November 2000

Czech Republic Update Memo

The following report outlines new developments in the past three months and the state of on-going developments.

1. The interaction between business and regulatory constraints

1.1 The regulatory background

During the third quarter of year 2000, the new Act on Telecommunications (act 151/200 Coll.) was enacted. Immediately, alternative operators started applying for voice telephony licenses. Also, the regulator (Czech telecommunication Office) started transforming itself into an independent regulatory authority.

1.2 Business constraints and entry barriers

An important development in lowering entry barriers occurred during the third quarter of year 2000: the new independent regulator (Czech telecommunication Office) opened a public tender for 3 countrywide licenses for FWA (Fixed Wireless Access) Networks with the explicitly stated intention to help new operators enter the market (and therefore excluded current operators of fixed and mobile networks).

1.3 Attitude of the incumbent operator towards alternative network providers

During the third quarter of 2000, the incumbent's attitude towards alternative operators influenced the following cases:

• GTS Czech Republic claims that it will lose up to 45,5 million CZK by the end of year 2000 (cca 1,28 million ECU) due to Czech Telecom's refusal to offer the special Internet tariff (Internet2000) to users dialing from CT's network to their ISP located in GTS networks. CT's argument is that Internet dial-up access is a data service and therefore needs not be included in connection agreements. The whole dispute is examined by the Office for the protection of competition (antimonopoly office) since mid 1999, and in December 1999 the Office concluded that Czech Telecom abused its dominant position and imposed a penalty. But CT appealed and the whole cause is still open and without solution. The Czech Telecommunication Office (as the regulator) decided in may 1999 that Internet access must be a part of interconnection agreements between the two companies.
• in August 2000 Czech Telecom announced it will widen its definition of off-peak hours when the special Internet2000 dial-up tariff is cheapest - before the off-peak interval started at 21:00 and ended on 7:00 on workdays. Since September 1^st it now starts already at 19:00. Telecom also started new negotiations with ISPs about changing (increasing) their commissions from the traffic their customers generate. No agreement was reached and Czech Telecom increased the commissions according to its unilateral decision. The ISPs, represented by their peering association (NIX) and three major providers of "free Internet", issued a series of press releases accusing Telecom of slowing down the growth of Internet in the Czech republic.
• the new Act on Telecommunications (Act 151/2000 Coll.) requests that dominant operators publish a "referential offer of interconnection", covering its technical and financial requirements for interconnection agreements with other operators. According to a public protest by Aliatel, an alternative operator, Czech Telecom refuses to publish such a referential proposal and this very much complicates the start of interconnection negotiations. Czech Telecom argues that he must wait until the regulator formulates rules for establishing interconnection tariffs (and also that the regulator must first declare that Czech Telecom has a dominant position on the market).

1.4 On-going regulatory developments concerning alternative networks

The most important regulatory event during the third quarter of year 2000 was the enactment of the new Act on telecommunications (Act 151/2000 Coll.), on July 1^st, 2000. This new Act opens the telecommunications market by January 1^st, at least in the sense that new operators can enter the market and start offering their services (with the notable exception of using carrier selection and number portability in the networks of the dominant operator, the obligation of the incumbent to permit these services was postponed by 2 years).

Immediately upon enactment of the new law alternative operators started applying for new licenses, mainly on voice services. According to available information, the following operators immediately applied for licenses: Aliatel, GTS, Contactel and UPC (Kabel Plus and Kabel Net).

According to the new Act on telecommunications, the Czech Telecommunications Office transforms itself into an independent regulatory body. Previously it was a part of the Ministry of transport and telecommunications. Now, its president is appointed by the government. On July 4th, the government appointed Mr. David Stadnik as the president of the new independent Office (Mr. Stadnik was also the previous head of the Office).

