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 ORGANISATION FOR ECONOMIC CO-OPERATION

AND DEVELOPMENT

Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came
into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD)
shall promote policies designed:

 to achieve the highest sustainable economic growth and employment and a rising standard of
living in Member countries, while maintaining financial stability, and thus to contribute to
the development of the world economy;

 to contribute to sound economic expansion in Member as well as non-member countries in

the process of economic development; and

 to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in

accordance with international obligations.

The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France,
Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members
subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th
January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the
Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996), Korea
(12th December 1996) and the Slovak Republic (14th December 2000). The Commission of the European
Communities takes part in the work of the OECD (Article 13 of the OECD Convention).

Publié en français sous le titre :

LA RÉFORME DE LA RÉGLEMENTATION DANS L’INDUSTRIE DES TÉLÉCOMMUNICATIONS

© OECD 2001
Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be
obtained through the Centre français d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins,
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should be made to OECD Publications, 2, rue André-Pascal, 75775 Paris Cedex 16, France.

© OECD (2001). All rights reserved. 2

 FOREWORD

Regulatory reform has emerged as an important policy area in OECD and non-OECD countries. For
regulatory reforms to be beneficial, the regulatory regimes need to be transparent, coherent, and
comprehensive, spanning from establishing the appropriate institutional framework to liberalising network
industries, advocating and enforcing competition policy and law and opening external and internal markets to
trade and investment.

This report on Regulatory Reform in the Telecommunications Industry analyses the institutional set-
up and use of policy instruments in Italy. It also includes the country-specific policy recommendations
developed by the OECD during the review process.

The report was prepared for The OECD Review of Regulatory Reform in Italy published in 2001.
The Review is one of a series of country reports carried out under the OECD’s Regulatory Reform
Programme, in response to the 1997 mandate by OECD Ministers.

Since then, the OECD has assessed regulatory policies in 16 member countries as part of its
Regulatory Reform programme. The Programme aims at assisting governments to improve regulatory quality
— that is, to reform regulations to foster competition, innovation, economic growth and important social
objectives. It assesses country’s progresses relative to the principles endorsed by member countries in the
1997 OECD Report on Regulatory Reform.

The country reviews follow a multi-disciplinary approach and focus on the government's capacity to
manage regulatory reform, on competition policy and enforcement, on market openness, specific sectors such
as electricity and telecommunications, and on the domestic macroeconomic context.

This report was principally prepared by Wonki Min, of the Directorate on Science, Technology, and
Industry, with the participation of Dimitri Ypsilanti of the Directorate on Science, Technology, and Industry.
It has benefited from comments provided by colleagues throughout the OECD. It benefited from extensive
comments provided by colleagues throughout the OECD Secretariat, as well as close consultations with a
wide range of government officials, parliamentarians, business and trade union representatives, consumer
groups, and academic experts in Italy. The report was peer-reviewed by the 30 member countries of the
OECD. It is published under the authority of the OECD Secretary-General.

© OECD (2001). All rights reserved. 3

 TABLE OF CONTENTS

1. THE ITALIAN TELECOMMUNICATIONS SECTOR .................................................................... 7

1.1. The national context for telecommunications policies ............................................................... 7
1.2. General features of the regulatory regime, telecommunications market and market participant 9
2. REGULATORY STRUCTURES AND THEIR REFORM .............................................................. 13
2.1. Regulatory institutions and processes....................................................................................... 13
2.2. Regulations and related policy instruments in the telecommunications sector ........................ 15
2.3. The dynamic view: convergence in communications markets ................................................. 33
3. PERFORMANCE OF THE TELECOMMUNICATIONS INDUSTRY .......................................... 33
3.1. Competition analysis ................................................................................................................ 33
3.2. Other performance indicators ................................................................................................... 39
4. CONCLUSIONS AND RECOMMENDATIONS ............................................................................ 41
4.1. General assessment of current strengths and weaknesses......................................................... 41
4.2. Potential benefits and costs of further regulatory reform ......................................................... 43
4.3. Policy recommendations........................................................................................................... 43
NOTES ......................................................................................................................................................... 45

BIBLIOGRAPHY ........................................................................................................................................ 50
BIBLIOGRAPHY

Tables

1. Italy’s transposition of the EU harmonisation directives

2. Distribution of revenues in the Italian telecommunications market, 1996-1999
3. Italy’s mobile subscriber penetration ranking among OECD countries
4. Overview of the Italian telecommunications market
5. Ownership status of the major operators in the Italian telecommunications market
6. Italian licensing regime
7. Comparison of Telecom Italia’s interconnection charges and the upper limits of EU “best practice guideline”
8. Changes on Telecom Italia’s interconnection charges
9. Pricing control mechanism on Telecom Italia’s services
10. Italy’s WTO commitment as a member country
11. Main interventions of the competition authority in the telecommunications sector
12. Fixed voice telephony services offered by Telecom Italia and Infostrada
13. Telecom Italia’s gross operating revenues from fixed and mobile telecommunications services
14. Telecom Italia’s fixed lines
15. Digitalisation in fixed network
16. Number of payphones per 1 000 inhabitants
17. Employment in the telecommunications services sector
18. PTO access lines per employee

Figures

© OECD (2001). All rights reserved. 4

1. Comparison of ratio between retail prices and interconnection charges
2. Rebalancing in Italy: changes of peak fixed to fixed call charges
3. OECD national business tariff basket, 1991-98
4. OECD Composite Business basket, November 2000
5. OECD Composite Residential basket, November 2000
6. Mobile consumer basket, November 2000,
7. Leased lines charges, November 2000
8. OECD Internet Access Basket for 20 hours at peak times using discounted PSTN rates

© OECD (2001). All rights reserved. 5

 Executive Summary

Background Report on Regulatory Reform in the Telecommunications Industry

The telecommunications industry has undergone significant regulatory reform over the last decade. By the beginning of
2001, 27 OECD Member countries have liberalised their telecommunications market, including voice telephony,
infrastructure investment and foreign investment in the telecommunications service industry. The success of the
liberalisation process depends on the presence of a transparent and effective regulatory regime that enables the
development of fair competition in the marketplace. Together with the transparent and effective regulatory regime, the
regulator’s readiness and willingness to apply pro-competitive regulatory measures in favour of promoting competition
play a key role in making a smooth transition of the telecommunications sector from monopoly to full competition. In
this context, this report analyses the effectiveness of the Italian telecommunications regulatory regime together with the
evaluation on the performance of the regulatory bodies.

By and large, the telecommunications market liberalisation in Italy has been driven by the European Commission’s
efforts to liberalise the European telecommunications market. Indeed, in most important policy issues such as
interconnection, licensing, universal service, etc., EU Directives have played a key role in moulding the Italian
regulatory framework. The Italian government has made many important policy decisions to promote competition since
the mid 1990s. Now, with the completion of the implementation of EU Directives into national legislation, Italy has a
fairly comprehensive regulatory regime enabling it to promote competition in the telecommunications sector.
Furthermore, for certain regulatory measures such as the coverage of carrier pre-selection, monitoring service of quality
and the unbundling of the local loop, the Italian regulatory regime has one of the most pro-competitive approaches
amongst all OECD member countries.

Italy, as regards the structure of the regulator (AGCOM or Autorità per le garanzie nelle comunicazioni), has a unique
regulatory system among OECD countries. In particular, the regulator has the responsibility to supervise the
telecommunications sector as well as the broadcasting sector and the press. This can enable the regulator to make
technologically neutral regulatory decisions and take consistent regulatory approaches for the whole communications
sector. At the same time, the regulator has demonstrated its willingness to promote competition through successive
regulatory rulings and new legislation.

However, there are a number of issues, which need to be promptly addressed in order to expedite the level of
competition in the marketplace. First of all, the AGCOM needs to have the necessary staff to exercise its regulatory
power appropriately and in a timely manner. In spite of the full empowerment of regulatory responsibility by law,
currently the AGCOM still shares regulatory powers with the Ministry, partially due to a lack of adequate staffing. This
regulatory power sharing has created confusion for market players in trying to determine which is the relevant regulatory
body governing specific issues such as spectrum management and numbering. At the same time, there is a need to
change regulations so that they are more user-friendly and market oriented. For example, the licensing regime is still
very complicated, and included up to the beginning of 2001 the use of concessions. In addition, the government’s golden
share in the incumbent creates uncertainty in the marketplace.

The incumbent still has a largely dominant market share in the access and local call market and leased line markets. The
dominance of the incumbent in the local market highlights the importance of the role of the regulator in the Italian
telecommunications market since there would not be fair competition unless the regulator ensures a non-discriminatory
and cost-oriented access regime.

© OECD (2001). All rights reserved. 6

1. THE ITALIAN TELECOMMUNICATIONS SECTOR

1.1. The national context for telecommunications policies

The reform of telecommunications markets in Italy has initially been driven by European Union
(EU) policies. Since the release of the 1987 “Green Paper on the Development of the Common Market for
Telecommunications Services”, the European Commission has played an important role in promoting the
liberalisation of the EU telecommunications market through successive liberalisation directives and
harmonisation directives.

Unlike the UK and Scandinavian countries, which undertook national initiatives to liberalise their
markets ahead of the EU efforts, the EU directives have mostly guided Italy’s liberalisation of the
telecommunications market. In fact, the liberalisation of the Italian telecommunications market can be best
described as the adoption of EU directives into national legislation, a process in which Italy has barely met
deadlines and was often late in keeping the EU’s deadline. In recent years the situation has improved and
liberalisation deadlines are being met with more regularity.

The late liberalisation of the market has helped the incumbent to maintain a dominant position in
the access and local voice market as well as the leased line market. Since there is practically no CATV
networks in Italy, the incumbent’s local loop is and will remain an essential facility for new entrants to access
end customers until wireless local loop (WLL) is in place. It implies that all new entrants need to interconnect
with the incumbent’s local loop to terminate their fixed to fixed and mobile to fixed phone calls unless they
have an agreement for local loop unbundling (ULL) with the incumbent. This emphasises the importance of
the role of regulator because the only way for new entrants to access end customers is through the
incumbent’s local loop.

Most OECD countries allow telecommunications operators to follow a legal proceeding through the
courts when they are not satisfied with the regulator’s ruling, and telecommunication operators, in particular,
incumbents use this recourse as a means of slowing down implementation of new rules. Nevertheless, it is
extraordinary that in Italy the incumbent, Telecom Italia, has gone to court against almost all regulatory
rulings made by the regulator. Of particular importance the dispute on the completion of rebalancing which
resulted in the regulator and the incumbent taking different positions on most regulatory issues such as
pricing regulation, and unbundling.

Telecom Italia is subject to “golden share regulation” based on the “Golden Share Decree1” issued
on 11 February 2000 and Telecom Italia’s constitution. According to the Golden Share Decree, the Italian
government can use its special powers to block an acquisition of Telecom Italia in order to protect the vital
interests of the State and the public. Although the Italian government did not exercise its special power when
Deutsche Telekom and Olivetti competed to take over Telecom Italia (Olivetti finally succeeded), the
existence of a “golden share regulation” means that the Italian government still is empowered to intervene in
the case of an acquisition of the incumbent.

© OECD (2001). All rights reserved. 7

 Table 1. Italy’s transposition of the EU harmonisation directives (as of 1 October 2000)
Directive Transposition Note
ONP Framework S The original ONP directive is substantially transposed by Decree No.
(90/387/EEC, modified by 55 of 9 February 1993, later integrated and supplemented by the
97/51/EC) framework Law No. 318 of 19 September 1997. Directive 97/51/EC
is not yet transposed.
Leased Lines (92/44/EEC; P The original leased lines directive (92/44/EEC) is substantially
modified by 97/51/EC and transposed by Decree No. 289 of 2 May 1994 and further integrated
by Decision 98/80/EC) by the framework Law No. 318 of 19 September 1997. The amended
directive has been transposed by the Government in January 2001;
the regulatory regime is consistent with the Directives.
New Voice Telephony N The old voice telephony directive (95/62/EC) is substantially
(95/62/EC, modified by transposed; the new directive was transposed in January 2001; the
98/10/EC) regulatory regime is consistent with the Directive. (Some of its
principles take place in the AGCOM Decision No. 101/99, dated 24
June 1999).
Licensing (97/13/EC) P Partially transposed by the framework Law No. 318 of 19 September
1997 and by the Ministerial Decree of 25 November 1997 (as
modified by Decision No. 217/99, dated 22 September 1999 and by
the decision No. 657/00/CONS, dated 4 October 2000). Only
recently, through Decision No. 467/00/CONS, dated 19 July 2000,
the AGCOM issued the provisions regarding general authorisations.
The transposition is now complete in relation to conditions attached
to general authorisations; non-public services will be subject to a
new regulation. In addition, the existing legislation on satellite co-
ordination still needs to be brought into line with the provisions of
the directive.
Interconnection (97/33/EC, S The Directive is substantially transposed by the Decree on
modified by 98/61/EC with interconnection of 23 April 1998, the Ministerial Decree on
respect to number portability numbering of 27 February 1998, updated by the Decision of the
and carrier pre-selection) AGCOM of 29 July 1999 on new numbering plan and related norms
and the Decree on universal service of 10 March 1998, which
supplemented the general provision of the framework Law No. 318
of 19 September 1997. Additional provisions on number portability
and carrier pre-selection have been issued by AGCOM, on 7
December 1999, through Decision No. 3/CIR and No. 4/CIR.
Numbering (97/33/EC S The provisions relating to carrier pre-selection have been fully
modified by 98/61/EC with transposed by the framework Law No. 318 of 31 July 1997, the new
respect to number portability numbering plan of 29 July 1999,by the Licensing Decree and by
and carrier pre-selection) several implementation directives issued by the NRA (3/00/CIR,
4/00/CIR and 6/00/CIR).
Data Protection (97/66/EC) S The Directive is substantially transposed by Decree No. 171 of 13
May 1998.
Note: S – Substantially transposed, P – Partially transposed, N – Not transposed.
Source: European Commission “Fifth Report on the Implementation of the Telecommunications Regulatory Package”, OECD.

© OECD (2001). All rights reserved. 8

 Box 1. How to control the incumbent in a liberalised telecommunications market?

Even after the liberalisation of telecommunication markets, a large number of OECD countries still maintain measures to
control ownership of the incumbent, in addition to asymmetric regulation based on telecommunications regulations and
general competition rules.

One way this has been done is by maintaining a majority shareholding of the incumbent or by imposing “golden share”
regulation. Since privatisation of the incumbent is not included in WTO commitments or in EU directives as a condition
of market opening, some governments such as the Netherlands and Germany still have a majority shareholding in the
incumbent. In particular, the Dutch government also has a “golden share” of KPN. In Italy and Spain, in spite of the fact
that the government does not hold enough shares to control the incumbent, the government can influence certain
activities of the incumbent through a “golden share”.

On the other hand, there are a number of countries such as Japan and France, which have a special law for supervising
the incumbent. In many cases, this special law requires a minimum percentage of government ownership and imposes
foreign ownership and/or individual ownership restrictions.

In principle, in a liberalised telecommunication service market where there are an increasing number of market players
and where capacity is being traded as a commodity, it does not make much sense to maintain special regulations on the
incumbent in addition to regulation based on general competition principles. In particular, considering the rapid
development of alternative infrastructure such as cable television networks and wireless networks, there is no reason to
impose special regulations on the incumbent other than regulations based on concepts of market power or essential
facilities. In any event, all countries have special requirements for national emergencies that they can use to impose
requirements on the incumbent.

