Annals of Public and Cooperative Economics 70:2 1999 pp.

331^350

THE PRIVATIZATION AND REGULATION OF

TELECOMMUNICATIONS IN SPAIN

by
Josë BAREA TEJEIRO and Olga RUIZ CAN¬ETE
Autonomous University of Madrid

There are three aspects of the telecommunications sector which

clearly show the need for analysis of its evolution and future prospects
in Europe:

. The liberalization process undertaken by the European Union in

the mid-1980s. This ended in 1998 with the sector having been
completely opened up to competition.
. The importance of this sector in the economy as a whole and in
society (the worldwide telecommunications market was more than
ECU 700,000 million in 1997, and provides jobs for 1.5 million in
Europe), as well as its strong growth.
. The internationalization of the markets, with continuous
movement in mergers and business partnerships, and constant
and rapid technological innovations.

This analysis of the privatization process and regulation of the

telecommunications sector in Spain begins by making reference to the
situation prior to the opening up for competition, privatization and
regulation of the sector, as well as to the ¢rst steps towards
liberalization. Following that, there will be a focus on theory,
highlighting the characteristics of this essential service. In addition,
we will look at the reasons supporting the conclusion that the solution
is not to transfer public companies, which until recently operated as a
monopoly, into private hands. On the contrary, the process, in reality,
demands the introduction of competition and the creation of a
regulatory agency which would serve as a watchdog for competition.
Finally, we will re£ect on the di¡erent measures which Spain has been
instituting over the past two years as part of the sector's liberalization
process. This will incorporate the European Community's regulations
regarding the complete opening up of the telecommunications sector
in December 1998.
&CIRIEC 1999. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK
and 350 Main Street, Malden, MA 02148, USA
332 J. BAREA TEJEIRO AND O. RUIZ CAN¬ETE

1 Situation prior to privatization-regulation and ¢rst steps of

liberalization (until 1996)

Before Spain's full membership in the European Community,

legislation on telecommunications was extremely scarce and disperse.
This legislation reserved the exclusive rights to essential
telecommunications services in Spain for Telefönica S.A. (somewhere
around 32% of whose capital was government owned).This corporation
had a regulatory contract of the concession which established the
obligations and rights of Telefönica with regard to providing these
services. There was also the post of Delegation of the Government in
Telefönica S.A., which had decision-making power in investment
policy and the company's business. This representative could veto the
decision of the Board of Directors for reasons of public order. In
addition, government could name ¢ve members of the Board of
Directors over and above those which they were entitled to because of
their stake in the company.
Following Spain's incorporation in the European Community, the
basic legislation regarding telecommunications was contained in the
Telecommunications Disposition Law (LOT), Law 31/1987, 18 December.
Nevertheless, the dynamic nature of telecommunications, the
evolution of the liberalization process and the progressive elimination
of the natural monopoly caused, over a short period of time, the 1987 law
to become outdated; it was necessary to carry out an in-depth
reformulation. Therefore, successive modi¢cations were made to the
law, special ones (such as that carried out by Law 32/1992, 3
December), as well as sectoral ones, which established a separate legal
system for certain speci¢c zones (such as Law 37/1995, 12 December, for
satellite telecommunications; or Law 42/1995, 22 December, for cable
telecommunications).
Liberalization measures were gradually put in place by way of
these modi¢cations.

. Thus, at the end of this period, the only services which are provided
under a monopoly system are those ¢nal ones related to basic
telephone service, telexes and telegrams.
. Carrier services are provided under a freely concurrent system.
. Value-added services are also provided under a system of free
competition. Among these services, mobile telephones are notable
in that, following a competitive process, a licence has been granted
for a second operator in the GSM service. The winner of this
competition was Airtel Mövil (in partnership with BT, Airtouch
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and Banco Santander), which began to provide service in October

