSION

Associate Director TERA Consultants Professor at the University of Paris Dauphine

he CJCE’s September 2009 decision, pitting the Portuguese soccer league and online game company Bwin opposite the Portuguese national lottery, Santa Casa (the decision upheld the national lottery’s decision), confirms that heterogeneity will continue to reign as the

MECN (2009), The French Gambling Market.

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II PART II.

THEMATIC REPORTS

THE LAW OF DECEMBER 8, 2009 ORGANISES THE REGULATION OF RAILWAY TRANSPORT AND ESTABLISHES A NEW REGULATORY AUTHORITY Recommended citation: II-1.1

THE LAW OF DECEMBER 8, 2009 ORGANISES THE REGULATION OF RAILWAY TRANSPORT AND ESTABLISHES A NEW REGULATORY AUTHORITY by Béatrice Parance, Senior Editor and Member of the Editorial Committee

II-1.1

MAIN INFORMATION

CONTEXT AND SUMMARY

he new Autorité de Régulation des Activités ferroviaires (ARAF- Railway Activities Regulatory Authority) has been implemented.

he principal goal of the Law of 8 December 2009 is to organise the regulation of the rail transport sector, which is currently opening up to competition and abandoning its formerly monopolistic structure. Indeed, rail freight transport has been open to competition since 31 March 2006, and international passenger rail transport, since January 2010. This law transposes the provisions of the European Community’s Third Railway Package, and was approved by the Conseil Constitutionnel (French Constitutional Council) in a decision dated 3 December 2009. Amongst its other provisions, the law regulates the ability of foreign truck operators to perform domestic road freight services, in order to limit the scope of their operations in France. Other provisions relate to the progressive liberalisation of urban transportation in the Paris region (Ile de France), which will be opened to competition in conformity with the European Regulation on Public Service Obligations. Bus services operated by the Régie autonome des transports parisiens (RATP, Paris City Transport Authority) will be opened to competition in 15 years; tramways, in 20 years; and metro lines, in 30 years. The law also modifies the rules for the management of metro and regional rail (RER) infrastructures, replacing existing provisions relating to the reimbursement of investments made by the RATP with provisions stem-

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ming from a former agreement on this subject between the RATP and the Syndicat des Transports d’Ile de France (STIF, Paris Regional Transport Union). Moreover, the law modifies existing standard transport agreements, providing that in the absence of a written agreement between the parties, international transport contracts will be automatically governed by standard agreements, subject to the application of mandatory provisions stemming from international treaties (the law completes Article 8 II of the Law laying down basic principles for government action in the field of domestic transportation, or Loi d’orientation sur les transports internes (LOTI) of 30 December 1982). It is within this framework that the law gives the following definition of “unreasonable error” (faute inexcusable) committed by a transporter: unreasonable error is deliberate negligence that implies the transporter had knowledge of the probability of damages and yet recklessly proceeded in the action without any valid reason for doing so. This notion, which has sparked an important debate in case law in recent years, is of capital importance, because it deprives the transporter of the benefit of contractual limits on compensation for damages caused to transported merchandise, as is the case in standard transport agreements. Finally, in order to optimize infrastructure management, and to promote the continuity and improvement of rural rail services, the RFF will have the ability to entrust management of low-traffic freight lines to regional rail operators. These regional operators will manage the infrastructures and will provide locomotion services on these lines, in order to optimize the allocation of technical and human resources. The development of proximity rail operators (opérateurs ferroviaires de proximité (OFP)) is an essential issue for the development of rail freight services. This law aims at organising an efficient system of regulation for this sector to allow non-discriminatory access to all operators. It creates an Independent Administrative Authority

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THE LAW OF FEBRUARY 9, 2010 TRANSFORMS STATE-OWNED LA POSTE INTO A PUBLIC LIMITED COMPANY AND EXPANDS ITS PUBLIC SERVICE OBLIGATIONS Recommended citation: II-2.1

called the Autorité de régulation des activités ferroviaires (ARAF - Railway Activities Regulatory Authority). This Authority will be composed of seven members, each nominated for six years, and will have broad investigatory powers, an auxiliary regulatory power, and a disciplinary power. The ARAF will have to be consulted on all legal propositions concerning railway transport, especially those concerning the schedule of tolls to be paid to the Réseau ferré de France (French Rail Network, or RFF, the public company that owns and maintains the rail network and railway stations) by rail operators for use of infrastructures, as well as the fare schedule for passenger lines operated under a monopoly.

BRIEF COMMENTARY

his is a major law for the railway sector, for it includes many provisions relating to the management of rail transportation and its infrastructures. The creation of a regulatory authority for this sector is a major step in its gradual move towards competition, mandated by European Union law. The goal of this reform is to maintain an equilibrium between the rights of passengers and those of new rail operators competing with the former monopolistic operator, as well as to optimise allocation of railway infrastructures in accordance with the sustainable development goals of national development programmes.

THE LAW OF FEBRUARY 9, 2010 TRANSFORMS STATE-OWNED LA POSTE* INTO A PUBLIC LIMITED COMPANY AND EXPANDS ITS PUBLIC SERVICE OBLIGATIONS by Marie-Anne Frison-Roche, Managing Editor and Director of the Journal of Regulation

II-2.1

MAIN INFORMATION

he Law of 9 February 2010 transforms the status of La Poste (the French Postal Service) into a Public Limited Company (Société Anonyme) from 1st March 2010 and organises postal activities, especially as relates to national and regional development programmes.

CONTEXT AND SUMMARY

he validation by the Conseil constitutionnel (French Constitutional Council) of Law n° 2010-123 of 9 February 2010 concerning the state-owned company La Poste (the French Postal Service) and postal activities, confirms the transformation of La Poste, previously a state-owned company, into a public limited company whose capital is 100% state-owned, on March 1, 2010. This change does not modify the nature of La Poste’s universal postal service obligations, but rather requires a modification of the status of the Public Limited Company in order

* The French Postal Service

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The Journal of Regulation n° 1 - April 2010

THE LAW OF FEBRUARY 9, 2010 TRANSFORMS STATE-OWNED LA POSTE INTO A PUBLIC LIMITED COMPANY AND EXPANDS ITS PUBLIC SERVICE OBLIGATIONS Recommended citation: II-2.1

to comply with the responsibilities of being the universal postal service provider. These responsibilities are, on one hand, (i) universal postal service, (ii) contribution to national and regional development, (iii) transport and distribution of newspapers and periodicals, (iv) accessible banking services, and on the other hand, collection, sorting, transport, and distribution of letters. Therefore, La Poste will benefit from derogation from certain provisions of the French Commercial Code relating to the status of Public Limited Companies, in order to enable compliance with the aforementioned responsibilities. The difficulty of the change in the status of La Poste crystallises around the issue of access to postal services, and of the cost engendered by responsibilities for national and regional development. The manner in which these costs will be subsidised is set out in Article 3 of the law. The maintenance of a national postal network is financed by a fund named Fonds postal de péréquation territoriale (Postal Network Subsidy Fund), managed by La Poste according to principles defined in a contract called contrat pluriannuel de la présence postale territoriale (pluriannual contract for continuous national postal service). This fund is to be financed by the local tax relief from which La Poste benefits, pursuant to the third indent of the second part of Article 1635 sexies of the French General Tax Code. Therefore, the Autorité de régulation des communications électroniques et des postes (ARCEP) will perform a yearly estimate of the additional cost incurred as a result of maintaining a universal postal network in accordance with La Poste’s responsibility for contributing to national and regional development. It will transmit a report to the Government and to the Parliament each year on the net cost of universal postal service maintenance, which will permit, if necessary, a reappraisal of the tax relief granted.

guarantee “every working day and not less than five days a week” at least “one clearance” and “one delivery to the home or premises of every natural or legal person” save under circumstances or geographical conditions deemed exceptional by the national regulatory authorities. Logically, La Poste was designated by the law n°99-533 of 25 June 1999 as the universal postal service provider in France and thereby “contributes to social cohesion and balanced national and regional development.” Universal postal service is to be provided in respect of “the principles of equality, continuity, and adaptability, while striving for the best economic and social efficiency. It ensures all users, anywhere in the country, permanent access to postal services complying with defined quality standards. These services are provided at reasonable prices for all users.” Thus, La Poste’s missions are not modified by this change of status, but it must be noted that, as a result, the missions of the Autorité de Régulation des Communications Electroniques et des Postes (ARCEP, French regulatory authority of the post and telecommunications) have been tacitly enlarged: a monitoring authority since its creation in 2001, the ARCEP’s powers now englobe national and regional development. However, the ARCEP is essentially an economic regulator, whereas national and regional development is an eminently political issue. Consequently, there might be a discrepancy between these new missions and the inherent nature of the ARCEP, initially created to foster undistorted competition in the postal services market. At the core of this system is a contract and taxation: the tools used by the State to negociate the fulfilment of its public interest objectives with La Poste. This ‘contractualisation’ of State intervention is perceived by some as a privatisation of the State, and by others as an efficient means of intervention.

BRIEF COMMENTARY

ursuant to the Postal Directive of 1997, universal postal service is defined as “the permanent provision of a postal service of specified quality at all points in their territory at affordable prices for all users.” Member States shall therefore take steps in order to ensure “the density of the points of contact and of the access points takes account of the needs of users,” and to take measures in order to

The Journal of Regulation n° 1 - April 2010

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A DECREE OF DECEMBER 23, 2009 DEGREE APPOINTS THE MEMBERS OF THE HADOPI’S COLLEGE AND OF THE COPYRIGHT PROTECTION COMMISSION Recommended citation: II-4.1

A DECREE OF DECEMBER 23, 2009 DEGREE APPOINTS THE MEMBERS OF THE HADOPI’S* COLLEGE AND OF THE COPYRIGHT PROTECTION COMMISSION by Béatrice Parance, Senior Editor and Member of the Editorial Committee

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MAIN INFORMATION

CONTEXT AND SUMMARY

omination of the members of the Haute autorité pour la diffusion d’oeuvres et la protection de droits sur Internet (Hadopi – High Authority for the Dissemination of Works and the Protection of Rights on the Internet).

he Act of June 12, 2009 to promote dissemination and protection of creative works on the Internet implemented a new independent administrative authority, the Haute autorité pour la diffusion d’œuvres et la protection des droits sur Internet (Hadopi—The High Authority for the Dissemination of Works and Copyright Protection on the Internet), which is why it was called the Hadopi I Act. This Authority will be composed of a College of 9 members, presided by Madame Marie-Françoise Marais, councillor to the Cour de Cassation (French Court of Cassation), and a Copyright Protection Commission, composed of 3 members.

to take action via court order against online copyright infringement on a public communication website. Moreover, the Act provides for a complementary penalty: the suspension of Internet access for a period of up to one year, and a ban on subscribing to another internet provider service during the suspension period. The Government has yet to publish Decrees relating to the manner in which the automatic email system will function, and which will define the procedure to be followed by the Authority. The Government has announced that Internet Service Providers would alone bear the cost related to the implementation of this Act. Links with other document in the same sector Cf. Thematic Report 4.2. on the legal implementation of the Hadopi.