1.2. General features of the regulatory regime, telecommunications market and market participant

1.2.1. Brief History

In Italy, until 1992, telecommunications services were provided directly by the State through the
ASST (Telephone Services State Agency) and the Posts and Telegraphs Administration (PT), or indirectly
through several concessionaires such as SIP, ITALCABLE, TELESPAZIO, SIRM, and TELEMAR.2

In 1992, the Italian government decided to give management of all telecommunication services
to the concessionaires (Law No.58/92). In 1994, recognising that the division of telecommunication
operations weakened the overall development of the Italian telecommunications industry, the Italian
government merged all concessionaires into a single company, Telecom Italia, with the exception of
TELEMAR. A year later Telecom Italia Mobile was established, and in 1997 Telecom Italia was incorporated
into STET (Societá Finanziaria Telefonica), following which STET changed its name to Telecom Italia.

In 1995, all telecommunications services were liberalised except fixed voice telephony, mobile and
satellite services and network installations. In 1997, networks and services by satellite were liberalised by
Decree-Law 11 February 1997, No. 55. On 31 July 1997 the Italian Parliament enacted Law No. 249 on the
“creation of the telecommunications National Regulatory Agency (AGCOM – Autorità per le Garanzie nelle
Comunicazioni)” and provisions on telecommunications and broadcasting systems. The Presidential Decree
of 19 September 1997, No. 318 completed full liberalisation of the telecommunications market.

© OECD (2001). All rights reserved. 9

 In November 1997, the Ministry of Treasury privatised Telecom Italia by selling virtually its entire
stake through a global offering and a private sale to a group of shareholders. On 21 May 1999 Olivetti
obtained control of Telecom Italia when approximately 52.12% of Telecom Italia Shares were tendered to
Olivetti. As of 21 June 2000 Olivetti, through its subsidiary Tecnost S.p.a., owns 54.99% of Telecom Italia
Shares, and the Treasury retains a 3.46% stake in Telecom Italia.

In the mobile market, Omnitel, the second mobile operator commenced services in 1995 and Wind,
the third mobile operator commenced operation in March 1999. Blu S.p.a., which obtained a licence as the
fourth national operator on August 4 1999, began providing a DCS 1800 service in the summer of 2000.

Box 2. Brief history of telecommunications market liberalisation in Italy

Before 1992: Provision of radio and telecommunications services by the State either directly or through
concessionaires.

1992: The responsibility to provide all telecommunications services was given to the concessionaires.

1994: All concessionaires were merged into a single company, Telecom Italia, with the exception of TELEMAR.

1995: Liberalisation of telecommunications services except voice telephony, mobile and satellite services and
network provision.

Start of services of the second mobile operator (Olivetti).

1997: Establishment of the regulator (AGCOM).

Privatisation of Telecom Italia.

Liberalisation of satellite services.

1998: Liberalisation of voice telephony market.

1999: Start of services of the third mobile operator (Wind).

2000: Start of services of the fourth mobile operator (Blu).

1.2.2. Telecommunications market and participants

Telecommunications market

At the end of 1999 Italy’s telecommunications market size is estimated at USD 32.9 billion,3 the
sixth largest telecommunication service in the OECD (and 4th largest among EU Member countries).

In particular, Italy’s mobile market was the third largest in the OECD in terms of revenue (USD 12
billion) and the number of subscribers (2nd and 1st in the EU respectively). The rapid growth of mobile
services is largely due to the introduction of prepaid card services. After the introduction of prepaid card
service in 1996, Italy’s mobile penetration rate ranking jumped from 12th to 8th among OECD member
countries between 1996 and 1997. Approximately 82% of TIM customers, as of 31 December 1999 used
prepaid cards. The only other OECD country, which has a comparable pre-paid card subscription percentage
with Italy, is Portugal.

© OECD (2001). All rights reserved. 10

 Table 2. Distribution of revenues in the Italian telecommunications market, 1996-1999

(percentage)

1997 1998 1999

Fixed telephony services 64.8 57.5 50.7
Mobile telephony services 27.5 34.9 41.3
Data services and leased lines (*) 7.7 7.6 8.0
Total 100.0 100.0 100.0
(*) – including Internet revenues.
Source: AGCOM evaluation on Communications Outlook and IDC data

Table 3. Italy’s mobile subscriber penetration ranking among OECD countries

1990 1991 1992 1993 1994 1995 1996 1997 1998 June 1999
Ranking 17 14 14 14 12 12 12 8 6 7
Source: OECD.

At the end of 1999, the incumbent operator, Telecom Italia, was the world’s seventh largest fixed
telecommunications operator with approximately 26.5 million fixed lines including ISDN, and its subsidiary
TIM was the largest mobile operator in Europe and the third largest in the world with 18.5 million mobile
customers.4

As of the end of 1999, there were approximately 448 000 lines (points of entry of data network)
leased to business customers of which 240 000 related to data transmission. In addition, there were almost
25 000 digital leased lines related to backbone networks and almost 8 500 digital lines for interconnection
with the Telecom Italia network leased to other domestic telecommunications operators.

In Italy, cable television networks have not developed due to the rapid development of analogue
terrestrial television, which was completely liberalised in 1976. As of 30 November 1999, there were
11 national terrestrial television channels, over 700 local television broadcasters (analogue) and
1 709 000 subscribers for satellite television.5 TV subscribers can view 57 to 60 terrestrial broadcasting
channels. TI is the largest shareholder of Stream,6 which was the only cable TV service provider in Italy until
the Autumn of 2000, when Canal + reached an agreement with TI to distribute its own channels. Stream
leases its facility from TI and has no plans to install its own networks. As of 30 November 1999 Stream had
about 500 000 customers, of which only 82 000 are served by cable and the others are served via digital
satellite programming.7

In the Internet market, as of the end of 1999, there were 4 930 000 subscribers.8 Telecom Italia Net
(Tin.it), the Internet service provider subsidiary of the incumbent telecommunication operator had the largest
market share with 1 990 000 subscribers. In spring 2000 several providers began marketing broadband
services using ADSL technology which permits fast access to Internet and the use of interactive multimedia
services.

© OECD (2001). All rights reserved. 11

Market participants

An overview of the participants in the Italian telecommunications market is summarised in Table 4.

As the table indicates, Telecom Italia, including its subsidiary Telecom Italia Mobile (TIM), has a dominant
position in all telecommunications market segments.

In the fixed voice telephony market, there were 122 licences for PSTN network and/or service
providers as of 1 June 2000. Except for the incumbent, Telecom Italia, major fixed voice telephony service
providers are Infostrada9 (owned by the National Electricity Co. [ENEL]), Albacom, Wind, Tiscali and Tele2.

In the mobile market, TIM is the sole provider of analogue mobile telecommunications services,
which account for about 8% of the mobile market in terms of users Analogue service is based on the TACS
900 standard and began operation in 1990. There are four operators including TIM with licences for GSM
and/or DCS 1800 mobile services. TIM and Omnitel began their GSM services in 1995. Wind had begun to
commercialise GSM/DCS services in March 1999. Wind and Omnitel are the only Italian
telecommunications operators that have both a mobile and a fixed licence. Blu began service in summer
2000, using DCS-1800, with cost-oriented roaming in the 900 MHz band. The late entrance of the third and
the fourth mobile operators gave a competitive advantage to TIM and Omnitel allowing them to obtain the
lion’s share of the market.

In addition 5 UMTS licenses were awarded in November 2000; a ruling allowing trials for wireless
in the local loop services (40.5-42.5 GHz band) shall enter into force soon, as well as licensing in the 24.5-
26.5 / 27.5-29.5 GHz bands.

It is noteworthy that Italian mobile operators do not provide any handset subsidies. Considering the
fact that handset subsidies take a significant portion of mobile operator’s cost structure in other countries, the
lack of handset subsidies enables Italian mobile operators to offer lower service charges on mobile services.
(See Section 3.1)

Table 4. Overview of the Italian telecommunications market

No. of licensees Market share Notes

(as of 1 June 2000) (as of the end of 1999)
Fixed Service based operators Telecom Italia (market share in %): There are three types of fixed voice
(operators without their - Local: (~100%). telephony licences:
own infrastructure): 100. - Long distance (% of minutes) - Voice telephony services.
(93%). - Network installation and
Facility based operators - International (% of outg. min.): provision.
(including network (68%). - Network installation for the sole
providers): 22. - Leased Lines: (100%). purpose of voice telephony
provision.

Mobile Analogue: 1 (TIM). Analogue: TIM - 100% Market share is estimated on the
Digital: 4 (TIM, OPI, Digital: basis of number of subscribers as of
WIND and BLU). -TIM - 48.7%. Sept. 2000 in GSM/DCS market
-OPI - 38.7%. (some 35.5 million total
-WIND - 11.1%. subscribers).
-BLU - 1.5%.
CATV 2 Stream: 100%; TELE+ (operation
started in October 2000).
Source: AGCOM.

© OECD (2001). All rights reserved. 12

 Table 5. Ownership status of the major operators in the Italian telecommunications market

Operators Ownership Status

Telecom Italia Tecnost S.p.a. 55.02%, Bank of Italy 1.14%, Treasury 3.46%, employees 0.36%, market 40.02% (as
of 29 February 2000).
Infostrada ENEL + France Telecom.
Albacom Albacom Holdings: British Telecom and BNL 45.5%, ENI 35%, Mediaset 19.5% (as of June 2000).
Tiscali Renato Soru 61.22%, Andala 8.01%, Kiwi Fund 8.01%, market 22.76% (as of June 2000).
Wind Enel 56.3%, France Telecom 43.7% (as of September 2000).
TIM Telecom Italia 52.46%, market 47.54% (as of 31 December 1999).
Omnitel Mannesmann 55.2%, Bell Atlantic 23.1%, Vodafone Airtouch 21.7% (as of 30 June 2000).
Blu Autostrade 32%, British Telecom 20%, Distacom 9%, Edizione Holding 9%, Mediaset 9%, BNL
7%, Italgas 7%, Gruppo Caltagirone 7% (as of June 2000).
Source: AGCOM.

2. REGULATORY STRUCTURES AND THEIR REFORM

2.1. Regulatory institutions and processes

Regulator in the telecommunications sector

The AGCOM, based in Naples, is the regulator in the telecommunications sector while the Ministry
of Communications (Ministry) has the responsibility of policy making in the sector.10 The AGCOM was
established by Law No.249 of 31 July 1997 and became operational from 22 July 1998. According to Law
No. 249 the AGCOM is fully independent and has authority on all regulatory issues in the
telecommunications sector (See Box 1). In addition, the AGCOM has investigative powers as well as the
authority to impose sanctions on operators who do not comply with their directives and resolutions.

Box 3. AGCOM’s regulatory responsibility in the telecommunications sector

- Regulations on interconnection.

- Spectrum planning and allocation in collaboration with the Ministry of Communications.

- Market entry: granting licences and issuing authorisations. This competence has been transferred to the Ministry of
Communications as from 26 March 2001.

- Numbering: number planning and management.

- Price regulation.

- Monitoring quality of service.

The horizontal regulatory competency over the whole communication sector (broadcasting,
telecommunications, and press) provides the AGCOM with one of the most comprehensive regulatory roles
in the OECD area. The AGCOM is one of five regulators11 in the OECD, which has regulatory power both in
the telecommunications sector and the broadcasting sector. Furthermore, the AGCOM is the only regulator
whose organisational structure is not based on specific services, such as telecommunications, broadcasting
and press, but structured on the basis of more general framework such as networks and services. Accordingly,

© OECD (2001). All rights reserved. 13

its Departments and Services are integrated to cover horizontally telecommunications, broadcasting and press
sectors. Fragmented regulation in the communications sector can restrict companies from taking full
advantage of the rapid convergence taking place between broadcasting, content and communications
technologies and services. The structure of AGCOM enables it to address regulatory issues across the
communication sector in a technological and competitively neutral way.

The organisational structure of the AGCOM consists of a council and two commissions (Network &
Infrastructure Commission and Services & Products Commission) which have specific regulatory
responsibilities in their own areas. Each commission is a collegial body made up of the president of the
AGCOM and four commissioners. The council consists of the president and all the commissioners.

The Senate of the Republic and the Chamber of Deputies each elect four commissioners, the
president of the AGCOM is appointed by the President of the Republic upon proposal of the Prime Minister
in agreement with the Minister of Communications, after a parliamentary hearing. AGCOM’s first year
operating expenditure was covered by a 0.35 per thousand levy, (rising to 1 per thousand for following years)
on revenues of national operators (except new entrants operating for less than two years) in the sectors under
its responsibility as well as administration fees such as licence fees, numbering fees, etc. According to the
law, the number of AGCOM’s permanent staff cannot exceed 260 persons. Currently there is about 200 staff
at the AGCOM.

There is a concern in the telecommunications industry that the nomination of commissioners is too
political. It is very important for the regulator to ensure its independence from all interested parties if there is
to be fair competition in the marketplace. In this regard, it is useful that the AGCOM publish not only its
regulatory decisions, but also the reasoning for its regulatory decisions.

Although the new law gave most of regulatory power to the AGCOM, lack of staff has meant that
the AGCOM has taken some time to become fully operational. In fact, the AGCOM has carried out a number
of tasks jointly with the Ministry under a bilateral agreement,12 which was supposed to expire in December
1999. However, the AGCOM and the Ministry extended this joint operation by renewing the agreement. This
joint operation has sometimes created confusion among market players in that they are not sure which
organisation is responsible for specific regulatory issues, such as spectrum allocation. The two year period
required for the transfer of full regulatory power from the Ministry to the regulator, the fact that AGCOM
was not fully operational when the market opened to competition and difficulties in recruiting professional
staff have all acted to slow implementation of appropriate regulatory safeguards in some market segments

The Ministry and the AGCOM have taken a public consultation approach (Green Paper approach)
for important decision making process. In particular, since 1999 the Ministry and the AGCOM have started to
use the Internet for public consultations, such as those on UMTS, wireless local loop and the general
authorisation regime. The consultative approach in decision-making is widely welcomed by the industry since
it helps to enhance transparency of decisions.

General competition authority

In Italy, like other OECD Member countries, as the telecommunications market shifts from
monopoly to competition, there has been increasing involvement of the competition authority in the
telecommunications sector. The Italian competition authority has been very actively involved in the
telecommunications sector. In particular, until 1998 it contributed significantly, together with the Ministry of
Communications, to regulate the telecommunications sector, mainly due to the absence of a sector specific
regulatory body. Compared with other competition authorities in the OECD region which often do not have
enough professional staff to supervise the telecommunications sector, the Italian competition authority is well
staffed.13

© OECD (2001). All rights reserved. 14

 The Italian Competition Law (Law No. 287/90) applies to the telecommunications sector without
exemption. Consequently, the competition authority has power to enforce competition rules into the
telecommunications sector. In practice, the competition authority has a competency for anti-competitive
behaviour and mergers.

Relationship between the regulator and the competition authority

As the role of the competition authority has grown in the telecommunications sector, OECD
countries have give more attention to the issue of potential overlap between the sector specific regulator and
the competition authority in order to prevent inconsistent regulatory rulings between the competition
authority and the telecommunications regulator.
In Italy, apart from general informal consultation, the competition authority and the AGCOM are
required to request the opinion of the other institution in specific cases. The competition authority is required
by law to ask for prior non-binding advice from the AGCOM on decisions concerning agreements restricting
competition, abuses of dominant power and mergers involving operators active in the communications sector
(Law No. 249/97, Section 1, Paragraph 6, Letter c), Point 11).