of 1995. Telefönica has also been granted a licence for GSM service
(until the year 2010). Telefönica is able to freely establish rates,
without doing more than reporting them to government. Thus,
there is a limited competitive system in place between Telefönica
Möviles and Airtel Mövil.
This market illustrates the bene¢ts which competition can bring
to users. In the past few years, the amount of documentation
required to obtain a line has been drastically reduced, usage fees
have fallen slightly compared with the previous situation, the price
of terminals has gone from being extremely high to being
practically free, and in practice the connection charge is zero. As
a result of all this, the number of users has absolutely exploded.The
penetration rate for mobile telephones in Spain is 10.5%, with 4.3
million users in 1997, and has been one of the highest growth
markets in Europe.
. Within broadcast services, television is controlled by speci¢c
legislation. This has established a system of limited competition
among the three private operators (Tele5, Antena 3 and Canal
Plus), the television stations of the autonomous regions and
Televisiön Espan¬ola.
. Telefönica de Espan¬a, S.A. maintains a contract with the state, in
force since 1991, by which it is accorded monopoly control over a
number of services (this has become more and more restricted, as
we have just pointed out).This same contract imposes on Telefönica
a series of obligations, such as taking into account such factors as
the general welfare, availability, quality, etc., when providing
services. Together with those obligations come certain rights,
such as the ability to establish the necessary infrastructure
network, occupying public domain, establishing easements and
limitations, etc. The post of Delegation of the Government is
created, whose prerogatives include the right to veto for reasons
of public interest, as well as prerogatives in Telefönica's
investment policy and plans. The tari¡s are approved by the
government.
. The Cable Law constitutes the ¢rst step in our legislation towards
the liberalization of infrastructures, as it allows the concessionary
of the service to install their own network, separate from the
network of those holding the carrier services. Another important
milestone in the Cable Telecommunications Law is its willingness
to grant the right to provide service in general, without granting
licences for speci¢c services. This philosophy is a result of the
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technological evolution that allows any type of service to be

provided through the infrastructures devised.
The law allows for the existence of two cable operators within
territorial boundaries it creates. One of those could be Telefönica
de Espan¬a, if it is in the interest of the current dominant operator
to participate in call for tenders. Certain time restrictions have
been placed on Telefönica to aid the birth of its competitors (16
months, extendible to 24, should it be necessary).
In addition to Telefönica, di¡erent operators are participating in
the development of cable. These have stated their intention to
submit tenders in all of the zones which have been established.
Among these we ¢nd two business groups: Uniön Fenosa, Endesa
and Stet who have stakes in regional cable operations companies
such as Supercable Andaluc|¨ a, and Cableuropa (made up of
SpainCom, Banco de Santander, Multitel Cable, Ferrovial and
Banco Central Hispano) which have won several of the regional
cable bidding contests which they have participated in. In 1997
cable telecommunications service concessions were been granted
in eleven key zones important for the coverage of Spanish
territory. In 1998, above all in the last trimester, we will see the
beginning of material activity by some cable operators. They are
already in the process of installing their infrastructures within
their territorial sphere in the corresponding zones.
The pricing system is by instruction from the Government, and
since 1 January 1998, they can provide basic telephone service.
. Satellite telecommunications service have been liberalized.
. The Ministry of Public Works,Transport and Environment has the
authority to propose legislation in the telecommunications ¢eld, as
well as assure coordination and interconnection of the existing
telecommunications. It also has the authority to grant
concessions, authorization and licences for equipment and
services. This regulatory authority is administered by Directorate
General of Telecommunications (DGT), which was created in 1985.
Additionally, the 1997 law created the Telecommunications
Advisory Board as the government's advisory body for this area.

2 Theoretical foundations for the privatization^ regulation of

the telecommunications sector

The telecommunications services are purely private domain,

known as `public services' characterized up until now as marketable
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goods using the market, and as a consequence, of private provision,

whose production, however, was chie£y reserved to the public sector.
The reason used to explain this, explicitly or implicitly, was the public
interest for the provision of these services.
The reasons given for considering that the aforementioned
marketable public services require state intervention, both by public
enterprise's production of these services as by regulation, have been
very numerous (natural monopolies, economies of scale, accessibility,
equal treatment, universality of the service, strategic character, etc.).
Technological changes have meant that a large part of the reasons
that justi¢ed public intervention have lost their raison d'eªtre and, at the
same time, the introduction of competition in these marketable public
services determines an increase of the regulatory activity of Public
Administration in order to assure equality and transparent and real
competition of these services. These facts delimit the necessary
separation between the regulatory function of the telecommunications
sector and the operational function of the national telecommunications
company.
The ¢rst question to be considered is whether the market can
e¤ciently provide this type of marketable public service. Instead of
the traditional solution of entrusting the production of these services
to public enterprise, granting it the monopoly, other alternatives exist,
such as the following:

. to ignore the problem, considering that intervention is unnecessary,

given that potential competition would su¤ce (Baumol);
. for the production of public services to be carried out by private
enterprise to which the licence would be granted;
. to regulate private monopoly.