On June 22^nd, 2000, the Czech Telecommunications Office opened a public tender for 3 licenses in the 26 GHz band (also called FWA, Fixed Wireless Access). The bids had to be submitted by August 15^th. 13 contestants submitted their bids, but only 12 were accepted and evaluated - the bid of Cesky Telecom was rejected by the CTO because the rules of the tender excluded current operators of public voice networks (fixed and mobile) and their owners (with more than 10%) and daughter companies. Consequently, Czech Telecom submitted a protest to the Constitutional Court, claiming that the Czech telecommunication Office violated the Constitution and the general spirit of the new Act on telecommunications by issuing what he calls "discriminatory conditions" in a public tender. On September 8^th, the steering committee of the tender evaluated the bids and recommended three winners. On the same, the Czech Telecommunications Office accepted the recommendation and declared the following winners of the tender:

• BroadNet Czech, a.s., (70% owned by BroadNet Europe, 20% by InWay, 10% Telekomunikacni montaze)
• GiTy | STAR ONE, a.s. (50,1% GiTy, 49,9% STAR ONE),
• NEXTRA Wireless s.r.o. (fully owned by Nextra Czech Republic, a part of the Telenor AS holding).

Immediately, the CTO also started the process of issuing licenses to these winners.

In July 2000, following a public debate, the Ministry of Transport and Telecommunications proposed the government to award 3 UMTS licenses to the 3 current mobile operators, for an administratively set price. Following the preparation of the new state budget (for 2001), the Ministry of finance asked for maximizing the financial outcome and selling the licenses in an auction. The Ministry of finance asked the Ministry of transport and telecommunications to evaluate again all the possibilities and present a proposal by the end of September. The Ministry of Transport already announced that it favors selling the licenses for a fixed price (administratively set) to 4 operators. i.e. one more than it wanted to award previously. The Ministry also announced that frequencies for 4 UMTS operators will be available by January 1st, 2002. According to various estimates of industry analysts, selling the licenses directly or through a so-called "beauty contest" could produce some 20 billion CZK (cca 0,57 billion ECU), while an auction could raise up to 30 billion CZK (0,86 billion ECU).

In September, the Office for the protection of competition (Antimonopoly Office) opened investigations in the field of cable television, where UPC holds a significant share of the market (after the acquisition of Kabel Plus, Kabel Net and Dattel). Possible results may include regulating the price of cable TV services and changing the legislation due to the intent of cable operators to enter the telecommunications market.

2. Inventory of the major " public " utilities with a potential for use in IS applications:

On September 12^th, InWay, an Internet service provider, announced that it started operating its FWA network in the licensed 3,5 GHz band as the first FWA network in the Czech republic. InWay obtained the necessary licenses from the Czech telecommunications office in January 2000. The network covers the following cities and their surroundings: Prague, Brno, Ostrava, Pardubice, Hradec Kralove, and Liberec.

Both the two biggest Czech mobile providers (Eurotel and Radiomobil) are working on the implementation of GPRS in its mobile networks. During the third quarter of 2000, final test are underway. A rollout is expected for the fourth quarter of year 2000.

Following its acquisition of three major Czech cable operators (Kabel Plus, Kabel Net and DattelKabel) by UPC (United Pan-Europe Communications N.V. (UPC)], Kabel Plus will be renamed to UPC Czech Republic a.s., and the two other companies will retain their individual names (but will share a common management, personnel and services). According to company sources, UPC Czech Republic has 412000 subscribers, and 769000 households are within reach of its networks. As the company announced, it wants to invest 2,5 to 3 billion CZK (cca 71 million ECU) into its networks and offer Internet access to 220 000 Czech households.

At the end of 1999, the power-generation company CEZ had established a daughter joint-stock company CEZTel, to operate the digital communication network built during the nineties for the needs of the power engineering sector. On April 13^th, 2000, CEZ Board of Directors decided to invest assets in CEZTel and started searching for a strategic partner. In July it was announced that Vivendi was selected as the strategic partner, and CEZ wants to sell him 66 percent of CEZTel. The ministry of Industry and Trade (MPO, Ministerstvo prumyslu a obchodu) objects such a sell-out, arguing that it would diminish the value of CEZ as a whole in its future privatization. The Ministry of Transport and Communications (MDS, ministerstvo Dopravy a Spoju) is in favor of selling CEZTel separately.