On the other hand, the competition authority is required to issue prior non-binding advice to the
AGCOM, on the identification of telecommunications operators with significant market power, conditions of
interconnection and access to networks, universal service funding, and accounting separation. As mentioned
in the background report to Chapter 3, which examines Competition Policy, a lack of agreement between two
regulators does not give the other agency a veto over action, but it may compel a more complete explanation
of the decision.

While the regulatory relationship and the consultation mechanism between the AGCOM and the
competition authority is well established, some operators complain about the delay in regulatory decisions
resulting from the long consultation period between two regulatory bodies. The AGCOM replies that this
period of time do not normally exceed two months.

2.2. Regulations and related policy instruments in the telecommunications sector

2.2.1. Regulations of entry and service provision

Licensing regime
Italy established a general licensing regime when the telecommunications market was liberalised.
The incumbent, Telecom Italia, and the two dominant mobile operators, TIM and Omnitel, initially have
maintained concessions. Telecom Italia’s concession was changed into a licence in November 2000, while the
change of the concessions of TIM and Omnitel took place in March 2001. The special and exclusive rights in
the concessions were, in any event, abolished on 1 January 1998.

Table 6. Italian licensing regime

Type of business or operators Entry condition

Fixed and mobile voice telephony services including the installation and provision of networks Individual Licence
Telecommunications services other than the above mentioned activities Authorisation
TIM, Omnitel Concession (subject
to the individual
licensing regime)

© OECD (2001). All rights reserved. 15

 In Italy, operators need to receive an individual licence from the AGCOM (from the Ministry as of
26 March 2001) for the provision of voice telephony and mobile telephony, and the installation and provision
of public telecommunications networks (including mobile networks). The individual licence has a duration of
15 years and is renewable through a prior application filed at least 6 months before the expiration date. In
principle, the AGCOM is required to make its decision within six weeks after receipt of the application.
Initial delays have been reported by the EU with regard to the issuing of licences but recent efforts made by
the regulator have reduced the time to acquire a new licence to an average of seven weeks, according to
AGCOM. The previous average was approximately 12 weeks.
Individual licence holders are required to pay licence fees, which may cover only the administrative
expenses incurred by AGCOM in the issuance and management, control and enforcement of the individual
licence. Moreover according to the budget law14 holders of individual licences or public concessions for the
provision of public networks voice services to the public and mobile and personal communications are
subject to a fee calculated as a percentage of turnover. The level of licence fees in Italy is approximately
within the average of EU member countries.15 If there is a lack of resources, such as for frequencies and
numbers, AGCOM can limit the number of individual licences for specific services. AGCOM has a right to
amend the conditions provided for an individual licence in objectively justified cases and in a proportionate
manner. In addition, AGCOM is entitled to revoke or suspend general authorisations and individual licences
in the event of repeated violations by the holder.
Companies only need to submit a declaration to AGCOM to begin providing services, which are
subject to the authorisation procedure (e.g. Internet services). Unless an applicant receives a formal opinion
from AGCOM within four weeks after submission of a declaration of business, it is deemed to receive an
authorisation. According to the Presidential Decree of 19 September 1997 No. 318, AGCOM has the
authority to impose special conditions on an authorisation if the use of spectrum or numbering is required.
Individual licences and general authorisations can only be transferred to third parties with the
AGCOM’s approval. Foreign companies, which are based in EU member countries or WTO signatory
countries, have the same rights as local firms, while for other foreign companies a principle of reciprocity is
applied. As of 31 June 2000, 122 licenses, 1 100 authorisations for other liberalised telecommunication
services and about 100 authorisations for communication services via satellite have been granted.
In July 1999, the AGCOM modified the decree of 2 November 1997 on licensing by abandoning the
requirement for a performance bond and investment in research and development by operators, which the
European Commission had criticised. Nevertheless, the current individual licensing regime,16 which requires
the AGCOM to verify the business plans and financial status of applicants, not only places an unnecessary
and costly regulatory burden on applicants, but also uses the scarce manpower of the AGCOM. The
expansion of the authorisation system to fixed voice telephony services, which are currently subject to an
individual licensing system, would lift unnecessary regulatory burdens from the telecommunications industry
as well as eliminate long lead times to enter the market. In this regard, the European Commission also said
“priority given to general authorisations, as opposed to individual licences” in its proposed Directive
(COM(2000) 386).
Indeed, for fixed telecommunications services, if the market is fully liberalised, the issuance of a
licence is only required as a means to verify if minimum requirements to enter the market have been met. As
competition develops in the fixed voice telephony market, a number of Member countries, such as Denmark
and the Netherlands, have introduced a simple market entry procedure on the basis of registration or simple
declaration.
The procedure to grant licences for mobile services is very complicated. According to the decree of
19 September 1997, mobile licences should be awarded through a public tender procedure, determined by the
Committee of Ministries, which is headed by the Prime Minster. This Committee is also responsible for the
selection of evaluators. This complicated mobile licensing regime has resulted in the adoption of a two step
procedure – combination of public tender and auction - to select UMTS licences (see Section 2.2.5). AGCOM
will be responsible for granting WLL licences. AGCOM plans to issue regional licences for WLL services.

© OECD (2001). All rights reserved. 16

 In spite of the fact that the Italian telecommunications market has been fully liberalised,
concessionaires remained in the marketplace until early 2001. The last telecommunication concessions
attributed to TIM, and OPI were changed into licences in March 2001. According to the concessions,
concessionaires and licence holders are required to pay to the State fees calculated as a percentage of their
previous year’s gross revenues from regulated services. 17
The Telecommunications Regulations provided that by 1 January 1999 the existing public
concessions had to be modified to make them consistent with the new regulatory framework. The public
concessions of TI and Telemar have been modified in December 2000. Under its public concession, Telecom
Italia had the right to provide all mobile public telecommunications services, regardless of the technologies
used. However, TIM participated in the licence allocation for UMTS on the same basis as other market
operators.
In spite of the existence of the sector specific independent regulator, in many OECD countries the
government retains competency to allocate spectrum due to public ownership of spectrum and the need to
take into account the demand for broadcasting services. Nonetheless, the Italian regulatory arrangement is
unnecessarily complicated and requires a long lead-time to decide on the procedure to select licensees. The
Italian governments need to make the licensing procedure more transparent and simpler. In addition, if
auctions are to be the chosen method to allocate spectrum licenses then this method needs to be inserted in
the law.
The decision to transfer licensing authority from AGCOM to the Ministry was a retrograde step in
terms of ensuring the proper functioning of regulation and the independence of the regulatory body.
AGCOM has the responsibility to develop a competitive market in telecommunications and supervise the
telecommunication sector. In this context market entry, and thus licensing, should be an integral part of their
responsibility, as should be the decision with regard to streamlining the market entry process.

Rights of way
Rights of way regulation in Italy is based mostly on several laws. Art. 4, Par. 3 of Law 249/97
stipulates that the licensed operators can lay down backbone networks. However, in terms of territory, which
is controlled by the local municipalities, the local municipalities have the authority to grant rights of way
based on local rules that shall be in line with a ruling issued by the national regulatory authority. If rights of
way cannot be granted to a new operator, AGCOM and the local municipalities can order facility sharing
using existing infrastructures. There is a mechanism to resolve conflict between companies concerning
facility sharing, conflict regarding rights of way between municipalities and telecommunications operators
can be brought to court in the first instance.
Since each local municipality has its own rights-of-way regulation, operators are required to receive
separate permission from municipalities for the construction of local networks. Furthermore, since
municipalities have the regulatory power to grant rights of way in their regional area, the purpose of the
ruling issued by AGCOM is to minimise the risk that operators face different rights of way regulations in
different municipal areas.

In addition, the involvement of local utilities in the telecommunications sector raises a concern of
possible discrimination in granting rights of way.18 It is important that conditions and requirements to attain
rights of way are transparent and non-discriminatory. In this respect, a public consultation is currently
underway for the introduction of a new regulatory framework on rights of way. AGCOM plans to introduce a
new regime by the summer of 2001. In the new rights-of-way regulatory regime, it would be strongly
recommended to give regulatory power to AGCOM to intervene in conflicts between municipalities and
telecommunications operators and to make binding resolutions.

© OECD (2001). All rights reserved. 17

 While agreements for collocation and facility sharing between operators without significant market
power are normally a matter of commercial negotiation, AGCOM may intervene to resolve disputes if
requested by either party. Where AGCOM’s does intervene, it imposes arrangements regarding facility and
property sharing only after an appropriate period of consultation period during which all interested parties
must be given an opportunity to express their views.

The operators with significant market power have an obligation to meet reasonable requests for
collocation. In particular, with regard to the issuance of the third and the fourth mobile licences, TIM and
Omnitel are required to provide site-sharing agreements at cost-oriented prices to Wind and Blu under the
supervision of AGCOM. In addition, in order to ensure fair competition between Blu and other mobile
operators, the existing mobile operators are required to provide national roaming service to Blu.

For the provision of international cables, licensed operators for public network provision can
construct their own cable landing stations. However, considering the high investment cost to construct a cable
landing station, AGCOM has ensured that access to the incumbent’s cable landing stations is available for
new entrants and covered within the framework of interconnection regulation at the Telecom Italia’s RIO
2000.

Line-of-business and ownership restrictions

Except for a special regulation on Telecom Italia that prohibits it to enter the terrestrial broadcasting
market due to its concession in the telecommunications market, there are no line-of-business restrictions in
Italy. If a cable operator wants to provide telecommunications services on its network it may ask for a voice
telephony licence either when applying for a CATV network licence or at a later stage. Law 249/97 provides
that networks used for broadcasting purposes may be used for the provision of telecommunication services
(provided that accounting or structural separation is assured, depending on whether the broadcaster has a
national or local TV licence).

There are no restrictions on foreign ownership in Italy and on the share holding of a single party.
However as mentioned earlier, Telecom Italia is subject to the golden share regulation. In a liberalised
market, there is no reason to impose special regulations on specific companies.

2.2.2. Access Regime

Following the liberalisation of the telecommunications market, probably the most important
regulatory safeguard to ensure fair competition is the establishment of a fair and transparent access regime.
Indeed, such a fair and transparent access regime is vital if there is no alternative local loop to that of the
incumbent, which is the case in Italy. In particular, the pricing mechanism of the access regime determines
the profitability of new entrants and eventually determines the level of competition in the marketplace. The
AGCOM has made very important regulatory decisions on the access regime recognising the dominance of
Telecom Italia in the local loop market.

Interconnection

Due to the lack of alternative infrastructure in the local loop, it is essential for other operators to
interconnect with Telecom Italia’s local loop in order to terminate their calls.

© OECD (2001). All rights reserved. 18

 Like most OECD countries, in Italy interconnection agreements between operators without
significant market power are regarded as a commercial matter in which the AGCOM may intervene only in
the case of disputes between the two parties. According to the Decree of 23 April 1998, individual licensees
are obliged to open negotiation with requesting parties within fifteen days from receiving an interconnection
request. This negotiation should be completed within forty-five days. The parties are required to notify that an
interconnection contract has been agreed upon to the AGCOM within ten days from the completion of a
contract. Unless interested parties reach an agreement within this period, they are required to inform the
AGCOM of the failure of negotiation with required information.19 Upon receiving a notice of failure, the
AGCOM has to make a decision on this matter within 90 days.

In contrast to interconnection agreements between operators without significant market power,

many specific ex-ante obligations are imposed on operators with significant market power in order to ensure
access to bottleneck facilities (see Box 4.).

Box 4. Interconnection obligations imposed on SMP operators

- Interconnection charges should be transparent and cost-oriented

- Interconnection should be available on the same terms and conditions for competing operators as SMP operators
providing for their own services

- Reference Interconnection Offers need to be published

- Interconnection should be offered at any technically feasible points

- SMP operators are required to keep separate accounting for interconnection services and other telecommunications
services.

Currently Telecom Italia, TIM and Omnitel are designated as operators with significant market
power in the interconnection market by AGCOM’s Determination No. 197/99 of 7.11.99. The AGCOM
makes an annual review to determine SMP operators and relevant markets.

Interconnection with Telecom Italia’s fixed telephone network

The interconnection framework for fixed networks has been in place since 1998, when the
telecommunications market was liberalised. The Italian interconnection regime is based on a service
competition model with no minimum requirement on interconnection points, and no discrimination in
interconnection charges between facility-based operators and simple resellers. While this service-based
competition model can help new entrants enter the market without a significant economic burden arising from
investing in network installations, in the longer term there is a risk that facility-based competition may not
develop if there is not sufficient incentive for new entrants to build their own networks.

Currently Telecom Italia’s interconnection charges are calculated using a fully distributed
accounting (FDC) model based on historical costs in spite of the fact that Decree of 23 April 1998 requires
the AGCOM to set up a new accounting methodology based on long run incremental cost by 1 January 1999.
Order 10/00/CIR20 committed AGCOM to publish a determination establishing the criteria of an accounting
system based on current costs by May 2000 after a public consultation. Although the results of the
consultation were published in November 2000 no guidelines were published outlining an implementation
process. In addition to cost orientation requirements, SMP operators’ interconnection charges are also
required to meet the EU “best practice guideline” according to the Decree. If SMP operators’ interconnection
charges are higher than those of the EU “best practice guideline”, the burden of proof is on the operator to

© OECD (2001). All rights reserved. 19

justify the difference in interconnection charges. In fact, Telecom Italia’s double and single transit
interconnection charges are determined by the EU “best practice guideline” while local interconnection
charges are determined by the FDC model. This has resulted in Telecom Italia’s interconnection charges to be
exactly the same as the upper limits of the EU “best practice guideline” (see Table 7).

Table 7. Comparison of Telecom Italia’s interconnection charges and the upper limits of EU “best practice
guideline” (as of Sep. 1999, Euro cents per min.)
Telecom Italia’s interconnection The upper limit of EU “best practice
charges guideline”
Local switch (fixed to fixed) 1.00 1.00
Local switch (mobile to 1.00 1.00
fixed)
Single tandem (fixed to 1.60 1.60
fixed)
Single tandem (mobile to 1.60 1.60
fixed)
Double tandem (fixed to 2.30 2.30
fixed)
Double tandem (mobile to 2.30 2.30
fixed)
Source: EU, “Fifth report on the implementation of the telecommunications regulatory package”.

Box 5. Service competition vs. facility based competition

In spite of the merits of service competition, which can lead to a rapid introduction of competition, reduction of prices,
and an increase in consumer choice, there is a consensus that in the longer term facility based competition brings more
benefits to consumers. In particular, facility based competition enables competition in the wholesale market, which in
turn stimulates reductions in retail prices and brings new innovative services through competition between infrastructure
providers.

To promote infrastructure competition, some countries have opted for favourable interconnection conditions for facility-
based operators or impose specific interconnection requirements on new licensees. For example, in the United Kingdom,
‘Annex II’ operators, which require ‘significant investment in infrastructure’ including Indirect Access operators have
enjoyed cost oriented interconnection rate while service providers (resellers) have been subject to ‘retail minus’
schemes. A similar approach has been taken also by the United States,21 France,22 Denmark23 and Spain.24 In the United
States, the FCC, on the basis of the 1996 Telecommunications Act, began to regulate local resale rates, and state
regulators have since then maintained a positive difference between wholesale rates, which are set at a discount from
retail rates, and interconnection rates which are cost based. As a result, local resale of telephone services is considered a
low margin business in the United States.25 Under cost-orientation principles, it is not necessary for there to be a
difference in interconnection charges between facility-based operators and service operators if interconnection costs are
the same for the incumbent. However, there is a concern that this would create a disincentive to the incumbent and to
new entrants to invest in infrastructure.