The alternative that is defended by a large part of the doctrine

nowadays is that of adopting regulations that introduce competition
as soon as possible.

2.1 Reasons for privatization

The theoretical reasons that have been brandished in favour of the

privatization of public enterprise, can be summed up in the following
way.
Technologies.Telecommunications have constituted a natural monopoly
of public service, that has been gradually ruptured as a consequence of
the profound technological advance that has taken place in the sector.
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The existence of a network for providing the service gave

rise to a market failure, making public intervention necessary.
The technological process has left the network concept of
telecommunications, which currently allows it to generate
competition for providing an e¤cient service.
Economic. According to Alvaro Cuervo (1997) privatization is conceived
to be a way of improving allocation and organizational e¤ciency, thus
facilitating the adaptation of enterprise to the new economic
environment. Public property, as a consequence of the singular agency
relations that it motivates, generates a behaviour of the members of
public enterprise that lack incentives for increasing e¤ciency, for
developing capacities and resources within the enterprise and for
competing in open markets.
The opening up of markets is necessary for privatization to generate
e¤ciency and for the current limiting regulations of competition, that
should be substituted precisely for the regulations that eliminate the
entry barriers in the market and avoid monopolistic powers.
Financial. The important technological advance in the tele-
communications sector requires strong investment, that Government,
the owner of public enterprise, is not able to ¢nance. Given that this
would imply having to have recourse to capital markets with the
consequent repercussion in the level of government borrowing, an
important indicator for the monetary union countries.
Other ¢nancial reasons, which justify privatization, are found in
the necessity to eliminate the subsidies and relief for investment of the
public owners that a¡ect public de¢cit, an indicator that has acquired
special relevance for achieving economic stability for the monetary
union countries. On the other hand, the cash that generates
privatization, although it does not produce a reduction of the public
de¢cit in accordance with the European System of Integrated
Economic Accounts, can be destined to paying o¡ public debt and,
therefore, indirectly reduce public de¢cit.

2.2 Reasons for introducing competition

As already mentioned, the action of privatizing public enterprise

in the ¢eld of telecommunications does not give rise simultaneously to
the introduction of competition. The question that arises is whether
competition should be introduced to public service companies or
whether regulating private monopoly following privatization would
su¤ce.
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According to Stiglitz there are various reasons for attempting the

introduction of competition in the production of marketable public
services:

. to provide a comparative basis, given that if there are no

competitors it is di¤cult to determine if the company that
monopolizes the production is e¤cient or not;
. to permit the establishment of a system of incentives that
compensates the task of e¤ciency;
. the competitive spirit not only leads to greater innovation, but also
a rapid di¡usion of suitable innovations.

When we talk about the introduction of competition in a sector,

this does not mean that everything in this sector is subject to
competition. Within the productive processes that a sector develops,
di¡erent types of goods or goods of di¡erent qualities can be obtained
and competition can be introduced in some of them. In the same way,
the production of a good can be divided in subprocesses and some of
these may be subject to competition.
Although it is quite clear that the introduction of competition in
public marketable services can, in some cases, introduce wastefulness,
nevertheless, it is also true that, in the case of monopolies, the same, if
not more, wastefulness is produced, albeit hidden by the lack of
transparency.
One reason that is given for the introduction of competition in the
communications sector, is that in this way consumer sovereignty and
their possibilities of choice are reinforced. However, as stated by the
Tribunal for Competition (1993) the liberalization of a sector does not
mean that competition within a sector appears immediately.
Liberalization is the ¢rst step needed for competition to take place.
Nevertheless, it is necessary for time to pass for e¡ective competition
to take place, as new companies need to carry out investment in order
to captivate market quotas from monopolies.
Price controls must be maintained until the situation of perfect
competition is reached.

2.3 How competition is introduced

In public services that require networks for operations, as is the

case, to a certain extent, in the case of telecommunications, if
competition is introduced, as well as liberalization and privatization,
a vertical and horizontal restructuring of the sector is essential.
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The aforementioned vertical restructuring implies the separation