In order to contain the phenomenon of the unauthorised sharing of files containing copyrighted works, this Authority is supposed to implement the idea of a three-strikes riposte system, which was finally promulgated by the Act of October 28, 2009, called the Hadopi II Act, which organises a system of simplified legal proceedings, allowing a single magistrate of a Tribunal correctionnel (a French court dealing with criminal issues, similar to a British Magistrate’s Court)

Haute Autorité pour la diffusion des œuvres et la protection des droits sur Internet (High Authority for the Dissemination of Works and the Protection of Rights on the Internet)

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The Journal of Regulation n° 1 - April 2010

THE ACT OF OCTOBER 28, 2009 (HADOPI II) ESTABLISHES CRIMINAL SANCTIONS FOR ONLINE COPYRIGHT INFRINGEMENT, TO BE ADMINISTERERED BY A REGULATORY AUTHORITY, THE HADOPI Recommended citation: II-4.2

THE ACT OF OCTOBER 28, 2009 (HADOPI II) ESTABLISHES CRIMINAL SANCTIONS FOR ONLINE COPYRIGHT INFRINGEMENT, TO BE ADMINISTERERED BY A REGULATORY AUTHORITY, THE HADOPI* by Béatrice Parance, Senior Editor and Member of the Editorial Committee

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D Act

MAIN INFORMATION efinitive ratification of the ’three-strikes’ riposte system concerning illegal downloading as part of the Hadopi II

CONTEXT AND SUMMARY

he Act of June 12th 2009 to promote dissemination and protection of creative works on the Internet, called the Hadopi I Act after the name of the new administrative authority it creates: La haute autorité pour la diffusion d’oeuvres et la protection de droits sur Internet – “Hadopi”, or the High Authority for the Dissemination of Works and Copyright Protection on the Internet, puts an end to the highly-mediatised parliamentary shilly-shallying on this issue. This law originated with Parliament’s desire to contain the phenomenon of the unauthorised sharing of files containing works protected by intellectual property laws. Parliament’s desire was first expressed through its bill named droit d’auteur et droits voisins dans la société de l’information (DADVSI—Copyright and Similar Rights in the Digital Society), which put forth the idea of a three-strikes riposte system (Act n° 2006-961 of August 1st 2006). Article 24 of this bill planned for the possibility of punishing the unauthorised reproduction for one’s personal use of a copyrighted work, interpretation, phonogram, video recording, or programme by a simple fine, when these works were made available through a peer-to-peer file-exchange system. But,

the Conseil Constitutionnel (French Constitutional Council) censured this law on the pretext that this disposition was contrary to the principle of equality before criminal sanctions, in that it implemented a difference in treatment between people who used peer-to-peer file-exchange services, and those who use other online communication services (section 65 of the Conseil Constitutionnel’s judgement). In order to pursue the goal of combating illegal file-sharing, the two houses of the French Parliament voted Act Hadopi I on May 13th 2009, which implemented the three-strikes system allowing the newly created Hadopi to cut off internet service to people who continued to illegally file-share, despite having received multiple warnings concerning the illegal nature of their activity. This bill was also judged unconstitutional by the Conseil constitutionnel in a June 10th, 2009 decision. The Conseil declared that the freedom of thought and opinion guaranteed by Article 11 of the 1789 Declaration of the Rights of Man and of the Citizen implies—due to the current state of various means of communication, and especially the generalised development of public online communication services, and their importance in allowing citizens to participate in democratic society and to express their ideas and opinions—that everyone must be free to access these services. Consequently, the Conseil decided that the new independent administrative authority implemented by the legislator could not cut off Internet access, and only a court of law could be allowed to pronounce such a penalty. This decision had major consequences, removing all criminal sanctions from the law. This scheme was therefore reworked by the Act of October 28th, 2009, called Act Hadopi II, which organises simplified legal proceedings for copyright infringement committed

Haute Autorité pour la diffusion des œuvres et la protection des droits sur Internet (High Authority for the Dissemination of Works and the Protection of Rights on the Internet)

The Journal of Regulation n° 1 - April 2010

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STATE AID: COMMISSION APPROVES THE SWEDISH EXPORT-CREDIT INSURANCE SCHEME Recommended citation: II-6.1

using an online communication service, i.e. a court order taken by a single magistrate of a Tribunal correctionnel (a French court dealing with criminal issues, similar to a British Magistrate’s Court). Moreover, the Act provides for a complementary penalty: the suspension of Internet access for a period of up to one year, and a ban on subscribing to another internet provider service during the suspension period. In a decision handed down on October 22, 2009, the Conseil constitutionnel approved these provisions, considering that the scale of online copyright infringement justified the simplified legal proceedings and the presence of a single magistrate, as long as these provisions did not create a difference in the treatment of people committing such acts. The Conseil constitutionnel only censured the provision allowing the criminal magistrate to decide by court order on the amount of damages requested by the plaintiff, because this must be decided by a separate Act of Parliament, and not by Decree.

BRIEF COMMENTARY

his law represents the outcome of a long Parliamentary saga which was as lengthy as it was difficult. This is an area where legal rules collide with the sheer scale of illegal downloading, which the public perceives as almost commonplace. Parliament therefore had to remind of the illegal nature of copyright violation on the internet. However, the judiciary implementation of the sanction provided for by this Act raises questions as to its efficacy. The future will allow us to serenely measure the efficacy of this scheme and, if need be, to revise the articulation of powers between the Administrative Authority and the judge. On this difficult question, other methods of action are possible, as we can observe in Spain, which has chosen to punish websites that facilitate illegal file sharing, rather than Internet users themselves. In a pilot study for a bill called “Economie durable” (Sustainable Economy), the “Commission de la propriété intellectuelle” (Intellectual Property Commisison), an entity within the Ministry of Culture, would refer such sites to the judiciary, which would be able to sanction them after having allowed them to express their point of view.

6: FINANCE, BANKING, AND INSURANCE STATE AID: THE EUROPEAN COMMISSION APPROVES THE SWEDISH EXPORT-CREDIT INSURANCE SCHEME by Marie Cullin, academic assistant

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he European Commission approves a Swedish export-credit insurance scheme until December 31st, 2010, in accordance with the Temporary Framework for State Aid Measures in the current financial and economic crisis

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CONTEXT AND SUMMARY

ursuant to the Temporary Framework of the European Commission for State aid measures, the European Commission authorised the Swedish export-credit insurance scheme, adopted in order to limit the adverse impact of the financial crisis on exports. According to Competition Commissioner Neelie Kroes, “The Swedish scheme provides exporting firms with the insurance cover they need and, at the same time, contains adequate safeguards to avoid

The Journal of Regulation n° 1 - April 2010

A BILL ON BANKING AND FINANCIAL REGULATION WAS REGISTERED WITH THE PRESIDENCY OF THE ASSEMBLÉE NATIONALE ON DECEMBER 16 2009. Recommended citation: II-6.2

the crowding-out of private companies from the credit insurance market”. The Swedish system will therefore provide companies established in Sweden with short-term export credit insurance, whenever these companies have not been able to find insurance coverage on the private market. The EC ascertained that such a system complies with the conditions set up in the Temporary Framework, especially the following criteria: (i) Sweden provided for sufficient proof that such a cover was unavailable on the private insurance market as a consequence of the financial crisis and (ii) the premiums charged by the Swedish government agency in charge of delivering the insurance coverage are in line with the premiums on the private market, and encourages exporting firms to use private insurers when such cover is available on the private market.

BRIEF COMMENTARY

he first conclusion that can be drawn from the decision of the EC is the reinforcement of the role of the State in a context of economic crisis. While

Competition Law is based on both a neutral conception of economic agents and a limitation of State intervention, the financial crisis has toppled these founding principles and opened the door to a new interpretation of competition, or more precisely, a new set of principles. Systemic risk and its potential consequences for the global economic system have therefore deeply shifted the appreciation of competition law, enabling States to regain power in diverse economic areas. A parallel can be drawn with the decision of the French Cour d’Appel (Court of Appeals) on the Steel Cartel that divided by 8 the fine ruled by the French Autorité de la Concurrence (Competition Authority). Although the decision indicates that Brussels would have levied a 1.5 to 1.8- fine on such a cartel, it does not believe that the French Finance Minister would decide to appeal its decision to the Cour de Cassation (French Court of Cassation). The reasons for these doubts are both the economic context currently facing companies, and the money that was granted by the State. Increasing fines on companies would increase fines on States that helped them, a reason that may influence the Finance Minister’s decision.

A BILL ON BANKING AND FINANCIAL REGULATION WAS REGISTERED WITH THE PRESIDENCY OF THE ASSEMBLÉE NATIONALE* ON DECEMBER 16 2009. by Marie Cullin, academic assistant

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French Bill on banking and Financial Regulation was registered with the Presidency of the “Assemblée Nationale” (the lower house of the French

Parliament, the National Assembly) on December 16th 2009, and plans for the creation of a council on financial regulation and systemic risk.

The Lower House of the French Parliament, the National Assembly

The Journal of Regulation n° 1 - April 2010

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Recommended citation: II-6.2

CONTEXT AND SUMMARY

his bill follows the G20 negotiations that took place in Pittsburgh, as well as the European Union initiative and the conclusions of the January 2009 Rapport Deletré (Deletré Report), which proposed the merger of the Commission bancaire (French Banking Commission), the Autorié de contrôle des assurances et des mutuelles (ACAM – French Insurance Company Supervision Authority), the Comité des entreprises d’assurances (CEA—Committee of Insurance Companies), and the Comité des établissements de credit et des entreprises d’investissement (CECEI – the Banking and Investment Firms Committee). Therefore, the outcome of this project is the creation of the Conseil de la régulation financière et du risque systématique (Financial Regulation and Systemic Risk Council), which will be in charge of advising the Finance Minister on preventing and managing systemic risk. This council would be composed of the Governor of the Banque de France (Bank of France), the President and Vice-President of the Autorité de contrôle prudentiel (The Prudential Control Authority), and the President or a representative of the Autorité des normes comptables (The Accounting Standards Authority). It would be presided by the Finance Minister, or his representative. Even though the new Council will be able to audition finance professionals, the major part of its mission will be coordinating sectorspecific regulation through the implementation of brainstorming and idea-sharing structures, which will be responsible for the following: (i) cooperation and information sharing

“

The choice to create this new council reveals the limits of hermetic sector-specific regulation to cope with systemic risk in the financial sector, especially since the true borders between the different branches of financial law are porous.

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between the participating institutions; (ii) a mission of surveillance and evaluation of the situation of financial markets and their systemic risks, as well as (iii) cooperation in elaborating international and European norms for the financial sector, on which the Conseil de la régulation financière et du risque systématique will be authorised to make any comment or publish any opinion it deems necessary.

BRIEF COMMENTARY

his major Parliamentary project has three major implications. The choice to create this new council reveals the limits of hermetic sector-specific regulation to cope with systemic risk in the financial sector, especially since the true borders between the different branches of financial law are porous. Without going so far as to reconsider the dualist structure of French financial regulation, the bill proposes a practical way to increase discussion between different regulators, by setting up an institutionalised forum for discussion, which should allow for a more global understanding of issues facing the financial sector. Secondly, this bill reflects the European Union’s role in managing the subprime crisis, and in defining the way to get out of it. Many propositions in the bill come from European Directives, like the implementation of a registration and supervisory system for credit rating agencies, with which this bill would entrust the Autorité des marchés financiers (AMF – French Financial Markets Authority). It also includes other propositions set forth by the European Union, such as the creation of a European system of supervision and control of the financial sector, and hedge fund regulation. Lastly, the bill shows the growing tendency towards more government intervention in the financial sector: it unabashedly combines politics and regulation by making the Finance Minister the President of this new Council that is supposed to advise him or her. However, we must highlight the strength of this new Council’s informal power, which is a result of the force of its regulators: the principle of coherency that guides their action.

The Journal of Regulation n° 1 - April 2010

THE AUTORITÉ DES MARCHÉS FINANCIERS APPROVES THE CODE OF DEONTOLOGY FOR ASSET MANAGEMENT, APRIL 28 AND DECEMBER 15 2009 Recommended citation: II-6.3

THE AUTORITÉ DES MARCHÉS FINANCIERS* APPROVES THE CODE OF DEONTOLOGY FOR ASSET MANAGEMENT, APRIL 28 AND DECEMBER 15 2009 by Marie Cullin, academic assistant

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MAIN INFORMATION

he Autorité des Marchés Financiers (AMF - French Financial Markets Authority) approves the “Provisions” section of the Code of Good Practice published by the Association française de la gestion financière (AFG - French Asset Management Association).

CONTEXT AND SUMMARY

ince 1990 and the first codes of good practice published by the Association Française de la Gestion Financière (French Asset Management Association – AFG), asset management professionals have played a major role in defining the rules of good practice. Indeed, every AFG member must comply with the good practice rules applying to its business. In this regard, two board meetings of the AMF unified the rules applying to the asset management industry. The first step of this harmonisation was the meeting of April 28th, 2009, during which the AMF approved the good practice provisions of the Code prepared by the AFG. These new professional standards were extended on a second meeting on December 15th, 2009. After having collected the opinion of the industry’s professional associations, that is to say the Association Française des Etablissements de Crédit et des Entreprises d’Investissement (French Association of Banks and Investment Firms – AFECEI), the Board decided that the provisions of this Code will apply to non-AFG asset management firms and to other investment services providers offering portfolio management services for third parties.

We can see in this decision, taken by the financial markets regulator, the normative power of the code of good practice adopted by private bodies. But even if this sort of code is created to comply with financial regulatory legislation, such as the Sarbanes-Oxley Law; there are limitations on their applications due to the limits applied by Personal Data Protection legislation. See in this way Sectorial reports 11-1 and 11-3.

BRIEF COMMENTARY

he decisions of the AMF Board illustrate the increasing collaboration between regulators and professionals in the lawmaking process. Three remarks can be made on this specific process. First, it reveals the ever more technical nature of regulated areas. Regulation therefore requires precise knowledge of both the economic and legal rules applying to the area concerned, and the goals and expectations of the sector’s actors and users. It therefore means that regulators have major powers in the implementation and the formation of public policy in major economic areas such as financial markets, energy, etc. However, the trend is towards involving professionals in the lawmaking process, in order to benefit from a better understanding of the issues at stake, and also to facilitate compliance with the rules. In this regard, it must be recalled that article 314-2 of the AMF’s General Regulations stipulates that professional organisations can draw up a code of conduct, thus contributing to self-regulation of the industry. Each code has to be officially approved by the AMF. Pursuant to this monitoring power, the AMF ensures that these private rules are compatible with its General Regulation. Following this official approval, violations of these private professional standards may be sanctioned by the AMF. Such a process bears witness to

French Financial Markets Authority (AMF)

The Journal of Regulation n° 1 - April 2010

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A GUIDEBOOK ON PREPARING REGISTRATION DOCUMENTS FOR LISTED SECURITIES HAS BEEN PUBLISHED BY THE AUTORITÉ DES MARCHÉS FINANCIERS Recommended citation: II-6.4

an inversion of the lawmaking process, where rules originate from professionals before being confirmed and made binding by the AMF. However, this system reveals that pro-

fessionals still need the legitimacy of the AMF in order to appear credible before the market and investors.