The current Italian regulatory regime concerning the calculation of interconnection charges is based
on the FDC accounting methodology that tends to over-compensate the incumbent by subsidising inefficient
historical costs incurred by the incumbent. As a result, there is a possibility that high interconnection charges
based on the FDC methodology can hamper a new entrant’s ability to compete with the incumbent. Thus,
AGCOM needs to introduce the LRIC accounting model as soon as possible as stipulated in the Decree. The
interconnection procedure allows AGCOM the possibility to determine its interconnection charges either by
accepting the incumbent’s proposal based on the FDC model or to impose “EU best practice” if the proposed
interconnection charge is above EU best practice. The longer term aim should be to attain cost-oriented
interconnection charges as quickly as possible and the best practice methodology for this is the LRIC model.

© OECD (2001). All rights reserved. 20

 In 1999, Telecom Italia had interconnection agreements with the networks of 17 more operators in
addition to the 6 operators in 1998. In addition, a total of 57 agreements were reached in July 2000.

Table 8. Changes on Telecom Italia’s interconnection charges (ITL per minute)

1998 1999 2000 (*)
Peak Off peak Peak Off peak Peak Off peak
Local 19.5 12.1 19.4 12.1 14.5 10.2
Single Transit 35.1 21.9 31.0 19.5 25.8 18.1
Double Transit 50.7 31.7 44.0 28.0 34.9 24.5
(*) approved by AGCOM with Determination 10/CIR/00.
Source: AGCOM.

A contentious interconnection issue in Italy relates to the linkage introduced by AGCOM in retail
charges and wholesale charges. AGCOM believes that changes in retail tariffs should be reflected by changes
in interconnection charges. The incumbent argues that this in effect imposes a fixed margin between
interconnection charges and retail charges and is thus a distortion of the cost-orientation principle and a
disincentive to competition. However, until interconnection charges are deemed to be cost-oriented, and until
there is an adequate level of competition, the danger remains that the incumbent can use changes in retail
prices to squeeze the profits of new entrants by maintaining high interconnection prices. The difficulty for the
regulator is to determine when it is appropriate to withdraw from such direct price intervention. It would, in
this context be useful for the regulator to draw up some general guidelines indicating the circumstances under
which it would streamline its price intervention.

Fixed to mobile interconnection charges

In September 1999, TIM and Omnitel were designated as SMP operators in the interconnection
market. This meant that in principle TIM and Omintel should have been subject to general obligations of
SMP operators in the interconnection market like Telecom Italia. In practice, a charge-cap was applied to
fixed to mobile interconnection charges while no specific regulation was imposed on mobile to mobile
interconnection charges. In June 1999, the AGCOM set up a charge cap for TIM and Omnitel’s fixed to
mobile interconnection charges (360 Lit/min). Since TIM and Omnitel are allowed to differentiate
interconnection charges based on the retail charging mechanism, in practice fixed to mobile interconnection
charges differ between peak (430 LL/min) and off-peak (190 LL/min).

The AGCOM’s decision to change the charging structure of fixed to mobile phone calls and to
designate TIM and Omnitel as SMP operators in the interconnection market was a right decision which
resulted in an important reduction (average reduction of 29%) on fixed to mobile interconnection charges.
This decision is based on the assessment of an international best practice as identified by an external auditor
into an investigation conducted by the DG Competition of the European Union. Nevertheless the charge cap
imposed on TIM and Omnitel is higher than the one recommended by the competition authority. Currently
there is no regulation on mobile to mobile interconnection charges. In practice, a reciprocal interconnection
accounting scheme has been in place between mobile operators since January 1999.

Unbundling of the local loop

With the development of electronic commerce and high speed Internet application services, there is
a growing demand for direct access to end customers in order to provide value added services such as Internet
services and cable television services as well as voice telephony services. In this context, regulators have
given priority to unbundling of the local loop (ULL) in many OECD member countries.

© OECD (2001). All rights reserved. 21

 Italy is among a growing number OECD countries, which have decided to introduce regulations on
ULL. In March 2000, the AGCOM decided to introduce ULL regulation on the fixed incumbent operator and
implement ULL service by September 2000. According to AGCOM’s decision (Order 2/00/CIR), the
coverage of ULL encompasses a wide range of unbundling solutions and the cost will be calculated by the
FDC accounting methodology. Considering the fact that different forms of unbundling solutions are
complementary rather than substitutes, Italy’s ULL regulation provides flexibility for new entrants to
specialise in the type of entry that suits their business plan. Telecom Italia has appealed against this Order to
the Lazio Court, in particular relating to the inclusion of fibre optics in the mandatory offer and the costing
criteria.

AGCOM has formed a monitoring group of the implementation of ULL in order to ensure the rapid
development of ULL in the Italian telecommunications market. Currently fifteen new entrants who plan to
use ULL for their service provision are participating in the monitoring group. Telecom Italia’s RIO for ULL
has been reviewed by the AGCOM, which has set the following charges for the local loop: monthly rental Lit.
22 200 for POTS, ISDN lines; 24 300 for ADSL enabled lines; the one-off set up fee is 174 400 Lit; the
monthly fee per fibre loop is Lit 1 145 400.

Box 6. Coverage of ULL in Italy

- Access to raw copper.
- Access to fibre.
- Bit stream access.
- Permanent virtual circuit.
- Extension capacity from remote MDF (main distribution frame) sites to the local exchange (SGU).
- Co-location capacity.

The implementation of ULL is especially important in Italy for new entrants since, due to the lack
of cable television networks and delays in introducing the regulatory framework for WLL services, there are
no alternative infrastructures. However, there is no doubt that the real issue, which will determine the success
of ULL regulation, is the level of price for ULL offerings. There is concern regarding Telecom Italia’s price
for ULL agreed to by AGCOM. Telecom Italia’s fixed line prices will increase over 2001 to Lit 20 700 in
July for residential customers. The price for ordinary unbundled loop will be Lit 22 200,26 that is Lit 1 500
higher than the monthly residential charge. However, the price for ULL is lower than the retail offer of
Telecom Italia for ADSL and ISDN, and business subscriber lines, which are expected to be the main
services offered by new entrants using ULL. AGCOM needs to remain vigilant to ensure that ULL prices
provide an incentive to new entrants to obtain direct access to end customers.

© OECD (2001). All rights reserved. 22

 Box 7. Rebalancing in Italy

Importance of rebalancing

To ensure effective competition, it is essential to have a fully rebalanced tariff structure, which reflects the cost structure
of an efficient operator’s telecommunications services both in retail and wholesale markets. Thus, fixed costs resulting
from the provision of subscriber lines need to be fully recovered by fixed line rental charges and connection charges, and
variable costs caused by the conveyance of calls should be recovered by per usage charges. At the same time, the
incumbent needs to rebalance its usage charges between local and long distance calls reflecting underlying costs of
delivering services. When fixed costs, so called non-traffic sensitive costs, are not fully recovered through fixed line
rental charges and connection charges, an access deficit results. In particular, this can happen when a monthly line rental
charge is subject to special price regulation in the context of universal service provision. At the same time, the regulation
of local call charges can prevent an incumbent from rebalancing its usage charges. It is essential for the regulator to
allow full rebalancing of the incumbent’s prices in order to ensure effective competition in the telecommunications
market. In addition, if there is economic loss due to the lack of rebalancing, this should be compensated through a
competitively neutral funding mechanism which neither distorts competition nor penalises a specific user group.

Rebalancing in Italy

In order to conform to EU directives, which require the completion of rebalancing by the end of 1999, the AGCOM has
taken a series of rebalancing measures. In December 1998, AGCOM reduced Telecom Italia’s national long distance
(7%) and international (9.6%) calls, while increased line rental charges (3%). AGCOM did not make any change in local
call charges. In June 1999, a specific charge for calls within the same district was introduced along with a further
reduction on long distance and international call charges. In addition, AGCOM decided to introduce a “per-second”
billing system by the end of 1999. In July 1999, price-cap regulation was introduced to regulate Telecom Italia’s voice
telephony services. While AGCOM announced that tariff rebalancing has been completed in compliance with the EU
deadline, Telecom Italia insists that it still has access deficits due to insufficient rebalancing. According to the
Presidential Decree of 19 September 1997 (DPR No. 318), if there had been any access deficit until 31 December 1997,
the access deficit would have been financed by charging an additional amount on the interconnection fees. Based on this
regulation, for the year 1997 AGCOM recognised an access deficit (for tariff rebalancing purposes) of ITL 5 477 billion
(Telecom Italia had claimed a network access deficit of ITL 5 477 billion). The audit carried out by the independent
auditor (KPMG) on behalf of the AGCOM confirmed the existence of an access deficit on the basis of 1997 data. For
1998 Telecom Italia has claimed an access deficit of ITL 4 117 billion and has filed with AGCOM a claim for a deficit
of ITL 3 330 billion for 1999. The AGCOM pointed out that the access deficit, audited by the independent advisor can
be gradually recovered by 2002 within the current price-cap mechanism.

Infringement procedure concerning tariff rebalancing

In 1998 the Commission of the EC opened an infringement procedure against Italy concerning rebalancing of tariffs of
voice services, in particular those of access services. In September 2000 this procedure led to a “reasoned opinion” of
the Commission stating that the existing price cap regime would not allow a complete rebalancing of the price of access
services by the end of the present price cap scheme. In December the Competition Directorate of the EC Commission
indicated that the existing sub-cap on the monthly subscription charge should be modified, allowing for an increase of
+6%. AGCOM answered to this allegation with Decision 847/00/Cons (11 December 2000), which introduced the
requested modification, thus allowing the Commission to lift the procedure.

Margins available to competitors in the local call market

TI’s local charges are constrained by the existing price cap on local call charges (RPI+0%); in fact, prices in the local
call market provide a limited margin for new entrants. Italy is not an exception in this context (see Figure 1).

© OECD (2001). All rights reserved. 23

 Figure 1. Comparison of ratio between retail prices and interconnection charges

10
9
Ratio (retail charges/IC charges)

8
7
6
Local
5 Long distance
4
3
2
1
0
Ire y

ay
G n ce

K
Fi rk

ly

s
Be r ia

Fr d

nd

he an

Sw in

it z e n
nd
D ium

an

nd
an

U
Ita

a
a

w
st

la

Sw e d

la
Sp
m

m
a
lg

rla
a
nl

or
Au

er
en

J
er

N
et
N

Note: 1. The local interconnection charges are a weighted average of using 80% of the 5-kilometre charge and 20% of the 20-
kilometre charge.
Note 2. The long distance interconnection charges are a weighted average, using 10% of the 5-kilometre charge, 30% of the 20-
kilometre charge and 60% of the 50% kilometre charge.
Note 3. For the long distance retail charges, using the tariff that applies to a 100-kilometre call as a proxy for long distance.
Note 4. For the retail charges, using the time of day call profiles to average the charges into peak and off peak.
Note 5. For the retail charges, including call set-up charges assuming a call duration of 2.5 minutes but not minimum call charges.
Note 6. For the retail charges, excluding tax charges.
Source: Ovum “Interconnect: Quarterly Update October 1999”.

2.2.3. Pricing regulation

In Italy the AGCOM is responsible for price regulation in the telecommunications industry. Until 31
December 1997, the Ministry determined Telecom Italia’s retail prices through a Ministerial Decree. Even
after the introduction of competition the AGCOM maintained a tariff approval system on Telecom Italia’s
retail service charges until 31 July 1999. Since August 1999, price cap regulation has been applied to
Telecom Italia’s voice telephony services. The price cap will be applied until 31 December 2002 to a whole
basket of Telecom Italia’s public voice telephone services composed of connection fees, monthly subscription
charges, local, long distance and international tariffs. Currently RPI – 4.5% is used as the price cap formula
for the general basket. In addition to the general basket, there are three specific sub-baskets concerning
residential voice telephony services, access charges (connection fees and monthly subscription charges) and
local calls. RPI – 2.5%, RPI + 6% and RPI +0% is respectively applied for these sub-baskets.
Price cap regulation has been introduced as a tool for tariff rebalancing and as an incentive for the
incumbent to increase efficiency. Although Telecom Italia has complained that the existence of sub baskets
substantially restricts flexibility to rebalance, AGCOM applied RPI +6% to access charges as a response to
the need to rebalance.

Based on the AGCOM’s instructions in December 1998 and June 1999, in November 1999 Telecom
Italia introduced per second billing, with a call set-up charge.27

In terms of mobile tariffs, operators are free to set tariffs except in the case of TIM’s analogue
services. Mobile operators are only required to provide 30 day prior notice to the AGCOM before launching
new tariffs. In the case of TIM’s analogue services, the “Contratto di Programma” between TIM and the

© OECD (2001). All rights reserved. 24

Ministry stipulates that subscription and connection fees cannot exceed those set out in the Ministerial decree
in 19 September 1996, and cannot be lower than those for GSM services. Usage charges are also regulated by
the decree.

Previously fixed to mobile call charges were determined by mobile operators in Italy. Since no
regulation was imposed on setting fixed to mobile charges, TIM and Omnitel were charging very high prices
for fixed to mobile services. In fact, these two companies were found guilty and fined by the competition
authority, for colluding to set identical prices on fixed to mobile calls. When the EC decided to investigate
fourteen cases in July 1998, where the situation indicated a possible distortion of market conditions between
fixed and mobile networks, Italy was, along with Germany, one of two countries, which were investigated in
all three categories; mobile to fixed termination rates, fixed operator’s retention on fixed to mobile calls and
mobile termination rates.

As a consequence, in January 1999, the AGCOM established the principle that the operator from
whom the call is originated should determine prices. After two interim decisions in March and September
1999, the AGCOM approved the new pricing scheme on fixed to mobile calls and the corresponding mobile
termination charges (see Box 8).

In terms of leased line services, a tariff approval system is applied to Telecom Italia’s leased line
charges. In 1999 the incumbent was still the sole supplier of leased lines. Competition is now developing in
long-distance and backbone services provided by alternative operators. The incumbent still dominates the
local and short-distance markets. The AGCOM’s Decision amending the RIO 2000 imposes the inclusion of
terms and conditions for the provision of half circuits for interconnection, for circuits of 64 Kbits, 2 Mbits
and 34 Mbits, 2 km and 5 km long. In assessing the corresponding economic conditions, the AGCOM will
take account of the price ceiling indicated in the Commission Recommendation on leased lines
interconnection pricing. Data for July 2000 indicate that the situation with regard to international leased lines
has improved, with a significant fall in tariffs from 1999 to 2000. With regard to 2 Mbit/s half circuits,
reductions of about 40% are reported for a line to the US, and about 30% for distant and near EU lines. With
regard to 64 kbit/s half-circuits, tariffs for a line to the US have decreased by about 30%; the reduction is
about 19% for lines to distant and near EU. However, tariffs remain significantly above the EU average for
all kinds of leased lines, except for 2 Mbit/s lines to the USA (which are below the average), and for 2 Mbit/s
lines to far EU (just above the average). The EC had in the first half of 2000 concluded that Italy’s leased line
prices (for 64 Kbit/s and 2 Mbit/s) were above EU average so that recent changes are important in bringing
Italy’s prices into line with EU best practice. However, on 31 October 2000 AGCOM approved new prices
for leased lines offered by Telecom Italia. The new offer provides for a reduction of 23.7% in prices of
national leased lines, together with a more transparent pricing system consisting of a new method for the
calculation of distance based on the actual distance between switches and in the elimination of the difference
among local and long distance circuits.