of the infrastructures of commercial activity, this is a necessary
condition, given that if public enterprise is left to possess or manage
the infrastructures of monopoly, especially other activities, there
would be theoretical rather than e¡ective competition. Experience
has shown that in some countries in which the network continued to
be managed by the monopolistic enterprise, despite the fact that
freedom of establishment and access of third parties to the network
had taken place, the introduction of competition has failed.
The horizontal restructuring implies the rupture of the
monopolistic enterprise so that there are su¤cient companies giving
rise to rivalry and competition, or rather, limiting to a large extent the
monopolistic action in order to allow possible competitors to have the
possibility of installing themselves. This restrictive policy is
established to avoid the extraordinary bene¢ciaries of the
monopolized activity from being used to ¢nance the crossed subsidies
in favour of liberalized activities, o¡ering below cost prices, and
therefore, preventing or hindering the entry of new operators.
When dealing with a market in expansion, as is the case of
telecommunications in Spain, where the growth of demand is very
important, it has not been necessary to divide Telefönica, but to
simply eliminate the barriers that impeded the entry of other
competitors.
Another essential condition for liberalizing public sector services
and, therefore, introduce competition is that of separating the function
of operator from that of regulator, without there being the smallest
confusion among these.
The function of operator should be that of producing the services of
telecommunications in the most e¤cient way, to the extent that the
function of the regulator, is a public function that consists in exerting
supervision and control. For competition to exist, it is necessary that
identi¢cation of the regulator with the objectives of the regulated does
not occur in order to avoid what is called `capture of the regulator'; this
demands total incompatibility between the positions of regulator of the
telecommunications sector and whatever position at whatever level
within companies of the sector.
In Spain, as from the beginning of the current year, (1998)
Government representatives have ceased to be on the Board of
Directors of companies in the telecommunications sector.
The introduction of competition in the telecommunications sector
should not imply a collapse of the equity principle as regards the public
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objective of the universalization of the telephone service. Despite the

existence of the monopoly of the Compan¬|¨ a Telefönica de Espan¬a, up
until 1996 the plans of rural telephony had not been covered, even
with the existence of explicit subsidies from the a¡ected Autonomous
Communities.
In a monopolistic regime, the additional costs that are produced in
the areas in which demand does not economically justify investment,
they remain covered by crossed subsidies; the rate system of internal
precaution permits the monopolist to cover these costs.
In a regime of competition, the cost of universalization of the
telephony service can ¢nance itself either by way of the budget of
public entities, thus providing absolute transparency of the cost of this
universalization policy, by the former monopolist when it has a
overwhelmingly dominant position of the market, or by all the
competitors in function of the tra¤c that each of these channels, from
the moment in which the monopolist loses its dominant position in the
market.

3 Current telecommunications policy in Spain (1997^1998)

The Member States, and among them Spain, should fully and
rapidly apply the European directives. Once the new conditions have
been established, it will be the responsibility of Member States to
defend the general welfare as much as fair competition and guarantee
that universal service is provided in the telecommunications sector.
Even when a state decides to completely abandon the management
of general interest telecommunications service, it will continue to exert
in£uence in various areas: control of the market and its agents,
participation in the ¢nancing of some infrastructures and regulation
in the area of consumer protection.
The time limit ¢xed for the liberalization process in Spain to be
completed ends in December 1998.
The evolution of a legislative framework has considerably
transformed the traditional landscape of telecommunications services
based on two basic events:

. the privatization of telecommunications operators having

government participation;
. the culmination of the liberalization process for tele-
communications services.
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The Spanish government's ¢rst steps toward privatization-

regulation in the telecommunications sector over the past two years
have primarily been through the Telecommunications Liberalization
Law (April 1997) and later the recently approved General
Telecommunications Law (April 1998). They can be grouped into the
categories outlined below.

Establishing full competition in the sector as from December 1998

Telecommunications services in general are quali¢ed as services in the

general interest.1 Nevertheless, some services, such as establishing and
exploiting public telecommunications networks, providing telephone
service available to the public, providing services or infrastructures
which involve the use of the public radio-electrical domain, are con-
sidered public services or are subject to general interest obligations.

Free competition to be introduced on 1 December 1998, as much for

providing services as for establishing and exploiting the
telecommunications infrastructure. The only things excluded from
this are radio and television.2 Having ¢xed 1 December 1998 as the
deadline for completely open competition, until that time, the main
impetus for opening up competition is primarily regulatory, that is, in
preparation for the ideal conditions for competition, once the moment
arrives, to be real and e¡ective.

Nonetheless, the possibility remains that the number of licences will

be limited, in order to guarantee e¤cient use of the radio-electrical
spectrum.