A GUIDEBOOK ON PREPARING REGISTRATION DOCUMENTS FOR LISTED SECURITIES HAS BEEN PUBLISHED BY THE AUTORITÉ DES MARCHÉS FINANCIERS* by Marie Cullin, academic assistant

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MAIN INFORMATION

CONTEXT AND SUMMARY

he Autorité des Marchés Financiers (French Financial Markets Authority) published a guidebook on the information to be provided in listed securities’ registration documents.

he guidebook prepared by the AMF sets out the regulator’s policies on information to be provided by listed companies in their registration documents. New recommendations have been given and three sections of the guide have updated. Registration documents should therefore provide the following information: (i) a presentation of risk factors, (ii) a description of major businesses and markets and (iii) a description of the structure of capital ownership. The goal of this update is both to help listed companies understand the AMF’s expectations on the new regulations, and to facilitate compliance with the new rules. Information presented under certain headings has been clarified and a FAQ dealing with practical issues is also provided in order to respond to the most frequent queries raised by companies regarding the preparation of registration documents.

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BRIEF COMMENTARY

here is no doubt that such a guidebook may help listed companies comply with the rules handed down by the AMF, but issuing such documents raises questions concerning their legal value. Will companies have to comply with these recommendations even though they are not legally binding? The AMF guidebook is indeed a recollection of the regulator’s policies, which are normally not legally binding or sanctioned. However, when a regulator publishes his ideological position, there is a strong implication that if companies follow such positions, they will not be legally punished. Therefore, the point is to know whether non-compliance with these recommendations will be punished. If this be the case, it means that the AMF is using soft law in order to surpass its statutory powers. Because both judges and corporations are subject to this sort of soft law, and take it increasingly into account, can one really question the legal value of these guidebooks, as well as their legitimacy?

The Journal of Regulation n° 1 - April 2010

A SEPTEMBER 16, 2009 DIRECTIVE OF THE EUROPEAN PARLIAMENT AND COUNCIL SETS COMMUNITY-WIDE RULES FOR THE TAKING-UP, PURSUIT, AND PRUDENTIAL SUPERVISION OF THE BUSINESS OF ELECTRONIC MONEY INSTITUTIONS Recommended citation: II-6.5

A SEPTEMBER 16, 2009 DIRECTIVE OF THE EUROPEAN PARLIAMENT AND COUNCIL* SETS COMMUNITY-WIDE RULES FOR THE TAKING-UP, PURSUIT, AND PRUDENTIAL SUPERVISION OF THE BUSINESS OF ELECTRONIC MONEY INSTITUTIONS by Margot Sève, member of the editorial committee

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MAIN INFORMATION

he European Directive of September 16th 2009 introduces a clear definition of electronic money and establishes a new prudential supervisory regime of the business of electronic money institutions.

CONTEXT AND SUMMARY

n September 2009 was adopted a new directive (Dir. 2009/110/CE of the European Parliament and Council) aiming for the removal of barriers to market entry and facilitating the taking up and pursuit of the business of electronic money issuance. The Rules to which electronic money institutions were subject needed indeed to be reviewed so as to ensure a level playing field for all payment services providers. The 2009 Directive repeals the 2000/46/CE directive of September 18th 2000 on the taking up, pursuit of and prudential supervision of the business of electronic money institutions. The 2000 Directive had been adopted in response to the emergence of new pre-paid electronic payment products, and was intended to create a clear legal framework designed to strengthen the internal market while ensuring an adequate level of prudential supervision. However, in its review of Directive 2000/46/EC, the Commission highlighted the need to revise that Directive, since some of its provisions were considered to have hindered the emergence of a true single market for electronic money services and the development of such user-friendly services. The new 2009 Directive introduces a clear definition of electronic money in order make it technically neutral. That definition covers all situations where the payment ser-

vice provider issues a pre-paid stored value in exchange for funds, which can be used for payment purposes because it is accepted by third persons as a payment. Article 2 states that e-money means “electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions (…) and which is accepted by a natural or legal person other than the electronic money issuer Regarding the prudential supervisory regime for electronic money institutions, it is reviewed and aligned more closely with risks faced by those institutions. That regime is thought to implement more coherence between the many requirements that payment institutions are subject to. Indeed, it aims at being coherent with the prudential supervisory regime applying to payment institutions implemented by Directive 2007/64/EC. In this respect, the relevant provisions of Directive 2007/64/EC (regarding in particular member states’ competent regulatory authorities and conditions for granting and maintaining authorization as electronic money institutions) should apply mutatis mutandis to electronic money institutions. E-money institutions may have, in addition to issuing electronic money, other activities, such as the granting of consumer credit, or operation of payment systems. These business activities other than issuance of e-money are subject to new requirements in terms of capital guarantees, in accordance with article 9 of Directive 2007/64/EC (on payment services in the internal market). These provisions include requirements on low-risk assets, and on the capital adequacy of investment firms and credit institutions for which specific risk capital charge is no higher than 1.6%. Moreover, member states shall prevent the same equity capital from being used multiple times when the electronic money institution belongs to the same group as another electronic money institution, a credit institution, a payment institution, an investment firm, an asset mana-

Directive 2009/110/EC amending directive 2005/60/EC and 2006/48/EC and repealing directive 2000/46/EC

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THE BASEL COMMITTEE ON BANKING SUPERVISION: INTERNATIONAL FRAMEWORK FOR LIQUIDITY RISK MEASUREMENT, STANDARDS AND MONITORING - CONSULTATIVE DOCUMENT (ISSUED FOR COMMENT AS OF APRIL 16, 2010), DATED DECEMBER 2009 Article II-6.5

gement firm, or an insurance or reinsurance firm. The new Directive also implements a regime for initial capital, combined with one for ongoing capital, to ensure an appropriate level of consumer protection and the sound and prudent operation of electronic money institutions. Member States shall require electronic money institutions to possess, at the time of authorization, an initial capital of not less than 350 000€ (it used to be €1 million). Finally, new obligations on redeemability are put on e-money issuers. Indeed, Member States shall ensure that electronic money be redeemable for cash money, upon request by the bearer of electronic money, at any moment and at face value. When redemption is requested before the termination of the contract, the electronic money holder may request redemption of the emoney in whole or in part. Member States shall adopt and

publish, no later than 30 April 2011, the laws, regulations and administrative provisions necessary to comply with the Directive.

BRIEF COMMENTARY

his directive established at the Community Level establishes a coherent legal framework for payment services, in order to maintain consumer freedom. This legal framework ensures the coordination of national provisions on prudential requirements, the access of new payment service providers to the market, information requirements, and the respective rights and obligations of payment services users and providers.

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CONTEXT AND SUMMARY

he Basel Committee on Banking Supervision approved a package of new proposals to strengthen global capital and liquidity regulations for consultation, as part of its comprehensive response to the international financial crisis.

fter its oversight body, the Group of Central Bank Governors and Heads of Supervision, had met on 6 September 2009, the Basel Committee on

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Banking Supervision (BCBS) strove to create a renewed, comprehensive set of measures to strengthen the regulation, supervision and risk management and set the new standards for banking regulation and supervision at the global level. As stated by Mr. Nout Wellink, Chairman of the Basel Committee, and President of the Netherlands Bank, the BCBS is “working toward the introduction of a macroprudential overlay which includes a countercyclical capital buffer, as well as practical steps to address the risks arising from systemic, interconnected banks”. To cope with the market failures revealed by the ongoing financial crisis, the BCBS has proposed a number of fundamental reforms to strengthen microprudential bank regulation, which will help raise the resilience of individual banking institutions to periods of stress. On the macroprudential

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side, the BCBS aims to address system-wide risks that can build up across the banking sector as well as their procyclical effect. Key elements of the proposals the Committee is issuing for consultation in its Consultative Document ‘Strengthening the Resilience of the Banking Sector’ of December 2009 may be summarized as follows: 1. To enable banks to absorb losses on a going concern basis, the Committee has announced for consultation a series of measures to raise the quality, consistency, and transparency of the regulatory capital base. In particular, it has urged for strengthening that component of the Core (‘Tier 1’) capital base which is fully available to absorb losses on a going concern basis, thus contributing to a reduction of systemic risk coming from the banking sector. 2. Secondly, the Committee has proposed strengthening of the risk coverage of the capital framework. In addition to the trading book and securitisation reforms announced in July 2009, the Committee is now proposing stronger capital requirements for counterparty credit risk exposures arising from derivatives, repos, collateral management and securities financing activities. Similarly to what had been introduced for market risks, this will address concerns about capital charges becoming too low during periods of compressed market volatility, helping to address procyclicality and promoting more integrated management of market and counterparty credit risk. 3. Third, the Committee is promoting an internationally harmonised leverage ratio, as a supplementary measure to the Basel II risk-based framework, as well as additional safeguards against attempts to mitigate risk based requirements. The ratio shall be calibrated so that it serves as a credible supplementary measure to the risk based requirements. 4. Fourth, the Committee aims to introduce several measures to promote the building up of capital buffers in good times that can be used in periods of stress, as well as provisioning based on expected losses, which would capture actual losses more transparently and less procyclically, as compared to the current ‘incurred loss’ provisioning model. The new framework would address the following measures in a more detailed way: cyclicality of the minimum requirement, forward-looking provisioning, capital conservation and excess credit growth. These four measures are desi-

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gned to complement each other. For example, forward looking provisioning focus on strengthening the banking system against expected losses, while the capital measures focus on unexpected losses. 5. Fifth, the Committee is introducing a global minimum liquidity standard for internationally active banks and a set of monitoring metrics to assist supervisors in identifying and analysing liquidity risk trends at both the bank and system wide level. These standards and monitoring metrics complement the Committee’s ‘Principles for Sound Liquidity Risk Management and Supervision’ issued in September 2008, and are elaborated in Committee’s second Consultative Document ‘International Framework for Liquidity Risk Measurement, Standards and Monitoring’ that deserves our attention. This Document’s main idea is that a strong liquidity base reinforced through robust supervisory standards is a necessary supplement to capital requirements, which by themselves are not sufficient. Due to the fact that, to date, there are no internationally harmonised standards in this area, the Committee is fleshing out its liquidity standards to promote an international level playing field to prevent a competitive race to the bottom. This document is organised as follows: After an Introductory part explaining rationales for a new Framework, Section II ‘Regulatory Standards’ discusses the two measures of liquidity risk exposure to achieve two separate but complementary objectives. The first objective is to promote short-term resiliency of the liquidity risk profile of institutions by ensuring that they have sufficient, high-quality, and liquid resources to survive an acute stress scenario lasting 30 days. The Committee developed the Liquidity Coverage Ratio which identifies the amount of unencumbered, high-quality, liquid assets an institution holds that can be used to offset the net cash outflows it would encounter due to an acute short-term stress scenario specified by supervisors. The second objective is to promote resiliency over longer-term horizons by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing structural basis. With regards to this, a longer-term structural ratio, the Net Stable Funding Ratio, has been developed to capture structural issues related to funding choices, measuring the amount of longerterm, stable sources of funding used by a bank, relative to the liquidity profiles of the assets funded. It would be used

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Recommended citation: II-6.6

to address liquidity mismatches and provide incentives for banks to use stable sources to fund their activities. Section III presents a set of common monitoring tools to be used by supervisors in their monitoring of liquidity risks at individual institutions. As a survey of Basel Committee members conducted in early 2009 identified that more than 25 different measures and concepts are globally used, to introduce more uniformity, the Committee has developed a set of common metrics that should be considered as the minimum types of information which supervisors should use in monitoring the liquidity risk profiles of supervised entities. The following was identified in the Consultative Document: 1. Contractual maturity mismatch – which provides an initial, simple baseline of contractual commitments and is useful in comparing liquidity risk profiles across institutions; 2. Concentration of funding – involving an analysis of concentrations of wholesale funding provided by specific counterparties, instruments and currencies, to assist supervisors in assessing the extent to which funding liquidity risks could occur in the event that one or more of the funding sources are withdrawn; 3. Available unencumbered assets: relating to the amount of unencumbered assets a bank has, which could potentially be used as collateral for secured funding, indicating the capacity of a bank to raise additional secured funds; 4. Market-related monitoring tools: useful proposed data includes monitoring market-wide data on asset prices and liquidity, institution-related information such as credit default swap (CDS) spreads and equity prices, and additional institution specific information related to the ability of the institution to fund itself in various wholesale funding markets. Section IV of this Consultative Document discusses application issues for the standards and monitoring tools, including the frequency with which banks calculate and report the metrics, the scope of application of the metrics and the amount of public disclosure for both standards and monitoring tools. The Basel Committee on Banking Supervision is currently initiating a comprehensive impact assessment of the proposed enhancements of its global capital requirements and the new liquidity standard to ensure that the new standards introduce greater resiliency of individual banks and the banking sector to periods of stress. Based on this analysis, the

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Committee will issue a comprehensive set of proposals on all elements discussed in these consultative documents by the end of 2010. Links with other documents in the same sector Basel Committee on Banking Supervision: International Convergence of Capital Measurement and Capital Standards: A Revised Framework Comprehensive Version, June 2006. Basel Committee on Banking Supervision: Principles for Sound Liquidity Risk Management and Supervision, September 2008. Basel Committee on Banking Supervision – Enhancements to the Basel II Framework, July 2009. Basel Committee on Banking Supervision: Guidelines for Computing Capital Incrementing Risks in the Trading Book, July 2009. Basel Committee on Banking Supervision: Revisions to the Basel II Market Risk Framework, July 2009. Basel Committee on Banking Supervision: Revisions to the Basel II Market Risk Framework, July 2009. G20: Declaration on Strengthening the Financial System, London Summit, 2 April 2009. G20: Enhancing Sound Regulation and Strengthening Transparency, Final Report, March 25, 2009.