Box 8. Structure of fixed to mobile call regulation

The retail price of fixed to mobile call is composed of two elements.

- Retention share of Telecom Italia: A price cap is applied to the retention share of Telecom Italia (ITL 110/min,
down from ITL 172/min). Telecom Italia may differentiate its retention share into two different price "profiles"
(residential and business) and differentiate it in two price bands (peak and off-peak) corresponding to the current
ones for national calls, but is not forced to do so.

- Mobile termination rates: A price cap is applied to TIM and Omnitel’s mobile termination rates (ITL 360/min, down
from respectively, ITL 475/min and ITL 500t/min). Like Telecom Italia’s retention, TIM and Omnitel are allowed
to differentiate their termination rates in two price-bands (peak and off-peak) corresponding to the current ones for
local calls. WIND and Blu’s termination rates are subject to commercial negotiation with Telecom Italia.

© OECD (2001). All rights reserved. 25

 Table 9. Pricing control mechanism on Telecom Italia’s services

Fixed voice Fixed to mobile call Leased Lines xDSL

telephony origination
Price control Price-cap Administered retention Approval Mandatory wholesale offer
mechanism at “retail minus” prices
Accounting FDC/ Retention: FDC/ “Retail minus” scheme
methodology Historical Cost FDC/Historical Cost Historical Cost
Source: AGCOM.
Figure 2. Rebalancing in Italy: changes of peak fixed to fixed call charges

2 0000
1 8000
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1 4000
1 2000 1997
Lit.

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6000 1999
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Note: Except monthly rental charges, other charges are based on a three-minute call including call set-up charges and excluding
VAT.
Source: AGCOM.

2.2.4. Universal service regulation

The Presidential decree of 19 September 1997, No. 318 (Art.1, par 1, letter z) defines “universal
service” as a minimum set of services of a specified quality, which is available to all users independent of
their geographical location at an affordable price.

Box 9. Coverage of universal service

- PSTN services (including fax and data transmissions via modem at minimum speed of 2 400 bits).
- Free access to emergency services.
- Uniform tariffs across the national territory.
- Operator assistance.
- Directory services.
- Subscriber information (including free itemised billing service).
- Public pay-phone services.
- Special tariffs for disabled people and low income users.
- Special connections and services for general interest.

© OECD (2001). All rights reserved. 26

 The coverage of universal service in Italy is limited to PSTN related services. Because the funding
of a broadly defined universal service requirement through levies on the telecommunications industry can
reduce efficiency and undermine other policy objectives, the narrowly defined Italian universal service
regime helps to minimise any necessary economic burden on telecommunication operators. Nevertheless, the
item of special connections and services for the general interest in the coverage of universal service
obligations needs to be more specifically defined because currently “the general interest” heading includes
almost all public activities such as public security, public aid, national defence, justice, education and
government. However, under current regulation the provision of services for the general interest cannot be
funded through the universal service funding scheme.
Currently, as a part of the Information Society Project, a plan for connecting schools and libraries to
the Internet is being developed by the Prime Minister’s Office. It needs to be emphasised that this project
should be funded from the national budget and should not be included in the coverage of universal service
obligation, which is financed by levies from telecommunications operators.
Until 1 January 1998, Telecom Italia was, during the monopoly regime, the only operator obliged to
offer throughout the entire Italian territory the same set of services in the context of its universal service
obligations (dPR 13 August 1984, No. 523). Now, in theory all licensed operators can bear USOs through
their licence condition, but only Telecom Italia is currently required to provide USOs. The net costs of
providing such universal services are calculated on a fully distributed historical cost basis. If such costs
represent an unfair burden on the supplier, licensed fixed and mobile operators may be required to contribute
to an ad hoc fund managed by the Ministry to cover such costs. Telecom Italia and other operators subject to
USOs must keep separate accounts to calculate the cost of providing theses services. The operators required
to provide universal service must submit on a yearly basis the relevant net costs to the AGCOM by March 31
of each year. The AGCOM needs to determine if the net costs represent an unfair burden on the suppliers
and, in such case, appoint an independent body to audit the calculation. By 15 July of each year, the Ministry
announces the amounts, which need to be contributed from licensed operators; such amounts have to be paid
to the fund by 15 August. The USO service providers will then be refunded by 15 September of that year.
Telecom Italia has estimated the costs of USO for 1998 as ITL 1.450 billion, and for 1999 as
ITL 640 billion. In practice, on 4 August 1999, the AGCOM determined that, for the year 1998, universal
service obligations did not amount to an unfair burden. The decision was mainly based on the fact that there
was no substantial competition in the fixed telephony market in 1998. The methodology for calculating the
net cost proposed by Telecom Italia has been assessed by an external auditor (WIK-NERA in association).
For the year 1999, the AGCOM acknowledged ITL 120.83 billion as the cost for Telecom Italia’s universal
service provision after independent auditor’s (a consortium of NERA, WIK and ERCS) assessment on
Telecom Italia’s submission taking into account indirect market benefits of the USO provision. In principle
licensed operators are required to contribute to the universal service fund on the basis of their turnover,
however the AGCOM set up a threshold (1% of the revenue minus payments on interconnection, leased lines
and roaming to other operators) for the protection of new entrants. As a result 43% of universal service costs
is levied from three major companies - TIM (ITL 33.98 billion), Omnitel (ITL 16.67 billion) and Infostrada
(ITL 1.2 billion).

2.2.5. Spectrum allocation

The Ministry of Communications, General Directorate for Planning and Frequency Management, is
responsible for spectrum planning in telecommunications. Spectrum planning and allocation is very
complicated in Italy. In practice, the Ministry is responsible for spectrum planning for telecommunications
and spectrum allocation for broadcasting. On the other hand, the AGCOM is responsible for spectrum
allocation for telecommunications and spectrum planning for broadcasting.

© OECD (2001). All rights reserved. 27

 The method used in Italy to grant the UMTS licences is a combination of a beauty contest and an
auction. Interested parties were first required to pass the pre-qualification process by submitting their
commercial and technical business plan along with evidence of some standard requirements (i.e. to have a
minimum capital and to have been involved in telecommunications business for at least three years). The
evaluation of the technical and commercial plans did not give rise to a point score, but simply to a declaration
that the various bidders were admitted (or excluded) to the auction phase of the procedure. On
14 January 2000, a decision of the AGCOM for the award of individual national licences for the third
generation mobile communications system (UMTS) was published in the Official Journal of the Italian
Republic. According to it, the procedure was planned to be carried out in two stages: 1) qualification, for the
purpose of pre-selecting candidates with appropriate technical, financial, and commercial capabilities, and 2)
selection. The selection phase of the procedure was then specified and set as an auction by subsequent
AGCOM decisions (decisions 367/CONS 14 June 2000 and 388/CONS 21 June 2000); the precise auction
rules and mechanisms were finally set by an act issued by an inter-ministerial committee on 25 July 2000
(“Disciplinare di Gara”).28 Eight bidders applied to the first phase of the process: the four existing mobile
operators and four new potential entrants: Andala (a consortium led by China’s Hutchison Whampoa and
Tiscali), Ipse 2000 (a consortium led by Spain’s Telefonica and Finland’s Sonera), Tu Mobile (controlled by
Tu Tlc Utilities) and Anthill (a consortium of small and medium sized firms led by International Last Mile
SpA). Only six candidates out of the eight qualified for the auction process (Tu Mobile and Tu Tlc Utilities
were excluded on the basis of lack of the standard requirements). The auction started with six candidates on
19 October 2000 and ended after 11 rounds on 23 October, when the sixth bidder Blu, the youngest of Italy’s
four incumbent mobile operators, withdrew, leaving five bidders for the five licences on offer. The
Government raised ITL 23 550 billion (12 billion Euro) for the five licences granted. On top of the core
spectrum (each licence has the same spectrum of 2x10MHz paired and 1x5MHz unpaired) there was an
additional paired spectrum in two blocks of 2x5MHz reserved for potential new entrants. As two new entrants
(Andala and IPSE 2000) were awarded the core spectrum and expressed, as required, their interest for the
additional spectrum during the bidding phase, they were allocated the two additional blocks, at a fixed cost of
ITL 1 600 billion (826 million Euro) for each block. Therefore the total revenue for the Government from the
spectrum auction was ITL 26 750 billion (14 billion Euro).

Box 10. Italian UMTS licensing schedule

- 24 August 2000: Submission of call for tender.
- 2 September 2000: Ministry’s announcement on the acceptance of bidding offers.
- 11 September 2000: Submission of technical and business plans to the Ministry.
- 22 September 2000: Completion of evaluation on technical and business plans.
- 19 October 2000: Starting of the auction.
- 23 October 2000: End of the auction.
- 3 November 2000: The Italian interministerial committee approved the results of the UMTS licences auction.

UMTS auctions in Europe have led to considerable debate, in particular because of the high licence
fees that have resulted from this process. One view has been that a high licence fee resulting from the auction
process would stimulate the quick delivery of the UMTS service. A view has also been expressed that the
high licence cost will eventually be transferred to end customers, thus having a negative impact on the rapid
take-up of broadband mobile services. At this stage it is not clear how high licence fees will affect the future
of UMTS services. However, it is clear that the use of auction has enhanced transparency and efficiency in
the allocation of scarce resources such as frequencies. The final cost per UMTS license deriving from the
Italian 3G auction process is well above the licence cost in the Netherlands and Spain but lower than in
Germany and the UK.29

© OECD (2001). All rights reserved. 28

 The choice by Italy to have a competitive tender linked with an auction for UMTS licences is
unique among OECD countries. The use of a hybrid methodology for spectrum allocation is due to the
current regulation, the PD 318 of 1997, that requires to use a competitive tender for spectrum allocation. If
this hybrid methodology is to be retained for the future spectrum allocation, then its legal basis should be
clarified by the revision of the law.
According to the plan, Telecom Italia’s TAC service based on analogue technology will remain
until the end of 2005. Considering a significant number of TAC users and the fact that Blu is not assigned the
900 MHz band due to the lack of frequencies, the suggested period for retention of analogue services should
be reviewed in that it hampers fair competition in the mobile market. It is recommended to phase out
analogue services much more quickly and make these frequencies available for new service providers.
The introduction of WLL has been delayed in Italy . Finally AGCOM made a ruling to auction
several regional WLL licences in different bands at the end of November 2000. There is, however, concern
that the extension of an open-ended auction process to WLL licensing may leave the fledgling broadband
wireless market mostly in the hands of those companies that have already invested huge sums in the roll-out
of digital subscriber lines that compete with broadband wireless. AGCOM defined procedures for granting
frequencies for WLL in 2000 and is expected to complete the process of WLL allocation by mid-2001,

2.2.6. Numbering policy

The AGCOM is responsible for the management of the numbering resources. This regulatory
function is supported by the National Numbering Commission, set-up by the Minister of Communications
and composed of representatives from the incumbent, the other licensed operators, the AGCOM and the
Ministry of Communication. However, currently, the Ministry, on the basis of the bilateral agreement with
the AGCOM, manages numbering resources.

According to the Authority Deliberation 6/00/CIR (National Numbering Plan and rules for its
implementation), numbering resources are granted to licensed operators for the provision of fixed and mobile
telecommunication networks and services. There are four different sets of numbers (special national services,
mobile services, geographic services and non-geographic services) which have specific rules for the
management and allocation of numbering resources.30 In principle, numbers are allocated by a ‘first come
first served’ basis. Operators are required to pay annual numbering fees for the use of numbers per number
basis and the use of carrier selection codes. Compared to other OECD countries, the level of Italy’s
numbering fees appears reasonable.31

The rapid development of competition in the Italian telecommunications sector with the increasing
number of new facility based carriers has highlighted the importance of numbering policy in Italy. In
recognising the importance of numbering policy, together with the pressure to meet the EU deadline to
implement carrier pre-selection and number portability, the Italian government has made a series of
regulatory decisions.

In terms of number portability, in fixed voice telephony services, the AGCOM’s Deliberation
4/CIR/99 introduced both geographic numbers within the local call zone and non-geographic numbers such as
toll free, shared cost and premium services. While number portability for non-geographic numbers started in
May 2000, number portability for geographic numbers, although expected to become very important with the
implementation of the unbundling of the local loop, which is supposed to be implemented by the end of 2000
is already in place in the form of service provider portability.

According to the original plan, number portability in mobile should have been implemented by July
1999, but it was postponed. As a transitional measure until number portability for mobile is in place, the
AGCOM has introduced the obligation for mobile operators to provide an automatic message indicating the

© OECD (2001). All rights reserved. 29

new number of the subscriber. This service is provided free to customers for at least 60 days. More recently
(Decision No. 388/00 of 21 June 2000) the AGC has fixed the 30 June 2001 as the target date for the
introduction of number portability in the mobile sector.

The three main mobile operators in Italy do not favour number portability. These mobile operators
argue that the introduction of number portability in mobile services would not only impose significant
economic burden on operators but also make it difficult for them to maintain new services such as “ON-
NET”, since these services are based on specific numbers. Nevertheless, considering the dominant position of
TIM and Omnitel in the mobile market, especially in the business market, and the late entrance of Blu, the
introduction of number portability seem essential to ensure fair competition in the marketplace. Furthermore,
there is no doubt that the introduction of number portability will give more choice to customers to select their
service providers.

Ensuring equal access to customers is one of the most important roles of the telecommunications
regulator since the incumbent still has a dominant position in the local loop market. Before the introduction of
ULL, carrier pre-selection was the only regulatory measure, which allowed new entrants to obtain direct
access to end customers. It still is often considered one of the most effective regulatory measures for ensuring
equal access.

In Italy, call by call carrier selection was introduced for long distance and international calls on
1 January 1998. On 15 July 1999, the AGCOM expanded the coverage of carrier selection to calls within the
same national destination code. From the 1 January 2000, the AGCOM introduced carrier selection also for
local calls.

From February 2000, customers can make inter-district, international calls and calls to mobile
networks using a pre-selected carrier, as an alternative to Telecom Italia. Calls within a district may be made
with carrier pre-selection starting from May 2000 in Milan, June 2000 and in Rome and July 2000 in other
local call areas. The comprehensive coverage of the Italian carrier pre-selection scheme, in particular the
inclusion of carrier pre selection for local calls and mobile networks is helping to promote competition in the
marketplace.

Specific codes dedicated to Internet service access were introduced by the AGC in the new
numbering plan decision of 8 June 2000 (Decision 6/00/CIR).

In summary, the AGCOM has made sound regulatory decisions with regard to numbering policy.

2.2.7. Quality of service

The supervision of quality of service is the responsibility of the AGCOM. However, currently the
Ministry and the AGCOM share the responsibility based on their bilateral agreement. A consumer council
(Consiglio Nazionale degli Utenti) was established at the AGCOM in May 1999. This is made up of eleven
members appointed by the AGCOM and selected among experts in the telecommunications and audio-visual
sectors on the basis of lists drawn up by consumer associations. In addition, the AGCOM has established a
couple of working groups for the quality of interconnection traffic and the transparency of telephony charges.
The EU ONP Directive (95/62/EC) requires EU Member State NRAs to establish and publish
targets for a number of technical elements. Italy has taken regulatory measures to meet EU ONP
requirements, but also taken regulatory action to protect consumer interests in the evolving
telecommunications market where increasing attention is paid to quality of service aspects and to customer
care beyond the traditional technical assessments (line quality, number of faults, etc.).