1 Change in the legal nature of telecommunications, as opposed to its

previous conception as `essential services of state ownership reserved for the
public sector' in the 1987 Law.
2 The monopoly of the singular service of signal transport for the channels of
land television. The latter, within the carrier service which supports the
service of Hertzian di¡usion, continues in its regime of restricted competition
until the year 2000. The fact that the regime of radio and television are not
contemplated, albeit in accordance with Community regulation, could cause
problems in the near future, given the technological and entrepreneurial
convergence between the telecommunication and audiovisual operators, that
will inescapably lead to a future transformation of the panorama of the latter
two. In fact, the Telecommunications Market Commission has authority over
the converging services with telecommunications, such as audiovisual ones,
among which are included radiodifussion and television.

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A transition period has been established (until 1 August 1999) to trans-

fer the current concessions to authorizations or licences, which under no
circumstances should imply maintaining special or exclusive rights.
Until the date of complete liberalization, the current situation is
characterized by the following basic elements:
1. Three existing basic telephone service operators: Telefönica de
Espan¬a, S.A., Retevisiön (in operation since January 1998) and
Lince (not in operation).
2. Free competition in carrier and value-added services, among
these the following should be noted:
. Three mobile telephone operators have appeared: Telefönica
Möviles, Airtel Mövil (in operation since October 1995) and
Retevisiön Mövil (not in operation). The growth of these
services in Spain has been extraordinary.
. In public data transmission services, the competition has
remained in£uenced by the presence of Telefönica de
Espan¬a's e¡ective monopoly in circuit hire. For the growth
of e¡ective competition it is necessary to break down this
situation. Although competition in these services has been
formally established for a long time, in reality it is poor.
. Information access services, which occupy the area between
telephone service and the Internet network, have seen much
growth in Spain in terms of the number of operators in
comparison with other countries.
. The services of voice telephony in a closed group of users has
seen barely any growth.
3. Two cable telecommunications operators have appeared in each
zone.
4. Liberalization of satellite telecommunications services.
The introduction of competition into the telecommunications
sector has as one of its main bene¢ts a direct e¡ect on growth,
employment and productivity in the economy as a whole.
One of the more noticeable e¡ects of this liberalization process has
been the price reductions and discount programmes launched by the
operators. The presence of discounts in a competitive market is a sign
of healthy competition. However, in those markets where competition
still has not become well-established, even more importantly during
the initial start-up stages of new operators, price discounting can be a
form of anti-competitive behaviour. In general, those discounts which
re£ect underlying di¡erences in the costs of supplying the service
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would not be competitive. Other forms of discounts can also have a

negative e¡ect on competition (discounts or bonuses for loyalty,
volume discounts which are selectively applied to certain users, etc.).
Therefore, the Telecommunications Market Commission (TMC) has
paid special attention to Telefönica's discount plans and has required
them to be applied only under certain, determined conditions.
Between 1995 and 1997, the evolution of tari¡s has been as follows,
in nominal percentage terms.3

Installation ^ ¢rst line 0

^ second line 743
Rental 0
Local calls 0
Regional calls 0
National calls 78.7
International calls ^ EU 724
^ USA 738

To be exact, the prices Telefönica is charging users are gradually

undergoing adjustment. These modi¢cations have been centred in two
main areas:

1. Lowering the ¢xed rates which Telefönica charges. There have

been reductions in national circuit hire, international circuit
hire and in inter-provincial service.
In the future it is predicted that the price of these services will
be reduced by even more, approaching the costs of providing the
service.
2. O¡ering discounts in relation with ¢xed-rate services. Telefönica
has carried out a campaign with di¡erent types of discounts in
relation to these services (discounts of between 40% and 60%
for certain destinations).
The prices o¡ered by Retevisiön are very competitive compared
with the dominant operator. Among their advantages we should
mention price rating by seconds and not by units and variable
discounts of up to 25% in line reductions, without connection or
installation charges.
Telefönica Espan¬a has a price adjustment which will mean an
increase in the quota of monthly charges and local tari¡s and a

3 Data taken from the ¢nal COM (1998) 101.

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decrease in the cost of provincial, interprovincial and international

tari¡s planned for August 1998.