BRIEF COMMENTARY

he Basel Committee on Banking Supervision (BCBS), as a forum for regular cooperation on banking supervisory matters which seeks promote and strengthen supervisory and risk management practices globally, has broadened its membership in June 2009, by including five new member representatives in its Governing body. In the following month, the BCBS issued several important documents aimed at enhancing the Basel II Framework, such as the Guidelines for Computing Capital Incrementing Risks, Revisions to the Market Risk Framework etc, which will come into effect at the end of 2010. These proposals were a part of the Committee’s broader programme to strengthen the regulatory capital framework, notably by promoting the build-up of capital buffers, strengthen the quality of bank ca-

The Journal of Regulation n° 1 - April 2010

pital and introducing a leverage ratio as a backstop to Basel II. Addressing the lessons of the existing financial crisis, the objective of this reform package open to consultation until 16 April 2010 is to improve the banking sector’s resiliency to shocks arising from whatever financial and economic stress, with the main goal to reduce the risk of spill over into the real economy. Through this reform package, the BCBS also aims to improve risk management and governance of banks, as well as banks’ transparency and resolution of systemically significant cross-border banks, adding to the global initiative to strengthen the financial regulatory system as endorsed by the Financial Stability Board and the G20 Group Leaders. The Basel Committee aims at raising the resilience of the banking sector by strengthening the regulatory capital framework, notably the quality of the capital base and risk coverage, but does not limit itself to capital. Throughout the global existing financial crisis, unprecedented levels of liquidity support were required from central banks in order to sustain the financial system and even with such extensive support, a number of banks failed, were forced into mergers or required resolution. Liquidity risk and its management did not receive the same attention and priority as other risk areas. The fact that one of the main reasons for the severity of the existing crisis was excessive on- and offbalance sheet leverage and a gradual erosion of the capital base backed by insufficient liquidity buffers, urged the BCBS to underpin capital standards by a leverage ratio intended to contain excess leverage in the banking system. The crisis was amplified by a procyclical deleveraging process and by the interconnectedness of systemic institutions through an array of complex financial transactions. To face this problem, the BCBS is proposing a number of macroprudential elements into the capital framework to address systemic risk arising from procyclical trends and interconnectedness of financial institutions. These measures against procyclicality should, hopefully, ensure that the banking sector serves as a shock absorber for risks in the financial system and in the broader economy, rather than a vector of risk. Policy options to ensure banks were subject to regulatory requirements that reflected the risks they represent for the financial system and the real economy were underdeveloped prior to the crisis.

to the stability of the financial system and the real economy, and reviewing policy options to reduce the probability and impact of failure of systemically important banks. It is evaluating the pros and cons of a capital surcharge for systemically important banks. It is also considering a liquidity surcharge and other supervisory tools as other possible policy options. Among key measures, BSBC members reached agreement on several important points: raising the quality, consistency and transparency of the core capital base, common principles of capital deduction and the full disclosure of capital base; introduction of the leverage ratio as a supplementary measure to the Basel II risk-based framework which will be harmonised internationally, fully adjusting for differences in accounting; measures that will represent the minimum global standard for funding liquidity and measures for countercyclical capital buffers. After the BCBS publishes the outcome of its comprehensive impact assessment of the aforementioned enhancements to its adopted and proposed standards, we may expect a comprehensive set of proposals on all important elements by the end of 2010.

The Committee is therefore developing practical approaches to assist supervisors in measuring the importance of banks

The Journal of Regulation n° 1 - April 2010

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THE ORDINANCE OF JANUARY 21, 2010 MERGES THE REGULATORY AUTHORITIES FOR THE BANKING AND INSURANCE SECTORS Recommended citation: II-6.7

THE ORDINANCE OF JANUARY 21, 2010 MERGES THE REGULATORY AUTHORITIES FOR THE BANKING AND INSURANCE SECTORS by Marie Cullin, academic assistant

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MAIN INFORMATION

rdinance n° 2010-76 of 21 January 2010 establishes a new independent administrative authority designated as the Autorité de contrôle prudentiel (Prudential Control Authority), resulting from the merger of the approval and monitoring authorities of the banking and insurance sectors.

CONTEXT AND SUMMARY

ollowing the conclusions of the General Finance Inspectorate advising a merger of the monitoring authorities for banks and insurance companies, Ordinance n° 2010-76 of 21 January 2010 establishes a new monitoring authority designated as the Autorité de contrôle prudentiel (Prudential Control Authority) in charge of ensuring (i) consumer protection, (ii) financial stability at a national and European scale, and (iii) French influence on international negotiations on the reform of financial regulation. The establishment of the Autorité de contrôle prudentiel thus leads to an in-depth modification of the face of financial and banking regulations. Previously, four authorities coexisted: (i) The Commission bancaire (Banking Commission) in charge of (i) controlling the compliance of credit establishments and investment companies with applicable provisions and (ii) sanctioning any misconducts; (ii) The Autorité de contrôle des assurances et des mutuelles (Insurance Companies Monitoring Authority), whose main function is to ensure the prudential control of insurance companies. It was granted the power to make recommendations, to take conservatory measures, and, in case of emergency, to take recovery measures and to pronounce sanctions if necessary. (iii) The Comité des Etablissements de crédit et des en-

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treprises d’investissement (Credit Establishments and Investment Companies Committee), (charged with making decisions and granting authorisations or individual derogations according to the terms of the regulatory and legal provisions applying to credit establishments and investment companies, except in cases where the Commission Bancaire is competent, (iv) The Comité des entreprises d’assurance (Insurance Companies Committee), which grants authorisations to insurance companies except in cases where the Autorité de Contrôle des assurances et des mutuelles is competent. These four authorities have been merged into a single, new independent administrative authority (Article 1 of the Ordinance of 21 January 2010) without legal personality, in charge of verifying proper application of rules applicable to the banking and insurance sectors. In order to fulfil this mission, the Prudential Control Authority has not been granted a regultatory power but rather (i) monitoring and administrative police powers, which will be exercised by the College and (ii) a disciplinary power, assigned to the Sanctions Commission. These powers are limited by the principles derived from Article 6 of the European Convention of Human Rights (ECHR) relating to the fair trial, including the respect of the adversarial trial, transparency, and the presumption of innocence. Consequently, not only shall monitoring reports be established in a contradictory and transparent manner, but also prosecution and judgements are performed by two separate entities within the Authority. Moreover, any decision handed down by the Sanctions Commission can be subject to an appeal before the Conseil d’Etat (State Council) made either by the sanctioned party or the President of the Authority within two months following the decision’s notification. The establishment of the Autorité de contrôle prudentiel also aims at reinforcing monitoring of consumer financial products. Therefore, a structured collaboration between the Authority and the Autorité des Marchés Financiers has been established. It involves a “ common pool” (Article 1 of

The Journal of Regulation n° 1 - April 2010

THE ORDINANCE OF JANUARY 21, 2010 MERGES THE REGULATORY AUTHORITIES FOR THE BANKING AND INSURANCE SECTORS Recommended citation: II-6.7

the Ordinance of 21 January 2010) in charge of monitoring changes in financial products, ensuring common supervision of financial products advertising, and implementing a single help-desk for all questions concerning consumer financial products.

regulation is naturally linked to sectors and markets, it does not concern itself with corporations, governance, internal control and ratios… In the future, one of the major issues at stake shall certainly be to find the best articulation between the prudential and the regulatory approach.

Links with other documents in the same sector See Sectorial Report II-6.11 on the implementation of “risk departments” within financial and credit establishments. This requirement for a risk department was stated by ministerial order on 19 January 2010 for financial operators, is the interface within these corporations for the institutional modification of the regulator, and bears witness to the larger consideration given to prudential control in the organisation of regulation.

The Prudential Control Authority offers a basis to these promises for better interregulation. On one hand, the merger of the banking and insurance authorities, and their reinforced collaboration with the Autorité des Marchés Financiers offers a possibility to overcome a sectorial approach and to systemically conceive regulation. On the other hand, this approach favours dialogue between the different branches of the financial area lato sensu, and achieving a common response that takes into account the special risks affecting each sector.

BRIEF COMMENTARY

he Ordinance of 21 January 2010 results in an indepth modification of the previous regulatory system, for it merges the four previous insurance and banking authorities into the new Autorité de contrôle prudentiel (Prudential Control Authority). This new, single authority is a perfect illustration of the subprime crisis’ major consequences for regulation: the development of macroprudential regulation. The subprime crisis indeed highlighted the interconnections between the financial, banking and insurance sectors and highlighted the necessity of reshaping regulation in order provide a coherent response to financial issues. However, it must be emphasized that the merger did not include the Autorité des Marchés Financiers (the Financial Markets Authority). Parliament preserved the independence of the Autorité des Marchés Financiers and preferred an active collaboration through the concept of a ’common pool’, rather than a complete merger. This corresponds to the well-tried scheme of regulator networks.

It should finally be underlined that the Ordinance includes financial stability at the European level among the missions of the Prudential Control Authority. Macroprudential regulation therefore illustrates the scope of a systemic conception, where the financial sector has no borders. The European Union thus offers a favourable field for common action in order to prevent correlated risks. The problem may however be that the financial market is larger than the European Union, for it is a global market. In this regard, American banking and financial regulation schemes are built on very different bases than in Europe. For instance, American regulation uses direct and frontal intervention in banking and insurance companies, regulating their size and business. This fundamental difference within Western markets, whose business is naturally unified, is a major regulatory issue.

Therefore, in opposition to the microprudential conception that is concerned with the individual institutional default risk, a macroprudential approach that aims at limiting the systemic risk affecting the whole financial sector is today favoured. Nevertheless, the prudential perspective and the regulatory approach are not the same, for the former favours internal risks affecting actors, whereas the latter focuses on external risks proper to the markets, and that because

The Journal of Regulation n° 1 - April 2010

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TWO DECISIONS BY THE EUROPEAN UNION’S GENERAL COURT JEOPARDISE THE EUROPEAN EMISSION TRADING SCHEME Recommended citation: II-10.1

TWO DECISIONS BY THE EUROPEAN UNION’S GENERAL COURT* JEOPARDISE THE EUROPEAN EMISSION TRADING SCHEME by Béatrice Parance, Senior Editor and Member of the Editorial Committee

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MAIN INFORMATION

CONTEXT AND SUMMARY

wo judgments of the General Court of the ECJ challenge the greenhouse gas emissions allowances trading system within the European market.

n October 13, 2003 European Directive implemented an EuropeanUnion-wide greenhouse gas emissions quota exchange system, in order to promote the reduction of greenhouse gasses in the European Community in an economically efficient and effective manner. The Directive instructs each Member State to elaborate five-year national greenhouse gas emissions plans, which determine the total quantity of quotas granted and the way they will be allocated to different national economic operators. Following this, an EUwide exchange system was organized to function according to the principles of supply and demand. National plans were supposed to satisfy the criteria provided by Directive’s 3rd appendix, and were supposed to limit emissions in conformity with the April 25, 2002 decision of the European Council approving the Kyoto Protocol and its various engagements. The Commission is to be notified of such plans, and can reject them, partially or entirely, insofar as they are incompatible with the Directive’s third appendix. A May 4, 2007 decision by the Commission rejected a part of the plan submitted by the Republic of Estonia and by Poland for the 2008-2012 period, imposing a 47.8% reduction on the emissions quotas proposed by the Estonian

plan, and a 27% reduction on those proposed by the Polish plan. However, two judgments handed down on September 23, 2009, the General Court of the European Communities has cancelled this decision, rebuking the Commission for exceeding the limits of its supervisory power by determining a quota ceiling and judging any plans that surpass that ceiling incompatible with the criteria of the Directive—a policy tantamount to an usurpation of Member States’ authority by the Commission. Moreover, the General Court judges that the Commission did not justify its rejection of the detailed facts and figures provided by these States to justify their plans, which does not leave them any margin of manoeuvre in implementing the Directive.