© OECD (2001). All rights reserved. 30

 Telecommunication operators providing fixed public networks and publicly available
telecommunications services are required to publish quality of service requirements every year. Moreover,
they need to publish annually the definitions of such quality of service requirements, the methods of measure
and the services actually rendered. The AGCOM has the right to carry out inspections and to review, at least
every three years, the definitions, the measurement methods and the targets. Furthermore, these operators are
required to inform users and the AGCOM at least one month ahead of any changes in existing service
offerings and information on new offerings.
To resolve consumer complaints two different sets of procedures were put in place. If there is a
formal request from users of a general nature such as the content of laws or on the interpretation of a ruling,
the AGCOM is required to respond. For specific complaints, the regional offices of the Ministry are called
into action, but AGCOM has recently officially opened a desk to receive comments from users.
In addition, Telecom Italia has a conflict resolving procedure for users: if the conciliatory procedure
does not lead to approval by both parties, then an arbitration procedure may be used.

2.2.8. International aspects

Italy as a member country of the EU, made commitments in the context of the WTO Agreement on
basic telecommunications service which was signed on 15 February 1997 and came into effect on 5 February
1998. Italy committed to the WTO schedule of the EU with no exceptions or conditions. Access to the Italian
market is totally open to foreign service providers who are WTO signatories and EU member countries. In
other cases, market access is subject to reciprocity principles. There are no restrictions regarding the size of
share holding or other ownership restrictions on individuals and corporations investing in telecommunication
service providers.

Table 10. Italy’s WTO commitment as a member country32

Range of services33 Timing of Commitment to common Foreign MFN exemptions

opened liberalisation set of regulatory ownership
principles restrictions
Full By 1 January 1998 Full No No
Source: WTO.

As a result of the market opening measures, foreign telecommunications companies are able to
establish new network infrastructure inside Italy and become facilities-based carriers providing cross-border
services or resale carrier services. In addition, foreign telecommunications companies have access to the same
interconnection rights as local telecommunications companies.

2.2.9. Application of competition principles

With regard to the application of competition principles, Italy has very pro-competitive regulatory
bodies, which are willing to apply regulatory measures to ensure fair competition. In terms of the sector
specific regulator, the most significant measures taken by the AGCOM were the designation of TIM and
Omnitel as providers with significant market power in terms of cellular service, interconnection, and the
definition of new pricing for fixed to mobile communications. While it is the norm to designate the
incumbent as an operator with significant market power, there are only a few countries, which designate
mobile operators as operators with significant market power in the interconnection market.

In April 1998, Telecom Italia was identified as an operator having significant market power in the
markets of fixed telecommunications networks, fixed public voice telephony services, leased lines and
interconnection services. In April 1998, TIM was identified as having significant market power in the mobile

© OECD (2001). All rights reserved. 31

telecommunications service market. In September 1999, the AGCOM identified TIM and Omnitel as
operators with significant market power in mobile telecommunications services and domestic
interconnection. The evaluation of significant market power operators is reviewed every year.

On the other hand, the competition authority is very active in applying competition rules in the
telecommunications market (see Table 11). For example, in October 1999, the competition authority fined
TIM ITL 100.5 billion, and Omnitel ITL 47.0 billion after finding both guilty of price fixing and of co-
ordinating strategies to compete with other telecommunication companies. While, both companies appealed
to the Lazio regional administrative court, the court rejected the appeal on 31 May 2000; in December 2000
the national supreme administrative court (Consiglio di Stato) partially accepted the companies’ view and
discharged them from the collusion charge, reducing the fine to TIM and Omnitel to, respectively, ITL 38
billion, and ITL 18 billion.

Table 11 Main interventions of the competition authority in the telecommunications sector

Year Case Results

1992 Case 3C Communications- The competition authority ruled that Sip S.p.a. had abused its dominant position by refusing
SIP (refusal to deal) to grant 3C Communications the use of telephone lines, and hence prevented it from
providing services.
1993 Case Ducati-Sip (vertical The competition authority ruled that Sip abused its dominant position by preventing other
restriction) distributors from gaining access to retail distribution channels for cellular telephones.

1994 Case GSM- cellular The competition authority ruled that this Sip’s GSM service promotion activities
telephone market (pre- constituted an abuse of dominant position.
emption of the mobile GSM
market)
1995 Case Assistal-Sip The competition authority ascertained an abuse of dominant position by Sip S.p.a. on the
(illegitimate competitive private switching systems installation and maintenance markets.
advantage)
1995 Case Telsystem-Sip (refusal The competition authority ordered Sip to immediately supply Telsystem with the links.
to deal)
1997 Case Albacom-Telecom Following the observations made by the competition authority, Telecom Italia undertook to
Italia - Servizio Executive offer its competitors the same discounts that were available to its own customers, as from
(discrimination practices) 1 July, 1997 and to guarantee them the best possible conditions in terms of quality
standards and promptness in bringing lines into operation.
1997 Case Albacom-Telecom The competition authority ascertained that Telecom had abused its dominant position in the
Italia-leased lines provision of leased lines.
(discrimination practices-
penalty: ITL 95 million)
1997 Case Telecom Italia-Intesa At the end of an investigation completed in November 1997, the competition authority
(merger not cleared) prohibited Telecom Italia from acquiring control of the company Intesa in the light of the
concentration of market power.
1999 Case TIM-Omnitel (collusive In September 1999, the competition authority ascertained a collusive agreement between
agreement - Penalty: TIM and Omnitel Pronto Italia, the two Italian telecom operators active in the market of
ITL 100.5 billion to TIM and mobile telephony services.
46 billion and
ITL 868 million to Omnitel)
2000 Case AIIP-Telecom Italia- The competition authority ascertained the damage inflicted to ISP in respect of Telecom
Internet Services Italia’s cross subsidisation practices.
(anticompetitive cross
subsidy and discrimination
practices- Penalty: 1 billion
and 240 million ITL. to
Telecom Italia)

2000 Case Tiscali/Telecom Italia On August 2000, the competition authority ascertained the abuse of dominant position of
(Reverse Interconnection) Telecom Italia in the market for reverse interconnection services.
2000 Case Telecom Italia/SEAT The competition authority authorised upon conditions the concentration pursuant to which
PAGINE GIALLE Telecom Italia acquires control over SEAT, laying down the measures aimed at preventing

© OECD (2001). All rights reserved. 32

 Year Case Results
anti-competitive consequences.
2000 Case Infostrada/Telecom On November 1999, the Authority has opened another investigation in Telecom Italia
Italia (ADSL service) behaviour in the liberalised markets of value added and Internet services, after a complaint
from Infostrada, concerning a possible abuse of Telecom Italia by the exclusive provision
of ADSL access to final clients. The case is still pending.
2000 Case UMTS-BID On October 2000, the competition authority initiated an investigation aimed at appraising
whether the bidding for UMTS licenses has been the result of an agreement among the
participants (Telecom Italia Mobile Spa, Omnitel Pronto Italia Spa, Wind
Telecomunicazioni Spa, Andala Opco Spa, Ipse Spa e Blu Spa) restricting competition in
the market for the awarding of the third generation mobile services licenses.
Source: Italian Competition Authority.

2.3. The dynamic view: convergence in communications markets

The rapid convergence taking place between broadcasting, content and communications technology
and services is bringing into focus the need for “next generation regulations”. For regulators, the trend in
technology and service convergence requires looking beyond current regulatory frameworks to consider how
to facilitate the process of convergence, maximise the benefits of competition among traditionally different
sectors and ensure that their economic benefits from convergence through the development of new services,
such as electronic commerce. Italy has an institutional advantage in meeting these challenges since the
AGCOM not only is responsible for telecommunications, broadcasting and press, but is designed to respond
communications issues in a technologically neutral way.

The AGCOM is the only regulator whose internal administrative structure is designed to reflect
convergence in the communications sector. This advanced structure supports the AGCOM in dealing with
regulatory issues in a technologically neutral way, which is essential for promoting fair competition
throughout the entire communications sector.

3. PERFORMANCE OF THE TELECOMMUNICATIONS INDUSTRY

The aim of regulation is to increase industry efficiency and to increase consumer benefits.
Reductions in tariffs, introduction of new services and the increase in service quality are often used as
measures to assess the result of regulatory reform. However, in consideration of the difficulties in measuring
the direct impacts of regulatory reform, perhaps the best way to assess the result of regulatory reform is to
analyse the intensity of competition in the marketplace, because eventually strong competition is the key
driving force which will bring benefits to consumers. In this section, the status of competition in the Italian
communications market and its performance in the OECD region will be analysed.

3.1. Competition analysis

Fixed voice telephony market

In the fixed telecommunications market, there has generally been a clear demarcation between
local, long distance and international services. This demarcation has also been used in telecommunication
regulations in many Member countries, in particular for granting licences. Italy has also used this
demarcation for licensing, although there is no restriction for applicants to hold both national and local
licences. When competition was first introduced in the telecommunications market, the normal scenario has
been that new entrants first enter the long distance and international markets, since the lack of rebalancing
means that these market segments are much more lucrative for new entrants, and the investment costs of

© OECD (2001). All rights reserved. 33

market entry lower. When new entrants gain a healthy market share in the long distance and international
markets and essential regulatory safeguards such as the completion of rebalancing, and cost-oriented
interconnection charges are ensured, competition has begun in the local telecommunications market. In
particular, as we can see in the United Kingdom, the development of alternative local access networks such as
cable television networks is a key factor for the success of competition in the local market.

This general principle applies to the development of competition in the Italian fixed voice telephony
market. However, due to the lack of rebalancing and alternative access networks, there has not been much
competition as yet in the local market. In the access market, the fact that CATV networks are virtually non-
existent, and Telecom Italia’s control of the major cable network service provider, Stream, means that there
will not be any meaningful competition in the access network market until WLL services are introduced. It is
likely that some competition in the local call market will result from the inclusion of local calls in carrier pre-
selection and the introduction of ULL. In fact, as of September 2000, over eighteen operators are offering
local calls through carrier-selection and eleven operators had signed carrier pre-selection agreements with
Telecom Italia. Furthermore, operators like Infostrada have introduced new services like “Tempozero” which
offers unlimited local and national long distance calls with fixed monthly fees. However, Telecom Italia is
also allowed to introduce similar services for its customers, so the success of new entrants depends on the
level of tariffs they can offer customers. This implies that meaningful competition can only develop if
Telecom Italia’s interconnection charges and charges for ULL allow for a sufficient margin for new entrants.
In this respect, the success of competition in the local call market largely depends on the AGCOM’s
regulatory vigilance to ensure cost-oriented prices for the access to Telecom Italia’s local loop.

While there is no meaningful competition in the local access market, the introduction of new prices
during the first half of 2000, such as Infostrada’s “Tempozero” and Telecom Italia’s “Teleconomy NoStop”,
demonstrates that consumers are already enjoying the benefits of competition even in the local call market,
considering the fact that these unmeasured local call services were not available previously (see Table 12).

Table 11. Fixed voice telephony services offered by Telecom Italia and Infostrada (Euro per minute, VAT included)

Operator Telecom Italia Infostrada Telecom Italia Infostrada Telecom Italia

Service name Teleconomy Tempozero Teleconomy 24 SpazioZero Teleconomy 24 Aziende
NoStop
Users Residential Residential Residential Residential Business Business (*)
Basic monthly 11.59 11.59 (to 11.59 11.59 (to 16.36 16.36
fee Telecom Italia) Telecom Italia) ISDN: 35.95 ISDN: 37.95
Additional 55.16 58.88 5.58 5.58 5.58 7.44
monthly fee ISDN: 11.16 ISDN: 14.87
Call set-up 0 0 0.062 0.062 0.079 0.079
Cost per 0 0 0.0149 0.0124 0.0149 0.0149
minute
Fixed to 0.332 peak 0.307 peak 0.332 peak 0.307 peak 0.266 0.266
mobile 0.176 off-peak 0.152 off-peak 0.176 off-peak 0.152 off-peak
(average)
International 0.310 plus 0.155 plus 0.310 plus 0.155 plus 0.310 plus 0.310 plus
from 0.161/min from 0.217/min from 0.161/min from 0.217/min from 0.155/min from 0.121/min
to 1.21/min to 1.55/min to 1.21/min to 1.55/min to 1.55/min to 1.55/min
Internet access 20 hours free, Free for "Libero" 0.0093 0.0093 for NA NA
Per minute after: 0.0093 ISP "Libero" ISP
(*) Special offering including a special rate for European Countries, USA and Canada
Source: ANUIT(http://www.anuit.it).

© OECD (2001). All rights reserved. 34

 In the long distance and international markets, new entrants have already acquired about 30%
market share and it is apparent that their market share will increase as competition grows in these market
segments. In particular, competition coming from resellers and Internet telephony will significantly increase
customer choice for these services and in return will reduce prices.

In fact, Figure 3 shows that Italy’s national business tariffs, which had been fairly static prior to competition,
have declined significantly with the introduction of competition in 1998. Nevertheless, Figure 4 and Figure 5
show that the Italian fixed voice telephony service charges are still higher than the average for OECD
countries. This indicates that there still is an incentive for new entrants to enter the market.

Figure 3. OECD National Business Tariff Basket, 1991-98 (Index 1990 = 100)

140
Greece
130

120 Italy

110
Belgium
100

90 Netherlands

80
UK
70
OECD
60
1990 1991 1992 1993 1994 1995 1996 1997 1998

Source: OECD, EURODATA.

Figure 4. OECD Composite Business basket, November 2000, VAT excluded,
UDS PPP.

3 00 0
Fixed Usage

2 50 0

2 00 0

1 50 0

1 00 0

50 0

0
Mexico
Czech Rep .
Ital y

Hun ga ry
USA

OECD avera ge
Swi tzerl an d

Fran ce

Irel an d

S pa in
P ortu ga l
No rway

G erman y

Tu rkey
Can ad a

Ja pa n

Po la nd
UK
Ice la nd

S wed en

Lu xe mbo urg

Finl an d

Austr ia

Gree ce

Au stral ia

Ne w Ze al an d

Korea
Be lg ium
Den ma rk

Nethe rla nds

Note: Excludes calls to mobiles.

Source: OECD.

© OECD (2001). All rights reserved. 35

 Figure 5. OECD Composite Residential basket, November 2000, VAT included, USD PPP

1000 Fixed Usage

900
800
700
600
500
400
300
200
100
0

OECDaverage
Ireland

Gr eece
UK
Denmark

Germany

Turkey

Hungar y
Czech Rep.
Luxembourg

Canada

Spain

Mexico

Poland
USA
Belgium
Netherlands

Italy

Portugal
Iceland

France
Finland

Korea

Japan
Australia
Switzer land

New Zealand
Nor way
Sweden

Austria

Note: Excludes calls to mobiles.

Source: OECD.