The separation of regulators and operators

Legislative functions, understood to be those of preparing basic
legislation and the resulting regulations, have been separated from
regulatory functions, or the administration of these laws with the
purpose of establishing the rules of the game and acting on
the mechanisms of the market. The former have remained within the
jurisdiction of the government and The Ministry of Development,
while the latter have been transferred to the TMC.
An independent organ has been created, the Telecommunications
Market Commission (TMC). Its province is safeguarding the conditions
for e¡ective competition, looking after proper price-setting interests
and serving as arbiter in con£icts. Speci¢cally, to have as its functions
arbitration; granting qualifying titles (concessions, satellite tele-
communications authorizations, value-added services, and that cable
which is not granted via tenders) and registration; shipping titles;
assigning numeration; supervising compliance with the obligations of
public service; intervention in the area of interconnection; serving as
watchdog for free competition in the telecommunications market
(activities related to the dominant operator and the other operators,
strategic alliances, etc.); sanctioning power in con£ict resolution; and
intervention in the audio-visual, telematic and interactive service
markets.
The regulatory authority of the sector rests with the government,
speci¢cally, with the Ministry of Development. This agency, in turn,
reserves the right to set prices and to grant authorization and licences
through tenders.Therefore, if the government does not give up its stake
in Retevisiön (30%) before December 1998, it will not be possible to
speak of an e¡ective separation of regulator and operator.This has also
been a criticism made by Telefönica, where, while the government no
longer has a stake in the company, for the past 10 years it has continued
to maintain a position of control over extraordinary situations.
We return to the ¢gure of the Telecommunications Advisory
Council, with the purpose of study, deliberation and proposal.
In general terms, the laws seems to be ambiguous on many points
regarding the assignment of authority to the TMC and the delineation
of its ¢eld of action in contrast with the Ministry of Development, the
Competition Defence Tribunal and the government itself, (especially
between the TMC and Development). A clear separation of functions
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has not been achieved. That is, between the legislative function (which
pertains to the government), and intervention and direct promotion
functions (executive functions, related to the management and
application of regulations) which should be assigned to the
independent regulatory body, the TMC. (Speci¢cally, it is possible to
mention the imbalance of power in the granting of titles, this having a
detrimental e¡ect on the TMC's authority, competition in inter-
connections or the modi¢cation of operator^user contracts.)

Obligations of public service: regulation of universal service

The de¢nition of communal universal service is understood to be `a
de¢ned group of telecommunications services of a certain quality,
accessible to all users independent of geographical location, and at a
reasonable price, special consideration being given to the island
situation'. The services included, subject to change with time, are the
following: connection to the ¢xed telephony network and ¢xed
telephony service which allows national and international calls, fax
and data transmission, telephone directories, a su¤cient supply of
public pay telephones, and disabled access.
The requirement for the service to be reasonably priced is an
essential part of universal telecommunications service. However,
together with this requirement it is necessary for each member state
to make it clear how this reasonable price should be determined in its
legislation or in the licences it grants. In terms of this, in Spain, price
limitations have been determined based on the costs of the sector,
productivity and the retail price index. Reasonable prices are a
requirement, but there are no speci¢c criteria to measure them by.
The dominant operator (Telefönica, at least until the year 2006) is
obliged to provide this service.4
In terms of calculating costs and ¢nancing the universal
telecommunications service, it is important to highlight three areas:

1. The operator, in order to calculate the costs, can only include

those costs associated with the obligation of universal service as
de¢ned by community legislation. In addition, it may only recoup
contributions to the `net' costs of these obligations. The national
regulatory authority may verify said calculations.

4 Although all the operators that require an individual licence are required
to follow the obligations of the public service.

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2. It is the responsibility of the member states to evaluate, based on

the calculation of net costs, if this represents an equitable burden
for the operator in question. Only in an inequitable case can it
resort to mechanisms for distributing these costs among the
market agents.
3. The community framework provides two mechanisms for
recouping costs (creating a universal service fund on the
national level or a system of supplementary surcharges) apart
from direct ¢nancing from the Government budget.

In Spain, in order to deal with ¢nancing universal tele-

communications service, the TMC has been made responsible for
determining if providing this service supposes a competitive
disadvantage for the operators providing the service. If this is the
case, the mechanisms for distributing the net costs of providing the
service among all the operators will be established and made public.
The method of calculation would be as follows:

Net cost ˆ Incremental costs of providing non-profitable services

ÿ Income derived from the activity
ÿ Intangible benefits associated with the universality
of the service:5

In each case, this calculation will be made by the operator who

provides the universal service, in accordance with whatever principles
the TMC may establish and with the TMC's approval of the results.
It will be the TMC itself that determines the distribution of this
cost among each one of the operators. This is to be done in accordance
with the principles of transparency, non-discrimination and
proportionality and taking into account the activity of each operator.