BRIEF COMMENTARY

hese judgments have considerable reach, and in two ways. First of all, they are a reminder of the border between the European Commission’s powers and the powers of Member States: the Commission cannot take the place of Member States in fixing or calculating quota limits. Because of this, EU Judges, once again, protect States from the European Commission’s tendency to usurp their powers in regulating various markets. Secondly, it is not clear that Member States, free to exercise their power, will make good use of it: we have observed an augmentation in the number of quotas and consequently a drop in their price. Therefore, quota prices have gone down by 4%, to 13.20 Euros per tonne. Beyond the immediate economic effects of these decisions, they jeopardise the very existence of a market based upon the strict limitation of greenhouse gasses. If quota ceilings are raised in many countries, the huge supply of quotas will cause a long-term price drop. This decision has been appealed to the European Court of

Decision by the General Court, 23 Sept. 2000, T 263/07

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The Journal of Regulation n° 1 - April 2010

THE CONSEIL CONSTITUTIONNEL PUBLISHES A DECEMBER 29, 2009 DECISION ON THE 2010 FINANCE ACT Recommended citation: II-10.2

Justice, and we will have to wait for its final decision to end this situation of great legal and economic uncertainty for the EU Emissions Trading Scheme. Beyond the economic impact directly induced by these judicial decisions, they mostly challenge the core functioning of a market which is based on the strict greenhouse gases emission limitation. Although the ceiling fixed for the total quantity of allowances is often raised by numerous countries, the increase in

the offer for emission allowances trading will surely, in the long run, result in a decrease of prices. One must therefore wait for the Court of justice’s judgment, since the parties appealed the one delivered by the general court. This subsequent procedure leaves the EC market of greenhouse gas emission allowance trading in great legal and economic uncertainty.

THE CONSEIL CONSTITUTIONNEL* PUBLISHES A DECEMBER 29, 2009 DECISION** ON THE 2010 FINANCE ACT by Béatrice Parance, Senior Editor and Member of the Editorial Committee

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MAIN INFORMATION

CONTEXT AND SUMMARY

he Conseil Constitutionnel (French Constitutional Council) approves the principle of a carbon tax scheme, but obliges the Government to review its scope.

he Government has been debating the idea of a carbon tax to penalize carbon dioxide emitters and to make them aware of the cost of their emissions. After the adoption of the Grenelle I Act, a conference of experts presided by former Prime Minister Michel Rocard met in July 2009 in order to think of a way to orient taxation in such a manner as to send price signals capable of orienting energy consumers’ behaviours.

The 2010 Finance Act therefore contained a scheme called the Carbon Tax, which was supposed to come into force on January 1, 2010. Preliminary bills of the Act clearly reveal that the goal of the carbon tax is to implement instruments allowing for significant reductions in of greenhouse gas emission in order to fight global warming, by creating an additional tax on fossil fuels, which would encourage businesses, households, and government administrations to reduce their emissions. The Act created a tax of 17 Euros per tonne of carbon dioxide emitted, compounded by a complex income tax credit scheme in order to refund them a fixed amount of the tax they paid, as well as total exemptions from the tax for the majority of the most polluting industries (power plants, refineries, cement works, coking works, glassworks, the chemical and airline industries, and passenger transport by road), as well as partial exemptions for agriculture, fishing, and merchandise transport by road and by sea.

French Constitutional Council n° 2009-599 DC

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Recommended citation: II-10.2

In its January 29, 2009 decision, the Conseil constitutionnel sanctioned this scheme. After reaffirming that the Charte de l’environnement (Environmental Charter) is considered to be part of the Constitution, especially its 2nd and 3rd articles on the principle of prevention, and its 4th article on the principle of repairing damage to the environment, the Conseil explains that the constitutionality of the scheme implemented by the law must be interpreted according to its conformity with the objective of reducing carbon emissions. The Conseil also remarks that tax breaks or special tax rates can only be justified when they are in the general interest, or when their beneficiaries are specifically taxed by a separate scheme. Yet, the complex scheme implemented by the law means that 93% of carbon dioxide emissions produced by industry would be completely exonerated from the carbon tax, and that activities subject to the tax would represent less than half of all greenhouse gas emissions. Truly, the scheme would essentially tax only heating products and automobile fuels, which are only one of the many sources of carbon dioxide emissions. The decision concludes that the size of the tax exemptions make this law contrary to the objective of the fight against global warming and create a blatant inequality before the law (section 82). Consequently, the Conseil declared this scheme unconstitutional.

“

This decision strengthens the Conseil consitutionnel’s role as a source of law.”

BRIEF COMMENTARY

his decision is particularly important and interesting for two reasons. Firstly, from the point of view of economic regulation, the objective of reducing carbon emissions can be accomplished either by a pedagogical approach, or by a coercive approach. Even though more and more environmental protection associations are taking the first approach, by publishing many reports and films denouncing the cataclysmic effects of global warming, the State has chosen to stimulate progress through force, using taxation. This could be interpreted as a tax incentive to adopt environmentally-friendly behaviours. However, the Conseil constitutionnel has ordered Parliament to take measures appropriate to fulfil the objectives they are supposed to fulfil (which means subjecting polluting industries to the carbon tax). The Government immediately reaffirmed its attachment to the idea of a carbon tax, and its desire to present a new scheme in a Cabinet Meeting as early as January 20, so as to quickly launch industry participation in finding ways that it could participate in the tax scheme. Amongst the ideas already launched, it has been proposed to subject industry to the tax, but allowing them to benefit from reduced and differentiated tax rates according to their sector and their level of exposition to international competition. Certain corporations could also benefit from tax restitutions because of their investments in reducing energy consumption. On the other hand, this decision strengthens the Conseil consitutionnel’s role as a source of law, in a simiilar way to its 2005 decision on that year’s finance act, in which it dismissed a tax-shield scheme that did not comply with the constitutional principles of accessibility and intelligibility of the law.

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The Journal of Regulation n° 1 - April 2010

WHISTLEBLOWING: THE FRENCH COUR DE CASSATION REDUCES THE SCOPE OF THE UNIQUE AUTHORISATION Recommended citation: II-11.1

WHISTLEBLOWING: THE FRENCH COUR DE CASSATION* REDUCES THE SCOPE OF THE UNIQUE AUTHORISATION by Marie-Anne Frison-Roche, Managing Editor and Director of the Journal of Regulation

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MAIN INFORMATION

decision of the Social Chamber of the French Cour de Cassation (Court of Cassation) handed down on December 8th, 2009, (n° 08-17.191) reduced the scope of the unique authorisation granted to companies concerning their internal whistle blowing proceedures.

CONTEXT AND SUMMARY

n its decision handed down on December 8th, 2009, the Social Chamber of the French Cour de Cassation (Court of Cassation) indicated that internal corporate whistle blowing systems authorised by the CNIL (La commission nationale de l’informatique et des libertés, or the French Data Protection Agency), through so-called ‘fourth unique authorisations’, on the basis of a Decree issued in application of the Loi informatique et libertés (Data Protection Act), are to be restrictively interpreted. The case concerned the Dassault Corporation, which had implemented, in conformity with the provisions of the Sarbanes Oxley Act, a code of good practices applicable within the company. As part of this code, a whistle blowing system was implemented, enabling employees to send emails to a dedicated email address in order to notify any breaches of the rules governing their professional activity. Before implementing this email system, Dassault had asked the CNIL to approve this scheme with a ‘fourth unique authorisation’. Article 3 of this unique authorisation allowed Dassault to collect information not only on financial, accounting, or corruption breaches of the code, but also any facts linked either to the vital inte-

rests of the company or the physical or mental integrity of its employees. In this regard, the Cour de cassation’s decision states that article 3 of the unique authorisation must not be interpreted as allowing companies to make extensive use of whistle blowing schemes. Therefore, any extensive system has to be explicitly and individually approved by the CNIL, rather than be granted a standard ‘fourth unique authorisation’. Besides, any personal data collected by the scheme that is protected by the Loi informatique et libertés (Data Protection Act) of January 6, 1978, must be explicitly declared to the CNIL in the application for authorisation.

BRIEF COMMENTARY

his decision by the French Cour de cassation illustrates regulation’s special architecture and the impact of judicial decisions on the regulator’s activity. Regulators’ independence is indeed framed by case law, which nurtures a particular form of cooperation between judges and regulators. The CNIL announced in a press release that its ‘fourth unique authorisation’ would be modified in order to comply with the decision. The impact of the Court’s decision is therefore very significant, and with regards to the relationship between judges and regulators, Regulatory Law results from the collaboration of several different authorities, which offers citizens a protective framework against the power of regulators. Besides making the ‘fourth unique authorisation’ compliant with Article 6 of the European Charter of Human Rights, the decision has an even more significant impact in that it raises the issue already presented by the Rapport Coulon (Coulon Report) on the decriminalisation of corporate law, which is that judges have to be trained in order to prepare them to deal with the technical nature of regulated sectors.

French Court of Cassation

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A DECREE OF DECEMBER 16, 2009 ESTABLISHES A COMMON NATIONAL REPERTORY OF SOCIAL SECURITY INFORMATION TO REDUCE FRAUD. THIS REPERTORY IS A HUGE COMPILATION OF PERSONAL DATA. Recommended citation: II-11.2

Regardless of the relationship between the judge and the regulator, this decision illustrates the clash between national regulations on one hand, and sectorial regulation on the other hand. Indeed, there must be balance between financial regulations based on information, and regulation of personal data based on secrecy, difficulty and casuistry — at least, this is the way judges usually see the issue, as in the present decision. Moreover, companies, from the moment they are active internationally, are subject to several legal systems and have to satisfy regulators that ignore each other, because of the independence of normative legal systems; Thus, the Sarbanes Oxley Act is quite universal in scope, since it applies to any company, domestic or foreign, listed

in the U.S.A. National regulators—in this case, the CNIL, and national judges do not apply the provisions of this law. Accordingly, economically unified companies are segmented by geographically different regulations, which makes governance difficult. Finally, this case allow us to take the measure of the role of codes of good conduct in applying provisions of foreign law in another country, which make such laws universally applicable. Thus, as demonstrated by Professor Gerard Farjat, codes of good conduct may be the most appropriate normative mode of economic globalisation, as long as their content is controlled by judges, as in this case.

A DECREE OF DECEMBER 16, 2009 ESTABLISHES A COMMON NATIONAL REPERTORY OF SOCIAL SECURITY INFORMATION TO REDUCE FRAUD. THIS REPERTORY IS A HUGE COMPILATION OF PERSONAL DATA. by Marie Cullin, academic assistant

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MAIN INFORMATION

CONTEXT AND SUMMARY

he implementation of a common repertory of information on Social Security tax payments provides the opportunity to gather real-time information on a vast majority of taxpayers, but is highly criticized for its possible violation of privacy rights.

fter authorisation by La commission nationale de l’informatique et des libertés (CNIL – French Data Protection Agency), a Decree issued on December 16th

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2009 officially implemented a common repertory of information on social security tax payments. According to this Decree, the creation of this repertory will (i) facilitate administrative formalities that citizens face in dealing with the Social Security Administration, (ii) improve the calculation of taxpayers’ benefits, and (iii) enable the production of anonymous statistics in order to control the quality of service. Besides these openly stated goals, the common repertory will be very useful in detecting and preventing Social Security fraud. Moreover, it combines a huge amount of information and interconnects data on almost all French citizens and residents concerning retirement, health insurance, unemployment insurance, family, and welfare benefits. Even though access to this information will be provided to all authorised employees of the Social Security Administration, the CNIL considers that sufficient protection of these data has been

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DECISION OF THE EUROPEAN PARLIAMENT OF FEBRUARY 11, 2010 Recommended citation: II-11.3

provided for. Moreover, the CNIL points out that no decision can be taken based solely on the data contained in the common repertory.