Fixed to mobile call market

AGCOM’s decision to change the pricing mechanism of fixed to mobile phone calls together with
the inclusion of fixed to mobile phone calls for carrier pre-selection has made it possible for new fixed
operators to compete in this market. However, considering the fact both Telecom Italia’s retention charges
and TIM and Omintel’s interconnection charges are subject to a charge cap mechanism, new entrants need to
offer retail prices which are lower than prices set up by the AGCOM. It implies that new operators’
competitiveness largely depends on access costs to Telecom Italia’s network. The AGCOM’s regulatory role
is necessary here to ensure cost-oriented access charges, which are a vital factor to determine the level of
competition in this market segment.

Mobile market

The start of Blu’s cellular mobile services in the second half of 2000 has increased competition in
the Italian mobile market. In fact, Figure 6 shows that Italy’s mobile tariffs are already cheaper than the
OECD average. However, considering that there are no handset subsidies in Italy, which traditionally account
for a large portion of mobile operator’s costs in other countries, it seems clear that there is room for
improvement.

© OECD (2001). All rights reserved. 36

 Figure 6. Mobile consumer basket, November 2000, VAT included, USD PPP

800

700 Fixed Usage

600

500

400

300

200

100

OECD average
Denmark

Czech Republic
Finland
Iceland
Luxembourg

Greece

Canada
Ireland

Poland

France
Italy

Ger many

Turkey

Hungary
Belgium

Portugal
Spain

Korea

Japan

Mexico
USA
Nether lands

New Zealand

Austria

Australia
Norway

Switzerland

Sweden

UK

Note: The basket includes 50 minutes per month and excludes international calls. VAT is excluded.
Source: OECD and Teligen.

Leased line markets

In the leased line market, Telecom Italia has a 100% market share. This lack of competition in the
leased line market has meant that leased line tariffs have remained high in spite of the tariff approval system
that applies to Telecom Italia’s leased line charges. The Fifth Implementation Report indicated that, with
regard to 2 Mbit/s national circuits prices of a 50 km and 200 km circuit in 1998 and 1999 were above the EU
average. Following an investigation of the provision of leased lines, in July 2000 the AGCOM instructed the
incumbent to reduce its prices for urban and inter-urban lines by an average of 23.7%. The modified tariffs
have been approved and published on 31 October 2000. The decision also includes measures to increase the
transparency of the offer (calculation of the actual distance on air instead of electrical distance and
elimination of the difference between local and long-distance circuits), to change the terms of the Service
Level Agreement offered by Telecom Italia (improving the timing of delivery and of repair and introducing
an automatic refunding mechanism for delays and delivery and of repair), and widen the range of services
offered. Figure 7 indicates that 64K leased line charges are higher in Italy than the OECD average.

In September 2000, the European Commission had noted that "excessive prices" were being
charged in Italy for 34 Mbps and 155 Mbps national leased lines in addition to the “discriminatory delays in
the provision of leased lines”.

© OECD (2001). All rights reserved. 37

 Figure 7. Leased lines charges, November 2000, VAT excluded, USD PPP

1200 64 K

1000

800
600
400

200
0

OECDaverage

Greece
Denmark

Turkey

Germany

Por tugal
Iceland

Luxembourg

Ireland
Canada

France

Mexic o

Poland
Spain

Japan
UK

Italy

Hungary
Belgium

New Zealand

Korea
USA
Netherlands
Sweden

Austria

Australia
Norway
Switzerland

Source: OECD.

Internet

In Italy healthy competition in the Internet Service Provider market has helped in placing pressure
for lower Internet access charges using the PSTN. The level of Telecom Italia’s PSTN charges for Internet
access charges is relatively low compared to other OECD countries. Although the number of Internet
subscribers had increased more than 60% from 1998 (2.5 million) to the end of 1999 (4.1 million), Italy still
trailed behind the OECD average with nine subscribers per 100 population compared to an OECD average of
11 per 100 population.34 This performance may be improved during 2000 given that the more attractive prices
were introduced at the end of the first half of 2000. One of the reasons for growth in number of subscribers
was the introduction of the “Freeserve” model by Tiscali35 (Tiscali has over one million subscribers to its
FreeNet service).

It is noteworthy that both AGCOM and the competition authority have actively supported
competition in the Internet market. AGCOM is exploring the possibility to assign specific numbering options
to the ISPs (currently operating under general authorisation), while numbering is normally reserved to
operators with an individual licence. On 10 July 1998 the Italian competition authority commenced an
investigation of Telecom Italia on the basis of a claim brought by the Italian Association of Internet
Providers, for potential abuse of dominant position in the Internet market. On 9 September 1999 Telecom
Italia and the Italian association of Internet providers signed an agreement to eliminate discrimination
towards Internet Service Providers and Other Licensed Operators, having positive effects also on
infrastructure costs supported by Internet Service Providers. On 28 January 2000 the competition authority
fined Telecom Italia ITL 1 248 million.

© OECD (2001). All rights reserved. 38

 Figure 8. OECD Internet Access Basket for 20 hours at peak times using discounted PSTN rates, September
2000, Including VAT

USD PPP
120

100 PSTN Fixed PSTN Usage ISP

80

60

40

20

0
Luxembourg

New Zealand
Czech Republic

Hungary

Netherlands

Norway

Switzerland

Mexico

Canada

Sweden
Portugal

Germany

Denmark

Turkey
Ireland

Greece

Japan

France

Finland

Korea
United Kingdom
OECD

United States
Poland

Spain

Austria

Italy

Iceland
Australia
EU
Belgium

3.2. Other performance indicators

Network development
In Italy, in spite of the steady growth in the number of subscriber fixed lines, in 1999 for the first
time Telecom Italia’s operating revenue from fixed line services decreased from that of the previous year.
This is mainly due to substitute effects between mobile and fixed services and strong competition in the fixed
long distance and international markets. As of the end of 1999, Italy had 46.4 access channels36 per 100
inhabitants which is lower than the OECD average (53.3 in 1999)
Table 12. Telecom Italia’s gross operating revenues from fixed and mobile telecommunications services

(ITL billion)

1998 1999
Fixed voice telephony services 36 292 35 856
Mobile services 11 904 14 425
Source: Telecom Italia “SEC 20F submission”.

Table 13. Telecom Italia’s fixed lines

1995 1996 1997 1998 1999

Subscriber fixed lines (thousands) (1) 24 845 25 259 25 698 25 986 26 502
Subscriber fixed line growth (%) (2) 1.8 1.7 1.7 1.1 2.0
ISDN equivalent lines (thousand) (3) 150.2 341.3 896.8 1 735.3 3 049
Notes:
1. Data include multiple lines for ISDN and excludes internal lines.
2. For each of the years ended December 31, the percentage growth figure represents growth per annum over the prior year.
3. Excluding internal lines. Include also in subscriber fixed lines.
Source: Telecom Italia “SEC 20F submission”.

© OECD (2001). All rights reserved. 39

Network Digitalisation

In terms of network digitalisation, as of the end of 1999, 99.9% of Telecom Italia’s domestic
telecommunications lines were digital, which is above the OECD average (94.2 in 1999). However it needs to
be mentioned that there are a number of Member countries – Finland, France, Germany, Iceland, Japan,
Luxembourg, the Netherlands, New Zealand, Norway and the United Kingdom – which already had attained
full digitalisation of fixed networks by 1997. Commercial ISDN service was introduced in 1994 and now
ISDN services are accessible to virtually all parts of Italy. As of the end of 1999, there were approximately
2.5 million basic rate ISDN subscribers and 568 thousand primary rate ISDN subscribers in Italy. In 1997 the
total number of ISDN subscribers in Italy (2.07 millions) was just under that of Germany (2.89 millions) in
the OECD region. In terms of the deployment of fibre optic cables measured by fibre km, at the end of 1999
Telecom Italia had installed approximately 2.9 million Kms. of fibre optic cables.

Table 14. Digitalisation in fixed network

1993 1995 1997 1999

Italy 57.0 76.00 94.00 99.9

OECD average 69.25 81.65 89.22 94.2

Source: OECD.

Quality of service

At the end of 1999, 74.0% of the public telephones in service were equipped with phone card
readers. Italy had 6 payphones per 1 000 inhabitants in 1999, a reduction since 1997, whereas in most OECD
countries this ratio has been increasing. However, Italy still had a higher per capita number of payphones than
the OECD average.

Table 15. Number of payphones per 1000 inhabitants

1995 1996 1997 1999

Italy 6.7 6.7 6.7 6.0
OECD average 4.1 4.6 4.9
Source: OECD.

By the end of 1999, 98.9% of faults were repaired within 24 hours. The call completion rate of the
local fixed network has steadily increased from 98.2% in 1993 to 99.7% in 1999. Similarly, the call
completion rate of the long distance fixed network increased from 95.4% in 1993 to 99.1% in 1999. In Italy,
the incumbent is obliged to provide the itemised billing service and the caller identification service is
available for all customers.

Employment and productivity

At the end of 1999, the total number of employees working for the main telecommunication
operators was 99 869 persons including 17 791 employees working for the mobile sector. It is noteworthy
that the total number of employees in the sector has steadily increased except between 1996 and 1997, in
spite of the large reduction of Telecom Italia employees,37 (a decrease of 3 395 employees between 1998 and
1999), largely thanks to the increase in number of employees in the mobile sector.

© OECD (2001). All rights reserved. 40

 Table 16. Employment in the telecommunications services sector

1995 1996 1997 1998 1999

Total staff in telecommunications 91 802 93 983 93 782 97 734 99 869
service
Total staff in mobile 5 280 7 348 10 116 14 388 17 791
telecommunications services
Source: OECD

The incumbent’s productivity, measured by subscriber lines per employee, has been increased
gradually. Italy’s productivity is well above the OECD average and the fourth best among OECD countries in
1997.

Table 17. PTO access lines per employee

1996 1997 1998 1999

Italy 284.8 307.1 323.6 343.4
OECD average 197.13 203.02
Source: OECD.

4. CONCLUSIONS AND RECOMMENDATIONS

4.1. General assessment of current strengths and weaknesses

Italy has made steady progress in telecommunications market liberalisation in the 1990s in
conformity with the EU Directives. As a result of the Italian government’s efforts to promote competition in
the telecommunications market, Italy has a fairly comprehensive regulatory regime enabling it to promote
competition in the telecommunications sector. In addition, the AGCOM has the responsibility to supervise the
telecommunications sector as well as the broadcasting sector and the press, which enables the AGCOM to
make technologically neutral regulatory decisions over the whole communications sector.

However, there still exist a number of problems, which need to be promptly addressed. In particular,
there have been delays reported in a number of important issues from the full operation of the AGCOM to
implement specific regulatory decisions in the Italian telecommunications sector.

Box 11. Strengths

x Advanced structure of regulatory body which enables technologically neutral and consistent regulatory rulings over
the whole communications sector.

x Implementation of necessary pro-competitive regulatory measures.

x Rapid development of the mobile sector;

x Low access charges for Internet services.

© OECD (2001). All rights reserved. 41

 By transposing almost all EU Directives, Italy now has a more or less comprehensive regulatory
framework to make the transition to a competitive telecommunications market. There is no limitation to
market access except the case of limited spectrum resources. At the same time equal access is ensured
through interconnection and numbering policies. Italy also has a competitively neutral universal service
funding mechanism. Furthermore, it has adopted regulatory measures for local loop unbundling, which is
very important for a market like Italy where no alternative infrastructure is available in the local loop.

As the nature of mobile service changes, from a complementary service to a substitute for fixed
voice telephony, services through the decrease in charges and the introduction of pre-paid cards, the growth
of the Italian mobile sector is bringing real competition to the Italian telecommunications market.

It is noteworthy that, in Italy, the level of PSTN charges for Internet access charges is among the
lowest in the OECD region. This low Internet access charge allows customers to access data services using
the PSTN. At the same time, the low Internet access charges help Internet content providers to benefit from
economies of scale, which is very important for an industry which is largely dependent on advertising
revenues.

Box 12. Weaknesses

x Complicated licensing regime and golden share regulation.

x Delay in introducing mobile number portability and WLL services.

x Delay in defining and implementing Long Run Incremental Cost (LRIC) accounting methodology.

x Lack of alternative infrastructure to the local loop.

x Higher than average short leased line prices.

While three years have passed since the establishment of the AGCOM in 1998, the AGCOM the
sharing of regulatory powers between the AGCOM and the Ministry based on bilateral contracts has caused
some confusion and inconvenience to the industry.

The Italian licensing regime is complicated and places unnecessary regulatory burdens on the
industry. The change of concessions into licences was finally completed in March 2001. Telecom Italia is
subject to “golden share regulation” based on the “Golden Share Decree38” issued on February 11 2000 and
Telecom Italia’s constitution. According to the Golden Share Decree, the Italian government can use its
special powers to block an acquisition of Telecom Italia in order to protect the privatisation policy. Although
the Italian government did not exercise its special power when Deutsche Telekom and Olivetti competed to
take over Telecom Italia (Olivetti finally succeeded), the existence of a “golden share regulation” means that
the Italian government still has a chance to intervene in the case of an acquisition of the incumbent by a
government-owned undertakings.

Considering the weak market position of new entrants in the mobile sector and the lack of
competition in the local access market, the introduction of mobile number portability and WLL services
should be secured.

The FDC accounting methodology, used at present by the regulator, tends to over-compensate the
incumbent through subsidising the historical inefficiencies. The implementation of interconnection charges,
as well as local loop unbundling access charges, based on forward looking long run incremental costs should
be a priority for the regulator.

© OECD (2001). All rights reserved. 42

 There are no alternative local loops in the Italian telecommunications market. For this reason, it is
important to ensure that the implementation of local loop unbundling is effective and at prices which allow
for effective entry. In addition, it is also important to ensure the rapid rollout of wireless in the local loop
technologies to enhance local competition.

4.2. Potential benefits and costs of further regulatory reform

Section 3 pointed to some early evidence that market liberalisation and competition are bringing
significant benefits through:

x Lowering of national and international long distance prices.

x Introduction of unmeasured local call services.
x Expansion and modernisation of telecommunication networks.

The immediate task is to ensure local competition, noting in particular the need for alternate
infrastructures. A sustained commitment to simplifying the licensing framework will also benefit market
players by reducing the regulatory burden.

In general, in spite of recent regulatory efforts by the AGCOM, there is room for improvement in
the effectiveness of the regulatory system to facilitate the transition from a monopoly to a competitive
telecommunications market. As described in Section 4.1, there still remain a few regulatory issues that need
to be addressed appropriately and promptly if the benefits of competition are to be maximised. High priority
should be given to ensuring that the AGCOM has the necessary resources at its disposal through prompt
recruitment of unfilled posts.

4.3. Policy recommendations

The following recommendations are based on the above analysis, taking into account the “Policy
Recommendations for Regulatory Reform” set out in the OECD Report on Regulatory Reform (OECD, June
1997).

1. Ensure that regulations and regulatory processes are transparent and non-discriminatory and
applied effectively

Ensure that the AGCOM can fully exercise its regulatory responsibilities by ensuring that it has its
full complement of human resource through rapid recruitment of staff

The Italian government needs to take prompt action to enable the AGCOM to meet its legal
responsibilities. The sharing of responsibility between the Ministry and the AGCOM should be terminated as
soon as possible and the AGCOM needs, by hiring appropriate staff, to take full responsibility of the sector.

Mobile number portability and WLL services should be introduced without any delay in order to
promote competition in the mobile market and the local access market.