5 In this way, the ¢nal COM (1996) 608 speci¢es that the immaterial bene¢ts
that the operator obtains in the role of provider of a universal service should be
taken into account. Although the bene¢ts that result from being a universal
service provider cannot be calculated in detail, it is possible to establish
reference estimations for each of the following categories. Nevertheless, in the
evaluation of these types the bases of calculation and all the suppositions used
should be indicated with clarity. These advantages include:
1. A greater recognition of its brand name (compared with that of its
competitors).

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346 J. BAREA TEJEIRO AND O. RUIZ CAN¬ETE

The objective parameters which will serve as indicators6 of said activity

will be determined by the Ministry of Development and will be applied
by the TMC.
The contributions received will be deposited in the National
Universal Telecommunications Fund, which was created by the 1998
law, with the purpose of guaranteeing ¢nancing for universal service.
This fund will be fed, primarily,7 by the cash contributions coming from
those operators required to contribute to the ¢nancing of universal
service and its management by the TMC.
The operators subject to requirements for the provision of
universal service will receive from this fund the amount
corresponding to this net costs this obligation would suppose.
In Spain, therefore, the ¢nancing of the cost of this service will be
provided for through a national fund which the operators will
contribute to, according to their relative tra¤c. Thus the system of a
national fund has been chosen, in place of supplementary quotas
(which is also being considered by the EU). However, there will be a
system of supplementary quotas in addition to those of
interconnection until this fund is in operation.
The cost of universal service has been estimated to exceed Pta
32,000^55,000 million, this is between 2.1% and 3.7% of the volume of
business of Telefönica de Espan¬a, S.A. (Data taken from the COM
(1998) 80).

(continued from previous page)

2. A universal coverage in the ubiquitous zone of operation ( that is to
say, inferior charges to those of their competitors when extending the
network to new clients).
3. An evaluation of the clients and groups of clients that embrace all its
vital path (this evaluation mentions the fact that a client is not currently
economical might become economical in the future; for example, a young
family that is, in principle, `unviable', can, as time passes, be pro¢table
when their incomes increase and their children start to use the
telephone). This means that, for the operator, to assist this client in the
short term can be bene¢cial, given the incomes generated over their life span.
4. Advantages as regards commercialization, having access to all types
of data regarding the use of the telephone.
6 Until each operator is not established, the percentage of gross income from
operations will be taken into account, in proportion to the volume of overall
business of the market.
7 The provisions for disinterested contributions to the ¢nancing of the
universal service are also contemplated.
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Administrative systems for concessions and authorizations will disappear

in the face of two unique items: individual licences and general
authorizations, in keeping with the community legislation.
The concept of dominant operator, de¢ned as the operator who has a
market share of over 25% in any geographic area, will be associated
with several obligations. Telefönica has been named as initial
dominant operator, holding this title until the year 2006.
Interconnection is a right and an obligation of any operator.This is subject
to negotiation between the parties involved. The TMC will only
intervene if an agreement cannot be reached. The principle of cost
guidance in interconnection prices is established.
In this area, the Order of Tari¡s and Conditions of Network
Interconnection states that the basic public telephone service
developed by the dominant operator to provide the ¢nal and carrier
service which is its support (Order of 18 March 1997) constitutes
the key legal reference, as it ¢xes, subsidiary by default under the
agreement, the technical and economic conditions of the
interconnection operations until 1 December 1998. To this end,
Telefönica and Retevisiön signed an interconnection contract dated
30 December 1997 in which price, physical and legal conditions to
support the start-up of the second operator were ¢xed.8
These charges were considered excessive by the European
Commission and it recommended that they be lowered to be more in
line with the interconnection tari¡s in other countries. However,
given that the tari¡ ranges proposed were not obligatory, but merely a
point of reference, the Ministry of Development did not accept them.
In fact, the interconnection rates deviate from the `best current
practice' by 51% for local, by 62% in double transit (interprovincial)
between ¢xed and ¢xed, and by 408% in double transit
(interprovincial) between ¢xed and mobile.
The radio-electrical spectrum continues to be de¢ned as a scarce resource
whose use is managed by the state who, as we have already pointed out,
will limit the use of the licences which make use of it. This reinforces
governmental control over services which have growth potential and
are of interest to new entrants, such as mobiles and local wireless
access.

8 This interconnection agreement is added to those that have already been

concluded between Telefönica and Airtel.