BRIEF COMMENTARY

mong all the questions raised by the CNIL’s role in this affair, one seems to be of particular importance. This debate has indeed been focused on the question of the use of personal data, which means that the real issue facing us today, namely the virtual traces we leave online, has been glossed over. As regards the common re-

pertory, the major issue was the length of time information would be stored in the system. The Decree implementing the repertory has provided for erasure of all information after five years time, which puts the system in line with the general legal provisions in this area. Therefore, it seems that the debate revolves more around whether citizens benefiting from social insurance programmes should be trusted or not. Nevertheless, the balance of power between government administrations and citizens puts the latter at a disadvantage. Shouldn’t the CNIL’s role be to provide citizens with some extra protection, rather than simply approving all decrees proposed by the government?

DECISION OF THE EUROPEAN PARLIAMENT OF FEBRUARY 11, 2010 by Marie-Anne Frison-Roche, Managing Editor and Director of the Journal of Regulation

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MAIN INFORMATION

he European Parliament vetoed the agreement between the European Union and the United States on the transfer of financial data from the SWIFT network, on the grounds that such transfers violate privacy rights and are disproportionate to their aim of fighting terrorism. CONTEXT AND SUMMARY SWIFT is a private company created in 1973 in order to form a network to manage crossborder wire transfers in Europe. Therefore, SWIFT is a network, which is why it is owned and managed cooperatively by nearly all European banks. One might therefore say that SWIFT is a form of self-regulation.

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In order to carry out its mission of performing interbank transfers, and especially wire-transfers, SWIFT has a considerable mass of personal data at its disposal, whether they concern senders or recipients of wire transfers. This data includes information such as where people are located, and whether the transactions were initiated from within or outside the European Union. It is understandable how effective this mass of information could be in fighting criminal organisations, which also function as networks. Such information would allow locating people when it is necessary to trace links between people, who are fragmented in different place and bound by different links, at different times, in different jurisdictions. Besides, money transfers between criminals are a very effective way to trace organised crime, which is why the September 11, 2001 attacks have made the American government very interested in using data from SWIFT in order to track suspicious movements of funds in Europe. A partnership was created towards this end between SWIFT and the C.I.A., in

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Recommended citation: II-11.3

order to allow the USA to access data relating to infra-European funds transfers. Afterwards, this surveillance system was made public in 2006, and was approved by European institutions in 2007, because governments participating in this system could not access personal data (i.e. it was not possible to link names with specific transfers). However, because of the technical inefficiency of having information available about funds transfers without having access to the personal information related to them, new negotiations began between the United States and the European Commission, which led to new agreements to permit direct access to data on funds transfers with their associated personal information. As one might have expected, all authorities dealing with data protection (such as France’s Data Protection Agency, the CNIL, or Commission Nationale de l’Informatique et des Libertés) disapproved of the agreement between SWIFT and the United States. These authorities allied themselves to publish a solemn disapproval of these agreements, just as they had done in a public statement made on November 26, 2006 on the previous agreements. But, since 2006, the European institutional landscape has changed, which means that this time, their statement did not go unnoticed. Truly, even though its approval is not necessary, the Lisbon Treaty requires the European Commission to request the European Parliament’s approval on any agreement signed between the European Union and another country. However, the Parliament refused to grant its assent. Parliament voted a resolution on February 11, 2010 that rejects this agreement and requests that the Commission work on a long-term agreement with the United States that would respect the Lisbon Treaty’s Charter of Fundamental Rights. The principal problems that the Parliament has with the agreement are firstly, that it is disproportionate to the goals pursued, and secondly, that the real security risks do not justify such a violation of freedom. Links with other documents in the same sector Update: On April 30, 2010, Viviane Reding, European Commissioner for Justice, said in Berlin that she would present a proposition by the end of May for a new general agreement with the United-States concerning the transfer of personal data from Swift. The new agreement would determine the protection of the Swift data provided to the

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USA within every individual agreement on this subject. This agreement would allow the United States to access bank data and information from more than 8.000 institutions and banks from the 200 countries participating in the Swift network. (Source: Les Echos, “Swift: projet d’accord-cadre entre les Etats-Unis et l’Europe fin mai, 3 mai 2010)

BRIEF COMMENTARY

wenty years ago, regulation of public liberties was envisaged in opposition to economic regulation. Today, this is no longer possible, for the two have become so intermeshed: one one hand, personal data has a considerable economic value, on the other hand, the fact that certain organizations possess huge amounts of personal data on others creates considerable risk. Faced with this situation, we have to admit that we are rather powerless, and the only sorts of rules that exist are procedural in nature. Truly, the first rule is to know how the data will be used, which obliges the owner of the information not to misuse it (here, the proper use is fighting terrorism). But how can we be sure that the information will only be used for this purpose? The other rule governing personal data control is proportionality: encroaching upon the right to privacy has to be justified by the nature of the goal itself, which in this case, is security. Here, too, the danger lies within the unresolved question of who is capable of guaranteeing the weights and measures of proportionality. It is too simple to say that our safety is so seriously at risk that our right to privacy is no longer of much value. As Alain Supiot so perfectly says in his book L’esprit de Philadelphia : la justice sociale face au marché total (The Spirit of Philadelphia: social justice faced with the total market), everything is prepared for a change from a state of law, to a state of exception, from which we can fear the worst, and whose procedures have never protected us. This is why we can only approve the European Parliament’s very strong use of its new powers—granted by the Lisbon Treaty—against the power of banks.

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A PARTNERSHIP ON THE “LOI INFORMATIQUE ET LIBERTÉS” HAS BEEN SIGNED BETWEEN THE CNB AND THE CNIL Recommended citation: II-11.4

A PARTNERSHIP ON THE “LOI INFORMATIQUE ET LIBERTÉS”* HAS BEEN SIGNED BETWEEN THE CNB** AND THE CNIL*** by Béatrice Parance, member of the editorial committee

II-11.4

MAIN INFORMATION

he Conseil National du Barreau (CNB – The French Bar Association) and the Commission Nationale de l’Informatique et des Libertés (CNIL—The French - Commission for Data Privacy) form a partnership to educate lawyers on the “loi informatique et libertés” (Data Privacy Act).

CONTEXT AND SUMMARY

r. Alex Türk, the President of the Commission Nationale de l’Informatique et des Libertés (CNIL —French Commission for Data Privacy), and Mr. Thierry Wickers, the President of the Conseil national du barreau (CNB – the French Bar Association), signed a partnership on February 11, 2010, in order to take common action in the domain of educating lawyers on the “Loi Informatique et Libertés” (French Data Privacy Act). This partnership plans to increase training of lawyers specialised in data privacy, and to augment representative organisations. Lawyers are seen as natural partners to take up such a function, which requires legal education and a large dose of independence. This is why the regulations applicable to lawyers were updated by a 2009 decision, which modified Article 6.2.2 of the regulations on lawyers specialised on data privacy, in order to define this role and to make it compatible with the deontological rules governing the profession.

The partnership also provides for the organisation of joint - education sessions on the provisions of the law for practicing and trainee lawyers. A directing committee will evaluate the steps taken in the partnership agreement.

BRIEF COMMENTARY

he status of Correspondant à la protection des données à caractère personnel (CPDCP – Data Privacy Specialist), also called Correspondant Informatique et Libertés (CIL), was created by the Act of August 6, 2004 (n° 2004-801), which modified the Loi Informatique et Libertés (Data Privacy Act) of 6 January 1978. This status corresponds to a person who is assigned to protect personal data, which was implemented by Article 18 of European Directive 96/46 of October 24, 1995 on the protection of individuals with regard to the processing of personal data and the free movement of such data. The French Decree (n° 2005-1309 of October 20, 2005) implementing this Directive defines the role of the CPDCP, who is responsible for ensuring the respect by a legal person (public or private) of the respect of the Data Privacy Law. Any legal person that hires a CPDCP is exonerated (at least partially, in function of the kinds of data being processed) from making declarations to the CNIL.

French Data Privacy Act The French Bar Association *** The French Commission for Data Privacy **

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III PART III.

BIBLIOGRAPHICAL REPORTS

UNCERTAIN RISKS REGULATED Recommended citation: III-1.1

UNCERTAIN RISKS REGULATED by Tatiana Jovanic, member of the Editorial Committee

III-1.1

Edited by Michelle Everson and Ellen Vos. Routledge - Cavendish, 2008

MAIN INFORMATION

omparison of various models of risk regulation in order to understand how those systems shape the relationship between law and science and how they attempt to overcome the public’s distrust of science-based decision making in the EU. CONTEXT AND SUMMARY TABLE OF CONTENTS:

1. The Scientification of Politics and the Politicisation of Science, Michelle Everson and Ellen Vos Part 1: Regulating Uncertain Risks 2. Opening Pandora’s Box: contextualising the Precautionary Principle in the European Union, Elizabeth Fisher Part 2: National Systems on food and Biotechnology Section 1. Case Studies on Food Regulation 3. Uncertainties in Regulating Food Safety in France, Julien Besancon and Olivier Borraz 4. The Origins of Regulatory Uncertainty in the UK Food Safety Regime Henry Rothstein 5. The Dutch Regulatory Framework for Food - Risk Analysis Based Food Law in the Netherlands, Bernd van der Meulen 6. Food Safety in Poland: Standards, Procedures and Institutions, Aleksander Surdej and Karolina Zurek 7. A Default-Logic Model of Factfinding for United States Regulation of Food Safety, Vern Walker Section 2. Case Studies on Biotechnology Regulation

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8. The French Regulatory System on GMOs, Christine Noiville 9. The UK Regulatory System on GMOs: Expanding the Debate?, Maria Lee 10. GMO Regulation in the Netherlands: a Story of Hope, Fear and the Limits of ‘Poldering’, Han Somsen 11. The Polish Regulatory System on GMOs: between EU Influence and National Nuances, Patrycja Dabrowska 12. The Regulation of Environmental Risks of GMOs in the United States, Michael Rodemeyer Part 3: EU and International Models 13. The EU Regulatory System on Food Safety: Between Trust and Safety, Ellen Vos 14. The EU Regulatory System for GMOs, Greg Shaffer and Mark Pollack 15. European Regulation of GMOs: Thinking about ‘Judicial Review’ in the WTO, Joanne Scott 16. The Codex Alimentarius Commission and its Food Safety Measures in the Light of their New Status, Mariëlle Matthee Part 4: Improving the Legitimacy and Credibility of Risk Regulation: Science, Procedures, Participation and Deliberation 17. Three Intimate Tales of Law and Science: Hope, Despair and Transcendence, Michelle Everson 18. Science, Knowledge and Uncertainty in EU Risk Regulation, Marjolein van Asselt, Ellen Vos and Bram Rooijackers 19. The Role of Scientific Experts in Risk Regulation of Foods, Harry Kuiper 20. Inclusive Risk Governance through Discourse, Deliberation and Participation, Andreas Klinke 21. Sound Science in the European and Global Market: Karl Polanyi in Geneva, Christian Joerges Links with other publications or other movements of thought in the same sector: Ansell, C. and D. Vogel (2006) eds: What’s the Beef? The Contested Governance of European Food Safety (Cambridge: MIT Pres).

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RISK REGULATION IN THE SINGLE MARKET: THE GOVERNANCE OF PHARMACEUTICALS AND FOODSTUFFS IN THE EUROPEAN UNION Recommended citation: III-1.2

Krapohl, S. (2008): Risk Regulation in the Single Market. The Governance of Pharmaceuticals and Foodstuffs in the European Union (Palgrave Macmillan) Vos, E. and F. Wendler (2006) eds: Food Safety Regulation in Europe. A Comparative Institutional Analysis (Antwerp: Intersentia) Links with other publications or other movements of thought in other sectors: Fischer, E. (2007) Risk Regulation and Administrative Constitutionalism (Oxford: Hart Publishing) Joerges C., Vos E. (1999) eds : EU Committees : Social Regulation, Law and Politics (Oxford : Hart Publishing) Hood, C., H. Rothstein, R. Baldwin (2001) eds: The Government of Risk. Understanding Risk Regulation Regimes (Oxford: Oxford University Press) Noiville, C. (2003): Du bon gouvernement des risques. Le droit et la question du risque acceptable (Paris: PUF)

BRIEF COMMENTARY

tainty, risk and regulation, suggesting various approaches that the EU might use to overcome specific obstacles in attempting to regulate these issues. The book begins with a critical analysis of the principles currently marking risk regulation and investigates the limits of using the precautionary principle as a regulative legal norm in cases of uncertain or incalculable risk. In Parts II and III, national, EU and international (WTO) models on foodstuffs and biotechnology are examined. The study on the regulatory framework of foodstuffs is concerned with food safety, while the study of biotechnology discusses in particular the framework regulating environmental issues and commercialisation of GMOs. This section points to European and international efforts to integrate scientific expertise within the regulatory process, urging for the constant re-assessment and re-evaluation of regulatory structures. In the last, IV part of the book, a shift is made to point out and examine general problems of legitimacy and credibility in the regulation of uncertain risks. Notions of participation, proceduralisation and procedural requirements, and deliberative initiatives characterise national, European and international processes of risk detection and regulation, albeit differently. In this part authors seek both the theoretical and pragmatic issues to explore solutions for the regulation of uncertain risks.Â

he book Uncertain Risks Regulated compares various models of risk regulation and represents an important contribution to the ongoing debate on uncer-

RISK REGULATION IN THE SINGLE MARKET: THE GOVERNANCE OF PHARMACEUTICALS AND FOODSTUFFS IN THE EUROPEAN UNION by Tatiana Jovanic, member of the Editorial Committee

III-1.2

Edited by Sebastian Krapohl Palgrave Studies in European Union Politics, Palgrave Macmillan, 2008

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MAIN INFORMATION

Study on the European Union regime of risk regulation for pharmaceuticals and foodstuffs based on an institutionalist approach to supranational risk regulation.