Considering the weak market position of new entrants in the mobile sector and the lack of
competition in the local access market, the delay in introducing mobile number portability and WLL services
gives an increased advantage to the existing mobile operators and the incumbent. The AGCOM needs to
make regulatory steps to expedite the introduction of mobile number portability and continue to place priority
in expediting the introduction of WLL services.

© OECD (2001). All rights reserved. 43

2. Reform regulations to stimulate competition, and eliminate them except where clear evidence
demonstrates that they are the best way to serve the broad public interest

To promote competition, the present carrier market entry requirements should be made simpler by
transforming individual licences to authorisations.

It is unnecessary to maintain an individual licensing system for fixed voice telephony services since
the regulatory costs exceed the benefits. The expansion of the authorisation system to fixed voice telephony
services, which are currently subject to the individual licensing system, would lift unnecessary regulatory
burden from the telecommunications industry as well as eliminate long lead times to enter the market.
Obligations imposed on providers of public voice networks and services can be integrated in appropriate
regulations. Responsibility for licensing should revert to AGCOM, which has the responsibility for creating
competitive market conditions and is best placed to monitor market developments.

The golden share regulation imposed on the incumbent should be removed in order to allow the
incumbent to carry out its activities unconstrained by the threat of potential government intervention, subject
to the general telecommunications and competition regulations.

In a liberalised market, there is no reason to impose specific regulations on the incumbent rather
than regulation based on market power. The golden share is not necessary in that there is a legal and
regulatory framework that already sets the parameters in which the incumbent can operate.

It is necessary to ensure that the schedule for rebalancing is maintained and completed.

It is important that the access deficits in the provision of the local loop are eliminated by the
rebalancing of retail prices. Price changes in subscriber line charges that took place in early 2001 are
important in this context. Without a completion of rebalancing, there exists a risk of price distortion since the
incumbent needs to recoup this deficit through other prices.

3. Review, and strengthen where necessary, the scope, effectiveness and enforcement of competition
policy

As competition develops, the role of competition law in the telecommunications market should be
strengthened, and sector specific regulation should be reviewed periodically in order to streamline the
regulation.

The AGCOM should forebear from regulation in areas or for activities where sufficient competition
has emerged and conditions will allow the development of effective and sustainable competition between
carriers. Excessive sector-specific regulation on carriers may hamper development of the full benefits of
competition. Periodic reviews of regulation to determine where streamlining can take place should be
undertaken. It is recommended that all market players should be able to request streamlining reviews.

The AGCOM needs to take pro-competitive regulatory measures to ensure fair access to end
customers.

Since there is no competition in the local loop, the role of the AGCOM is critical to ensure fair
access to end customers. To this end, the recent decision on the early introduction of the unbundling of the
local loop is commendable. Nevertheless, there still is a dispute on the price of this service. The AGCOM
should put high priority on this issue so new entrants can obtain direct access to subscribers and compete with
the incumbent on a level playing field.

© OECD (2001). All rights reserved. 44

 NOTES

1. According to the Golden Share Decree, the Italian government may exercise its special powers to prevent
acquisitions of shares of privatised companies such as Telecom Italia if such acquisitions (1) are not
transparent and would not ensure full disclosure with respect to controlling share ownership of the companies
whose shares are being acquired and the objectives and industrial plans proposed by the buyers of the target
companies, (2) compromise liberalisation and market competition or are not in line with the company’s
privatisation goals, or entails situations of conflict of interests which could compromise the company’s
missions with respect to the objectives of public interest, (3) entail objective risks of being affected by
criminal organisations, or involve the company in unlawful activities, (4) jeopardise conservation of the
special powers of the State, or (5) represent a considerable risk of serious harm to the vital interests of the
State described above, including the supply of essential raw materials and goods, the supply of essential
public services and the security of related installations and networks and, further, the development of
advanced technological sector..

2. The ASST provided national long distance calls and international calls in Europe and in the Mediterranean
region and the PT provided telex and telegraph services. The concessionaires provided specific services such
as the installation and management of fixed networks and the provision of national telecommunications
services (SIP), intercontinental services (ITALCABLE), space communications (TELESPAZIO), and
maritime communications (SIRM and TELEMAR).

3. OECD Communications Outlook 2001, OECD, Paris (forthcoming).

4. Telecom Italia, 1999 SEC 20F submission.

5. AGCOM.

6. Currently, Telecom Italia owns 35% of Stream. The other shareholders are News Corporation (35%), Gruppo
Gecchi Gori (18%) and SDS (12%).

7. AGCOM.

8. Telecom Italia, SEC 20F, 1999, page 30.

9. Infostrada had 5.8 million subscribers of which 3.1 million were for voice services and 2.7 million for Internet
services at the end of June 2000.

10. The Ministry of communications has the responsibility to:

 Transpose the European directives.

 Regulate the market of radio and terminal equipment.

 Actuate the surveillance of the services market and the radio and terminal equipment market in order to
protect the user’s interests.

 Plan frequencies and to grant individual licences for private services.

© OECD (2001). All rights reserved. 45

11 OECD (1999), “Telecommunications Regulations: Institutional Structures and Responsibilities”: The United
States, Canada, Japan and Switzerland are the other four countries which have a regulator responsible for both
telecommunications and broadcasting.

12 A first set of requirements for formal co-operation between AGCOM and the Ministry is based on the legal
provisions (article 1, paragraph 25 of Law 249/97) which aims to support the gradual transfer of regulatory
responsibility from the Ministry to AGCOM. The collaboration agreement between AGCOM and the Ministry
has been published in the Official Journal of Italian Republic No. 169 of 22/7/98 and is still operating after
being renewed several times.

This collaboration agreement deals with:

 Frequency assignment planning.

 Frequency reallocation for mobile systems.

 Numbering national planning.

 Quality of services.

13. In the period 1992- March 2000 the Area «Telecommunication» of the Direction Enquiry Activity «A» had
five staff members (three economists and two lawyers). In the same period there were about two staff
members working on deceptive advertising proceedings in telecommunication markets.

Starting April 2000, after a general re-organisation of the Competition Authority, the new Direction D
«Communication», with responsibilities in telecommunication, information technology, radio and TV
broadcasting, publishing, and advertising proceedings has 10 staff members.

14. NR 448 of 1998.

15. European Commission (1999), “Fifth Report on the Implementation of the Telecommunications Regulatory
Package”.

16. In addition to the verification of the financial structure and the business plan, the current licensing regime
requires the applicant to satisfy the following requirements:

 The establishment as a PLC (public limited company) or as Mutual Limited Ownership (a mutual
company in the form of a public company), in which the assets shall be not less than 10% of the
investment, accounting for net budget loss.

 The CEO or legal representative of the applicant company must not have been prosecuted and sentenced.

 The applicant must be an Italian, EEA or WTO resident company.

 In addition, the holder of an individual licence is subject to the following obligations:

 Respect of essential requirements on operation safety, network integrity, service interoperability and data
protection.

 Apply technical standards approved at International or European or national level.

 Apply health and environmental measures.

 Determine and publish the services to be provided and their terms and quality parameters.

© OECD (2001). All rights reserved. 46

  Adopt and publish the contract framework with the users.

 Negotiate, if necessary, interconnection with other national and foreign operators.

 Implement, if necessary, requests for interconnection coming from authorised operators in third countries
having ratified the agreements relevant to the telecommunications liberalisation stipulated with WTO.

 Contribute to the provision of the net costs of Universal Service.

 Provide for the payment of the contributions.

 Install network type approval equipment according to existing standards.

 In particular, the holder of an individual licence for voice telephony shall:

 Avoid undue discriminations of numbering sequence used to access the services.

 Provide, free of charge, the access to emergency services.

 Take into account the needs of disabled people when providing public telephone booths.

 Ensure geographic coverage as stated in the application.

17. The public concession fee paid for 1997 and for 1998 was on average 3.5% of revenues related to such
services. Concessionaires and individual licence holders whose yearly revenue exceeds 200 billion Lire.
According to the Italian Budget law for 1998, concessionaires and licence holders which fall within the
category pay 3% for 1999, 2.7% for 2000, 2.5% for 2001, 2.0% for 2002 and 1.5% for 2003 from their
revenues. Previously public concession fees were imposed. According to the Ministerial Decree of March 21
2000, the fees should only be applied to revenues from telecommunications networks installation and
provision, voice telephone service and mobile personal services. Licence holders whose yearly revenues are
below 200 billion Lire, unless is at a loss, have to pay 2% up to year 2002 and 1.5% in 2003.

18. European Commission (1999), “Fifth Report on the Implementation of the Telecommunications Regulatory
Package”.

19. The parties are required to submit: 1) the parties’ position in the negotiation, 2) the technical, economic and
juridical reasons supporting the parties’ position and c) an acceptable negotiation breaking off and viable
alternatives.

20. Dated 15 February 2000.

21. In the United States all incumbent LECs are required to offer for resale any telecommunications service that
the carrier provides at retail to subscribers who are not telecommunications carriers. State commissions are
required to identify marketing, billing, collection, and other costs that will be avoided or that are avoidable by
incumbent LECs when they provide services wholesale and calculate the portion of the retail rates for those
services that is attributable to the avoided and avoidable costs. If a state elects not to implement the
methodology, it may elect, on an interim basis, a discount rate from within a default range of discount rates
established by the FCC. The FCC established a default discount range of 17 – 25% off retail prices, leaving
the states to set the specific rate within that range, in the exercise of their discretion.

22. In France, the difference between interconnection charges for infrastructure operators and charges for service
providers amounts to about 40%. (European Commission, “Fifth Report on the Implementation of the
Telecommunications Regulatory Package”).

© OECD (2001). All rights reserved. 47

23. In Denmark, the interconnection charges for service providers are determined by the ‘retail – 21%’ scheme.
(European Commission, “Fifth Report on the Implementation of the Telecommunications Regulatory
Package”).

24. In Spain, the interconnection charges for service providers are 30% higher than those of facility based
operators. (European Commission, “Fifth Report on the Implementation of the Telecommunications
Regulatory Package”).

25. Thomas Kiessling and Yves Blondeel “Effective competition in European telecommunications” an analysis of
recent regulatory development” Info vol. 1 number 5, October 1999.
26
The price per month for raw copper used to provide ADSL services is 24 300 lire.

27. The price per call set up is ITL. 100 for local calls, ITL 127 for national calls (fixed to mobile and fixed to
fixed) and same area calls and ITL 500 for international calls.

28. The main features of UMTS licensing conditions were the following:

 Number of licenses: up to five.

 Term of the licenses: 15 years.

 Licensing procedures: procedure carried out in two stages: 1) qualification, for the purpose of pre-
selecting candidates with appropriate technical, financial, and commercial capabilities, and 2) auction by
competitive biddings, starting from of a base of Lit 4 000 billion (¼ELOOLRQ

 Spectrum resources: The basic licenses were of 2X10 MHz paired spectrum plus 1X5MHz unpaired
spectrum. Two additional 2x5 MHz blocks were available for new entrants. No transfer of licences to a
third party was permitted.

 Licensees' obligations: independently from any obligation voluntarily undertaken in the offer, by end of
30 months' period starting 1 January 2002, licensees will have to cover the regional capital cities; by the
end of next 30 months' period, licensees will have to cover other major cities.

 Pro-competitive measures: a detailed regulation adopted by the Authority on 21 June 2000 has set pro-
competitive measures such as roaming obligations, as well as rules on sites, facility and infrastructure
sharing.

29. European comparison 3G licence Cost

UK Netherlands Germany Spain Italy

Population (mln) 58.9 15.9 83 39.2 57
Penetration mobile (%) 51 53 42 49 65
Licenses awarded 5 5 6 4 5
Spectrum awarded MHz/licenses 28 28.8 24.2 35 25
Total spectrum awarded MHz 140 144.2 145 140 125
Licenses Total cost (¼EQ 38.7 2.68 50.8 0.516 12.1
Cost per license (¼EQ 7.74 0.536 8.46 0.129 2.42
Cost per Population (¼ 657 168 612 877 212
Cost x license per POP(¼ 131 34 101 3 42

© OECD (2001). All rights reserved. 48

30. Special national services include emergency services, public utility services and customer care services. As
for the latter, codes are assigned to the telecommunication services operators for access to their customer care
centres only. As for the remaining services, codes are assigned on request by the competent administrations.

For mobile services, operators receive a number of prefix codes and are responsible for the allocation of the
subscriber numbers.

As far as geographic services are concerned, numbering resources are assigned to the requesting operator in
blocks of 10 000 numbers per local area. Operators can specify (and obtain, if available) a preference for the
numbering of the block(s).

Non-geographic services include, inter alia, toll-free numbers, VAS, premium rate services, shared cost
services. According to type of services, numbering resources are assigned in single number or in blocks of
100 numbers. Operators can specify a preference for the single number or the block(s) requested.

31. European Commission (1999), “Fifth Report on the Implementation of the Telecommunications Regulatory
Package”

32. The EU offer commits to complete liberalisation of basic telecommunication services (facilities-based and
resale) across the EU for all market segments (local, long distance and international). The offer also covers,
for instance, satellite networks and services and all mobile and personal communications services and
systems. Restrictions include foreign equity limits by France (20%: radio-based services, direct investment
only) and Portugal (25%). Full liberalisation of public voice telephony and facilities-based services is to be
implemented on a delayed basis only by Spain in December 1998; by Ireland in 2000; by Greece in 2003; and
by Portugal in 2000 for public voice telephony and July 1999 for facilities based services. Liberalisation of
internationally connected mobile and personal communications services is to be implemented on a delayed
basis only by Ireland and Portugal in 1999.

33. In the EU commitment on WTO basic telecommunications services agreement, telecommunications services
are defined as the transport of electromagnetic signals-sound, data image and any combinations thereof,
excluding broadcasting.

34. See OECD, Communications Outlook 2001, forthcoming.

35. Internet subscribers do not pay any Internet Service Provider charges under this model. The ISP earns revenue
from advertising and/or from interconnection charges.

36. Access channels includes main lines adjusted for ISDN subscription.

37. Telecom Italia, 1999, SEC 20F submission.

38. According to the Golden Share Decree, the Italian government may exercise its special powers to prevent
acquisitions of shares of privatised companies such as Telecom Italia if such acquisitions (1) are not
transparent and would not ensure full disclosure with respect to controlling share ownership of the companies
whose shares are being acquired and the objectives and industrial plans proposed by the buyers of the target
companies, (2) compromise liberalisation and market competition or are not in line with the company’s
privatisation goals, or entails situations of conflict of interests which could compromise the company’s
missions with respect to the objectives of public interest, (3) entail objective risks of being affected by
criminal organisations, or involve the company in unlawful activities, (4) jeopardise conservation of the
special powers of the State, or (5) represent a considerable risk of serious harm to the vital interests of the
State described above, including the supply of essential raw materials and goods, the supply of essential
public services and the security of related installations and networks and, further, the development of
advanced technological sector.

© OECD (2001). All rights reserved. 49

 BIBLIOGRAPHY

European Commission (1999), “Fifth Report on the Implementation of the Telecommunications Regulatory
Package”, Brussels.

Kiessling, Thomas and Yves Blondeel (1999), “Effective competition in European telecommunications, an analysis
of recent regulatory development”, Info vol. 1, number 5, October.

OECD (2001), OECD Communications Outlook 2001, Paris (forthcoming).

OECD (1999), “Telecommunications Regulations: Institutional Structures and Responsibilities”, Paris.

Telecom Italia (1999), Securities Exchange Commission Form 20F.

© OECD (2001). All rights reserved. 50