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A group of charges to ¢nance transaction costs derived from the

application of the system of licences, authorizations, planning, control
and management of Public Numeration Space, issuing certi¢cates, etc.,
is established.
The possibility of the government ¢xing maximum and minimum prices,
as well as a transportation surcharge on interconnection prices due to the
inequality of the tari¡s is established.
During 1997 and 1998 the system and procedures for the
authorization of telecommunications service tari¡s established in
the Royal Decree 7/1996 has been maintained. In this area, the
government, through the Commission for Economic Issues, though it
is subject to informing the TMC, is quali¢ed to approve the structure
and level of the rates which the dominant operator applies to basic
telephone service.
In the area of mobile telephone service rates, these may be freely
¢xed by the operators, the government having reserved the authority
to establish price ranges for these services.
As for the prices of interconnection services between networks and
to guarantee that the services are inter-operational, the system
currently in force establishes the principle of free agreements between
the operators involved in the interconnection transactions. However,
this includes the guarantee of `maximum authorized prices' by the
Ministry of Development for certain basic services provided by the
dominant operator. This authority will be transferred to the TMC on 1
December 1998.
Numeration is considered to be a public resource and responsibility for
the this is divided between the TMC and government.
The principle of separation of accounts is established to prevent and
intervene in situations where the dominant position is abused. By
virtue of this principle, the operators which are considered to
be dominant in public telecommunications networks and
telecommunications services accessible to the public will have to
present the TMC with separate and audited accounts.

Separation between operators and regulator

Together with the liberalization-regulation process in the
telecommunications sector, the Spanish government has advanced to
privatization (understood to be the sale of its stake) of the
telecommunications operators which government has a stake in.
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Table 1 ± Public voice telephone operators in Spain (July 1998)

Fixed voice telephone Mobile voice telephone

Local/provincial Analogical
Dominant: Telefönica de Espan¬a, S.A.
Telefönica de Espan¬a, S.A.
Alternative operators:* GSM-900
Retevisiön Dominant:
TV cable operators (11) Telefönica de Espan¬a, S.A. (74% of the market)
Lince Alternative operators:
Airtel (26% of the market)
Interprovincial/International
Dominant: DCS-1800
Telefönica de Espan¬a S.A. (90% of the market) Operators:{
Alternative operators:{ Retevisiön Mövil
Retevisiön (10% of the market) Telefönica Möviles
TV cable operators (11) Airtel
Lince

*These companies do not yet operate on a local level. Only Retevisiön is planned to do so from
September 1998.
{
None of these are operational. Retevisiön Mövil will be operational for December 1998 or the first
trimester of 1999, whilst Telefönica and Airtel will not be able to provide a service until six months after
the signing of the concession contract of the licence to Retevisiön Mövil (June 1998).
{
Only Retevisiön operational, from January 1998.

In this area, the state has proceeded to sell its stake in Telefönica
de Espan¬a, S.A. through a Public Bid in two phases. In October 1995 it
sold 12% and in January 1997 it disposed of the remaining 21% of its
stake.
Nevertheless, it reserved the right to its previous administrative
authorization, for a period of 10 years, over the adoption of certain
company agreements (dissolution, split, or merger, change of business
objective, . . . or the acquisition of a stake in the company of 10% or
more). This authorization appertains to the Ministry of Development.
With respect to its stake in Retevisiön, S.A., the Ministry of
Development sold 70% of its stake in 1997 and plans to get rid of the
remaining 30% before December 1998.

4 Conclusions

The introduction of competition into the Spanish tele-

communication market has resulted in the market distribution
shown in Table 1.
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As we have already pointed out, one of the most noticeable e¡ects

of the privatization process has been the reduction in prices. The prices
that Retevisiön is o¡ering are 25% less expensive than Telefönica's in
interprovincial calls and 16% in international calls. To that we may
add promotions (between one third and one half price in some time
periods) and billing by seconds, which means an additional reduction
(by avoiding the rounding up to units).
The dominant operator,Telefönica, has reacted by beginning to bill
by seconds, from August 1998, and discounting their prices by 5% for
provincial calls, 15% for interprovincial and 12% for international,
while the cost of local calls will rise.

Appendix ^ Telecommunications market in Spain in ¢gures

Per capita at current market prices 1997 76.9 (EU:100)

Telecoms services market value 1997 ECU 10.585 million
Per capita telecoms expenditure 1997 ECU 269 (EU media: 376)
Telecoms services market value growth 98/97 8.60% (EU media: 8.2%)
Cellular mobile subscribers per 100 habitants 1997 11 (EU media: 13)
Telephone lines per 100 habitants 1996 40.75

Source: COM (1998) 80 and final COM (1998) 101.

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