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RISK REGULATION IN THE SINGLE MARKET: THE GOVERNANCE OF PHARMACEUTICALS AND FOODSTUFFS IN THE EUROPEAN UNION Recommended citation: III-1.2

CONTEXT AND SUMMARY TABLE OF CONTENTS:

Introduction: The Need for a Systematic Analysis of Supranational Risk Regulation PART I: AN INSTITUTIONALIST APPROACH TO SUPRANATIONAL RISK REGULATION Functional Pressure and Path-Dependencies: The Emergence and Development of Supranational Regulatory Regimes Efficiency and Legitimacy: The Evaluation of Supranational Regulatory Regimes PART II: THE AUTHORIZATION OF PHARMACEUTICALS IN THE EU From National Crises to a Strong Supranational Regime: The Development of Pharmaceutical Authorization in Europe A Strong Regulatory Network: The Evaluation of the European Regulatory Regime for Pharmaceuticals PART III: THE REGULATION OF FOODSTUFFS IN THE EU From an Early Single Market to a Crisis of Consumer Confidence: The Development of Foodstuff Regulation in Europe A Weak Supranational Agency: The Evaluation of the European Regulatory Regime for Foodstuffs PART IV: CONCLUSION A Comparison of Pharmaceutical and Foodstuff Regulation in Europe This book is divided into three parts. The first part presents the institutionalist approach to supranational risk regulation. Here, the author first analyses the need for, and the historical development of, EU risk regulation and the pressure to develop of supranational regulatory regimes. Such regimes were not originally part of the EU’s scope of activities, but functional pressure has required centralising risk regulation at the supranational level in order to achieve the Single Market. In the next chapter the author develops analytic tools for evaluating the performance of emerging supranational regulatory regimes. Theoretically contemplating the interests of consumers and industry, the author conclu74

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des that the long-term interests of both market players call for appropriate risk regulation. To achieve this, through the functional pressure to establish strong regulatory regimes at the EU level, member states must make a credible commitment, and delegate their lawmaking power to independent agents. This, on the other side, necessitates a credible commitment to supranational risk regulation and accountability mechanisms, which would strengthen the legitimacy of this ‘chain of delegation’, which is becoming more and more important for legitimising delegations of power and day-to-day operations. The second part of the book is a case study of the EU regulatory regime for pharmaceuticals. The author, in the fourth chapter, first analyses the history of European pharmaceutical legislation from the 1950s onwards and analyses its development, which was significantly influenced by the thalidomide case. Not only member states, but also the EU itself, became active in the field of pharmaceutical regulation after that scandal. The failure of mutual recognition of national pharmaceutical authorisations led to a failure of market integration in the pharmaceutical sector, but the European pharmaceutical industry had a strong interest in the establishment of a single market and urged for centralisation in 1990s, which had ultimately lead to the establishment of the European Medicines Agency. Further on, in the fifth chapter, the author evaluates the EU regulatory regime for pharmaceuticals, the centralised authorisation procedure and the mutual recognition procedure, focusing in particular on member states’ credible commitment to the regime, and its relative success. The third part of the book is dedicated to the EU regulatory regime for foodstuffs and is structured in line with the second part on the pharmaceutical regulation. Hence, in chapter six the author analyses the development of European foodstuffs regulation from 1950s onwards, starting with the evaluation of the mutual recognition principle and the so-called ‘simplified procedure’ within the Single Market programme, where the Commission was assisted and/or controlled by several committees. In this chapter the author has stressed the weaknesses of the 1990s EU regulatory regime for foodstuffs in light of the BSE (mad cow) scandal, the ‘Europeanization’ of disease and the attempt to implement intergovernmental cooperation to regain consumer confidence, which necessitated the establishment of the

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Recommended citation: III-1.2

European Food Safety Authority. Chapter seven is an analysis of the efficiency criteria and legitimacy of the regulatory regime for foodstuffs. However, the delegation of powers to national regulatory agencies, and the success of the EU’s agenda in the food sector, was weaker than in pharmaceutical sector. The last chapter represents a summary of author’s findings and compares the result of the two case studies. Here the observation is that those two similar sectors differ is built on the historical-institutionalist argument, and is backed by three hypotheses that the author uses to explain this difference. The author concludes with a summary of the consequences of the debate on the institutionalist approach to supranational risk regulation. Links with other publications or other movements of thought in the same sector: Abraham, J. and G. Lewis (2000) : Regulating Medicines in Europe: Competition, Expertise and Public Health (London: Routledge) Ansell, C. and D. Vogel (2006) eds: What’s the Beef? The Contested Governance of European Food Safety (Cambridge: MIT Pres). Feick, J. (2005): Learning and Interest Accommodation in Policy and Institutional change: EC Risk Regulation in the Pharmaceutical Sector (London: Discussion Paper No. 25 of the ESCR Centre for Analysis of Risk an Regulation). Mossialos, E., M. Mrazek and T. Walley (2004) eds: Regulating Pharmaceuticals in Europe: Striving for Efficiency, Equity and Quality (Maidenhead: Open University Press). Premanand, G. (2006): EU Pharmaceutical Regulation: The Politics of Policy-Making (Manchester: University Press) Toke, D. (2004): The Politics of GM Food: A Comparative Study of the UK, USA and EU (London: Routledge) Links with other publications or other movements of thought in other sector: Arnull, A. and D. Wincott (2002) eds : Accountability and Legitimacy in the European Union (Oxford: Oxford University Press) Everson, M. and E. Vos (2009) eds:

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Uncertain Risks Regulated (Routledge: Cavendish) Frencis, J. (1993): The Politics of Regulation : A Comparative Perspective (Oxford: Blackwell) Geradin, D and N. Petit (2004): The Development of Agencies at EU and National Levels : Conceptual Analysis and Proposals for Reform (Jean Monnet Working Paper 01/04) Joerges C., Vos E. (1999) eds: EU Committees: Social Regulation, Law and Politics (Oxford: Hart Publishing) Vos, E. (2004) : Overcoming the Crisis of Confidence: Risk Regulation in an Enlarged European Union (Maastricht : Working Paper of the Universiteit Maastricht)

BRIEF COMMENTARY

his book analyses risk regulation in the Single Market for pharmaceutical products and foodstuffs and explains why member states cannot escape supranational risk regulation. The author has depicted a tremendous shift in the health and safety regulation of those products with a view towards strengthening consumer confidence in the foodstuff and pharmaceutical sectors. Indeed, these two groups of products are well suited for such a comparison due to the fact that they are consumer products and could pose enormous risks to consumer health, especially taking into account the information asymmetries between consumers and manufacturers. In addition to revealing reasons for the centralisation of the institutional regulatory architecture, the author attempts to explain why the regulatory institutions of the EU in the pharmaceutical and foodstuff sector differ, even though they belong to similar policy areas. Whereas the functional demands for supranational risk regulation are similar in pharmaceutical and foodstuff regulation, the efficiency of the two respective regulatory regimes has differed widely over the last 15 years: while the regulatory regime for pharmaceuticals has lead to the establishment of a single market for highly innovative products, the single market for foodstuffs is still under way. Krapohl’s main contribution is his institutionalist analysis of the developmental paths of institutional designs, and the efficiency and legitimacy of the EU’s risk regulation framework in these sectors.

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THE EUROPEAN COMMISSION PUBLISHES ITS FINAL REPORT ON ITS COMPETITION INQUIRY INTO THE PHARMACEUTICAL SECTOR ON JULY 8, 2009 Recommended citation: III-2.1

THE EUROPEAN COMMISSION PUBLISHES ITS FINAL REPORT ON ITS COMPETITION INQUIRY INTO THE PHARMACEUTICAL SECTOR ON JULY 8, 2009 by Marie-Anne Frison-Roche, Managing Editor and Director of the Journal of Regulation

III-2.1

MAIN INFORMATION

he European Commission, sensing potential anticompetitive behaviour in the pharmaceutical sector, conducted an inquiry into this sector, and adopted its final report on the matter on July 8th 2009. The Commission’s suspicion was that anticompetitive behaviours could be slowing down the entry of generic drugs into national markets, whereas the burden of drug spending on public finances and public health policy make rapid generic entry an important issue. The Commission concluded that delays are due in part to pharmaceutical companies’ behaviour, especially as concerns the use they make of their intellectual property rights. However, on the other hand, one may also sustain that the strategic use of an acquired legal right is no less than legitimate, and that public health policy is a matter for national regulation. Indeed, it is for Member States, rather than European competition law, to determine the level of healthcare coverage that their society is financially willing to bear.

CONTEXT AND SUMMARY

ublic health policy is regulated by ex ante administrative rules that, amongst other things, set drug prices. Moreover, drugs are simply goods that are freely circulated on a market where the consumers are patients requiring medication. But what makes the situation economically and politically specific is the following: from an economic perspective, the method of payment is unusual because society, rather than the actual consumer, bears the cost of the medication purchased; as for politics, the situation is particular because there is a strong political commitment to providing universal access to medication, free of charge.

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Nonetheless, it seems the Commission prefers to look at this complex situation through the lens of competition law, since it asserted last July that the drug market was being affected by barriers to entry, barriers due to the exercise of intellectual property rights, an act deemed by the Commission to be responsible for slowing down the entry of generic drugs into the market. Anticompetitive is therefore the adjective the Commission decided to apply to the way pharmaceutical companies accumulate patents (so-called patent clusters), or extend the length of their protection. Moreover, the report also designates as anticompetitive the fact for pharmaceutical companies to exercise of their patent rights to the fullest when they sue competitors in order to defend their prerogatives. Once in court, pharmaceutical companies then use their leverage to get their competitors to enter a settlement agreement. Another example is their interference in the administrative procedure granting Market Authorisations to generic drug companies. The report underlines that these kinds of behaviours are facilitated by the numerous and heterogeneous intellectual property regulations within Europe, and therefore strongly recommends the implementation of a harmonised European IP law. Indeed, this is far from being the case: the poor quality of patents delivered in every country are at the root—their repercussions leading to anticompetitive situations—of market distortions that do nothing to boost innovation, and only weaken public finances. Therefore, the implications of the report go beyond merely criticising a perverted system, and suggests improving patent law in order for it to benefit not only pharmaceutical companies themselves, but also patients, countries, freemarket competition, and innovation.

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SPEECH DELIVERED BY MR. JEAN-LUDOVIC SILICANI, THE CHAIRMAN OF THE ARCEP, ON NOVEMBER 19, 2009, DURING THE “DIGIWORLD SUMMIT”, ORGANISED BY THE IDATE Recommended citation: III-3.1

BRIEF COMMENTARY

n one hand, the sector report’s rationale makes perfect sense with regards to competition law, since a market that erects barriers to entry (in this case hindering generic drugs from being approved), needs to be corrected. On the other hand, while this report claims as an innovation the mere fact of reacting to such anticompetitive behaviour, the European Competition Authority should not forget that drugs do not correspond to the rules applying to ordinary products on an ordinary market. That is why the distorted situation presented in the report illustrates the definition and purpose of regulatory law: a logic that aims at ensuring—or restoring—a certain balance between the principle of competition and (an)other principle(s). In the phar-

maceutical sector, such ‘other principles’ are of a technical nature, and refer to the high-risk and long-term investments necessary in order to finance research. Furthermore, these principles are also political ones. Indeed, only sovereign States, i.e. European Union member states, are legitimate for providing a framework for their individual pharmaceutical markets, in particular through public health policies aimed at combating certain illnesses. Consequently, implementing such public policies absolutely requires that patent rights be an incentive to stimulate research and innovation, regardless of the fact that competition law merely tolerates patents as incongruous, temporary and the-shorter-the-better monopolies. All in all, the main flaw of the Commission’s sector report is not so much its orientation, but rather its oversimplification of the situation.

SPEECH DELIVERED BY MR. JEAN-LUDOVIC SILICANI, THE CHAIRMAN OF THE ARCEP, ON NOVEMBER 19, 2009, DURING THE “DIGIWORLD SUMMIT”, ORGANISED BY THE IDATE* by Béatrice Parance, Senior Editor and Member of the Editorial Committee

III-3.1

MAIN INFORMATION

he President of the Autorité de régulation des communications électroniques et des postes (Arcep –French Electronic and Postal Communications Regulation Authority) presents his vision of Telecommunications Regulation in favour of Network Neutrality.

CONTEXT AND SUMMARY

uring the IDATE summit, Mr. Jean-Ludovic Silicani, the President of the Autorité de regulation des communications électroniques et des postes (Arcep – French Electronic and Postal Communications Regulation Authority) defended his point of view on the new challenges and issues in electronic communications regulation, and announced the creation of a committee within the Arcep to reflect on regulation of this sector in the long-term.

European Audiovisual and Telecommunications Institute

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SPEECH DELIVERED BY MR. JEAN-LUDOVIC SILICANI, THE CHAIRMAN OF THE ARCEP, ON NOVEMBER 19, 2009, DURING THE “DIGIWORLD SUMMIT”, ORGANISED BY THE IDATE Recommended citation: III-3.1

The first subject addressed was the opening of the telecommunications sector to competition. The President explained that the construction of solid, lasting free-market competition can be obtained not by seeking maximum competition, but rather, optimal competition. Optimal competition entails finding a balance between a supply of quality services at a reasonable price to consumers, and the possibility for operators to earn sufficient margins to enable them to innovate and invest. To this end, he repeated that he was favourable to licensing a fourth mobile telephone operator in France. The increased competition that would result would benefit consumers, for mobile telephone service prices in France are at the high end of the European average.

“

The regulation of this sector therefore has to have a definition as to what “acceptable” neutrality means.

Secondly, upon the subject of electronic communication, the President supported the idea of shifting from asymmetrical regulation—which has become less necessary because of the change from a monopolistic situation to a competitive market—to symmetrical regulation, which would give equal treatment to all operators. This would imply a change in the role of the regulator, who would become less of a police officer and more of a ‘catalyst for market development’. The digital economy is a major sector for the economy and represents 6% of gross national product. The President of the Arcep intends to overcome the two major hurdles confronting this sector, in order to build a lasting and innovative digital ecosystem.

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The first issue, considered to be a horizontal issue, is developing very-high-speed Internet networks, both in the home and on mobile phones. This requires reconciling the various goals of competition, investment, and local and national development programmes; all of which must open up to other solutions. For mobile networks, the Arcep has followed the provisions of the Loi de modernisation de l’économie (Economic Modernisation Act) of August 4, 2008, and conducted a consultation with telephone service providers on the possibility of their sharing 3rd generation mobile infrastructures, which should lead to a standard agreement between all operators by the end of the year. The reconciliation of competition and innovation is also problematic in licensing a 4th mobile telephone provider in France, because this new operator requires a band of radio frequencies to emit its services, and there are a very limited number of frequencies available. The Arcep’s new method of attribution should be published at the end of the year and answer these problems. For landline networks, the deployment of a new fibre-optic local loop should allow a progressively greater number of consumers to access the Internet at virtually unlimited speeds. However, once again, the creation of new networks should not lead to new monopolies on the local loop. Technically, the terminal part of fibre optic networks should be open and neutral, in order to allow all operators to service users on the network, especially networks within private property, as was decided by the Loi de modernisation de l’économie in August 2008. This principle of network mutualisation will have to be implemented by the Arcep. After having conducted many studies and experiments on the question, the Arcep has concluded that there has to be a clear legal framework in order to deploy fibre optics, an idea that the major operators agree upon. There has to be a distinction between densely populated areas and sparsely populated areas. For densely populated areas, the idea is to allow operators to contact building owners to obtain permission to equip the building with fibre: he will install either one fibre for each operator, or a devise to permit access to the building by different operators. Once the legal framework has been established, operators will have to publish their service plans and tariffs. For less densely populated areas, fibre optic deployment will be horizontally mutualised, open to different operators in a fair cost-sharing system. In these two contexts, the goal will be to promote network mutua-

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Recommended citation: III-3.1

lisation and to stimulate investment by coordinating public and private initiative. The Arcep will also examine the ways that public funds will be used in these programmes, in the context of the national loan to promote infrastructure development during the economic crisis. The second major issue for this sector is that of its underlying economic model, meaning the sharing of the value and the financing of networks between different links in the value chain. The deployment of very-high-speed internet will promote the expansion of very attractive contents which will reciprocally increase consumer’s appetite for high speed internet. There is already an evolution in the role of various actors who want to reposition themselves on the value chain by developing new activities, which creates competitive difficulties because of the exclusivity policies implemented. The Autorité de la Concurrence (French Competition Authority) published an opinion on this subject on July 7, 2009. Beyond these questions, the relations between different links of the chain, especially between content providers and service providers, raise questions as to network neutrality and Internet neutrality, which can be divided into three distinct issues. Economic neutrality exists when value is shared between service providers and content providers, and when they share the financing of network development. It is because of the amount of content available that new generation networks have to be built, which could imply that content providers should participate in financing them. Their financial participation seems to be a reasonable consideration for the cost that they and their clients engender for service providers. However, there exists the issue of network neutrality when service providers prioritise traffic to and from different networks, in an attempt to modulate data fluxes in order to optimise their quality of service. Finally, deontological neutrality explores the degree of involvement of service providers or the government in the nature of content provided, especially when such content is illegal.

while striving to respect the two essential principles of electronic telecommunications law: non-discrimination, which prohibits service providers from unduly favouring certain content, especially its own if it is vertically integrated; and transparency, which allows the consumer to be informed on the rules of traffic management applied by his service provider. This reflection process will give way to a process of cooperation with the actors of the sector and the organisation of a conference. BRIEF COMMENTARY President Silicani’s speech is very interesting because it clearly demonstrates the issues facing Internet neutrality today, and the future evolution of the regulator’s place in this new economic and technological sector. The same debate is ongoing in the United States, where content and service providers are fighting for the protection of their interests. The former, like Google and Yahoo, supported by Internet users’ associations, are fighting to preserve Internet’s neutral and egalitarian principles. The latter would prefer to have their customers and content providers pay for higher traffic priority, in order to benefit from a better service. The debate is all the livelier because the Internet service providers are also very powerful media conglomerates. Starting in 2005, the American regulatory authority, the Federal Communications Commission, imposed neutrality obligations on various service providers that had merged with content providers. President Barack Obama seems to have clearly shown himself in favour of network neutrality, and the strict respect of the principles of non-discrimination and transparency.

The regulation of this sector therefore has to have a definition and a regulation as to what “acceptable” neutrality means. In other words, the relations between content providers and service providers have to be determined. This is why, since September 2009, the Arcep has begun a process of reflecting upon solutions to this important subject,

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The Journal of Regulation n° 1 - April 2010

SPEECH OF JOAQUÍN ALMUNIA, THE NEW COMPETITION COMMISSIONER, 9TH GLOBAL FORUM ON COMPETITION, OECD, PARIS, FEBRUARY 18, 2010. SUBSIDIES COULD BE USEFUL TO AVOID CATASTROPHES IN MANY SECTORS; THE MAJOR DIFFICULTY BEING DISTORSIONS BETWEEN DIFFERENT LEVELS OF REGULATION Recommended citation: III-3.2

SPEECH BY JOAQUÍN ALMUNIA, THE NEW COMPETITION COMMISSIONER, 9TH GLOBAL FORUM ON COMPETITION, OECD, PARIS, FEBRUARY 18, 2010. SUBSIDIES COULD BE USEFUL TO AVOID CATASTROPHES IN MANY SECTORS; THE MAJOR DIFFICULTY BEING DISTORSIONS BETWEEN DIFFERENT LEVELS OF REGULATION by Marie-Anne Frison-Roche, Managing Editor and Director of the Journal of Regulation

III-3.2

MAIN INFORMATION CONTEXT AND SUMMARY

n this important speech, “the 9th Global Forum on Competition,” organised by the OECD in Paris February 18th, 2010, the new European Commissioner for Competition, Mr. Joaquín Almunia, of course recalled, as he had done during his inauguration, the importance of the fight against anti-competitive behaviour. But the most important part of his speech was devoted to state aid, in the form of subsidies provided by governments, over the last 18 months, to the financial sector and other sectors of the economy, in order to prevent a catastrophic banking collapse. The Competition Commissioner, regardless of the current crisis situation, admits furthermore that, in normal times, aids or investments can remedy market failures, promote investment in environmentally friendly technologies, or foster economic and social development in a particularly economically distressed region. Mr Joaquín Almunia stressed that public policies are very important and that governments must have the most appropriate tools at their disposal to achieve these goals. Thus, in the second part of his speech, European Union Commissioner Joaquín Almunia gives a historical perspective on the European Commission’s position on state aids, for the time when it was necessary to radically combat them in order to build a single market must now be put into context. He insists that the Commission must take into account whether or not an aid is granted in response to a market failure. He takes the example of the difficulty for small business to access risk capital, due to high transaction costs, which makes this an appropriate situation for state aid. Similarly, he stresses that state aids are justified to support

The Journal of Regulation n° 1 - April 2010

research costs, which markets are not ready to finance, because the risk of research is too important compared to the very long-term return-on-investment horizons. Thus, specifically mentioning incentive techniques, the European Union Commissioner said that state aid is justified when it is proportionate, or when it causes proper adjustments in corporate behaviour that serve public policy objectives not spontaneously fulfilled by the market. This proportionality is checked by a calculation, that ensures competition is not more damaged than necessary and that the incentive system functions.

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The theory of regulation fundamentally refers to economic rationality, by correctly using taxpayer money, for example.”

Secondly, European Commissioner Joaquín Almunia returns to the role of State aids in the global financial crisis. He reminds how the European Commission, in a coordinated way, supervised state aids granted by Member States to their individual finance sectors, by taking into account their respective market situation, and the type of aid granted (guarantee schemes, recapitalisation measures, etc.).

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Recommended citation: III-3.2

He stressed that such measures must always be congruent with certain fundamental principles such as non-discriminatory access for all establishments to state-sponsored schemes, and appropriate measures taken by the providing state to prevent beneficiary financial institutions from abusing the aid received. The orator stresses that this helped to maintain minimum distortion between Member States’ financial institutions. Going further, this European Community policy is now helping to rebuild viable financial institutions, capable of fulfilling their role in the real economy. In the third part of his speech, the Commissioner addresses the issue of state aids in a national, supranational and international perspective. Indeed, the European Union itself is a subject of international law, pursuing common European objectives on the international stage. But the principle of implied prohibition of state aids, because they create a distortion of competition between firms that no longer compete with each other on their own merits, is not valid between member states of the EU. He stresses that creating a “national champion” creates “domestic damages” to firms that do not enjoy the government’s favours. Some member States have a review system for state aids, such as Spain, a system that is required for countries wishing to join the European Union. As regards the international level, state aid can be an instrument of protectionism, as addressed by the WTO system. The Commissioner concluded that State Aid is a key element of European policy on competition, in that they help to maintain European Companies at an equal level of competition. They have shown their usefulness in the current context of economic and financial crisis, avoiding a damaging subsidy race between member states and minimizing distortions of competition, which could result from broad state aid distribution programmes by Member States. But state aids are not solely a European problem. This is also a question of competitive equality at national, supranational and international levels. Moreover, these rules help governments to use funds where they are most needed and where it is most useful to use them. Finally, these measures help States to best use

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taxpayers’ money where it is most useful. This speech is important not only because the first speeches of a new commissioner always set the ‘tone’, but also because it clearly shows the role of regulation in competition law when state aids are part of the management of a financial and banking crisis. Indeed, the Commissioner shows that State aids and subventions are legitimate and appropriate tools for States to avoid disasters in these areas. Simply, they raise legitimate concerns as to the use of such tools. Therefore, he posits that the Commission is entitled to calculate the adequacy of their use in relation to the gravity of the crisis, by calculating the magnitude of the means employed, so that we find ourselves at the heart of the meaning of Regulation. The second part of his remarkable speech is on a major problem: the level of regulation and the distortions that this level then implies, while regulatory phenomena are present in both domains. Thus he laments the absence of a regulation for state aids (for hereforth there will be more a regulation rather than a prohibition of state aids) despite the European character of the market, just as his remarks on the existence of an international policy on the subject are simply prospective, although such a regulation would be necessary in order to prevent a rupture in competitive equality. Finally, the last sentence of his speech, “Ultimately, they help governments assess the effectiveness of proposal subsidy measures, and help channel funds to where they are most necessary and can deliver the most benefit to taxpayers” shows that the theory of regulation fundamentally refers to economic rationality, by correctly using taxpayer money, for example, and is thereby opposed to the traditional theory of the State, concerned with the sovereign will in reference to the mandate given by voters. That is the Gordian knot.

The Journal of Regulation n° 1 - April 2010